Document ID: SEC-2013-0533-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2013-03-19T04:00Z

[Federal Register Volume 78, Number 53 (Tuesday, March 19, 2013)]
[Notices]
[Pages 16898-16903]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06292]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69132; File No. SR-NASDAQ-2013-041]

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

March 13, 2013.
    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 1, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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 prepared by NASDAQ. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to modify Chapter XV, entitled ``Options Pricing,'' 
at Section 2 governing pricing for NASDAQ members using the NASDAQ 
Options Market (``NOM''), NASDAQ's facility for executing and routing 
standardized equity and index options. Specifically, NOM proposes to 
amend certain Penny Pilot Options \3\ Rebates to Add Liquidity and 
certain Non-Penny Pilot Options \4\ Fees for Adding and Removing 
Liquidity.
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through June 30, 2013. See Securities 
Exchange Act Release Nos. 57579 (March 28, 2008), 73 FR 18587 (April 
4, 2008) (SR-NASDAQ-2008-026) (notice of filing and immediate 
effectiveness establishing Penny Pilot); 60874 (October 23, 2009), 
74 FR 56682 (November 2, 2009) (SR-NASDAQ-2009-091) (notice of 
filing and immediate effectiveness expanding and extending Penny 
Pilot); 60965 (November 9, 2009), 74 FR 59292 (November 17, 2009) 
(SR-NASDAQ-2009-097) (notice of filing and immediate effectiveness 
adding seventy-five classes to Penny Pilot); 61455 (February 1, 
2010), 75 FR 6239 (February 8, 2010) (SR-NASDAQ-2010-013) (notice of 
filing and immediate effectiveness adding seventy-five classes to 
Penny Pilot); 62029 (May 4, 2010), 75 FR 25895 (May 10, 2010) (SR-
NASDAQ-2010-053) (notice of filing and immediate effectiveness 
adding seventy-five classes to Penny Pilot); 65969 (December 15, 
2011), 76 FR 79268 (December 21, 2011) (SR-NASDAQ-2011-169) (notice 
of filing and immediate effectiveness extension and replacement of 
Penny Pilot); 67325 (June 29, 2012), 77 FR 40127 (July 6, 2012) (SR-
NASDAQ-2012-075) (notice of filing and immediate effectiveness and 
extension and replacement of Penny Pilot through December 31, 2012); 
and 68519 (December 21, 2012), 78 FR 136 (January 2, 2013) (SR-
NASDAQ-2012-143) (notice of filing and immediate effectiveness and 
extension and replacement of Penny Pilot through June 30, 2013). See 
also NOM Rules, Chapter VI, Section 5.
    \4\ Non-Penny Pilot Pricing includes NDX. For transactions in 
NDX, a surcharge of $0.10 per contract is added to the Fee for 
Adding Liquidity and the Fee for Removing Liquidity in Non-Penny 
Pilot Options, except for a Customer who will not be assessed a 
surcharge.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    NASDAQ proposes to modify Chapter XV, entitled ``Options Pricing,'' 
at Section 2(1) governing the rebates and fees assessed for option 
orders entered into NOM. The Exchange is proposing to amend the 
Customer,\5\ Professional,\6\ Non-NOM Market Maker \7\ and NOM Market 
Maker \8\ Penny Pilot Options Rebates to Add Liquidity and the NOM 
Market Maker Non-Penny Pilot Options Fees for Adding and Removing 
Liquidity.
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    \5\ The term ``Customer'' or (``C'') applies to any transaction 
that is identified by a Participant for clearing in the Customer 
range at The Options Clearing Corporation (``OCC'') which is not for 
the account of broker or dealer or for the account of a 
``Professional'' (as that term is defined in Chapter I, Section 
1(a)(48)).
    \6\ The term ``Professional'' or (``P'') means any person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s) pursuant 
to Chapter I, Section 1(a)(48). All Professional orders shall be 
appropriately marked by Participants.
    \7\ The term ``Non-NOM Market Maker'' or (``O'') is a registered 
market maker on another options exchange that is not a NOM Market 
Maker. A Non-NOM Market Maker must append the proper Non-NOM Market 
Maker designation to orders routed to NOM.
    \8\ The term ``NOM Market Maker'' or (``M'') is a Participant 
that has registered as a Market Maker on NOM pursuant to Chapter 
VII, Section 2, and must also remain in good standing pursuant to 
Chapter VII, Section 4. In order to receive NOM Market Maker pricing 
in all securities, the Participant must be registered as a NOM 
Market Maker in at least one security.
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    The Exchange proposes to reduce the current Non-NOM Market Maker 
Rebate to Add Liquidity in Penny Pilot Options from $0.25 to $0.10 per 
contract in order that a Non-NOM Market Maker would be paid the same 
rebates as a Firm \9\ and Broker-Dealer.\10\ The Exchange also proposes 
to amend the Tier 6 Customer and Professional Rebate to Add Liquidity 
in Penny Pilot Options and add a new Tier 7 rebate. Currently, the

[[Page 16899]]

Exchange offers Customers and Professionals a Rebate to Add Liquidity 
if they qualify for a tier based on their monthly volume. The Exchange 
has a six tier rebate structure as follows:
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    \9\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \10\ The term ``Broker-Dealer'' or (``B'') applies to any 
transaction which is not subject to any of the other transaction 
fees applicable within a particular category.

------------------------------------------------------------------------
                                                          Rebate to  add
                     Monthly volume                         liquidity
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Tier 1 Participant adds Customer and Professional                  $0.26
 liquidity of up to 24,999 contracts per day in a month
Tier 2 Participant adds Customer and Professional                   0.40
 liquidity of 25,000 to 34,999 contracts per day in a
 month.................................................
Tier 3 Participant adds Customer and Professional                   0.43
 liquidity of 35,000 to 74,999 contracts per day in a
 month.................................................
Tier 4 Participant adds Customer and Professional                   0.44
 liquidity of 75,000 or more contracts per day in a
 month.................................................
Tier 5 Participant adds (1) Customer and Professional               0.42
 liquidity of 25,000 or more contracts per day in a
 month, (2) the Participant has certified for the
 Investor Support Program set forth in Rule 7014; and
 (3) the Participant executed at least one order on
 NASDAQ's equity market................................
Tier 6 Participant has Total Volume of 130,000 or more              0.46
 contracts per day in a month..........................
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    The Exchange proposes to amend Tier 6 to qualify the current 
requirement that a Participant with Total Volume of 130,000 or more 
contacts per day in a month will receive a rebate of $0.46 per contract 
to require that 25,000 or more of the Total Volume to qualify for Tier 
6 must be Customer or Professional liquidity. In addition, the Exchange 
also proposes to add a new Tier 7 which would pay an increased rebate 
of $0.48 per contract if a Participant has Total Volume of 325,000 or 
more contracts per day in a month, or (2) adds Customer and 
Professional liquidity of 1.00% or more of national customer volume in 
multiply-listed equity and ETF options classes in a month \11\ or (3) 
adds Customer and Professional liquidity of 60,000 or more contracts 
per day in a month and NOM Market Maker liquidity of 30,000 or more per 
day per month. Similar to Tier 6, the Exchange shall define Total 
Volume as Customer, Professional, Firm, Broker-Dealer, Non-NOM Market 
Maker and NOM Market Maker volume in Penny Pilot Options and Non-Penny 
Pilot Options which either adds or removes liquidity on NOM.\12\ For 
purposes of Tier 7, the Exchange would allow NOM Participants under 
Common Ownership \13\ to aggregate their volume to qualify for the 
rebate. The Exchange believes that the amendment to Tier 6 and the 
addition of Tier 7 will incentivize Participants to transact additional 
Customer and Professional volume. The addition of Tier 7 will also 
incentivize Participants to post NOM Market Maker liquidity on NOM.
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    \11\ The reference to national volume refers to volume on all 
options markets. NASDAQ OMX PHLX LLC (``Phlx'') and the Chicago 
Board Options Exchange Incorporated (``CBOE'') utilize a similar 
national volume number to calculate rebates. Phlx pays customer 
rebates based on relative contracts per month as a percentage of 
total national customer volume in multiply-listed options transacted 
on Phlx. See Phlx's Pricing Schedule at Section A. CBOE offers each 
Trading Permit Holder (``TPH'') a credit for each public customer 
order transmitted by the TPH which is executed electronically in all 
multiply-listed option classes, excluding QCC trades and executions 
related to contracts that are routed to one or more exchanges in 
connection with the Options Order Protection and Locked/Crossed 
Market Plan, provided the TPH meets certain percentage thresholds in 
a month as described in the Volume Incentive Program. See CBOE's 
Fees Schedule.
    \12\ The Exchange is proposing to add the words ``on NOM'' to 
the Total Volume definition solely to clarify that this volume 
refers to transactions on the Exchange.
    \13\ Common ownership is defined in Chapter XV as Participants 
under 75% common ownership or control.
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    The Exchange proposes to amend the NOM Market Maker Rebate to Add 
Liquidity in Penny Pilot Options from $0.30 per contract to a four tier 
rebate structure. The Exchange proposes to pay a Tier 1 rebate of $0.25 
per contract for Participants that add NOM Market Maker liquidity in 
Penny Pilot and Non-Penny Pilot Options of up to 39,999 contracts per 
day in a month. The Exchange proposes to pay a Tier 2 rebate of $0.30 
per contract for Participants that add NOM Market Maker liquidity in 
Penny Pilot and Non-Penny Pilot Options of 40,000 to 89,999 contracts 
per day in a month. The Exchange proposes to pay a Tier 3 rebate of 
$0.32 per contract for Participants and its affiliates under Common 
Ownership \14\ that qualify for the Tier 7 Customer and Professional 
Rebate to Add Liquidity in Penny Pilot Options. The Exchange proposes 
to pay a Tier 4 rebate of $0.32 \15\ or $0.38 per contract in the 
following symbols, iShares MSCI Emerging Markets Index (``EEM''), SPDR 
Gold Shares (``GLD''), iShares Russell 2000 Index (``IWM''), 
PowerShares QQQ (``QQQ''), SPDR S&P 500 (``SPY''), iPath S&P 500 VIX ST 
Futures ETN (``VXX'') and Financial Select Sector SPDR (``XLF''), if 
Participants add NOM Market Maker liquidity of 90,000 or more contracts 
per day in a month. The Exchange believes that offering NOM Market 
Makers the ability to obtain higher rebates will encourage NOM Market 
Makers to post greater liquidity on NOM.
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    \14\ See note 12.
    \15\ The Exchange would pay $0.32 per contract rebate for all 
other qualifying Penny Pilot Options excluding EEM, GLD, IWM, QQQ, 
SPY, VXX and XLF.
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    The Exchange also proposes to increase the NOM Market Maker Non-
Penny Pilot Fee for Adding Liquidity from $0.25 to $0.35 per contract 
and the Fee for Removing Liquidity from $0.82 to $0.85 per contract. 
The Exchange proposes to increase these fees in order to offer NOM 
Market Makers an opportunity to earn higher rebates in Penny Pilot 
Options for transacting both Penny and Non-Penny Pilot Options.
    The Exchange also proposes technical amendments to capitalize the 
term ``common ownership'' as that term is defined in Chapter XV and add 
the words ``on NOM'' to the definition of Total Volume as described 
herein.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\16\ in general, and with 
Section 6(b)(4) of the Act,\17\ in particular, in that they provide for 
the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility or 
system which NASDAQ operates or controls.
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    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposal to reduce the Non-NOM 
Market Maker Rebate to Add Liquidity in Penny Pilot Options from $0.25 
to $0.10 per contract is reasonable because the Exchange proposes to 
offer Non-NOM Market Makers the same rebate as Firms and Broker 
Dealers. The Exchange believes that offering Customers, Professionals 
and NOM Market Makers the opportunity to earn higher rebates is 
reasonable because by incentivizing Participants to select the Exchange 
as a venue to post Customer and Professional liquidity will attract 
additional order flow to the benefit of all market participants and 
incentivizing NOM Market Makers to

[[Page 16900]]

post liquidity will also benefit participants through increased order 
interaction. Today, the Exchange assesses Non-NOM Market Makers, Firms 
and Broker-Dealers the same fees for adding and removing liquidity in 
all symbols. The Exchange is proposing to likewise pay these market 
participants the same rebates.
    The Exchange believes that the amendments to the Penny Pilot 
Options Rebates to Add Liquidity are equitable and not unfairly 
discriminatory for various reasons. The Exchange believes that paying 
Customers and Professionals a tiered Rebate to Add Liquidity in Penny 
Pilot Options, as proposed herein, is equitable and not unfairly 
discriminatory as compared to other market participants. Pursuant to 
this proposal, the Exchange would pay the highest Tier 1 Rebate to Add 
Liquidity in Penny Pilot Options of $0.26 per contract to Customers and 
Professionals for transacting one qualifying contract as compared to 
other market participants.\18\ The Exchange believes that Customers are 
entitled to higher rebates because Customer order flow brings unique 
benefits to the market through increased liquidity which benefits all 
market participants. The Exchange believes that continuing to offer 
Professional the same Penny Pilot Options Rebates to Add Liquidity as 
Customers is equitable and not unfairly discriminatory because the 
Exchange is offering Professionals the same rebates as today, with the 
exception of Tier 6, which is being amended, and Tier 7, which is new. 
The Exchange believes that offering Professionals the opportunity to 
earn the same rebates as Customers, as is the case today, and higher 
rebates as compared to Firms, Broker-Dealers and Non-NOM Market Makers, 
and in some cases NOM Market Makers, is equitable and not unfairly 
discriminatory because the Exchange does not believe that the amount of 
the rebate offered by the Exchange has a material impact on a 
Participant's ability to execute orders in Penny Pilot Options. The 
Exchange has been assessing the impact of rebates since it first began 
to offer them and has also observed the impact of fees and rebates on 
other options exchanges in terms of quoting and liquidity. The Exchange 
believes that the Fees for Adding Liquidity in Penny Pilot Options, as 
compared to Rebates to Add Liquidity, impact a market participant's 
decision-making more prominently with respect to posting order flow on 
different venues and price. In modifying its rebates and offering 
Professionals, as well as Customers, higher rebates, the Exchange hopes 
to simply remain competitive with other venues so that it remains a 
choice for market participants when posting orders and the result may 
be additional Professional order flow for the Exchange, in addition to 
increased Customer order flow. In addition, a Participant may not be 
able to gauge the exact rebate tier it would qualify for until the end 
of the month because Professional volume would be commingled with 
Customer volume in calculating tier volume. A Professional could only 
otherwise presume the Tier 1 rebate would be achieved in a month when 
determining price. Further, the Exchange initially established 
Professional pricing in order to ``* * * bring additional revenue to 
the Exchange.'' \19\ The Exchange noted in the Professional Filing that 
it believes ``* * * that the increased revenue from the proposal would 
assist the Exchange to recoup fixed costs.'' \20\ The Exchange also 
noted in that filing that it believes that establishing separate 
pricing for a Professional, which ranges between that of a customer and 
market maker, accomplishes this objective.\21\ The Exchange does not 
believe that providing Professionals with the opportunity to obtain 
higher rebates equivalent to that of a Customer creates a competitive 
environment where Professionals would be necessarily advantaged on NOM 
as compared to NOM Market Makers, Firms, Broker-Dealers or Non-NOM 
Market Makers. Also, a Professional is assessed the same fees as other 
market participants, except Customers.\22\ For these reasons, the 
Exchange believes that continuing to offer Professionals the same 
rebates as Customers is equitable and not unfairly discriminatory. 
Finally, the Exchange believes that NOM Market Makers should be offered 
the opportunity to earn higher rebates as compared to Non-NOM Market 
Makers, Firms and Broker Dealers because NOM Market Makers add value 
through continuous quoting \23\ and the commitment of capital.
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    \18\ The NOM Market Maker Tier 1 Rebate to Add Liquidity in 
Penny Pilot Options would be $0.25 per contract pursuant to this 
proposal and all [sic] other market participants would receive a 
$0.10 per contract rebate.
    \19\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066) 
(``Professional Filing''). In this filing, the Exchange addressed 
the perceived favorable pricing of Professionals who were assessed 
fees and paid rebates like a Customer prior to the filing. The 
Exchange noted in that filing that a Professional, unlike a retail 
Customer, has access to sophisticated trading systems that contain 
functionality not available to retail Customers.
    \20\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
    \21\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066). The Exchange 
noted in this filing that it believes the role of the retail 
Customer in the marketplace is distinct from that of the 
Professional and the Exchange's fee proposal at that time accounted 
for this distinction by pricing each market participant according to 
their roles and obligations.
    \22\ The Fee for Removing Liquidity in Penny Pilot Options is 
$0.47 per contract for all market participants, except Customers. 
Customers are assessed $0.45 per contract.
    \23\ Pursuant to Chapter VII (Market Participants), Section 5 
(Obligations of Market Makers), in registering as a market maker, an 
Options Participant commits himself to various obligations. 
Transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and Market Makers 
should not make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. Further, all Market 
Makers are designated as specialists on NOM for all purposes under 
the Act or rules thereunder. See Chapter VII, Section 5.
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    The Exchange believes the amended Tier 6 rebate and new Tier 7 
Customer and Professional Rebates to Add Liquidity in Penny Pilot 
Options are reasonable, equitable and not unfairly discriminatory 
because the Exchange is offering Participants meaningful incentives to 
increase their participation on NOM in terms of higher Penny Pilot 
Options Rebates to Add Liquidity and fee reductions which reduce costs. 
The Exchange's proposal to amend the Tier 6 Customer and Professional 
Rebate to Add Liquidity in Penny Pilot Options is reasonable because 
the Exchange believes that requiring a certain amount of the Total 
Volume to consist of Customer or Professional liquidity will continue 
to attract liquidity to the Exchange to the benefit of all market 
participants. The Exchange believes the amendment to the Tier 6 
Customer and Professional Rebate to Add Liquidity in Penny Pilot 
Options is equitable and not unfairly discriminatory because all 
Participants may qualify for the rebate and such incentives will 
benefit other market participants through the increased liquidity that 
such Customer and Professional order flow will bring to the Exchange.
    The Exchange's proposal to add a new Tier 7 Customer and 
Professional Rebate to Add Liquidity in Penny Pilot Options and pay an 
increased rebate of $0.48 per contract to Participants that transact 
Total Volume of 325,000 contracts or more per day, in a month, add 
Customer and Professional liquidity of 1.00% or more of national 
customer volume in multiply-listed equity and ETF options classes in a 
month or add Customer and Professional liquidity of 60,000 or more 
contracts per day in a month and NOM Market Maker liquidity of 30,000 
or more per day per month is reasonable,

[[Page 16901]]

equitable and not unfairly discriminatory because the Exchange believes 
that Participants will be incentivized to execute an even greater 
number of orders on the Exchange, add a greater amount of Customer and 
Professional liquidity on NOM and post a greater amount of NOM Market 
Maker liquidity, which in turn benefits all market participants. The 
Exchange believes the existing monthly volume thresholds have 
incentivized Participants to increase Customer and Professional order 
flow to the Exchange. The Exchange desires to continue to encourage 
Participants to route Customer and Professional orders, and post NOM 
Market Maker orders, to the Exchange by offering increased Customer and 
Professional Rebates to Add Liquidity in Penny Pilot Options. All 
Participants that transact Customer and Professional orders in Penny 
Pilot Options are and will continue to be eligible for the Customer and 
Professional rebates.\24\
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    \24\ Pursuant to this proposal, Tier 1 pays a rebate of $0.26 
per contract to Participants that add Customer and Professional 
liquidity of up to 24,999 contracts per day in a month of Penny 
Pilot Options. There is no required minimum volume of Customer and 
Professional orders to qualify for the Customer or Professional 
Rebate to Add Liquidity in Penny Pilot Options.
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    The Exchange's proposal to permit Participants to qualify for Tier 
7 Customer and Professional Rebate to Add Liquidity in Penny Pilot 
Options by adding Customer and Professional liquidity of 1.00% or more 
of national customer volume in multiply-listed equity and ETF options 
classes in a month is reasonable because measuring Customer and 
Professional liquidity as a percentage of national customer volume in 
the industry relative to those contracts executed on NOM allows the 
Exchange to control and account for changes in national industry-wide 
multiply-listed options volume. Further, allowing Participants to 
combine equity options volume with that of ETFs will provide 
Participants an opportunity to qualify for this rebate tier. The 
Exchange's proposal to permit Participants to qualify for Tier 7 by 
adding Customer and Professional liquidity of 1.00% or more of national 
customer volume in multiply-listed equity and ETF options classes in a 
month is equitable and not unfairly discriminatory because it will be 
applied to all Participants in a uniform matter. Any Participant is 
eligible to receive the rebate provided they transact a qualifying 
amount of electronic Customer and Professional volume as required. The 
Exchange believes that permitting Participants to otherwise qualify for 
Tier 7 by transacting Total Volume of 325,000 contracts or more per 
day, in a month, or adding Customer and Professional liquidity of 
60,000 or more contracts per day in a month and NOM Market Maker 
liquidity of 30,000 or more per day per month is reasonable because the 
Exchange already allows Participants to obtain rebates today based on 
Total Volume and offering to allow Participants to qualify for Tier 7 
by adding a certain mix of Customer, Professional and NOM Market Maker 
liquidity provides Participants additional opportunities to obtain a 
higher rebate and benefit other market participants by the liquidity 
and order interaction that such order flow will bring to NOM. As stated 
previously, the other means to qualify for Tier 7 (other than adding 
Customer and Professional liquidity of 1.00% or more of national 
customer volume in multiply-listed equity and ETF options classes in a 
month), transacting Total Volume of 325,000 contracts or more per day, 
in a month, or adding Customer and Professional liquidity of 60,000 or 
more contracts per day in a month and NOM Market Maker liquidity of 
30,000 or more per day per month, is equitable and not unfairly 
discriminatory because all Participants may achieve this rebate by 
transacting the appropriate level of volume required by Tier 7.
    The Exchange believes that the new NOM Market Maker Penny Pilot 
Options Rebates to Add Liquidity tiers are reasonable because the 
Exchange is offering NOM Market Makers the ability to obtain higher 
rebates by posting liquidity on NOM. The Exchange proposes to pay NOM 
Market Makers a Tier 1 Rebate to Add Liquidity of $0.25 per contract in 
Penny Pilot Options for adding up to 39,999 contracts per day in a 
month of Penny or Non-Penny Pilot Options. While the Exchange is paying 
Customers and Professionals higher rebates for adding Penny Pilot 
Options Customer and Professional liquidity in Tiers 1 and 2 for volume 
up to 39,999 contracts,\25\ the NOM Market Maker can achieve that 
volume by aggregating Penny and Non-Penny Pilot Options in order to 
obtain a $0.25 per contract Tier 1 NOM Market Maker Rebate to Add 
Liquidity in Penny Pilot Options and may be able to achieve the $0.30 
per contract Tier 2 rebate, as is the case today, by adding Penny and 
Non-Penny Pilot Options contract volume. The highest rebate a NOM 
Market Maker can achieve with the proposed tier structure is $0.38 per 
contract, which is higher than the current NOM Market Maker rebate of 
$0.30 per contract and remains lower than the Customer and Professional 
Tier 2 rebate, as is the case today. The Exchange believes that the 
proposed NOM Market Maker rebate tier structure is reasonable because 
the Exchange is incentivizing NOM Market Makers to earn higher rebates 
by posting a greater number of contracts on NOM. NOM Market Makers are 
valuable market participants that provide liquidity in the marketplace 
and incur costs unlike other market participants. The Exchange believes 
that encouraging NOM Market Makers to be more aggressive when posting 
liquidity benefits all market participants through increased liquidity. 
The Exchange believes that the NOM Market Maker rebate proposal is 
equitable and not unfairly discriminatory because it does not misalign 
the current rebate structure because NOM Market Makers will continue to 
earn higher rebates as compared to Firms, Non-NOM Market Makers and 
Broker-Dealers and will continue to earn lower rebates as compared to 
Customers and Professionals for most rebate tiers except as described 
herein, a NOM Market Maker will earn a lower Tier 1 rebate as compared 
to the current $0.30 rebate.
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    \25\ The Exchange pays $0.26 per contract for Customer and 
Professional Penny Pilot Options liquidity up to 24,999 contracts 
per day in a month (Tier 1), $0.40 per contract for Customer and 
Professional Penny Pilot Options liquidity between 25,000 and 34,999 
contracts per day in a month (Tier 2) and $0.43 per contract for 
Customer and Professional Penny Pilot Options liquidity between 
35,000 to 74,999 contracts per day in a month (Tier 3).
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    With respect to the rebate tiers, the Exchange believes that the 
tiers are reasonable because although Tier 1 pays a lower rebate of 
$0.25 per contract as compared to today's NOM Market Maker rebate, as 
mentioned herein, Participants may add NOM Market Maker liquidity in 
either Penny Pilot or Non-Penny Pilot Options, up to 39,999 contracts 
per day in a month, to obtain that rebate. Today, the Exchange 
similarly allows Customers and Professionals to obtain rebates by 
transacting Customer, Professional, Firm, Broker-Dealer, Non-NOM Market 
Maker or NOM Market Maker volume in Penny Pilot Options or Non-Penny 
Pilot Options which either adds or removes liquidity on NOM (known as 
``Total Volume'') to qualify for a rebate. Likewise, the Exchange is 
proposing that NOM Market Makers may qualify for Rebates to Add 
Liquidity in Penny Pilot Options by transacting either Penny or Non-
Penny Pilot Options. The Exchange believes that incentivizing NOM 
Market Makers to post liquidity in Penny and Non-Penny Pilot Options in

[[Page 16902]]

order to obtain a rebate is reasonable, equitable and not unfairly 
discriminatory because participants will benefit through increased 
order interaction and all NOM Market Makers have a similar opportunity 
to obtain the rebate. As mentioned, the Exchange believes that NOM 
Market Makers are provided an opportunity to qualify for a Tier 2 
rebate, and obtain the same $0.30 per contract rebate as today, because 
they can aggregate Penny and Non-Penny Pilot Options volume. A 
Participant that adds NOM Market Maker liquidity in either Penny Pilot 
or Non-Penny Pilot Options of 40,000 to 89,999 contracts per day in a 
month would achieve the same $0.30 per contract rebate as NOM Market 
Makers receive today. The Exchange believes that these first two NOM 
Market Maker rebate tiers are reasonable because NOM Market Makers will 
be incentivized to be more aggressive in posting liquidity on NOM to 
achieve higher rebates or the same rebate. The Exchange believes that 
rebate Tiers 1 and 2 are equitable and not unfairly discriminatory 
because all NOM Market Makers may qualify for the tiers and every NOM 
Market Maker is entitled to a rebate solely by adding one contract of 
NOM Market Maker liquidity on NOM. Also, as mentioned, the NOM Market 
Maker would receive a higher rebate in Tier 1 as compared to a Firm, 
Non-NOM Market Maker or Broker-Dealer because of the obligations borne 
by NOM Market Makers as compared to other market participants.
    The Exchange's proposal to pay a Tier 3 NOM Market Maker rebate of 
$0.32 per contract for Participants and its affiliates under Common 
Ownership that qualify for the Tier 7 Customer and Professional Rebate 
to Add Liquidity in Penny Pilot Options is reasonable because as 
mentioned herein, NOM Market Makers are valuable market participants 
that provide liquidity in the marketplace and incur costs unlike other 
market participants. A NOM Market Maker has the obligation to make 
continuous markets, engage in a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, and not make bids or offers or enter into transactions that are 
inconsistent with a course of dealings. Encouraging NOM Market Makers 
to add greater liquidity benefits all Participants in the quality of 
order interaction. By further incentivizing Participants to achieve the 
Tier 7 Customer and Professional Rebate to Add Liquidity, the Exchange 
is seeking to add a greater amount of Customer and Professional 
liquidity to the marketplace which benefits all Participants as well as 
reduce costs not only to Professionals and Customers in paying the Tier 
7 Customer and Professional rebate, but also NOM Market Makers by 
offering the Tier 3 NOM Market Maker Rebate to Add Liquidity in Penny 
Pilot Options. The Exchange's proposal to pay a Tier 3 rebate of $0.32 
per contract for Participants and its affiliates under Common Ownership 
that qualify for the Tier 7 Customer and Professional Rebate to Add 
Liquidity in Penny Pilot Options is equitable and not unfairly 
discriminatory because all NOM Market Makers may qualify for the Tier 3 
NOM Market Maker rebate provided they are able to qualify for the Tier 
7 Customer and Professional Rebate to Add Liquidity in Penny Pilot 
Options. As mentioned herein, there are various opportunities to 
achieve a Tier 7 Customer and Professional Rebate to Add Liquidity in 
Penny Pilot Options.
    The Exchange's proposal to pay a Tier 4 NOM Market Maker rebate of 
$0.32\26\ or $0.38 per contract in EEM, GLD, IWM, QQQ, SPY, VXX and XLF 
if the Participant adds NOM Market Maker liquidity of 90,000 or more 
contracts per day in a month is reasonable because the Exchange 
believes that offering NOM Market Makers the ability to obtain higher 
rebates will encourage additional order interaction. The Exchange's 
proposal to pay a Tier 4 NOM Market Maker rebate of $0.32\27\ or $0.38 
per contract in EEM, GLD, IWM, QQQ, SPY, VXX and XLF if the Participant 
adds NOM Market Maker liquidity of 90,000 or more contracts per day in 
a month is equitable and not unfairly discriminatory because all NOM 
Market Makers may qualify for the Tier 4 NOM Market Maker rebate.
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    \26\ The Exchange would pay $0.32 per contract rebate for all 
other qualifying Penny Pilot Options excluding EEM, GLD, IWM, QQQ, 
SPY, VXX and XLF.
    \27\ The Exchange would pay $0.32 per contract rebate for all 
other qualifying Penny Pilot Options excluding EEM, GLD, IWM, QQQ, 
SPY, VXX and XLF.
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    The Exchange believes that it is reasonable, equitable, and not 
unfairly discriminatory to adopt specific pricing for EEM, GLD, IWM, 
QQQ, SPY, VXX and XLF because pricing by symbol is a common practice on 
many U.S. options exchanges as a means to incentivize order flow to be 
sent to an exchange for execution in the most actively traded options 
classes, in this case actively traded Penny Pilot Options.\28\ The 
Exchange notes that EEM, GLD, IWM, QQQ, SPY, VXX and XLF are some of 
the most actively traded options in the U.S. The Exchange believes that 
this pricing will incentivize members to transact options on EEM, GLD, 
IWM, QQQ, SPY, VXX and XLF on NOM in order to obtain the higher $0.38 
per contract rebate.
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    \28\ See Phlx's Pricing Schedule. See also the International 
Securities Exchange LLC's Fee Schedule. Both of these markets 
segment pricing by symbol.
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    The Exchange believes that its proposal to increase the NOM Market 
Maker Non-Penny Pilot Fee for Adding Liquidity from $0.25 to $0.35 per 
contract and the Fee for Removing Liquidity from $0.82 to $0.85 per 
contract is reasonable because the Exchange desires to offer NOM Market 
Makers the opportunity to earn higher rebates by transacting Penny and 
Non-Penny Pilot Options, which order flow benefits other market 
participants. These fees will assist the Exchange in offering such 
rebates. The Exchange believes that its proposal to increase the NOM 
Market Maker Non-Penny Pilot Fee for Adding Liquidity from $0.25 to 
$0.35 per contract and the Fee for Removing Liquidity from $0.82 to 
$0.85 per contract is equitable and not unfairly discriminatory because 
the Exchange would continue to assess lower fees to NOM Market Makers, 
as compared to all other Participants except Customers,\29\ as is the 
case today, because NOM Market Makers add value through continuous 
quoting\30\ and the commitment of capital.
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    \29\ Customers do not pay Non-Penny Pilot Fees for Adding 
Liquidity and today are assessed an $0.82 per contract Non-Penny 
Pilot Fee for Removing Liquidity.
    \30\ Pursuant to Chapter VII (Market Participants), Section 5 
(Obligations of Market Makers), in registering as a market maker, an 
Options Participant commits himself to various obligations. 
Transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and Market Makers 
should not make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. Further, all Market 
Makers are designated as specialists on NOM for all purposes under 
the Act or rules thereunder. See Chapter VII, Section 5.
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    With respect to Tier 3, the Exchange proposes to pay the $0.32 per 
contract rebate to Participants or its affiliates under Common 
Ownership that qualify for Tier 7. The Exchange proposes to allow 
Participants to aggregate their volume with affiliates in order to 
qualify for this Tier of the NOM Market Maker Rebate to Add Liquidity 
in Penny Pilot Options. The Exchange also proposes to permit 
Participants to allow NOM Participants under Common Ownership to 
aggregate their volume to qualify for the rebate. The Exchange believes 
that its proposal to permit Participants under Common Ownership to 
aggregate their volume is reasonable, equitable and not unfairly 
discriminatory because the Exchange would permit all Participants

[[Page 16903]]

the ability to aggregate for purposes of the rebates if certain 
Participants chose to operate under separate entities.

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

    NASDAQ does not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Customers have 
traditionally been paid the highest rebates offered by options 
exchanges. While the Exchange's proposal results in a Professional 
receiving a higher rebate as compared to a NOM Market Maker, in certain 
circumstances, the Exchange does not believe the proposed rebate tiers 
would result in any burden on competition as between market 
participants. The Exchange's proposal also aligns the Non-NOM Market 
Maker Penny Pilot Rebate to Add Liquidity with that of a Firm and 
Broker-Dealer. The Exchange's proposal to increase Non-Penny Pilot 
Options Fees for Adding and Removing Liquidity does not misalign the 
current fees as NOM Market Makers will continue to be assessed lower 
fees as compared to a Non-NOM Market Maker, Firm or Broker-Dealer 
because of the additional obligations that are required of NOM Market 
Makers as compared to these market participants. Customers continue to 
pay a lower Fee for Removing Liquidity in Non-Penny Pilot Options, 
which is currently the case for most fees on NOM which are either not 
assessed to a Customer or where a Customer is assessed the lowest fee 
because of the liquidity such order flow brings to the Exchange.
    The Exchange believes that offering Customers and Professionals the 
proposed tiered rebates creates competition among options exchanges 
because the Exchange believes that the rebates may cause market 
participants to select NOM as a venue to send Customer and Professional 
order flow. The Exchange believes that incentivizing NOM Market Makers 
to post liquidity on NOM benefits market participants through increased 
order interaction.
    The Exchange operates in a highly competitive market comprised of 
eleven U.S. options exchanges in which sophisticated and knowledgeable 
market participants can readily send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive. The 
Exchange believes that the proposed rebate structure and tiers are 
competitive with rebates and tiers in place on other exchanges. The 
Exchange believes that this competitive marketplace impacts the rebates 
present on the Exchange today and substantially influences the 
proposals set forth above.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\31\ 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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    \31\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2013-041 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-2013-041. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 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 Number SR-NASDAQ-2013-041, and should 
be submitted on or before April 9, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06292 Filed 3-18-13; 8:45 am]
BILLING CODE 8011-01-P