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Wednesday, July 27, 2022

Options Regulatory Alert #2022 - 22
Prearranged Trading and Signaling of Imminent Order

Category:

  • Regulatory

Markets Impacted:

Contact Information:

Nasdaq Regulation is reminding participants, members, member organizations, and their associated persons that use of orders or quotes to signal the arrival of an options order or otherwise to coordinate order flow with another market participant may violate exchange rules and be deemed conduct inconsistent with just and equitable principles of trade.

Nasdaq Regulation reviews for the failure to display an order, schemes to artificially maximize internalization of order flow, and the utilization of affiliated broker-dealers to circumvent order display requirements. When appropriate, Nasdaq Regulation will investigate and pursue disciplinary action.

Rules related to these prohibited practices include, among others:

  • Nasdaq Rule Options 9 Business Conduct, Section 2 - Adherence to Law and Compliance with NOM Rules

  • Nasdaq Rule Options 9 Business Conduct, Section 9 - Prevention of the Misuse of Material Nonpublic Information

  • Nasdaq Rule Options 3 Options Trading Rules, Section 22 - Limitations on Order Entry, including the requirement that all member firms are responsible for ensuring that agency orders are displayed for one second prior to sending a proprietary order.

  • Nasdaq Rule General 9, Section 1, General Standards

  • Related rules of Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; and Nasdaq PHLX LLC.

    • Member firms are encouraged to compete for order executions, but competition must be fair, unbiased, and based on independent arms-length negotiation. Moreover, order routing and quotation generation algorithms must rely on the hallmarks of best execution and arms-length independent pursuit of counterparties to find the best price. Member firms must put their best execution and other obligations for the orders entrusted to them above their own pecuniary interests.

    Questions regarding the attached Regulatory Alert can be directed to the contacts below.

    • Joseph Cusick, Vice President, Nasdaq Options Surveillance, at joseph.cusick@nasdaq.com
    • David Strandberg, Head of Enforcement, Nasdaq Regulation, at david.strandberg@nasdaq.com

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