22042 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

15 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 In Amendment No. 1, the Exchange made a 

technical amendment to Item I of Exhibit 1 to delete 

an erroneous reference to the NASDAQ Options 

Market and replace it with a reference to the 

Exchange. 

4The term ‘‘Market Maker’’ is defined in Rule 

5005(a)(24) as a dealer that, with respect to a 

security, holds itself out (by entering quotations in 

the NASDAQ Market Center) as being willing to buy 

and sell such security for its own account on a 

regular and continuous basis and that is registered 

as such. Proposed Rule 5950(e)(5). 

5The term ‘‘MQP Company’’ is defined in 

proposed Rule 5950(e)(7) as a fund (Exchange 

Traded Fund) sponsor or other entity that lists one 

or more MQP Securities on NASDAQ pursuant to 

the Market Quality Program. The term ‘‘Company’’ 

is defined in Rule 5005(a)(6) as the issuer of a 

security listed or applying to list on NASDAQ, and 

may include an issuer that is not incorporated, such 

as, for example, a limited partnership. 

6The term ‘‘MQP Security’’ is defined in 

proposed Rule 5950(e)(1) as a security that meets 

all of the requirements to be listed on NASDAQ as 

an Exchange Traded Fund, Linked Security, or 

Trust Issued Receipt pursuant to Rules 5705, 5710, 

or 5720, respectively. 

7The Exchange believes that, based on 

discussions with the Financial Industry Regulatory 

Authority (‘‘FINRA’’), FINRA intends to file an 

immediately effective rule change that would 

exempt from FINRA Rule 5250 Exchange programs 

that are approved by the Commission. The 

Exchange notes that FINRA Rule 5250 does not 

preclude the Exchange from any action, but 

precludes FINRA members (not all Exchange 

members are FINRA members) from directly or 

indirectly accepting payment or consideration from 

an issuer of a security for acting as a market maker. 

See Securities Exchange Act Release Nos. 60534 

(August 19, 2009), 74 FR 44410 (August 28, 2009) 

(SR–FINRA–2009–036) (order approving proposal 

to adopt NASD Rule 2460 without substantive 

change into the Consolidated FINRA Rulebook as 

Rule 5250); and 38812 (July 3, 1997), 62 FR 37105 

(July 10, 1997) (SR–NASD–97–29) (order approving 

adoption of NASD Rule 2460; FINRA Rule 5250 and 

NASDAQ Rule 2460 are based on NASD Rule 2460) 

(‘‘1997 order’’). Being mindful of the concern in the 

1997 order about investor confidence and market 

integrity, the Exchange designed the MQP Program 

to be highly transparent with: clear public 

notification requirements; clear entry, continuation, 

and termination requirements; clear market maker 

accountability standards; and, perhaps most 

importantly, clear market quality (liquidity) 

enhancement standards that benefit investors and 

market participants. 

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 such 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 No. SR–Phlx–2012– 

41 and should be submitted on or before 

May 3, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8778 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66765; File No. SR– 

NASDAQ–2012–043] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing of Proposed Rule Change, as 

Modified by Amendment No. 1 Thereto, 

To Establish the Market Quality 

Program 

April 6, 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 March 23, 

2012, The NASDAQ Stock Market LLC 

(‘‘NASDAQ’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

substantially prepared by NASDAQ. On 

March 29, 2012, the Exchange submitted 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as modified by 

Amendment No. 1 thereto, from 

interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASDAQ (also known as the 

‘‘Exchange’’) is filing with the 

Commission a proposal to add new Rule 

5950 (Market Quality Program) to enable 

market makers that voluntarily commit 

to and do in fact enhance the market 

quality (quoted spread and liquidity) of 

certain securities listed on the Exchange 

to qualify for a fee credit pursuant to the 

Exchange’s Market Quality Program, 

and to exempt the Market Quality 

Program from Rule 2460 (Payment for 

Market Making). NASDAQ believes this 

voluntary program will benefit 

investors, issuers or companies, and 

market participants by significantly 

enhancing the quality of the market and 

trading in such listed securities. 

The Market Quality Program set forth 

in Rule 5950 will be effective for a oneyear pilot period beginning from the 

date of implementation of the program. 

During the pilot, NASDAQ will 

periodically provide information to the 

Commission about market quality in 

respect of the Market Quality Program. 

The text of the proposed rule change 

is available from NASDAQ’s Web site at 

http://nasdaq.cchwallstreet.com/ 

Filings/, at NASDAQ’s principal office, 

on the Commission’s Web site at 

www.sec.gov, and at the Commission’s 

Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASDAQ included statements 

concerning the purpose of, and basis for, 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. 

NASDAQ 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 

The purpose of the filing is to propose 

new Rule 5950 to enable Market 

Makers 4 that enhance the market 

quality of certain securities listed on the 

Exchange (known as ‘‘targeted 

securities’’) and thereby qualify for a fee 

credit pursuant to the Market Quality 

Program (‘‘MQP’’ or ‘‘Program’’), and to 

exempt the Program from Rule 2460. 

Rule 5950 will be effective for a oneyear pilot period. The pilot period will 

commence when the Market Quality 

Program is implemented by the 

Exchange and an MQP Company 5 and 

one or more related Market Makers are 

accepted into the MQP in respect of a 

security listed pursuant to the Program 

(‘‘MQP Security’’).6 The pilot program 

will end one year after implementation.7

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22043 

The Exchange has a provision in its Rule 2460 

that is, in respect of Exchange members, largely 

similar to FINRA Rule 5250. See Securities 

Exchange Act Release No. 53128 (January 13, 2006), 

71 FR 3550 (January 23, 2006) (File No. 10–131) 

(order approving registration of The NASDAQ Stock 

Market LLC as a national securities exchange and 

adopting Rule 2460). As discussed in the body of 

the proposal, the Exchange proposes to modify Rule 

2460 so that it is not applicable to the MQP. 

8For definitions of ETF, LS, and TIR, see 

proposed Rule 5950 subsections (e)(2), (e)(3), and 

(e)(4), respectively. 

9The Exchange notes that MQP Securities do not 

encompass derivatives on such securities. 

10The Rule 5000 Series contains rules related to 

the qualification, listing, and delisting of 

Companies on the NASDAQ Stock Market. The 

Rule 5100 Series discusses NASDAQ’s general 

regulatory authority. The Rule 5200 Series sets forth 

the procedures and prerequisites for gaining a 

listing on the NASDAQ Stock Market, as well as the 

disclosure obligations of listed Companies. The 

Rule 5300, 5400, and 5500 Series contain the 

specific quantitative listing requirements for listing 

on the Global Select, Global Market, and Capital 

Market, respectively. The corporate governance 

requirements applicable to all Companies are 

contained in the Rule 5600 Series. Special listing 

requirements for securities other than common or 

preferred stock and warrants are contained in the 

Rule 5700 Series. The consequences of a failure to 

meet NASDAQ’s listing standards are contained in 

the Rule 5800 Series. Finally, listing fees are 

described in the Rule 5900 Series. 

11The enhanced market quality (e.g., liquidity) 

would, as discussed below, emanate from market 

quality standards for MQP Market Makers that 

include, for example, posting a market in an MQP 

Security that is no wider on the offer side and no 

wider on the bid side than 2% away from NBBO. 

Proposed Rule 5950(c)(1)(B). 

Other markets have considered various ways to 

increase liquidity in low volume securities. NYSE 

Euronext, for example, has advocated that a marketwide pilot program with wider spread increments 

for less liquid securities could be a worthwhile 

experiment. NYSE Euronext has also recognized 

that the creation of a program in which small 

companies could enter into agreements directly 

with broker-dealers or through exchanges to 

provide direct payments to a broker-dealer who 

agrees to make a market in the issuer’s security is 

an idea that may warrant further review by FINRA 

and the Commission. See Testimony of Joseph 

Mecane, Executive Vice President, NYSE Euronext, 

Before the House Committee on Government 

Reform and Oversight, November 15, 2011. 

12These small companies and their securities 

(whether components of listed products like ETFs 

or direct listings) have been widely recognized as 

essential to job growth and creation and, by 

extension, to the health of the economy. Being 

included in a successful ETF can provide the stocks 

of these companies with enhanced liquidity and 

exposure, enabling them to attract investors and 

access capital markets to fund investment and 

growth. 

The Exchange expects, as noted, that MQP 

Securities will largely or entirely consist of ETFs, 

and discusses them accordingly in the proposal. 

The Exchange notes that the MQP is available and 

appropriate for LS and TIR products, which have 

some characteristics in common with ETF products. 

For example, TIRs are non-equity securities that are 

issued by a trust, and LS are non-equity securities 

that are linked to the performance of other assets, 

namely indexes and commodities (including 

currencies). See Rules 5710 and 5720. 

13By imposing quality quoting requirements to 

enhance the quality of the market for MQP 

Securities, the MQP will directly impact one of the 

ways that Market Makers manage risk in lower tier 

or less liquid securities (e.g., the width of bid and 

offer pricing). 

14See Payments to Market Makers May Improve 

Trading in Smaller Stocks, by Nina Mehta, 

Bloomberg, November 15, 2011. 

The Exchange believes that by establishing 

specific market quality requirements in the MQP to 

expand quote competition and liquidity in targeted 

securities such as ETFs, the Program will be 

conducive to capital formation—not only in the 

targeted securities or ETFs (e.g., higher trading 

volume and/or creation of additional share units), 

but also in the individual components that make up 

the targeted securities (e.g., higher share trading 

volume). Securities that trade in active, liquid 

markets are less likely to suffer from mispricing 

(that is, a discount in pricing because of a lack of 

liquidity) that can diminish a company’s ability to 

raise capital for further investment and growth. 

15See Robert Greifeld, CEO, NASDAQ OMX 

Group, Sarbox and Immigration Reform for Jobs, 

Wall Street Journal, October 4, 2011. For a 

discussion of capital formation issues in the U.S., 

see letters between Mary Shapiro, Chairman of the 

SEC, and Congressman Darrel E. Issa, Chairman of 

the House Committee on Oversight and 

Governmental Reform, dated March 22, 2011, April 

6, 2011, and April 29, 2011. 

16See Securities Exchange Act Release No. 63270 

(November 8, 2010), 75 FR 69489 (November 12, 

2010) (NASDAQ–2010–141) (notice of filing and 

immediate effectiveness establishing the Investor 

Support Program to attract retail order flow to the 

Exchange). See also Securities Exchange Act 

Release No. 64437 (May 6, 2011), 76 FR 27710 (May 

12, 2011) (NASDAQ–2010–059) (approval order 

creating a listing market, The BX Venture Market, 

that will have strict qualitative listing requirements 

Continued 

During the pilot, the Exchange will 

periodically provide information to the 

Commission about market quality in 

respect of the MQP. 

MQP Securities may include 

Exchange Traded Funds (‘‘ETFs’’), 

Linked Securities (‘‘LS’’), and Trust 

Issued Receipts (‘‘TIRs’’).8 However, the 

Exchange believes that MQP Securities 

will predominantly, if not entirely, 

consist of ETFs as reflected in the 

proposal. 

Background 

The proposed Market Quality Program 

is a voluntary program designed to 

promote market quality in MQP 

Securities.9 An MQP Company that lists 

an eligible MQP Security on NASDAQ 

will pay a listing fee as set forth in 

proposed Rule 5950 (‘‘MQP Fee’’) in 

addition to the standard (non-MQP) 

NASDAQ listing fee applicable to such 

MQP Security as set forth in the Rule 

5000 Series (consisting of Rules 5000– 

5999).10 An MQP Fee will be used for 

the purpose of incentivizing one or 

more Market Makers in the MQP 

Security (‘‘MQP Market Maker’’) to 

enhance the market quality of the MQP 

Security. Subject to the conditions set 

forth in this rule, this incentive will be 

credited (‘‘MQP Credit’’) to one or more 

MQP Market Makers that make a quality 

market in the MQP Security pursuant to 

the Program.11

The Need for the MQP 

The Exchange believes that the MQP 

will be beneficial to the financial 

markets, to market participants 

including traders and investors, and to 

the economy in general. First, the 

Exchange proposes the MQP to 

encourage narrow spreads and liquid 

markets in situations that generally have 

not been, or may not be, conducive to 

naturally having such markets. The 

securities that comprise these markets 

may include less actively traded or less 

well known ETF products that are made 

up of securities of less well known or 

start-up companies as components.12

Second, in rewarding Market Makers 

that are willing to ‘‘go the extra mile’’ 

to develop liquid markets for MQP 

Securities,13 the MQP would clearly 

benefit traders and investors by 

encouraging more quote competition, 

narrower spreads, and greater liquidity. 

Third, the MQP will lower transaction 

costs and enhance liquidity in both 

ETFs and their components, making 

those securities more attractive to a 

broader range of investors. In so doing, 

the MQP will help companies access 

capital to invest and grow. And fourth, 

the MQP may attract smaller, less 

developed companies and investment 

opportunities to a regulated and 

transparent market and thereby serve 

the dual function of providing access to 

on-Exchange listing while expanding 

investment and trading opportunities to 

market participants and investors. 

There is support for paid for market 

making (also known as ‘‘PFMM’’) at the 

highest governmental levels. 

Congressman Patrick McHenry, the 

Chairman of the House Committee on 

Governmental Reform and Oversight, for 

example, recently noted that agreements 

between issuers and market makers to 

pay for market making activity ‘‘* * * 

would allow small companies to 

produce an orderly, liquid market for 

their stocks. Research has shown that 

these agreements, already permitted 

overseas, have led to a positive 

influence on liquidity for small public 

companies.’’ 14

In a similar vein, Robert Greifeld, 

Chief Executive Officer of NASDAQ, 

recently noted that unlike the United 

States, ‘‘[t]he U.K., Canada, and Sweden 

all have exchange markets that serve as 

‘incubators’ for smaller companies.’’ 15

The Exchange believes that the MQP 

proposal will, by encouraging liquid 

markets, enable the Exchange to 

similarly serve as an ‘‘incubator,’’ and to 

continue being an innovator in 

expanding markets to benefit market 

participants, traders, and investors.16

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22044 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

and quantitative standards that would attract 

smaller, growth companies). 

17See Testimony of Edward S. Knight, General 

Counsel and Executive Vice President, NASDAQ 

OMX Group, Before the Senate Committee on 

Banking, Housing, and Urban Affairs, December 1, 

2011. 

18See Why do Firms Pay for Market Making in 

Their Own Stock? by Johannes A. Skjeltorp, Norges 

Bank, and Bernt Arne Odegaard, University of 

Stavanger and Norges Bank, June 2011. See also 

Why Designate Market Makers? Affirmative 

Obligations and Market Quality by Hendrik 

Bessembinder, Jia Hao, and Michael Lemmon, June 

2011. This study suggests that future flash crashes 

can be avoided and social welfare enhanced by 

designating market makers and engaging paid for 

market making, and observing the positive 

attributes of direct payments from listed firms to 

designated market makers on the Stockholm Stock 

Exchange and Euronext Paris. 

19The Exchange believes that the Skjeltorp and 

Odegaard article is therefore directly applicable to 

the First North paid for market making experience. 

20See Paying for Market Quality, Working Paper 

F–2006–06, by Amber Anand, Carsten Tanggaard, 

and Daniel G. Weaver: November 2005, Aarhus 

School of Business. 

21At the time of the study, SSE was owned by 

OMX AB. SSE merged into NASDAQ OMX in 2005 

and retained its identity within the new corporate 

structure. The SSE paid for market making system 

matured into the current First North market. 

22See Payments to Market Makers May Improve 

Trading in Smaller Stocks, by Nina Mehta, 

Bloomberg, November 15, 2011. 

23See Testimony of Eric Noll, Executive Vice 

President, NASDAQ OMX Group, Before the House 

Committee on Government Reform and Oversight, 

November 15, 2011. Mr. Noll noted also that one 

of the unintended consequences of market 

fragmentation in the current U.S. securities markets 

has been a lack of liquidity and price discovery in 

listed securities outside of the top 100 traded 

names, and a disturbing absence of market attention 

paid to small growth companies by market 

participants. The Exchange believes that the MQP 

proposal offers a practical and positive solution. 

24See supra notes 18, 19, and 20. 

25NASDAQ OMX Nordic, which has securities 

exchanges and clearing operations in the Nordic 

countries Sweden, Denmark, Iceland, and Finland 

and Baltic countries Latvia and Estonia, operates 

First North and the Main Market. For additional 

information, see http:// 

www.nasdaqomxnordic.com/ 

about_us?languageId=1. 

26For example, the Markets in Financial 

Instruments Directive (‘‘MiFID’’). It should be noted 

that certain parts of the EU legislation, for example 

the Transparency Directive, only apply to 

companies admitted to trading on the Main Market. 

27A Financial Services Authority is the regulator 

of financial services and securities exchanges in an 

EU country (including the Nordics) and as such is 

similar to the Commission in respect of 

involvement in market regulation and oversight. 

28The First North and Main Market have 

increasingly higher listing standards, similarly to 

the tiered NASDAQ listings markets. See Rule 5300, 

5400, and 5500 Series regarding the Global Select, 

Global Market, and Capital Market, respectively. In 

a similarly tiered fashion, between First North and 

Main Market is an intermediary market known as 

First North Premiere (a segment of First North) that 

is designed to help companies seeking higher 

investor visibility and/or preparation for Main 

Market listing. 

The MQP would reward Market Makers 

for committing capital to securities and 

meeting rigorous market quality 

benchmarks established by the 

Program.17 This approach has worked 

very successfully in overseas markets, 

including the NASDAQ OMX Nordic 

First North market (known as ‘‘First 

North’’). 

The practice of paid for market 

making to increase the liquidity of less 

liquid securities was examined by 

Johannes A. Skjeltorp and Bernt Arne 

Odegaard in a working paper from June 

2011.18 Skjeltorp and Odegaard 

examined paid for market making on the 

Oslo Stock Exchange, which uses a 

market making model that is similar to 

that of NASDAQ’s First North market,19

and noted that they ‘‘* * * find a 

significant reduction in liquidity risk 

and cost of capital for firms that hire a 

market maker. Firms that prior to hiring 

a market maker * * * [have] a high 

loading on a liquidity risk factor, 

experience a significant reduction in 

liquidity risk to a level similar to that of 

the larger and more liquid stocks on the 

exchange.’’ 

About six years prior to the Skjeltorp 

and Odegaard article, Amber Anand, 

Carsten Tanggaard, and Daniel G. 

Weaver studied liquidity provision 

through paid for market making on the 

Stockholm Stock Exchange (‘‘SSE’’), 

currently named NASDAQ OMX 

Stockholm AB.20 The researchers 

examined the success of fifty previously 

illiquid firms that were listed on the 

SSE and enjoyed, along with investors, 

the benefits of paid for market making. 

The researchers examined the impact of 

the paid market maker program and 

found that firms experienced ‘‘* * * a 

decreased cost of capital and significant 

improvements in market quality and 

price discovery.’’ 21 The market makers 

were known as liquidity providers, and 

the firms could set maximum spread 

widths for their stocks, as is currently 

done. Anand, Tanggaard, and Weaver 

found that following the beginning of 

paid for market making services, 

spreads narrowed by a statistically 

significant amount and depth increased 

at the inside and in the aggregate for 

four price levels away from the inside. 

The researchers found that 

accompanying the increase in depth was 

a significant increase in average trade 

size, suggesting that traders did not find 

it necessary to break up their orders to 

accommodate low market depth, and 

found an increase in trading activity, 

suggesting that liquidity providers were 

actively trading with public customers. 

More recently, Eric Noll, Executive 

Vice President, NASDAQ OMX Group, 

described the positive impact of paid for 

market making in the First North 

market, stating that NASDAQ OMX has 

had ‘‘great success’’ in increasing 

liquidity in stocks on First North, a 

European venue for smaller companies 

that has a program enabling companies 

to compensate market makers.22 Mr. 

Noll noted that in just five years, First 

North market has grown to 141 listings 

with a total capitalization of 2.8 billion 

Euros, and that 22 of the First North 

companies have graduated to the main 

market since 2006.23

Paid for Market Making on the First 

North Market 

The Exchange believes that 

commensurate with the previouslydiscussed studies regarding paid for 

market making,24 it is instructive to 

examine the paid for market making 

experience on the First North market. 

By way of background, the First North 

market is an alternative listing market to 

the NASDAQ OMX Nordic Main Market 

(‘‘Main Market’’).25 Both First North and 

Main Market are subject to and 

regulated by European Union (‘‘EU’’) 

directives 26 and exchange rules, and are 

supervised and regulated by one or 

more Financial Services Authorities 

(‘‘FSAs’’).27 While the Main Market is 

intended for listing companies that are 

well established, First North is intended 

for listing small, young or growth 

companies (not unlike the beneficiaries 

of the MQP) while providing an 

infrastructure and trading and 

settlement systems that are similar to 

those of the Main Market. First North 

offers new or small public companies 

the benefits of listing on a public market 

and the potential for good markets 

through a paid for market making 

system, and is often the first step 

towards listing on the Main Market.28

The First North paid for market 

making system is based on a standard 

exchange-supplied contract between a 

listing firm and a designated market 

maker (‘‘DMM’’) that sets forth market 

obligations for the market maker. The 

Exchange sets forth obligations for the 

MQP Market Makers (as well as MQP 

Companies) in proposed Rule 5950 in 

the belief that this provides the greatest 

amount of transparency and 

accountability for all that wish to 

participate in the MQP. 

The paid for market making model on 

NASDAQ’s First North has operated 

since 2002 and has been demonstrably 

successful to the benefit of issuers and 

investors, without material regulatory 

issues. One of the definitive market 

quality attributes associated with 

expansion of liquidity through paid for 

market making is the significant 

narrowing of bid/ask spreads. This 

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22045 

29RTWAS is the bid/ask spread relative to the 

stock price calculated at every NBBO change, then 

averaged with weights for how long each NBBO 

condition lasted. 

30The Exchange believes that the volatility 

reflected on the RTWAS chart after August 2011 is 

due in large part to economic events in the EU. 

31The Exchange believes that just as First North’s 

positive PFMM experience is successful in its own 

right, so it is equally positive within the wider 

European liquidity enhancement (paid for market 

making) experience. See, e.g., How Do Designated 

Market Makers Create Value for Small-Caps? by 

Albert J. Menkveld and Ting Wang, August 1, 2011. 

This analysis of the 2001 Euronext system roll-out 

to the Amsterdam market, where small-caps had the 

opportunity to hire a DMM who guaranteed a 

minimum liquidity supply in their stock, found an 

improvement in liquidity level and a reduction in 

liquidity risk. See also Designated Sponsors and 

Bid-Ask Spreads on Xetra by Jo ̈rdis Hengelbrock, 

October 31, 2008. This analysis of Deutsche Bo ̈rse 

Group’s Xetra program that began in the 1990s, 

where issuers of less liquid stocks could contract 

with a Designated Sponsor to provide liquidity in 

a stock for a fee, found that investor costs including 

spreads were lower for those stocks that had at least 

one such dedicated Designated Sponsor. 

32Moreover, the Exchange notes that while 

spreads widened for stocks on all markets around 

the world during the height of the financial crisis 

in September and October 2008, First North stocks 

with PFMM experienced less spread widening than 

comparable stocks without PFMM. 

33The Exchange believes that even though First 

North market lists equities while the proposed MQP 

market would emphasize listing ETF products, this 

does not detract from, and indeed enhances, the 

comparability of the First North PFMM experience 

to MQP. See infra note 36 (discussing the potential 

benefit of the unique trust structure of ETFs). 

34The Commission has recognized the strong 

policy preference under the Act in favor of price 

transparency and displayed markets. See Securities 

Exchange Act Release No. 61358 (January 14, 2010), 

75 FR 3594 (January 21, 2010) (Concept Release on 

Equity Market Structure). 

To that end, the Exchange has recently put into 

place initiatives designed to expand the liquidity of 

certain targeted securities on transparent and 

displayed markets on the Exchange. See, e.g., 

Securities Exchange Act Release No. 63270 

(November 8, 2010), 75 FR 69489 (November 12, 

2010) (NASDAQ–2010–141) (notice of filing and 

immediate effectiveness of proposal to establish 

Investor Support Program in respect of retail or 

natural order flow). 

phenomenon is directly and 

immediately beneficial for all market 

participants, including investors and 

listing companies (which may also 

benefit from accompanying volume 

increase). As depicted in the chart 

below, in 2010 and 2011 the Relative 

Time Weighted Average Spread 

(‘‘RTWAS’’) 29 at First North was 

significantly better for securities with 

PFMM than for those without the 

benefit of PFMM. 

The substantial positive advantage 

that market participants receive from 

PFMM is clearly demonstrated in the 

chart below, showing that non-PFMM 

security spreads were: (a) Often more 

than four times wider than PFMM 

security spreads; and (b) a majority of 

the time more than three times wider 

than PFMM spreads. Moreover, the 

spreads for stock with PFMM were more 

stable through time. 

A comparison of Relative Time 

Weighted Average Spread on First North 

shows the significant, consistent impact 

of PFMM in narrowing spreads.30 This 

directly benefits investors in PFMM 

securities by lowering their transaction 

costs.31

In terms of regulation, the First North 

PFMM experience has not raised 

concerns. Based on Exchange 

discussions with the Office of General 

Counsel at NASDAQ OMX Nordic in 

respect of the First North market, the 

Exchange is not aware of regulatory 

oversight issues (e.g., Swedish FSA or 

Danish FSA) in respect of paid for 

market making on First North.32

The Exchange believes that the MQP 

will, like paid for market making on 

First North, achieve positive results.33

The Proposal—Background 

The Exchange believes that this 

proposal would help raise investor and 

issuer confidence in the fairness of their 

transactions and the markets in general 

by enhancing market maker quote 

competition in securities on the 

Exchange, narrowing spreads, 

increasing shares available at the inside, 

reducing transaction costs, supporting 

the quality of price discovery, 

promoting market transparency, and 

improving investor protection.34

As noted, the proposal would 

enhance the market quality of targeted 


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22046 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

35The Exchange notes that foreign (non-U.S.) 

ETFs, particularly those that are derivative-based, 

may have certain negative characteristics that are 

not present in U.S. ETFs. In some cases, under the 

Undertakings for Collective Investment in 

Transferable Securities (UCITS, Europe’s equivalent 

of the Investment Company Act of 1940) structure, 

individual firms are permitted to fulfill multiple 

roles within the construct of the product’s trading 

and or creation/redemption process (e.g., the 

Sponsor/Issuer of a European ETF could be the 

same entity as the market maker, distributor, 

intraday Net Asset Value (‘‘NAV’’) calculation 

agent, custodian bank, and/or counterparty to any 

underlying asset). Under the Investment Company 

Act of 1940 (‘‘1940 Act’’), this is not permitted. 

36 It has been noted that since the prices of ETFs 

are generally linked back to the underlying 

securities, there is less opportunity for 

manipulation. See Payments to Market Makers May 

Improve Trading in Smaller Stocks, by Nina Mehta, 

Bloomberg, November 15, 2011. To that end, the 

Exchange notes that by definition an ETF will have 

an insulating wall between Market Maker and 

product, namely a trust structure—which is not 

present with other products such as equity 

securities—that establishes the daily NAV for an 

ETF. NAV reflects the per-share value of an ETF, 

which is based upon the performance of a fund’s 

underlying components and methodology. 

37See Testimony of Eric Noll, Executive Vice 

President and Head of Transaction Services 

NASDAQ OMX, before the Securities Subcommittee 

of the Senate Banking Committee October 19, 2011 

(‘‘I can tell you from personal experience that the 

companies that make up QQQ [(the NASDAQ–100 

technology ETF)] consider it a real achievement, 

and certainly NASDAQ is proud of the excellence 

QQQ represents.’’). 

In addition, the Exchange believes that 

purchasers of ETFs that find success because of 

increased market quality (especially where such 

ETFs are smaller or niche funds with fewer 

components) may choose to invest directly in the 

fund components after a positive ETF market 

quality and execution experience. 

38See Testimony of Eric Noll, Executive Vice 

President, NASDAQ OMX Group, before the House 

Committee on Oversight and Government Reform, 

November 15, 2011. 

39There are a record 291 funds (216 ETFs and 75 

ETNs) on the March 2012 ‘‘ETF Deathwatch’’ list 

maintained by Ron Rowland, president of Capital 

Cities Asset Management. All the funds on this list 

have limped along for at least three months with 

less than $5 million in assets or fewer than 

$100,000 worth of shares changing hands daily. The 

list now includes about 17% of the industry’s 

approximately 1,400 ETFs and exchange-traded 

notes, as measured by number of funds. Mr. 

Rowland states: ‘‘The largest risk is not, however, 

that [the funds] may close in the future. No, the 

more notable risk is that they suffer from extremely 

poor liquidity today. Wide bid/ask spreads, little to 

no volume behind the quotes, and sleeping market 

makers can potentially inflict much more damage 

on unknowing investors than a fund closure.’’ 

40 In that this proposal is designed to provide 

market quality support to smaller, less frequently 

traded segments of securities (ETFs), subsection (d) 

of proposed Rule 5950 indicates that an MQP 

Security will no longer be eligible to remain in the 

MQP if the security sustains an average NASDAQ 

daily trading volume (‘‘ATV’’) of two million shares 

or more for three consecutive months. Subsection 

(d) also provides other reasons for termination of 

the MQP with respect to an MQP security: an MQP 

Company withdraws from the MQP, is no longer 

eligible to be in the MQP, or ceases to make MQP 

payments to NASDAQ; an MQP Security is delisted 

or is no longer eligible for the MQP; an MQP 

Security does not have at least one MQP Market 

Maker for more than one quarter; or an MQP 

Security does not, for two consecutive quarters, 

have at least one MQP Market Maker that is eligible 

for MQP Credit. Any MQP Credits remaining upon 

termination of the MQP in respect of an MQP 

Security will be distributed on a pro rata basis to 

the MQP Market Makers that made a market in the 

MQP Security and were eligible to receive MQP 

Credit pursuant to this rule. If no MQP Market 

Makers qualify, then the remaining MQP Credit will 

be refunded to the MQP Company. Termination of 

an MQP Company, MQP Security, or MQP Market 

Maker does not preclude the Exchange from 

allowing re-entry into the Program where the 

Exchange deems proper. Proposed Rule 5950(d). 

41See Securities Exchange Act Release No. 53128 

(January 13, 2006), 71 FR 3550 (January 23, 2006) 

(File No. 10–131) (order approving registration of 

The NASDAQ Stock Market LLC as a national 

securities exchange and adopting Rule 2460). 

FINRA, with whom the Exchange has an agreement 

regarding provision of certain regulatory services, 

has a similar provision in FINRA Rule 5250. As 

discussed, the Exchange believes that FINRA 

intends to file an immediately effective rule change 

that would exempt from FINRA Rule 5250 

Exchange programs that are approved by the 

Commission. 

42 IM reflects interpretive material to an Exchange 

rule. 

43See Securities Exchange Act Release No. 38812 

(July 3, 1997), 62 FR 37105 (July 10, 1997) (SR– 

NASD–97–29) (order approving adoption of NASD 

Rule 2460). In discussing the 1997 order, the 

Commission cited to NASD Notice to Members 75– 

16 (February 20, 1975), and also to the letter from 

Kenneth S. Spirer, Attorney, Division of Market 

Regulation, SEC, to Mr. Jack Rubens, Monroe 

Securities, Inc. (May 4, 1973) (regarding acceptance 

of a fee or service charge from issuers in connection 

with making a market). See also Securities 

Exchange Act Release No. 39670 (February 25, 

1998), File No. S7–3–98, 63 FR 9661) (notice for 

public comment of proposed amendments to Rule 

15c2–11 under the Act in response to increasing 

incidents of fraud and manipulation in the OTC 

securities market involving thinly traded securities 

of thinly-capitalized issuers, known as microcap 

securities) (‘‘15c2–11 proposal’’). In the 15c2–11 

proposal, the Commission cited NASD Rule 2460 

when discussing that microcap fraud often involves 

‘‘pump and dump’’ operations, in which 

unscrupulous brokers sell the securities of lessseasoned issuers to retail customers by using high 

pressure sales tactics and a supply of securities 

under the firm’s control. 

securities, particularly ETFs. The 

Exchange believes that ETFs offer great 

value to retail and institutional 

investment communities, as reflected in 

their popularity as investment vehicles 

both in the U.S. and abroad.35 ETFs 

offer transparency, liquidity, 

diversification, cost efficiency, and 

investment flexibility to gain broad 

market exposure or to express a 

directional view as a core or satellite 

component to one’s investment 

portfolio, and do so while offering 

investment exposure to all asset 

classes—many of which would 

otherwise be inaccessible.36 Moreover, 

ETFs, particularly those that are equity 

based, also benefit listed companies. By 

being included in a single, diversified 

security, companies gain access to a 

greater audience of investors who may 

not have bought the individual stock.37

This means that the markets are deeper 

and more liquid, benefiting not only 

investors but the economy as a whole.38

This proposal will allow ETFs that may 

not otherwise see much trading or 

volume 39 to be listed and traded on the 

Exchange in more liquid markets.40

The Proposal—Specifics 

Proposed Rule 2460 

Preliminarily, the Exchange is 

proposing to modify its Rule 2460, 

which prohibits direct or indirect 

payment by an issuer to a Market Maker, 

to indicate that Rule 2460 is not 

applicable to the MQP.41 Specifically, 

the Exchange is proposing new IM– 

2460–1 (Market Quality Program) 42 to 

state that Rule 2460 is not applicable to 

a member that is accepted into the 

Market Quality Program pursuant to 

Rule 5950 or to a person that is 

associated with such member for their 

conduct in connection with that 

program. The Exchange believes that 

this proposed limited clarification is 

proper in that it allows the MQP to go 

forward on a pilot basis without 

denigrating the basic premise of Rule 

2460, which was designed to forestall 

problematic relationships between 

exchange members (e.g., market makers) 

and issuers. The Exchange’s proposal, 

on the other hand, assiduously controls 

the exchange member/issuer 

relationship by setting forth an 

extensive rule-based process with clear 

Program requirements for issuers (MQP 

Companies) and clear market quality 

requirements for members (MQP Market 

Makers) that can only be effected in a lit 

and highly regulated exchange 

environment. 

In the order approving NASD Rule 

2460 (the 1997 order), upon which 

NASDAQ Rule 2460 is based (as is 

FINRA Rule 5250), the Commission 

discussed that NASD Rule 2460 

preserved investor confidence, 

preserved the integrity of the 

marketplace, and established a clear 

standard of practice for member firms.43

The Exchange designed the MQP to 

meet the goals of market integrity, 

investor confidence, and clear member 

standards as discussed in the 1997 

order. In particular, the Exchange 

designed the MQP to have precise 

standards for all parties in the Program 

(e.g., MQP Companies and MQP Market 

Makers) and to be highly transparent 

with clear public notification 

requirements; with clear entry, 

continuation, and termination 

requirements; with clear Market Maker 

accountability standards; and, perhaps 

most importantly, with clear market 

quality (liquidity) enhancement 

standards that benefit investors and 

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22047 

44 In addition to the clear and unambiguous MQP 

market quality standards promoting tighter markets 

and increased liquidity to the benefit of market 

participants, it has been demonstrated that alreadyestablished paid for market making programs in 

Europe have resulted in a significant and sustained 

reduction in spreads. As an example, securities that 

enjoyed PFMM in NASDAQ’s First North’s market 

have spreads that are as much as four times 

narrower, and are more stable, than securities 

without PFMM. See supra notes 30, 31, and 32 and 

related text. Narrower spreads always benefits [sic] 

investors by lowering their transaction costs. 

45Moreover, an MQP Company approved to be in 

the Program must meet both the non-MQP initial 

and continued listing standards (e.g., Rules 5300, 

5400, 5500) and the MQP initial and continued 

listing standards to list a security pursuant to the 

MQP. 

46Moreover, an MQP Market Maker must be 

approved to be a member on NASDAQ to be eligible 

for the MQP, and thereafter must attain the general 

market making requirements (e.g., Rule 4613) and 

the specific MQP market quality standards to be 

able to attain an MQP Credit. 

47One of the eligibility criteria for an MQP 

Market Maker to receive an MQP Credit, for 

example, is that the MQP Market Maker must 

maintain at least 2,500 shares of attributable, 

displayed posted liquidity on the NASDAQ Market 

Center that are priced no wider on the offer side 

and no wider on the bid side than 2% away from 

NBBO. Proposed Rule 5950(c)(1)(B). 

48The Exchange notes that the MQP as proposed 

(e.g., fully transparent and with clear market quality 

standards) would not be susceptible to the ‘‘pump 

and dump’’ fraud and manipulation schemes noted 

in the 15c2–11 proposal. See also supra note 36 

discussing that ETFs afford less opportunity for 

manipulation and that the ETF trust structure acts 

as an insulating wall between market maker and 

product. 

49These securities may include less actively 

traded or less well known ETF products that have 

less well known or start-up companies as 

components. 

50The Exchange believes that the Companies 

most likely to list on the MQP, and pay the requisite 

MQP listing fees, will be ETF family sponsors. 

51Proposed Rule 5950(b)(1). 

market participants. The positive 

aspects of the MQP are clear and 

unambiguous.44

First, the entire Market Quality 

Program is clearly and accurately set 

forth in proposed Rule 5950. This 

includes the application and 

withdrawal process, the listing fee and 

credit structure, the market quality 

standards that an MQP Market Maker 

must meet and maintain to secure an 

MQP Credit, and the Program 

termination process. Second, the 

Exchange will provide notification on 

its public Web site regarding the 

variable aspects of the Program. 

Specifically, this notification will 

include the names of the MQP 

Companies and the MQP Market Makers 

that are accepted into the Program; how 

many MQP Securities an MQP Company 

may have in the Program; the specific 

names of the MQP Securities that are 

listed pursuant to the Program; the 

identity of the MQP Market Makers in 

each MQP Security; and the amount of 

the supplemental MQP Fee, if one is 

established by an MQP Company, in 

addition to the basic MQP Fee, as 

discussed below. Third, MQP Securities 

will be traded on a highly regulated and 

transparent exchange, namely 

NASDAQ, pursuant to the current 

trading and reporting rules of the 

Exchange, and pursuant to the 

established market surveillance and 

oversight procedures of the Exchange. 

And fourth, the MQP would encourage 

narrower spreads and better market 

quality (more liquid markets) for 

securities that generally have not been, 

or may not be, conducive to naturally 

having such markets. The Exchange 

believes that these factors, which 

directly benefit all market participants 

and investors, are instrumental to 

developing strong investor confidence 

in the MQP and the integrity of the 

market. 

Moreover, the Exchange believes that 

the MQP does not implicate conflicts of 

interest. That is, unlike the situation 

that the NASD was trying to address in 

its Rule 2460 or NASD Notice to 

Members 75–16, where issuers had the 

ability to directly pay a market maker to 

illegally pump up the price of an 

issuer’s stock, the proposed MQP does 

not encourage MQP Market Makers to 

improperly pump up prices nor, for that 

matter, establish any direct financial 

connection between MQP Market 

Makers and MQP Companies. First, an 

MQP Company must go through an 

MQP application process, and the 

Exchange must accept the MQP 

Company into the Program, before an 

MQP Company can list a product 

pursuant to the Program.45 Second, an 

MQP Market Maker must go through a 

separate MQP application process, and 

the Exchange must accept an MQP 

Market Maker into the Program, before 

an MQP Market Maker can make a 

market in a product listed pursuant to 

the Program.46 Third, in terms of flow 

of funds, the Exchange stands between 

an MQP Company and an MQP Market 

Maker. An MQP Company cannot and 

does not, under any circumstances, pay 

any funds to an MQP Market Maker that 

makes a market in the MQP Company’s 

product pursuant to the Program. This 

is crucial. The Program is constructed so 

that the only way that an MQP Market 

Maker can earn an MQP Credit—the 

payment of which is administered by 

the Exchange—is to maintain a quality 

market in terms of the spread and 

liquidity of an MQP Security.47 The 

Program does not afford any other way 

for an MQP Market Maker to earn an 

MQP Credit. The Exchange firmly 

believes that the clear, unambiguous, 

and transparent nature of the Program 

and its established market quality 

standards are counter-indicative of any 

inherent conflict of interest.48

Additionally, the Exchange notes that 

the MQP is proposed initially as a pilot 

program. This is significant for several 

reasons. First, NASDAQ is proposing 

the pilot as an attempt to repair a gap 

in market structure, namely the 

challenge of certain small or start-up 

securities lacking access to quality 

markets with adequate liquidity.49

Second, the Exchange has agreed, as 

part of the MQP pilot, to submit 

periodic reports to the Commission 

about market quality in respect of the 

MQP. These reports will endeavor to 

compare, to the extent practicable, 

securities before and after they are in 

the MQP. The reports will provide 

information regarding, for example, 

volume metrics, number of MQP Market 

Makers in target securities, and spread 

size, and will help the Commission and 

NASDAQ to evaluate the efficacy of the 

Program and the PFMM concept. And 

third, if the Exchange desires to expand 

the pilot program or make the MQP 

permanent, the Exchange will need to 

file a new rule change proposal with the 

Commission. 

The Exchange believes that the MQP 

proposal would help raise investor and 

issuer confidence in the fairness of their 

transactions and the markets in general 

by enhancing market maker quote 

competition in securities on the 

Exchange, narrowing spreads, 

increasing shares available at the inside, 

reducing transaction costs, supporting 

the quality of price discovery, 

promoting market transparency, and 

improving investor protection. 

Proposed Rule 5950—Securities Eligible 

for the MQP 

The MQP is available to Companies 

that choose to list certain MQP 

Securities on the Exchange. To be 

eligible for listing, MQP Securities must 

meet the requirements to be listed on 

NASDAQ as an ETF, LS, or TIR 

pursuant to Rules 5705, 5710, and 5720, 

respectively.50 In addition, the MQP 

Security must meet all NASDAQ 

requirements for continued listing 

during the period of time that the MQP 

Security is in the MQP.51

Proposed Rule 5950—Application and 

Withdrawal 

The first step for an entity wishing to 

participate in the MQP by listing a 

security on the Exchange, and for a 

Market Maker wishing to participate in 

the MQP as an MQP Market Maker, is 

to submit an MQP application to the 

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22048 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

52See Proposed Rule 5950(a). Thus for an MQP 

Company to be liable for payment of MQP Fees 

pursuant to the Program, and for an MQP Market 

Maker to be eligible to receive an MQP Credit for 

his market making activities, the Exchange must 

have accepted the application of each of these 

parties in respect of an MQP Security, and, the 

parties must each have fulfilled their obligations 

pursuant to the MQP. Proposed Rule 5950(b)(1) and 

(c)(1). 

53Proposed Rule 5950(a)(1)(C). 

54NASDAQ may also, on a Program-wide basis, 

limit the number of MQP Market Makers permitted 

to register in an MQP Security. NASDAQ will 

provide notification on its Web site of any such 

limit. If a limit is established, NASDAQ will 

allocate available MQP Market Maker registrations 

in a first-come-first-served fashion based on 

successful completion of an MQP Market Maker 

application. Proposed Rule 5950(c)(3). 

55Proposed Rule 5950(a)(1)(A) and (B). Factors 

that may be considered by the Exchange are set 

forth in subsection (a)(1)(B)(i) and include, but are 

not limited to, the following: the current and 

expected liquidity characteristics of MQP 

Securities; the projected initial and continuing 

market quality needs of MQP Securities; and the 

trading characteristics of MQP Securities (e.g., 

quoting, trading, and volume). 

56 In making this determination, NASDAQ may 

take into account the volume and price movements 

in the MQP Security; the liquidity, size quoted, and 

quality of the market in the MQP Security; and any 

other relevant factors. Proposed Rule 5950(a)(2)(A). 

57Proposed Rule 5950(a)(2)(B). 

58Proposed Rule 5950(a)(2)(C). 

59Proposed Rule 5950(a)(3). 

60Proposed Rule 5950(b)(2)(A). Moreover, Trade 

Share Payments will be based upon each MQP 

Market Maker’s share of total Qualified Trades in 

an MQP Security executed on the NASDAQ Market 

Center. Quote Share Payments will be based in 

equal proportions on: (a) Average quoted size at or 

better than NBBO; and (b) average time spent 

quoting at or better than NBBO. Proposed Rule 

5950(c)(2)(B). 

The Exchange believes that allocation of MQP 

Fees to Quote Share Payments and Trade Share 

Payments properly reflects the efforts of MQP 

Market Makers to improve the quality, depth, and/ 

or liquidity of these securities (e.g., from initial 

quotation to final trade and execution). The 

Exchange believes that the combination of quote 

and trade payments in the Program is more effective 

in measuring the participation of an MQP Market 

Maker and the resulting liquidity that is added to 

the marketplace. A traditional per share incentive 

plan (e.g., a make-take pricing model) often is not 

attractive to market makers in respect of low 

volume securities because of the risk associated 

with the liquidity characteristics of the security 

coupled with the low volume and reduced revenue 

opportunity; from the perspective of market makers 

the costs may outweigh the benefit of liquidity 

provision. Additionally, by including a component 

dedicated to quote quality, the program provides an 

incentive to narrow spreads and increase the size 

at NBBO even when there are few or no trades 

occurring. As such, the Exchange believes that as 

MQP Market Makers increase the overall quality of 

the market it is important to compensate them for 

both their quote and trade participation in targeted 

securities. 

61Proposed Rule 5950(b)(2)(B). 

62Proposed Rule 5950(b)(2)(C). 

63Proposed Rule 5950(b)(2)(D). 

Exchange.52 Once the Exchange 

determines that the MQP Company and 

the MQP Market Maker are eligible to be 

in the MQP according to the parameters 

of the proposed rule, the Exchange will 

indicate acceptance to the MQP 

Company and the MQP Market Maker. 

NASDAQ will provide notification on 

its Web site regarding acceptance of an 

MQP Company and an MQP Market 

Maker into the Program.53 NASDAQ 

may, on a Program-wide basis, limit the 

number of MQP Securities that any one 

MQP Company may list in the MQP; 

any limitation would be uniformly 

applied to all MQP Companies.54 In 

determining to limit the number of MQP 

Securities in the MQP, NASDAQ may 

consider information that it believes 

will be of assistance to it, such as 

whether a restriction, if any, is in the 

best interest of NASDAQ, the MQP 

Company and the goals of the MQP, and 

investors.55

Moreover, to further enhance the 

transparency of the Program, proposed 

Rule 5950(a)(1)(C) indicates that 

NASDAQ will also provide notification 

on its Web site regarding the following: 

the total number of MQP Securities that 

any one MQP Company may have in the 

Program; and the names of MQP 

Securities that are listed on NASDAQ 

and the MQP Market Maker(s) in each 

listed MQP Security. 

An MQP Company and an MQP 

Market Maker may choose to withdraw 

from the Program. After an MQP 

Company is in the MQP for six 

consecutive months but less than one 

year, it may voluntarily withdraw from 

the MQP on a quarterly basis. The MQP 

Company must notify NASDAQ in 

writing not less than one month prior to 

withdrawing from the MQP. NASDAQ 

may determine, however, to allow an 

MQP Company to withdraw from the 

MQP earlier.56 After an MQP Company 

is in the MQP for one year or more, it 

may voluntarily withdraw from the 

MQP on a monthly basis. The MQP 

Company must notify NASDAQ in 

writing one month prior to 

withdrawing.57 After an MQP Market 

Maker is in the MQP for not less than 

one quarter, he may withdraw from the 

MQP on a quarterly basis. The MQP 

Market Maker must, similarly to an 

MQP Company, notify NASDAQ in 

writing one month prior to 

withdrawing.58

After an MQP Company is in the MQP 

for one year, the MQP and all 

obligations and requirements of the 

Program will automatically continue on 

an annual basis unless NAQSAQ [sic] 

terminates the Program by providing not 

less than one month prior notice of 

intent to terminate; the MQP Company 

withdraws from the Program pursuant 

to subsection (a)(2) of this rule; or the 

MQP Company is terminated from the 

Program pursuant to subsection (d) of 

this rule.59

Proposed Rule 5950—MQP Fees From 

MQP Companies 

An MQP Company seeking to 

participate in the MQP must pay to 

NASDAQ an annual basic MQP Fee of 

$50,000 per MQP Security. The basic 

MQP Fee must be paid in quarterly 

installments as billed by NASDAQ. The 

basic MQP Fee will be allocated as 

follows: 50% will fund the Quote Share 

Payment that is based on Qualified 

Quotes; and 50% will fund the Trade 

Share Payment that is based on 

Qualified Trades, as defined and 

described below.60

An MQP Company may also choose to 

pay an annual supplemental MQP Fee 

per MQP Security. The basic MQP Fee 

and supplemental MQP Fee when 

combined will not exceed $100,000 per 

year. The supplemental MQP Fee must 

be paid, together with the basic MQP 

Fee, in quarterly installments as billed 

by NASDAQ. The amount of the 

supplemental MQP Fee, if any, will be 

determined by the MQP Company on an 

annual basis. The supplemental MQP 

Fee must be paid, together with the 

basic MQP Fee, to NASDAQ in quarterly 

installments. An MQP Company shall 

indicate the proportions between 0% 

and 100% in which the supplemental 

MQP Fee will be allocated to the Quote 

Share Payment and/or Trade Share 

Payment. NASDAQ will provide 

notification on its Web site regarding 

the amount, if any, of the supplemental 

MQP Fee and the Quote Share Payment/ 

Trade Share Payment allocation 

determined by an MQP Company.61

The MQP Fee is in addition to the 

standard (non-MQP) NASDAQ listing 

fee applicable to the MQP Security and 

does not offset such standard listing 

fee.62

The MQP Fee will be paid to the 

Exchange on a quarterly basis as billed 

by the Exchange, and will be credited to 

one or more MQP Market Makers that 

qualify for such credit for an MQP 

Security pursuant to proposed Rule 

5950. NASDAQ will bill MQP 

Companies in arrears. NASDAQ will, at 

the beginning of a quarter, bill each 

MQP Company for the quarterly portion 

of an MQP Company’s MQP Fee (basic 

and supplemental) for an MQP Security. 

Each such quarterly bill will be based 

on the MQP Credit that one or more 

MQP Market Makers in an MQP 

Security qualified for in the 

immediately preceding quarter pursuant 

to this rule.63 All revenue from MQP 

Fees (basic and supplemental) will be 

credited pro rata to the eligible MQP 

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22049 

64Proposed Rule 5950(b)(2)(E). 

65Rule 4613 states that market making obligations 

applicable to NASDAQ members that are registered 

as Market Makers include, among other things, 

quotation requirements and obligations as follows: 

For each security in which a member is registered 

as a Market Maker, the member shall be willing to 

buy and sell such security for its own account on 

a continuous basis during regular market hours and 

shall enter and maintain a two-sided trading 

interest (‘‘Two-Sided Obligation’’) that is identified 

to the Exchange as the interest meeting the 

obligation and is displayed in the Exchange’s 

quotation montage at all times. Interest eligible to 

be considered as part of a Market Maker’s TwoSided Obligation shall have a displayed quotation 

size of at least one normal unit of trading (or a larger 

multiple thereof); provided, however, that a Market 

Maker may augment its Two-Sided Obligation size 

to display limit orders priced at the same price as 

the Two-Sided Obligation. Unless otherwise 

designated, a ‘‘normal unit of trading’’ shall be 100 

shares. After an execution against its Two-Sided 

Obligation, a Market Maker must ensure that 

additional trading interest exists in the Exchange to 

satisfy its Two-Sided Obligation either by 

immediately entering new interest to comply with 

this obligation to maintain continuous two-sided 

quotations or by identifying existing interest on the 

Exchange book that will satisfy this obligation. 

66The term ‘‘Regular Market Session’’ shall have 

the meaning given in Rule 4120(b)(4)(D). Proposed 

Rule 5950(e)(8). 

67These are quotes that are attributable to 

members and not hidden quotes. 

68Proposed Rule 5950(c)(1)(B). 

For example, regarding the first market quality 

standard (25%)—in an MQP Security where the 

NBBO is $25.00 × $25.10, for a minimum of 25% 

of the time when quotes can be entered in the 

Regular Market Session as averaged over the course 

of a month, an MQP Market Maker must maintain 

bids at or better than $25.00 for at least 500 shares 

and must maintain offers at or better than $25.10 

for at least 500 shares. Thus, if there were 20 

trading days in a given month and the MQP Market 

Maker met this requirement 20% of the time when 

quotes can be entered in the Regular Market Session 

for 10 trading sessions and 40% of the time when 

quotes can be entered in the Regular Market Session 

for 10 trading sessions then the MQP Market Maker 

would have met the requirement 30% of the time 

in that month. 

For example, regarding the second market quality 

standard (90%)—in an MQP Security where the 

NBBO is $25.00 × $25.10, for a minimum of 90% 

of the time when quotes can be entered in the 

Regular Market Session as averaged over the course 

of a month, an MQP Market Maker must post bids 

for an aggregate of 2,500 shares between $24.50 and 

$25.00, and post offers for an aggregate of 2,500 

shares between $25.10 and $25.60. Thus, if there 

were 20 trading days in a given month and the MQP 

Market Maker met this requirement 88% of the time 

when quotes can be entered in the Regular Market 

Session for 10 trading sessions and 98% of the time 

when quotes can be entered in the Regular Market 

Session for 10 trading sessions then the MQP 

Market Maker would have met the requirement 

93% of the time in that month. 

69Proposed Rule 5950(c)(2)(A). This subsection 

indicates that a Qualified Quote represents 

attributable and displayed liquidity (either quotes 

or orders) in an MQP Security; that a quote or order 

entered by an MQP Market Maker in an MQP 

Security is only a Qualified Quote if it is posted 

within 2% of the NBBO; and that a Qualified Trade 

in an MQP Security represents a liquidity-providing 

execution of a Qualified Quote on the NASDAQ 

Market Center. 

70Proposed Rule 5950(c)(2)(B). See also supra 

note 60. 

71Proposed Rule 5950(c)(2)(C). 

72Proposed Rule 5950(c)(3). See also supra note 

54. 

73 17 CFR 242.605. 

74FINRA surveils trading on the Exchange 

pursuant to a regulatory services agreement. The 

Exchange is responsible for FINRA’s performance 

under this regulatory services agreement. 

75For a list of the current members and affiliate 

members of ISG, see www.isgportal.com. 

Market Maker(s) in an MQP Security. 

Any portion of an MQP Fee that is not 

credited to eligible MQP Market Makers 

will be refunded to the MQP 

Company.64

Proposed Rule 5950—MQP Credit to 

Market Makers 

When making a market in an MQP 

Security, an MQP Market Maker must, 

in addition to fulfilling the market 

making obligations per Rule 4613,65

meet or exceed several market quality 

requirements on a monthly basis to be 

eligible for an MQP Credit. First, for at 

least 25% of the time when quotes can 

be entered in the Regular Market 

Session 66 as averaged over the course of 

a month, an MQP Market Maker must 

maintain: (a) At least 500 shares of 

attributable, displayed quotes 67 or 

orders at the NBBO or better on the bid 

side of an MQP Security; and (b) at least 

500 shares of attributable, displayed 

quotes or orders at the NBBO or better 

on the offer side of an MQP Security. 

And second, for at least 90% of the time 

when quotes can be entered in the 

Regular Market Session as averaged over 

the course of a month, a MQP Market 

Maker must maintain: (a) At least 2,500 

shares of attributable, displayed posted 

liquidity on the NASDAQ Market Center 

that are priced no wider than 2% away 

from the NBBO on the bid side of an 

MQP Security; and (b) at least 2,500 

shares of attributable, displayed posted 

liquidity on the NASDAQ Market Center 

that are priced no wider than 2% away 

from the NBBO on the offer side of an 

MQP Security.68

MQP Credits for each MQP Security 

will be calculated monthly and credited 

quarterly on a pro rata basis to one or 

more eligible MQP Market Makers. Each 

MQP Credit will be comprised of a 

Quote Share Payment that is based on 

Qualified Quotes, and a Trade Share 

Payment that is based on Qualified 

Trades.69 Trade Share Payments will, as 

discussed, be based upon the total 

aggregate share amount of Qualified 

Trades in an MQP Security executed on 

the NASDAQ Market Center, and Quote 

Share Payments will be based in equal 

proportions on: (a) Average quoted size 

at or better than NBBO; and (b) average 

time spent quoting at or better than 

NBBO.70

An MQP Credit will be credited 

quarterly to an MQP Market Maker on 

a pro rata basis for each month during 

such quarter that an MQP Market Maker 

is eligible to receive a credit pursuant to 

the proposed rule. However, the 

calculation to establish the eligibility of 

an MQP Market Maker will be done on 

a monthly basis. Thus, for example, if 

during a quarter an MQP Market Maker 

was eligible to receive a credit for two 

out of three months, he would receive 

a quarterly pro rata MQP Credit for 

those two months.71

NASDAQ may limit, on a Programwide basis, how many MQP Market 

Makers are permitted to register in an 

MQP Security, and will provide 

notification on its Web site of any such 

limitation. As discussed above, if a limit 

is established, NASDAQ will allocate 

available MQP Market Maker 

registrations in a first-come-first-served 

fashion based on successful completion 

of an MPQ [sic] Market Maker 

application.72

Finally, to give the Exchange and the 

Commission an opportunity to evaluate 

the impact of the MQP on the quality of 

markets in MQP Securities, the 

Exchange is proposing that the MQP 

will be effective for a one-year pilot 

period. During the pilot period, the 

Exchange will submit monthly reports 

to the Commission about market quality 

in respect of the MQP. The reports will 

endeavor to compare, to the extent 

practicable, securities before and after 

they are in the MQP and will include 

information regarding the MQP such as: 

(1) Rule 605 metrics; 73 (2) volume 

metrics; (3) number of MQP Market 

Makers in target securities; (4) spread 

size; and (5) availability of shares at the 

NBBO. 

The first report will be submitted 

within sixty days after the MQP 

becomes operative. 

Surveillance 

The Exchange believes that its 

surveillance procedures are adequate to 

properly monitor the trading of targeted 

securities (including ETFs) on the 

Exchange during all trading sessions, 

and to detect and deter violations of 

Exchange rules and applicable federal 

securities laws. Trading of the targeted 

MQP Securities through the Exchange 

will be subject to FINRA’s surveillance 

procedures for derivative products 

including ETFs.74 The Exchange may 

obtain information via the Intermarket 

Surveillance Group (‘‘ISG’’) from other 

exchanges that are members or affiliates 

of the ISG 75 and from listed MQP 

Companies and public and non-public 

mstockstill on DSK4VPTVN1PROD with NOTICES

22050 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

76 15 U.S.C. 78f. 

77 15 U.S.C. 78f(b)(4) and (5). 

78See Recommendations Regarding Regulatory 

Responses To The Market Events Of May 6, 2010, 

February 18, 2011 (Recommendation that the SEC 

evaluate whether incentives or regulations can be 

developed to encourage persons who engage in 

market making strategies to regularly provide buy 

and sell quotations that are ‘‘reasonably related to 

the market.’’). Available at http://www.sec.gov/ 

spotlight/sec-cftcjointcommittee/021811-report.pdf. 

data sources such as, for example, 

Bloomberg. 

2. Statutory Basis 

NASDAQ believes that the proposed 

rule change is consistent with the 

provisions of Section 6 of the Act,76 in 

general, and with Sections 6(b)(4) and 

6(b)(5) of the Act,77 in particular, in that 

it provides for the equitable allocation 

of reasonable dues, fees, and other 

charges among members and issuers or 

Companies and other persons using any 

facility or system which NASDAQ 

operates or controls, and it is designed 

to promote just and equitable principles 

of trade, to remove impediments to and 

perfect the mechanism of a free and 

open market, and, in general, to protect 

investors and the public interest. 

The goal of the MQP—to incentivize 

members to make high-quality, liquid 

markets—supports the primary goal of 

the Act to promote the development of 

a resilient and efficient national market 

system. Congress instructed the 

Commission to pursue this goal by 

emphasizing multiple policies, 

including the promotion of price 

discovery, order interaction, and 

competition among orders and markets. 

The MQP promotes all of these policies; 

it will enhance quote competition, 

improve NASDAQ liquidity, support the 

quality of price discovery, promote 

market transparency and increase 

competition for listings and trade 

executions while reducing spreads and 

transaction costs. Maintaining and 

increasing liquidity in exchange-listed 

securities executed on a registered 

exchange will help raise investors’ 

confidence in the fairness of the market 

and their transactions. Improving 

liquidity in this manner is particularly 

important with respect to ETFs and lowvolume securities, as noted by the Joint 

CFTC/SEC Advisory Commission on 

Emerging Regulatory Issues.78

Each aspect of the MQP adheres to 

and supports the Act. First, the Program 

promotes the equitable allocation of fees 

and dues among issuers. The MQP is 

completely voluntary in that it will 

provide an additional means by which 

issuers may relate to the Exchange 

without modifying the existing listing 

options. Issuers can supplement the 

standard listing fees (which have 

already been determined to be 

consistent with the Act) with those of 

the MQP (which are consistent with the 

Act as well). While the MQP will result 

in higher fees for issuers that choose to 

participate, the issuers receive 

significant benefits for participating, 

including committed Market Makers, 

greater liquidity, and lower transaction 

costs for their investors. Additionally, 

issuers will have the ability to withdraw 

from the Program after an initial 

commitment in the event they 

determine that participation is not 

beneficial. In that case, the withdrawing 

issuers will automatically revert to the 

already-approved fee schedule 

applicable to the market tier in which 

their shares are listed. 

The MQP also represents an equitable 

allocation of fees and dues among 

Market Makers. Again, the MQP is 

completely voluntary with respect to 

Market Maker participation in that it 

will provide an additional means by 

which members may qualify for a credit, 

without eliminating any of the existing 

means of qualifying for incentives on 

the Exchange. Currently, NASDAQ and 

other exchanges use multiple fee 

arrangements to incentivize Market 

Makers to maintain high quality markets 

or to improve the quality of executions, 

including various payment for order 

flow arrangements, liquidity provider 

credits, and NASDAQ’s Investor 

Support Program (set forth in NASDAQ 

Rule 7014). Market Makers that choose 

to undertake increased burdens 

pursuant to the MQP will be rewarded 

with increased credits; those that do not 

undertake such burdens will receive no 

added benefit. As with issuers, Market 

Makers that choose to participate in the 

MQP will be permitted to withdraw 

from it after an initial commitment if 

they determine that the burdens 

imposed by the MQP outweigh the 

benefits provided. 

Additionally, the MQP establishes an 

equitable allocation of fees among 

Market Makers that choose to 

participate and fulfill the obligations 

imposed by the rule. If one Market 

Maker fulfills those obligations, the 

MQP Fee will be distributed to that 

Market Maker; if multiple Market 

Makers satisfy the standard, the MQP 

Fee will be distributed pro rata among 

them. Any portion of an MQP Fee that 

is not credited to eligible MQP Market 

Makers will be refunded to the relevant 

MQP Company. All fees paid by issuers 

choosing to participate in the MQP, both 

initial and supplemental MQP Fees, will 

be available for distribution to eligible 

NASDAQ Market Makers. In other 

words, all of the benefit of the MQP 

Fees will flow to high-performing 

Market Makers rather than to NASDAQ, 

provided that at least one Market Maker 

fulfills the obligations under the 

proposed rule. 

The MQP is designed to avoid unfair 

discrimination among Market Makers 

and issuers. The proposed rule contains 

objective, measurable (universal) 

standards that NASDAQ will apply with 

care. These standards, both for issuers 

and for Market Makers, will be applied 

equally to ensure that similarly situated 

parties are treated similarly. This is 

equally true for inclusion of issuers and 

Market Makers, withdrawal of issuers 

and Market Makers, and termination of 

eligibility for the MQP. The standards 

are carefully constructed to protect the 

rights of all parties wishing to 

participate in the Program by providing 

notice of requirements and a description 

of the selection process. NASDAQ will 

apply these standards with the same 

care and experience with which it 

applies the many similar rules and 

standards in NASDAQ’s rule manuals. 

NASDAQ notes that it operates in a 

highly competitive market in which 

market participants can readily favor 

competing venues if they deem fee 

levels at a particular venue to be 

excessive, or rebate opportunities 

available at other venues to be more 

favorable. In such an environment, 

NASDAQ must continually adjust its 

fees and program offerings to remain 

competitive with other exchanges and 

with alternative trading systems that 

have been exempted from compliance 

with the statutory standards applicable 

to exchanges. NASDAQ believes that all 

aspects of the proposed rule change 

reflect this competitive environment 

because the MQP is designed to increase 

the credits provided to members that 

enhance NASDAQ’s market quality. 

Finally, NASDAQ notes that the 

proposed paid for market making 

system has been used successfully for 

years on NASDAQ OMX Nordic’s First 

North market. The First North paid for 

market making system has been quite 

beneficial to market participants 

including investors and listing 

companies (issuers) that have 

experienced market quality and 

liquidity with narrowed spreads. The 

Exchange believes that the proposed 

MQP will similarly enjoy positive 

results to the benefit of investors in 

MQP Securities and Companies related 

to them and the financial markets as a 

whole. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASDAQ does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22051 

79See Securities Exchange Act Release No. 38812 

(July 3, 1997), 62 FR 37105 (July 10, 1997) (SR– 

NASD–97–29). 

80See id. at 37107 (‘‘Specifically, the Commission 

finds that the rule preserves the integrity of the 

marketplace by ensuring that quotations accurately 

reflect a broker-dealer’s interest in buying or selling 

a security. The decision by a firm to make a market 

in a given security and the question of price 

generally are dependent on a number of factors, 

including, among others, supply and demand, the 

firm’s expectations toward the market, its current 

inventory position, and exposure to risk and 

competition. This decision should not be 

influenced by payments to the member from issuers 

or promoters. Public investors expect brokerdealers’ quotations to be based on the factors 

Continued 

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 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the Exchange consents, 

the Commission shall: 

(a) By order approve or disapprove 

such proposed rule change; or 

(b) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

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. The 

Commission requests comment, in 

particular, on the following aspects of 

the proposed rule change: 

1. Much of the reasoning, empirical 

data, and academic literature discussed 

by NASDAQ in its proposal is based on 

providing market making incentives to 

enhance the market quality of, and 

capital formation for, smaller operating 

companies. However, the MQP 

proposed by NASDAQ would apply 

only to certain exchange-traded 

derivative securities products (defined 

in the proposal as MQP Securities to 

include Exchange Traded Funds, Linked 

Securities, and Trust Issued Receipts), 

and not to operating companies. Are the 

same arguments and rationale discussed 

by NASDAQ for operating companies 

equally applicable to exchange-traded 

products? Would the reported effects of 

other market-making incentive programs 

designed to enhance the market quality 

of traded operating companies be 

similar if applied to exchange-traded 

products? If so, how so? If not, why not? 

2. How, if at all, might a marketmaking incentive program applied to 

exchange-traded products impact the 

operating companies that comprise the 

index underlying such exchange-traded 

products? Under what circumstances 

could an impact on those companies be 

beneficial or harmful? Could any impact 

differ depending on whether or not an 

exchange-traded product uses 

derivatives to gain exposure to such 

companies, or uses leverage or inverse 

leverage? 

3. What are commenters’ views on 

NASDAQ’s assertion that being 

included as a ‘‘component’’ of an 

exchange-traded product (such as an 

ETF) results in benefits to an individual 

operating company? Do commenters 

agree with this assertion? Why or why 

not? Could such benefits arise 

independently from a company’s 

inclusion in an underlying index, 

regardless of whether an exchangetraded product tracking such an index is 

traded? Is there any data available that 

analyzes the impact on a company when 

it becomes a component of an 

underlying index versus when it 

becomes a portfolio component of an 

exchange-traded product that tracks 

such an index? 

4. How does the rationale in support 

of trading lesser-known or smaller 

operating companies translate to the 

need for similar support of an exchangetraded product that tracks these 

companies? What about an exchangetraded product that tracks and invests in 

very liquid companies, but itself has 

low levels of liquidity? Is there an 

independent rationale for needing to 

support these types of exchange-traded 

products when the market does not? Are 

there unintended consequences of 

incentivizing such products? If so, what 

are they? 

5. Given the inherent arbitrage link 

between trading exchange-traded 

products and their underlying holdings, 

why would a lack of liquidity in such 

a product impact the ability of market 

makers to quote relatively narrow bids 

and offers? What, if anything, does a 

lack of liquidity or wide bid-ask spread 

in an exchange-traded product indicate 

about the ability of a market maker to 

make effective use of arbitrage and the 

creation/redemption mechanisms often 

associated with exchange-traded 

products? How, if at all, would a 

market-making incentive program affect 

any intraday premium (discount) of the 

traded price of an exchange-traded 

product above (below) its intraday 

indicative value? 

6. NASDAQ states that the MQP is 

designed to promote market quality in 

MQP Securities by, among other things, 

encouraging narrow spreads and greater 

liquidity. Under the proposal, MQP 

Market Makers would receive MQP 

Credits for quoting at or near the NBBO, 

regardless of the actual NBBO spread. 

The Commission seeks specific 

commentary on any potential impact of 

the proposed rules on the market quality 

of the MQP Securities. Do commenters 

agree with the Exchange that the MQP 

would encourage tighter quoted prices 

and greater quoted size at the NBBO for 

MQP Securities? If so, please explain. If 

not, why not? 

7. Do commenters believe that the 

MQP would result in MQP Market 

Makers quoting at better prices (and 

larger sizes) than they would otherwise 

quote without the incentives provided 

by the Program? Why or why not? 

8. If the market qualities of two 

securities share similar characteristics 

(quoted spread, size, volume, etc.) but 

one is supported by MQP incentives and 

the other is not, what, if anything, does 

that suggest about the comparative 

robustness of those market qualities? 

Are there aspects of this type of 

incentivized market quality that should 

concern investors? Are such apparent 

improvements in market quality 

consistent with the Act and investor 

protection? Why or why not? 

9. FINRA Rule 5250 prohibits FINRA 

members from directly or indirectly 

accepting payment from an issuer of a 

security for acting as a market maker. 

NASDAQ notes in its filing that it 

expects FINRA to file a proposed rule 

change to amend its Rule 5250 to 

exempt NASDAQ programs, such as the 

MQP, that are approved by the 

Commission. In addition, NASDAQ has 

its own rule, substantially similar to 

FINRA Rule 5250, which prohibits 

direct or indirect payment by an issuer 

to a market maker. The Exchange stated 

that it designed the MQP to meet the 

goals of market integrity, investor 

confidence, and clear member standards 

discussed in the Commission’s order 

approving NASD Rule 2460 (which is 

now FINRA Rule 5250).79 Do 

commenters believe the MQP would or 

would not raise concerns regarding 

investor confidence, market integrity, 

and member standards? For example, 

NASD Rule 2460 was implemented, in 

part, to address concerns about issuers 

paying market makers to improperly 

influence the price of an issuer’s 

stock.80 What are commenters’ views on 

mstockstill on DSK4VPTVN1PROD with NOTICES

22052 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

described above. If payments to broker-dealers by 

promoters and issuers were permitted, investors 

would not be able to ascertain which quotations in 

the marketplace are based on actual interest and 

which quotations are supported by issuers or 

promoters. This structure would harm investor 

confidence in the overall integrity of the 

marketplace. The Commission finds that the 

proposed rule supports a longstanding policy and 

position of the NASD and establishes a clear 

standard of fair practice for member firms.’’) 

81The Commission’s order approving NASD Rule 

2460 discussed conflicts of interest that may exist 

between issuers and market makers. See id. at 

37106 (‘‘It has been a longstanding policy and 

position of the NASD that a broker-dealer is 

prohibited from receiving compensation or other 

payments from an issuer for quoting, making a 

market in an issuer’s securities or for covering the 

member’s out-of-pocket expenses for making a 

market, or for submitting an application to make a 

market in an issuer’s securities. As stated in Notice 

to Members 75–16 (February 20, 1975), such 

payments may be viewed as a conflict of interest 

since they may influence the member’s decision as 

to whether to quote or make a market in a security 

and, thereafter, the prices that the member would 

quote.’’) 

82See supra note 44 and accompanying text. 

83See Proposed Rule 5950(a)(1)(C) and 

(b)(2)(B)(iii). 

whether, and if so, how, the MQP would 

be consistent with this basis? 

10. Could there be conflicts of interest 

between an MQP Company (the issuer) 

and the designated MQP Market 

Maker(s) for such MQP Securities 

participating in the Program? If so, what 

are those conflicts of interest? 81 Please 

explain whether NASDAQ’s proposal 

adequately addresses such potential 

conflicts. 

11. In order to address concerns about 

potential conflicts of interest between 

issuers and market makers, NASDAQ 

stated that it designed the MQP to have 

clear and precise standards for all 

parties in the Program (e.g., MQP 

Companies and MQP Market Makers).82

Should such participation standards 

also be objective to ensure that there is 

a level playing field in determining who 

the issuers and market makers are for a 

particular MQP Security in the 

Program? Are the proposed criteria for 

participation by potential MQP Market 

Makers and/or potential MQP 

Companies in the MQP sufficiently 

clear, precise, and objective? Why or 

why not? 

12. Is it appropriate and consistent 

with the Act to allow MQP Companies 

to pay the additional Supplemental 

MQP Fee at their discretion? Why or 

why not? Is it appropriate and 

consistent with the Act to allow MQP 

Companies to be able to decide how to 

allocate their Supplemental MQP Fee 

between Quote Share Payments and 

Trade Share Payments? Why or why 

not? What would be the impact on 

market maker incentives of allowing 

MQP Companies to pay the additional 

Supplemental MQP Fee and to decide 

how to allocate its Supplement MQP 

Fee between Quote Share Payments and 

Trade Share Payments? Please explain. 

13. With respect to a series of MQP 

Securities, should the MQP Company 

paying the MQP Fee be the sponsor or 

the fund? What impact, if any, would it 

have on fund investors if the fund pays 

the MQP Fee as opposed to the sponsor? 

Are the proposed Rules sufficiently 

clear as to which entity will be paying 

the MQP Fee? 

14. Section 11(d)(1) of the Act 

generally prohibits a firm that is both a 

broker and a dealer in securities from 

extending or maintaining any credit on 

any new issue security if the brokerdealer participated in the distribution of 

the new issue security within the 

preceding 30 days. The Commission has 

granted relief to authorized participants 

from these restrictions if, among other 

things, neither the broker-dealer 

authorized participant, nor any natural 

person associated with such brokerdealer authorized participant, directly 

or indirectly, receives from the fund 

complex any payment, compensation, or 

other economic incentive to promote or 

sell the shares of the fund to persons 

outside the fund complex, other than 

non-cash compensation permitted under 

NASD Rule 2380. Should authorized 

participants participating in the creation 

and redemption of shares of MQP 

Securities that are also MQP Market 

Makers in those same MQP Securities be 

eligible to receive MQP Credits derived 

from Trade Share Payments? Would 

MQP Credits derived from Trade Share 

Payments give these authorized 

participants economic incentives to 

promote or sell shares of the MQP 

Security? Should such payments be 

viewed by the Commission as coming 

directly or indirectly from the fund 

complex of the MQP Security? Should 

MQP Credits derived from Trade Share 

Payments disqualify broker-dealer 

authorized participants from relying on 

the Commission’s exemption from 

Section 11(d)(1) of the Act? 

15. Could the MQP have an impact 

(either positive or negative) on 

incentives for market making in other 

exchange-traded products listed and 

traded on NASDAQ that are not eligible 

for and/or do not participate in the 

Program, either because NASDAQ has 

limited the total number of MQP 

Securities that any one MQP Company 

may have in the MQP, the MQP 

Company does not qualify for the MQP, 

or the MQP Company’s application for 

participation is otherwise denied? If so, 

what type of impact, and why? If not, 

why not? Please explain. 

16. Proposed Rule 5950(d)(1)(A) states 

that the MQP will terminate if an MQP 

Security sustains an average NASDAQ 

ATV of two million shares or more for 

three consecutive months. Is this 

proposed threshold for discontinuance 

in the Program reasonable? If so, why? 

If not, why not? Should there be an 

alternative threshold or measure to 

determine termination from the 

Program? Please explain. 

17. Could the MQP have unintended 

consequences on fair and orderly 

markets in an MQP Security when such 

security leaves the program? If so, what 

could these consequences be? If not, 

why not? Please explain. 

18. NASDAQ has proposed to 

implement the MQP on a one-year pilot 

basis. Is one-year a reasonable time 

period during which to assess the 

impact of the proposed rules? If not, 

why not? Please explain. 

19. What additional data, if any, 

should be provided by NASDAQ to help 

assess during the pilot period whether 

the MQP is achieving its stated goals? 

For example, if the Exchange required 

MQP Securities to be listed and traded 

outside the MQP for a period of time 

before being eligible for the MQP, could 

such a requirement provide useful 

‘‘before and after’’ data for MQP 

Securities to permit the Exchange and 

the Commission to more accurately 

assess the market quality of the 

securities before participating in the 

Program and the market quality of the 

same securities while participating in 

the Program? If so, how? If not, please 

explain. 

20. The MQP proposed rule provides 

for certain public disclosures relating to 

the Program (i.e., notifications on 

NASDAQ’s Web site will include names 

of the MQP Companies and the MQP 

Market Makers that are accepted into 

the Program, how many MQP Securities 

an MQP Company may have in the 

Program, the specific names of the MQP 

Securities that are listed pursuant to the 

Program, the identity of the MQP 

Market Makers in each MQP Security, 

the amount of the supplemental MQP 

Fee, etc.).83 Do commenters believe that 

these disclosures would provide 

sufficient information to investors? If 

not, why not? Is there any other 

information that the Exchange should 

provide on its Web site regarding the 

MQP and participating MQP Securities, 

MQP Companies, and MQP Market 

Makers? For example, should NASDAQ 

be required to provide notification on its 

Web site of any notices from an MQP 

Company or MQP Market Maker to 

withdraw from the Program? What 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22053 

84 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4 . 

3A Member is any registered broker or dealer, or 

any person associated with a registered broker or 

dealer, that has been admitted to membership in the 

Exchange. 

4This occurs when two orders presented to the 

Exchange from the same Member (i.e., MPID) are 

presented separately and not in a paired manner, 

but nonetheless inadvertently match with one 

another. Members are advised to consult Rule 12.2 

respecting fictitious trading. 

advantages or disadvantages would such 

disclosure provide? Please explain. 

21. Would it be helpful to investors to 

have public notice of an MQP 

Company’s participation in the Program 

through means other than on the 

Exchange’s Web site, such as in the 

MQP Company’s periodic reports to the 

Commission, on the MQP Company’s 

Web site, or through a ticker symbol 

identifier on the consolidated tape? 

Why or why not? 

22. What are commenters’ views on 

whether the proposed disclosures are 

sufficient to enable all investors, even 

less sophisticated investors, to 

understand the potential impact of the 

proposed MQP on the market quality of 

an MQP Security, including that an 

MQP Company’s participation in the 

Program is voluntary and subject to 

withdrawal, or that the MQP Security 

may become ineligible for the Program 

if its trading volume reaches sufficiently 

high levels? 

23. Should the Exchange be required 

to publicly (and anonymously) disclose 

statistics on the performance of MQP 

Market Makers? Would such disclosure 

provide meaningful information to 

investors (e.g., would such disclosure 

provide investors the opportunity to 

assess how much perceived liquidity is 

being provided by MQP Market Makers, 

as opposed to liquidity provided by 

market makers and other market 

participants who are not paid an MQP 

Credit)? If so, what information should 

be disclosed and why? If not, why not? 

What advantages or disadvantages 

would such disclosure provide? Please 

explain. 

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 rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2012–043 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–2012–043. 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 Section, 100 F Street NE., 

Washington, DC 20549–1090, on official 

business days between 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–2012–043 and 

should be submitted on or before May 

3, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.84

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8789 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66762; File No. SR–EDGX– 

2012–12] 

Self-Regulatory Organizations; EDGX 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Relating to Amendments 

to the EDGX Exchange, Inc. Fee 

Schedule 

April 6, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 30, 

2012 the EDGX Exchange, Inc. (the 

‘‘Exchange’’ or the ‘‘EDGX’’) 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 the selfregulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

fees and rebates applicable to Members 3

of the Exchange pursuant to EDGX Rule 

15.1(a) and (c). All of the changes 

described herein are applicable to EDGX 

Members. The text of the proposed rule 

change is available on the Exchange’s 

Internet Web site at http:// 

www.directedge.com, at the Exchange’s 

principal office, and at the Public 

Reference Room of the Commission. 

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 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of these statements may be examined at 

the places specified in Item IV below. 

The self-regulatory organization 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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to make a 

technical amendment to the description 

of the Mega and Mini Tape B Tiers in 

footnote 1 to clarify that these rebates 

($0.0034 per share and $0.0030 per 

share, respectively) are provided for 

liquidity added on EDGX in Tape B 

Securities only. 

Flag E represents a customer 

internalization 4 charge per side if a 

Member inadvertently matches with 

itself. In order to provide additional 

transparency to Members, Flag E is 

proposed to be bifurcated into two flags 

and re-named to state ‘‘Internalization’’ 

instead of ‘‘Customer Internalization’’: 

Flag EA (internalization on the adding 

liquidity side) and Flag ER 

(internalization on the removing 

mstockstill on DSK4VPTVN1PROD with NOTICES