Document ID: SEC-2014-1010-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2014-06-18T04:00Z

[Federal Register Volume 79, Number 117 (Wednesday, June 18, 2014)]
[Notices]
[Pages 34814-34817]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14199]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72378; File No. SR-NASDAQ-2014-062]

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

June 12, 2014.
    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 June 2, 2014, 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 
amending the NOM Market Maker \3\ Rebates to Add Liquidity in Penny 
Pilot \4\ Options.
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    \3\ The term ``NOM Market Maker'' means 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. See Chapter XV. ``Participant'' means a 
firm, or organization that is registered with the Exchange pursuant 
to Chapter II of these Rules for purposes of participating in 
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or 
``Nasdaq Options Market Maker''. See Chapter I, Section (a)(40).
    \4\ The Penny Pilot was established in March 2008 and was 
extended through December 31, 2014. 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); 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); 69787 (June 18, 
2013), 78 FR 37858 (June 24, 2013) (SR-NASDAQ-2013-082); and 72244 
(May 23, 2014), 79 FR 31151 (May 30, 2014) (SR-NASDAQ-2014-056) 
(notice of filing and immediate effectiveness). See also NOM Rules, 
Chapter VI, Section 5.
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    While the Exchange has designated the proposal as effective upon 
filing, the Exchange has designated that the change is operative on 
June 2, 2014.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and

[[Page 34815]]

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 amend Chapter XV, Section 2 regarding the Tier 6 
NOM Market Maker Rebates to Add Liquidity in Penny Pilot Options, to 
add another methodology by which a Participant can earn the rebate. 
NASDAQ proposes the amendment in order to continue to incentivize 
Participants to select NOM as a venue when directing order flow.
Rebates for Adding NOM Market Maker Liquidity
    The Exchange currently pays NOM Market Maker Rebates to Add 
Liquidity based on a six tier rebate structure, which is found in 
Chapter XV, Section 2(1), as follows:

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           Monthly volume                                                      Rebate to add liquidity
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Tier 1..............................  Participant adds NOM Market   $0.20
                                       Maker liquidity in Penny
                                       Pilot Options and/or Non-
                                       Penny Pilot Options of up
                                       to 0.10% of total industry
                                       customer equity and ETF
                                       option average daily volume
                                       (``ADV'') contracts per day
                                       in a month.
Tier 2..............................  Participant adds NOM Market   $0.25
                                       Maker liquidity in Penny
                                       Pilot Options and/or Non-
                                       Penny Pilot Options above
                                       0.10% to 0.30% of total
                                       industry customer equity
                                       and ETF option ADV
                                       contracts per day in a
                                       month.
Tier 3..............................  Participant adds NOM Market   $0.30
                                       Maker liquidity in Penny
                                       Pilot Options and/or Non-
                                       Penny Pilot Options above
                                       0.30% to 0.60% of total
                                       industry customer equity
                                       and ETF option ADV
                                       contracts per day in a
                                       month.
Tier 4..............................  Participant adds NOM Market   $0.32 or $0.38 in the following symbols BAC,
                                       Maker liquidity in Penny      GLD, IWM, QQQ and VXX or $0.40 in SPY
                                       Pilot Options and/or Non-
                                       Penny Pilot Options of
                                       above 0.60% of total
                                       industry customer equity
                                       and ETF option ADV
                                       contracts per day in a
                                       month.
Tier 5..............................  Participant adds NOM Market   $0.40
                                       Maker liquidity in Penny
                                       Pilot Options and/or Non-
                                       Penny Pilot Options of
                                       above 0.30% of total
                                       industry customer equity
                                       and ETF option ADV
                                       contracts per day in a
                                       month and qualifies for the
                                       Tier 7 or Tier 8 Customer
                                       and/or Professional Rebate
                                       to Add Liquidity in Penny
                                       Pilot Options.
Tier 6..............................  Participant adds NOM Market   $0.42
                                       Maker liquidity in Penny
                                       Pilot Options and/or Non-
                                       Penny Pilot Options above
                                       0.80% of total industry
                                       customer equity and ETF
                                       option ADV contracts per
                                       day in a month and
                                       qualifies for the Tier 7 or
                                       Tier 8 Customer and/or
                                       Professional Rebate to Add
                                       Liquidity in Penny Pilot
                                       Options.
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    For purposes of qualifying for a NOM Market Maker Penny Pilot 
Options Rebate to Add Liquidity tier, the Exchange today uses a metric 
that is a percentage of total industry customer equity and exchange 
traded fund (``ETF'') option average daily volume (``ADV'') contracts 
per day in a month.\5\ This percentage metric is graduated from Tier 1 
(lowest percentage) through Tier 6 (highest percentage). For example, 
currently a Participant can earn the $0.20 Tier 1 rebate if he adds NOM 
Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot 
Options of up to 0.10% of total industry customer equity and ETF option 
ADV contracts per day in a month; and can earn the $0.42 Tier 6 rebate 
if he adds NOM Market Maker liquidity in Penny Pilot Options and/or 
Non-Penny Pilot Options above 0.80% of total industry customer equity 
and ETF option ADV contracts per day in a month and qualifies for the 
Tier 7 or Tier 8 Customer,\6\ and/or Professional \7\ Rebate to Add 
Liquidity in Penny Pilot Options.
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    \5\ See Securities Exchange Act Release No. 71703 (March 12, 
2014), 79 FR 15172 (March 18, 2014) (SR-NASDAQ-2014-023) (order 
approving proposal to establish, among other things, the percentage 
metric).
    \6\ The term ``Customer'' means 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)). See 
Chapter XV.
    \7\ The term ``Professional'' 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. See Chapter XV.
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    The Exchange proposes to amend the Tier 6 rebate to add an 
alternative to the current metric. Specifically, in addition to the 
current metric of above 0.80% of total industry customer equity and ETF 
option ADV where the NOM Market Maker also qualifies for the Tier 7 or 
Tier 8 Customer and/or Professional Rebate to Add Liquidity in Penny 
Pilot Options,\8\ the Exchange proposes to add the alternate metric 
that a Participant may earn a Tier 6 rebate if he adds NOM Market Maker 
liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 
0.90% of total industry customer equity and ETF option ADV contracts 
per day in a month.
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    \8\ The Tier 7 rebate requires that a participant has Total 
Volume of 150,000 or more contracts per day in a month, of which 
50,000 or more contracts per day in a month must be Customer and/or 
Professional liquidity in Penny Pilot Options. The Tier 8 rebate 
requires that the Participant adds Customer and/or Professional 
liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 
0.75% or more of national customer volume in multiply-listed equity 
and ETF options classes in a month. See Chapter XV, Section 2(1).
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    With the proposed amendment, the Exchange would pay a Tier 6 $0.42 
per contract rebate where a Participant adds NOM Market Maker liquidity 
in Penny Pilot Options and/or Non-Penny Pilot Options above 0.80% of 
total industry customer equity and ETF option ADV contracts per day in 
a month and qualifies for the Tier 7 or Tier 8 Customer and/or 
Professional Rebate to Add Liquidity in Penny Pilot Options, or 
Participant adds NOM Market Maker liquidity in Penny Pilot Options and/
or Non-Penny Pilot Options above 0.90% of total industry customer 
equity and ETF option ADV contracts per day in a month. The Exchange is 
not amending the current qualification for the Tier 6

[[Page 34816]]

NOM Market Maker rebate, but is simply adding an alternate method to 
qualify to earn a rebate.
    In addition, the Exchange is proposing to delete an extraneous 
period in Tier 5, and thereby conform the punctuation in Tiers 1 
through 6 of the NOM Market Maker Rebates to Add Liquidity in Penny 
Pilot Options.
    The Exchange would continue to incentivize Participants, with NOM 
Market Maker rebate Tiers 1 through 6 as amended, to provide liquidity 
by paying specified rebates to those Participants that add NOM Market 
Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot Options 
according to percentage metrics keyed to industry customer equity and 
ETF option average ADV contracts per day in a month.\9\
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    \9\ The dynamic rebate structure, consisting of a percentage of 
total industry customer equity and ETF option ADV, is similar for 
Customer and/or Professional Penny Pilot Options as well as for NOM 
Market Makers for similar products (e.g., Penny Pilot Options and 
Non-Penny Pilot Options). The Exchange notes that if a Participant 
qualifies for two tiers, the higher rebate will be paid in a given 
month.
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2. Statutory Basis
    NASDAQ believes that its proposal to amend its Pricing Schedule is 
consistent with Section 6(b) of the Act \10\ in general, and furthers 
the objectives of Section 6(b)(4) and (b)(5) of the Act \11\ 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 is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4), (5).
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    The Exchange's goal is to modify percentage eligibility thresholds 
where a Participant adds NOM Market Maker liquidity in order to 
continue to encourage market participants to direct a greater amount of 
NOM Market Maker liquidity to the Exchange. The Exchange's proposal 
does not eliminate rebates or the ability for market participants to 
earn rebates, but rather incorporates an additional way to earn rebates 
as noted herein.
    The Exchange's proposal to amend Tier 6 of the NOM Market Maker 
Rebate to Add Liquidity in Penny Pilot Options is reasonable, equitable 
and not unfairly discriminatory for the reasons noted below.
    The Exchange's proposal to adopt a new Tier 6 metric for 
Participants that add the highest level of NOM Market Maker liquidity 
in Penny Pilot Options and/or Non-Penny Pilot Options above 0.90% of 
total industry customer equity and ETF option ADV contracts per day in 
a month is equitable and not unfairly discriminatory because all 
eligible Participants that qualify for the additional Tier 6 NOM Market 
Maker Rebate to Add Liquidity metric will be uniformly paid the 
rebate.\12\
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    \12\ The NOM Market Maker obligations and regulatory 
requirements remain unchanged. 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 would continue to incentivize Participants, with Tiers 
1 through 6 NOM Market Maker Penny Pilot Options Rebates to Add 
Liquidity, as amended, to provide liquidity by paying specified rebates 
to those Participants that add NOM Market Maker liquidity in Penny 
Pilot Options and/or Non-Penny Pilot Options according to percentage 
metrics keyed to industry customer equity and ETF option average ADV 
contracts per day in a month. The proposed percentage metrics are 
dynamic in nature in that they reference total industry options 
contracts per day (rather than a static number of contracts per 
day),\13\ and thereby make the Rebate structure similar for Customers 
and/or Professionals as well as for NOM Market Makers for similar 
products (e.g., Penny Pilot Options and Non-Penny Pilot Options).\14\
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    \13\ See supra note 5.
    \14\ The Exchange notes that if a Participant qualifies for two 
tiers, the higher rebate will be paid.
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    In addition, the Exchange believes it is reasonable to continue to 
use percentage metrics keyed to industry customer equity and ETF option 
average ADV contracts per day in a month because that is a benchmark 
that Participants are comfortable with in respect to Customer and 
Professional liquidity. Moreover, the Exchange believes that industry 
customer volume is a fair metric because it does not have the periodic 
spikes that may occur due to floor trading. Because NOM is an 
electronic market place with no trading floor, the Exchange believes 
that an industry volume metric is fair and reasonable.

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

    NASDAQ does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.
    The Exchange believes that adding an additional percentage 
eligibility metric in Tier 6 for Participants that bring the largest 
amount of liquidity should encourage Participants to direct additional 
NOM Market Maker order flow to the Exchange, and will dovetail with the 
existing metric in Tier 6.
    Added liquidity benefits all market participants by providing more 
trading opportunities, which attracts market participants to the 
Exchange. An increase in the activity of these market participants in 
turn facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
The Exchange believes that encouraging Participants to add NOM Market 
Maker liquidity creates competition among options exchanges because the 
Exchange believes that the rebates may cause market participants to 
select NOM as a venue to send order flow. The Exchange is continuing to 
offer rebates at specified percentage metrics for NOM Market Maker 
order flow being executed at the Exchange, which additional order flow 
should benefit other market participants.
    The Exchange operates in a highly competitive market comprised of 
twelve U.S. options exchanges in which many sophisticated and 
knowledgeable market participants can readily and do send order flow to 
competing exchanges if they deem fee levels or rebate incentives at a 
particular exchange to be excessive or inadequate. These market forces 
support the Exchange belief that the rebate structure and tiers as 
amended are competitive with rebates and tiers in place on other 
exchanges. The Exchange believes that this competitive marketplace 
continues to impact 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

[[Page 34817]]

19(b)(3)(A)(ii) of the Act.\15\ 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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    \15\ 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-2014-062 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-062. 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 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-2014-062, and should 
be submitted on or before July 9, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14199 Filed 6-17-14; 8:45 am]
BILLING CODE 8011-01-P