Document ID: SEC-2011-0350-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-03-14T04:00Z

[Federal Register Volume 76, Number 49 (Monday, March 14, 2011)]
[Notices]
[Pages 13694-13696]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-5718]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64050; File No. SR-NASDAQ-2011-034]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Enhance the Investor Support Program

March 8, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on February 28, 2011, The NASDAQ Stock Market LLC (the 
``Exchange'' or ``NASDAQ'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by 
NASDAQ. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes changes to the fee provisions of Rule 7014 
(Investor Support Program) to increase the rebate for adding targeted 
liquidity within the Investor Support Program. The Exchange also 
proposes to amend a typographical error.
    NASDAQ has designated this fee change proposal effective and 
operative upon filing.
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com, at NASDAQ's principal office, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing changes to the fee provisions of Rule 
7014 to increase the rebate for adding targeted liquidity within the 
Investor Support Program. The Exchange also proposes to amend a 
typographical error.
    The Exchange established an Investor Support Program (``ISP'') that 
enables NASDAQ members to earn a monthly fee credit for providing 
additional liquidity to NASDAQ and increasing the NASDAQ-traded volume 
of what are generally considered to be retail and institutional 
investor orders in exchange-traded securities (``targeted 
liquidity'').\3\ The goal of the ISP is to incentivize members to 
provide such targeted liquidity to the NASDAQ Market Center.\4\ The 
Exchange noted in

[[Page 13695]]

the ISP Filing that maintaining and increasing the proportion of orders 
in exchange-listed securities executed on a registered exchange (rather 
than relying on any of the available off-exchange execution methods) 
would help raise investors' confidence in the fairness of their 
transactions and would benefit all investors by deepening NASDAQ's 
liquidity pool, supporting the quality of price discovery, promoting 
market transparency and improving investor protection.
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    \3\ For a detailed description of the Investor Support Program, 
see Securities Exchange Act Release No. 63270 (November 8, 2010), 75 
FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness) (the ``ISP Filing''). See also Securities 
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate 
effectiveness); 63628 (January 3, 2011), 76 FR 1201 (January 7, 
2011) (NASDAQ-2010-154) (notice of filing and immediate 
effectiveness); and 63891 (February 11, 2011), 76 FR 9384 (February 
17, 2011) (NASDAQ-2011-022) (notice of filing and immediate 
effectiveness).
    \4\ The Commission has recently expressed its concern that a 
significant percentage of the orders of individual investors are 
executed at over the counter (``OTC'') markets, that is, at off-
exchange markets; and that a significant percentage of the orders of 
institutional investors are executed in dark pools. Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (Concept Release on Equity Market Structure, 
``Concept Release''). In the Concept Release, the Commission has 
recognized the strong policy preference under the Act in favor of 
price transparency and displayed markets. The Commission published 
the Concept Release to invite public comment on a wide range of 
market structure issues, including high frequency trading and un-
displayed, or ``dark,'' liquidity. See also Mary L. Schapiro, 
Strengthening Our Equity Market Structure (Speech at the Economic 
Club of New York, Sept. 7, 2010) (``Schapiro Speech,'' available on 
the Commission Web site) (comments of Commission Chairman on what 
she viewed as a troubling trend of reduced participation in the 
equity markets by individual investors, and that nearly 30 percent 
of volume in U.S.-listed equities is executed in venues that do not 
display their liquidity or make it generally available to the 
public).
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    The Exchange now proposes an adjustment to the Investor Support 
Program, in the form of an increase in the rebate for the ISP for 
members that exceed the Baseline Participation Ratio \5\ by at least 
0.86%. The primary objective in making this adjustment is to further 
incentivize members to provide targeted liquidity to the Exchange by 
increasing the rebate for those that bring even larger amounts of 
liquidity to NASDAQ.
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    \5\ The term ``Participation Ratio'' is defined as: for a given 
member in a given month, the ratio of (i) the number of shares of 
liquidity provided in orders entered by the member through any of 
its Nasdaq ports and executed in the Nasdaq Market Center during 
such month to (ii) the Consolidated Volume. Rule 7014(d)(4). The 
term ``Consolidated Volume'' is defined as: for a given member in a 
given month, the consolidated volume of shares of System Securities 
in executed orders reported to all consolidated transaction 
reporting plans by all exchanges and trade reporting facilities 
during such month. Rule 7014(d)(6).
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    The ISP generally compares a member's Participation Ratio for the 
current month to the same member's Participation Ratio in August 2010 
(known as the ``Baseline Participation Ratio''). This ratio is 
determined by measuring the number of shares in liquidity-providing 
orders entered by the member (through any NASDAQ port) and executed on 
NASDAQ and dividing this number by the consolidated (across all trading 
venues) share volume of System Securities \6\ traded in the given 
month.\7\ To determine the amount of the ISP credit pursuant to the 
program, pursuant to sub-section (b), NASDAQ would multiply $0.0003 or 
$0.0004 by the lower of: the number of shares of displayed liquidity 
provided in orders entered by the member thorough its ISP-designated 
ports and executed in the NASDAQ Market Center during the given month; 
or the amount of Added Liquidity \8\ for the given month, which is 
compared to the member's Baseline Participation Ratio. The Exchange 
proposes to increase the tiered rebate to a rate of $0.0005 for members 
that bring a greater amount of targeted liquidity.
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    \6\ The term ``System Securities'' is defined as: all securities 
listed on NASDAQ and all securities subject to the Consolidated Tape 
Association Plan and the Consolidated Quotation Plan. Rule 4751(b).
    \7\ See Rule 7014(d)(2) and (d)(4).
    \8\ The term ``Added Liquidity'' is defined as: for a given 
member in a given month, the number of shares calculated by (i) 
subtracting from such member's Participation Ratio for that month 
the member's Baseline Participation Ratio, and then (ii) multiplying 
the resulting difference by the average daily consolidated volume of 
shares of System Securities in executed orders reported to all 
consolidated transaction reporting plans by all exchanges and trade 
reporting facilities during such month; provided that if the result 
is a negative number, the Added Liquidity amount shall be deemed 
zero. Rule 7014(d)(1).
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    Specifically, the Exchange proposes to clarify subsection (b) to 
state that, subject to the conditions set forth in subsection (c),\9\ 
in addition to the current tiered rebate rates of $0.0003 or $0.0004, 
the rebate rate may also be $0.0005. The Exchange adds proposed sub-
section (c)(3) to indicate that the $0.0005 rebate rate is available to 
those members that bring in an even greater amount of liquidity by 
exceeding the Baseline Participation Ratio by at least 0.86%. Thus, to 
qualify for the $0.0005 rebate rate, a member would essentially have to 
bring twice as much targeted liquidity to the Exchange (in the form of 
Added Liquidity relative to the Baseline Participation Ratio) as the 
member would need to bring to the Exchange to qualify for the next-
lower $0.0004 rebate rate.\10\
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    \9\ Subsection (c)(1) states that a member shall not be entitled 
to receive any ISP credit pursuant to (b) for a given month if any 
of the following applies: (A) the member's ISP Execution Ratio for 
the month in question is 10 or above; or (B) the average daily 
number of shares of liquidity provided in orders entered by the 
member through its ISP-designated ports and executed in the Nasdaq 
Market Center during the month is below 10 million, provided that in 
calculating such average, Nasdaq will exclude days when it is open 
for less than the entire regular trading day.
    \10\ Subsections (c)(2) and (c)(3) as amended state: (2) A 
member shall not be entitled to receive an ISP credit pursuant to 
section (b) of this Rule at the $0.0004 rate if for a given month 
the member does not exceed its Baseline Participation Ratio by at 
least 0.43%. (3) A member shall not be entitled to receive an ISP 
credit pursuant to section (b) of this Rule at the $0.0005 rate if 
for a given month the member does not exceed its Baseline 
Participation Ratio by at least 0.86%.
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    The Exchange believes that the increased rebate rate should 
encourage members to strive to bring even more retail and institutional 
orders in exchange-traded securities to the Exchange. The Exchange 
notes that the rebate concept remains the same after this filing: the 
more added liquidity a member brings to the Exchange, the higher the 
member's potential rebate rate may be within the parameters of Rule 
7014.
    The ISP is designed to operate on a monthly cycle, both from the 
perspective of targeted flow brought to the Exchange and ISP rebates to 
members that brought such flow. Since its inception,\11\ the ISP fee 
program has been, and continues to be, non-discriminatory, reasonable, 
and effective in attracting targeted liquidity to the NASDAQ Market 
Center. The primary objective in making the proposed adjustment is to 
encourage members to bring larger amounts of targeted liquidity to the 
Exchange by increasing the rebate for such liquidity. The Exchange 
believes that its proposal is decidedly non-discriminatory because it 
does not favor or distinguish any group of ISP participants while 
promoting the clear goal of the ISP.
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    \11\ See Securities Exchange Act Release No. 63270 (November 8, 
2010), 75 FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of 
filing and immediate effectiveness).
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    In terms of housekeeping changes, the Exchange proposes to correct 
a typographical error in subsection (c)(2) of Rule 7014. On February 2, 
2011, the Exchange filed an immediately effective fee proposal 
regarding the Investor Support Program. By this fee filing, the 
Exchange stated in subsection (b) of Rule 7014 that, subject to the 
conditions set forth in section (c) of Rule 7014 the ISP rebate rate 
may be $0.0004 (as discussed herein); and stated in sub-section (c)(2) 
that the additional tiered rebate rate would be available to those 
members that bring in an even greater amount of liquidity by exceeding 
the Baseline Participation Ratio by at least 0.43% (the ``$0.0004 
filing'').\12\
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    \12\ See Securities Exchange Act Release No. 63891 (February 11, 
2011) (NASDAQ-2011-022) (notice of filing and immediate 
effectiveness).
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    In the $0.0004 filing, the Exchange correctly stated, four times in 
the body of its filing, that the new additional rebate rate was 
$0.0004. The Exchange likewise correctly stated in the rule text, as 
reflected in subsection (b) of Rule 7014, that the additional rebate 
rate was $0.0004. However, in the second reference to the additional 
rebate rate in the rule text at subsection (c)(2) of the $0.0004 
filing, the Exchange made a typographical error by adding an extra zero 
to the rebate rate of $0.0004 (e.g. $.00004).
    The Exchange believes that it is clear from the $0.0004 filing that 
the Exchange intended to add an additional tiered rebate rate of 
$0.0004. The Exchange now corrects this typographical error by removing 
the extraneous zero so that the rebate rate in

[[Page 13696]]

subsection (c)(2) is reflected as $0.0004, in conformity with 
subsection (b) of Rule 7014.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\13\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\14\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which NASDAQ operates or controls, 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.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(4) and (5).
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    The Investor Support Program encourages members to add targeted 
liquidity that is executed in the NASDAQ Market Center. The primary 
objective in making this enhancement to the Investor Support Program is 
to add an even greater amount of targeted liquidity to the Exchange. 
The rule change proposal, like the ISP, is ``not designed to permit 
unfair discrimination'' \15\ but, rather, is intended to promote 
submission of liquidity-providing orders to NASDAQ, which would benefit 
all NASDAQ members and all investors. Likewise, the proposal, like the 
ISP, is consistent with the Act's requirement ``for the equitable 
allocation of reasonable dues, fees, and other charges.'' \16\ As 
explained in the immediately preceding paragraphs, the proposal 
enhances the goal of the ISP. Members who choose to significantly 
increase the volume of ISP-eligible liquidity-providing orders that 
they submit to NASDAQ would be benefitting all investors, and therefore 
an additional credit, as contemplated in the proposed enhanced program, 
is equitable. Finally, NASDAQ notes that the intense competition among 
several national securities exchanges and numerous OTC venues 
effectively guarantees that fees and credits for the execution of 
trades in NMS securities remain equitable and are not unfairly 
discriminatory.\17\
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    \15\ See Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
    \16\ See Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4).
    \17\ See, e.g., Concept Release (discusses the various venues 
where trades are executed).
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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 necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\18\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(3)(a)(ii).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-034 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-2011-034. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2011-034 and should be submitted on or before April 4, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5718 Filed 3-11-11; 8:45 am]
BILLING CODE 8011-01-P