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[Federal Register Volume 77, Number 47 (Friday, March 9, 2012)]
[Notices]
[Pages 14456-14458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-5736]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66515; File No. SR-NASDAQ-2012-033]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Fees and Rebates in Penny Pilot Options and Non-Penny Pilot 
Options

March 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 29, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASDAQ. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to modify pricing for NASDAQ members using the 
NASDAQ Options Market (``NOM''), NASDAQ's facility for executing and 
routing standardized equity and index options. Specifically, NASDAQ 
proposes to amend Section 2 of Chapter XV of NOM Rules to increase 
transaction fees for adding and removing liquidity in All Other Options 
\3\ as well as the Customer Rebate to Add Liquidity in Penny Pilot 
Options (``Penny Options'').
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    \3\ All Other Options refers to non-Penny Pilot options. The 
Penny Pilot was established in March 2008 and in October 2009 was 
expanded and extended through June 30, 2012. See Securities Exchange 
Act Release Nos. 57579 (March 28, 2008), 73 FR 18587 (April 4, 
2008)(SR-NASDAQ-2008-026)(notice of filing and immediate 
effectiveness establishing Penny Pilot); 60874 (October 23, 2009), 
74 FR 56682 (November 2, 2009)(SR-NASDAQ-2009-091)(notice of filing 
and immediate effectiveness expanding and extending Penny Pilot); 
60965 (November 9, 2009), 74 FR 59292 (November 17, 2009)(SR-NASDAQ-
2009-097)(notice of filing and immediate effectiveness adding 
seventy-five classes to Penny Pilot); 61455 (February 1, 2010), 75 
FR 6239 (February 8, 2010)(SR-NASDAQ-2010-013)(notice of filing and 
immediate effectiveness adding seventy-five classes to Penny Pilot); 
62029 (May 4, 2010), 75 FR 25895 (May 10, 2010) (SR-NASDAQ-2010-
053)(notice of filing and immediate effectiveness adding seventy-
five classes to Penny Pilot); and 65969 (December 15, 2011), 76 FR 
79268 (December 21, 2011) (SR-NASDAQ-2011-169) (notice of filing and 
immediate effectiveness extension and replacement of Penny Pilot). 
See also NOM Rules, Chapter VI, Section 5.
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    While changes to the Fee Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on March 1, 2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

[[Page 14457]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to modify certain transaction fees and rebates in 
Chapter XV, Sec. 2, entitled ``NASDAQ Options Market--Fees,'' in order 
to attract and enhance participation in NOM and raise revenues.
    Specifically, the Exchange proposes to amend All Other Options 
(non-Penny Options) rebates and fees. The Exchange proposes to increase 
the Professional Fee for Adding Liquidity in All Other Options from 
$0.20 to $0.30 per contract.\4\ The Exchange also proposes to increase 
the Professional, Firm, Non-NOM Market Maker and NOM Market Maker Fees 
for Removing Liquidity in All Other Options from $0.45 to $0.50 per 
contract.\5\ The Exchange believes that increasing the Professional Fee 
for Adding Liquidity in All Other Options and the Professional, Firm, 
Non-NOM Market Maker and NOM Market Maker Fees for Removing Liquidity 
in All Other Options will help raise revenues.
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    \4\ The Exchange is not proposing to amend the Customer, Firm, 
Non-NOM Market Maker or NOM Market Maker Fees for Adding Liquidity 
in All Other Options.
    \5\ The Exchange is not proposing to amend the Customer Fee for 
Removing Liquidity in All Other Options.
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    The Exchange is also proposing to amend the monthly volume tiers of 
the Customer Rebate to Add Liquidity in Penny Options to further 
incentivize NOM Participants to route Customer orders to the Exchange. 
Currently, there are five tiers of the Customer Rebate to Add Liquidity 
in Penny Options. Each tier requires the NOM participant to meet 
certain criteria in order to qualify for the rebate. Specifically, the 
Exchange is proposing to amend Tier 5, which states that if a 
``Participant adds (1) Customer liquidity of 25,000 or more contracts 
per day in a month, and (2) the Participant has certified for the 
Investor Support Program set forth in Rule 7014; \6\ and (3) the 
Participant executed at least one order on NASDAQ's equity market,'' 
the Participant will be paid a rebate of $0.40 per contract. The 
Exchange is proposing to increase this Customer rebate to $0.41 per 
contract. The Exchange believes that further incentivizing NOM 
Participants to send additional Customer orders to the Exchange will 
benefit all market participants by adding liquidity to the market in 
Penny Options.
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    \6\ For a detailed description of the Investor Support Program 
or ``ISP,'' see Securities Exchange Act Release No. 63270 (November 
8, 2010), 75 FR 69489 (November 12, 2010) (SR-NASDAQ-2010-141) (the 
``ISP Filing''). See also Securities Exchange Act Release Nos. 63414 
(December 2, 2010), 75 FR 76505 (December 8, 2010) (SR-NASDAQ-2010-
153); and 63628 (January 3, 2011), 76 FR 1201 (January 7, 2011) (SR-
NASDAQ-2010-154). In order to qualify for an ISP credit, a 
Participant would need to transact a certain amount of displayed 
liquidity through an ISP-designated port which results in an 
increase in the overall liquidity that the member provides to NASDAQ 
measured as a proportion of the consolidated share volume traded by 
all market participants across all trading venues. To this end, a 
member's ``Baseline Participation Ratio'' is determined by measuring 
the number of shares in liquidity-providing orders entered by the 
member (through any NASDAQ port) and executed on NASDAQ and dividing 
this number by the consolidated (across all trading venues) share 
volume traded in a given month. To determine whether a member added 
liquidity to NASDAQ in a given month, NASDAQ would perform the same 
calculation on a monthly basis for the then-current month and 
compare the resulting ratio to the Baseline Participation Ratio.
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2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with Section 
6(b)(4) of the Act,\8\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which NASDAQ operates or controls.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposal to increase the 
Professional Fee for Adding Liquidity in All Other Options to $0.30 per 
contract is reasonable, equitable and not unfairly discriminatory, 
because, as compared to Firms and Non-NOM Market Makers, a Professional 
would continue to be assessed a lower Fee for Adding Liquidity. In 
addition, the new fee is the same fee assessed today for a NOM Market 
Maker for adding liquidity. The Exchange believes that Professionals 
engage in trading activity similar to that conducted by market makers. 
For example, Professionals join bids and offers on the Exchange and 
thus compete for incoming order flow; Professionals do so in direct 
competition with the Exchange's market makers. Also, Professionals have 
access to more information than a Customer and therefore should 
continue to be assessed a higher rate than a Customer.
    The Exchange believes that its proposal to increase the 
Professional Fee for Removing Liquidity in All Other Options to $0.50 
per contract is reasonable, equitable and not unfairly discriminatory 
because Professionals would be assessed a fee that is less favorable 
than a Customer but equivalent to market markers because it has been 
established that Professionals have access to more information than a 
Customer.
    In addition, the Exchange believes that its proposal to increase 
the Firm and Non-NOM Market Maker Fees for Removing Liquidity in All 
Other Options to $0.50 per contract is reasonable because the Firm and 
Non-NOM Market Maker fees are within the range of fees assessed by 
other exchanges. NYSE Arca, Inc. (``NYSE Arca'') assesses Firms and 
Broker-Dealers a $0.50 per contract fee for electronic orders.\9\
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    \9\ See NYSE Arca's Fee Schedule.
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    The Exchange also believes that its proposal to increase the 
Professional, Firm, Non-NOM Market Maker and NOM Market Maker Fees for 
Removing Liquidity in All Other Options to $0.50 per contract is 
reasonable because the proposed Fees for Removing Liquidity are less 
than the average fees paid by market makers on other exchanges when 
factoring in payment for order flow.\10\ In addition, the Exchange 
believes that its proposal to increase the Professional, Firm, Non-NOM 
Market Maker and NOM Market Maker Fees for Removing Liquidity in All 
Other Options to $0.50 per contract is equitable and not unfairly 
discriminatory because the Exchange is proposing to uniformly increase 
the fees applicable to all market participants except Customers.\11\ A 
lower Customer Fee for Removing Liquidity benefits all market 
participants by incentivizing NOM Participants to transact a greater 
number of Customer orders, which results in increased liquidity.
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    \10\ NOM does not have a payment for order flow program.
    \11\ Customers are assessed a $0.45 per contract Fee for 
Removing Liquidity in All Other Options.
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    The Exchange believes that the increased Customer rebate for market 
participants that add Customer liquidity of 25,000 or more contracts 
per day in a month, certify for the ISP and execute at least one order 
on NASDAQ's equity market is reasonable, because it will continue to 
incentivize NOM

[[Page 14458]]

Participants to transact additional Customer orders and encourage 
participants in the Exchange's equity markets to also participate in 
the Exchange's options market.
    The Exchange believes that the increased Customer rebate for market 
participants that add Customer liquidity of 25,000 or more contracts 
per day in a month, certify for the ISP and execute at least one order 
on NASDAQ's equity market is equitable and not unfairly discriminatory, 
because the increased rebate is intended to encourage increased 
activity in both NOM and in the ISP of the NASDAQ equity market. The 
goal of the ISP is to incentivize members \12\ to provide liquidity 
from individual equity investors to the NASDAQ Market Center. The 
increased rebate would encourage firms that certify pursuant to Rule 
7014 to increase the amount of Customer order liquidity to NOM. The 
addition of such liquidity, either through the ISP or through increased 
Customer order flow, would benefit all Exchange members that 
participate in those markets.
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    \12\ The Commission has expressed its concern that a significant 
percentage of the orders of individual investors are executed in the 
over-the-counter (``OTC'') market, that is, not on exchange markets; 
and that a significant percentage of the orders of institutional 
investors are executed in dark pools. See Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) 
(Concept Release on Equity Market Structure, ``Concept Release''). 
In the Concept Release, the Commission has recognized the strong 
policy preference under the Act in favor of price transparency and 
displayed markets. The Commission published the Concept Release to 
invite public comment on a wide range of market structure issues, 
including high frequency trading and un-displayed, or ``dark,'' 
liquidity. See also Mary L. Schapiro, Strengthening Our Equity 
Market Structure (Speech at the Economic Club of New York, Sept. 7, 
2010) (``Schapiro Speech,'' available on the Commission Web site) 
(comments of Commission Chairman on what she viewed as a troubling 
trend of reduced participation in the equity markets by individual 
investors, and that nearly 30 percent of volume in U.S.-listed 
equities is executed in venues that do not display their liquidity 
or make it generally available to the public).
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    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants can and do send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive or 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed fee and rebate scheme are competitive and similar to other 
fees, rebates and tier opportunities in place on other exchanges. The 
Exchange believes that this competitive marketplace materially impacts 
the fees and rebates present on the Exchange today and substantially 
influences the proposal set forth above.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\13\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2012-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2012-033. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.) Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-033 and should 
be submitted on or before March 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5736 Filed 3-8-12; 8:45 am]
BILLING CODE 8011-01-P
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