Document ID: SEC-2007-1046-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-08-01T04:00Z

[Federal Register: August 1, 2007 (Volume 72, Number 147)]
[Notices]               
[Page 42163-42165]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au07-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56130; File No. SR-NASDAQ-2007-061]

 
Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Institute a Pricing Incentive Program for Market Makers in Exchange-
Traded Funds and Index-Linked Securities

Date: July 25, 2007.
    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 July 18, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by Nasdaq. 
The Exchange has designated this proposal as one establishing or 
changing a due, fee, or other charge imposed by a self-regulatory 
organization pursuant to section 19(b)(3)(A)(ii) of the Act \3\ and 
Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to institute a pricing incentive program for market 
makers in exchange-traded funds (``ETFs'') and index-linked securities 
(``ILSs'') listed on Nasdaq.\5\ Nasdaq plans to implement the proposed 
rule change on August 1, 2007. The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nasdaq.com/about/LegalCompliance.stm.

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    \5\ The Exchange's proposed rule text is contained in the Nasdaq 
7000 Series (Charges for Membership, Services, and Equipment) at 
paragraph (g) of Rule 7018 (Nasdaq Market Center Order Execution and 
Routing).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    Nasdaq proposes to introduce a pricing incentive program for market 
makers in ETFs and ILSs listed on Nasdaq. In April 2007, Nasdaq 
executed 34.8% of all transactions in ETFs listed on U.S. exchanges, 
making it the largest market for ETF transactions. Nasdaq also executes 
a large percentage of transactions in ILSs. However, Nasdaq currently 
lists fewer ETFs and ILSs than the New York Stock Exchange LLC and the 
American Stock Exchange LLC. The proposal is designed both to enhance 
Nasdaq's competitiveness as a listing venue for ETFs and ILSs and 
further strengthen its market quality as a transaction venue for ETFs 
and ILSs.
    Nasdaq proposes to adopt rules that are similar to those regarding 
NYSE Arca, Inc.'s (``NYSE Arca's'') program for Designated Market 
Makers.\6\ Under NYSE Arca's program, a Designated Market Maker for a 
security listed on NYSE Arca is required to maintain minimum 
performance standards with regard to (1) Percent of time at the 
national best bid (best offer) (``NBBO''), (2) percent of executions 
better than the NBBO, (3) average displayed size, (4) average quoted 
spread, and (5) in the case of derivative securities, the ability of 
the Designated Market Maker to transact in underlying markets. In 
return, the Designated Market Maker pays $0.0025 per share when 
accessing liquidity in stocks for which it is the Lead Market Maker, 
and receives a $0.004 per share credit when providing liquidity.
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    \6\ See NYSE Arca Equities Rule 7.24 (Designated Market Maker 
Performance Standards) and NYSE Arca Schedule of Fees and Charges 
for Exchange Services (http://www.nyse.com/pdfs/NYSEArca_Equities_Fees.pdf
).

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    Under Nasdaq's proposed program, a market maker in an ETF or ILS 
may become a ``Designated Liquidity Provider'' in a ``Qualified 
Security'' and receive similarly favorable incentive pricing. A 
Qualified Security must be an ETF or ILS listed on Nasdaq, have at 
least one Designated Liquidity Provider, and have a Nasdaq-designated 
maximum trading volume. Specifically, a security is no longer eligible 
to be a

[[Page 42164]]

Qualified Security once there have been two calendar months in any 
three calendar-month period during which its average daily volume on 
Nasdaq exceeded 250,000 shares. Thus, the program is designed to 
encourage support of ETFs and ILSs during their period of initial 
listing, when the security must develop an active trading market in 
order to succeed. Once the volume threshold is reached, the pricing for 
the ETF or ILS would be consistent with pricing for other securities 
traded on Nasdaq.
    A ``Designated Liquidity Provider'' is a registered Nasdaq market 
maker in a Qualified Security that has committed to maintain minimum 
performance standards. Designated Liquidity Providers would be selected 
by Nasdaq based on factors including, but not limited to, experience 
with making markets in ETFs and ILSs, adequacy of capital, willingness 
to promote Nasdaq as a marketplace, issuer preference, operational 
capacity, support personnel, and history of adherence to Nasdaq rules 
and securities laws. Nasdaq may limit the number of Designated 
Liquidity Providers in a Qualified Security, or modify a previously 
established limit, upon prior written notice to members. Specifically, 
Nasdaq may modify such limit either to increase or decrease the number 
of Designated Liquidity Providers for a Qualified Security upon 
providing such prior written notice.
    As is true under the equivalent rules of NYSE Arca, the minimum 
performance standards applicable to a Designated Liquidity Provider may 
be determined from time to time by Nasdaq and may vary depending on the 
price, liquidity, and volatility of a particular Qualified Security. 
The performance measurements would include: (1) Percent of time at the 
NBBO; (2) percent of executions better than the NBBO; (3) average 
displayed size; and (4) average quoted spread. Nasdaq may remove 
Designated Liquidity Providers that do not meet the performance 
standards or that decide to change their status at any time.
    When accessing liquidity in a Qualified Security or routing to 
another market, the Designated Liquidity Provider would pay $0.003 per 
share executed; when providing liquidity, the Designated Liquidity 
Provider would receive a credit of $0.004 per share executed. 
Consistent with the requirements of Rule 610 of Regulation NMS,\7\ 
however, in the unlikely event that the security trades at less than $1 
per share, the normal execution fee and credit schedule in Nasdaq Rule 
7018(a) regarding securities trading less than $1 would apply.
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    \7\ 17 CFR 242.610.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 6 of the Act,\8\ in general, and sections 
6(b)(4) and 6(b)(5) of the Act,\9\ 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 designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest, 
respectively. Nasdaq believes that by allocating pricing benefits to 
certain market makers that make tangible commitments to enhancing 
market quality for ETFs and ILSs listed on Nasdaq, the proposal will 
encourage the development of new financial products, provide a better 
trading environment for investors in ETFs and ILSs, and encourage 
greater competition between listing venues for ETFs and ILSs.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will encourage 
greater competition among venues that list ETFs and ILSs and further 
strengthen the quality of the Nasdaq market as a venue for transactions 
in ETFs and ILSs. Accordingly, 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.

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

    Nasdaq states that written comments were neither solicited nor 
received with respect to the proposed rule change.

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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A)(ii) of the Act \10\ and Rule 19b-4(f)(2) \11\ 
thereunder because it establishes or changes a due, fee, or other 
charge imposed by the Exchange. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 19b-4(f)(2).
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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-2007-061 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2007-061. 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 inspection 
and copying in the Commission's Public Reference Room, 100 F. Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Nasdaq. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that

[[Page 42165]]

you wish to make available publicly. All submissions should refer to 
File Number SR-NASDAQ-2007-061 and should be submitted on or before 
August 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14841 Filed 7-31-07; 8:45 am]

BILLING CODE 8010-01-P