Document ID: SEC-2016-0720-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2016-04-26T04:00Z

[Federal Register Volume 81, Number 80 (Tuesday, April 26, 2016)]
[Notices]
[Pages 24681-24684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09598]

[[Page 24681]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77662; File No. SR-NASDAQ-2016-051]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 7014

April 20, 2016.
    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 April 4, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. 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 is proposing changes to amend Nasdaq Rule 7014 to remove the 
Investor Support Program (``ISP''), to add the Small Cap Incentive 
Program (``SCIP''), and to amend both the Qualified Market Maker 
(``QMM'') Program and the National Best Bid or Offer (``NBBO'') 
Program.
    The changes are being filed for immediate effectiveness and will 
become operative April 1, 2016.
    The text of the proposed rule change is available at 
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 those 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 parts of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend Nasdaq Rule 
7014 by removing the ISP, adding the SCIP, as well as amending both the 
QMM Program and the NBBO Program.
ISP
    The Exchange proposes to eliminate the ISP from Nasdaq Rule 
7014(a). The purpose of the ISP was to enable Nasdaq members to earn a 
monthly ISP 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''). However, the Exchange has 
determined that the ISP no longer serves its intended purpose and that 
members are availing themselves of other programs. Specifically, 
changes to the QMM Program have in many circumstances made the ISP 
rebates obsolete.
    The Exchange also proposes to amend Nasdaq Rule 7014 to remove ISP 
references throughout the rule.
SCIP
    The Exchange proposes to add the SCIP as Nasdaq Rule 7014(a). The 
SCIP will be for Nasdaq market markers (``Nasdaq Market Makers'') \3\ 
registered in Nasdaq-listed companies with a market capitalization 
(``cap'') of less than $100 million. The Exchange will update the 
Nasdaq-listed company symbols list \4\ every six months via an Equity 
Trader Alert. The initial list is being created using data culled from 
the end of January 2016. However, the Exchange may remove symbols for 
companies that are delisted, halted for an extended period of time or 
for other listing-related matters at any time.
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    \3\ See Nasdaq Rule 4612.
    \4\ See http://www.nasdaqtrader.com/Trader.aspx?id=SCIPPilot.
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    Nasdaq Market Makers registered in a SCIP symbol will receive an 
additional displayed liquidity rebate of $0.0005 per share executed for 
executions at or above $1.00 (``SCIP Rebate'') if their percent of time 
at the NBBO is above 50% for the month (``NBBO Test''). The SCIP Rebate 
will be in addition to all other applicable displayed rebates.
    For shares executed below $1.00, Nasdaq Market Makers will be 
subject to the following rates: (i) The rebate to add liquidity will be 
0.10% (10 basis points) of the total dollar volume; and (ii) the fee to 
remove liquidity will be 0.25% (25 basis points) of the total dollar 
volume.
    There will be no fee for quotes and orders executed in the Nasdaq 
Opening or Closing Cross (collectively, the ``Nasdaq Crosses''), or any 
other cross (e.g., trading halt, limit up-limit down) for Nasdaq Market 
Makers that meet the NBBO Test in SCIP symbols. Market-on-close and 
limit-on-close orders executed in the Nasdaq Closing Cross and market-
on-open, limit-on-open, good-till-cancelled, and immediate-or-cancel 
orders executed in the Nasdaq Opening Cross are not eligible for the 
SCIP Rebate. These orders are considered ``passive'' orders in the 
Nasdaq Crosses or orders that are swept into the Nasdaq Crosses. All 
other orders are orders specifically designated to become active or 
execute in the cross and will receive the SCIP Rebate if they otherwise 
so qualify.
Impact of SCIP on the Tick Pilot
    The SCIP will take effect on April 1, just prior to the April 4 
effectiveness of the data collection phase of the Tick Pilot.\5\ Nasdaq 
believes that the SCIP is fully consistent with both the effective 
operation and the important policy objectives of the Tick Pilot. Nasdaq 
actively supports the SEC's goal of studying the impact of nickel 
trading increments on the trading of small capitalization securities, 
including those that will benefit from the SCIP proposed here.
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    \5\ On May 6, 2015, the Commission issued an order approving a 
Plan to Implement a Tick Size Pilot Program (``Plan''), as modified 
by the Commission, to be implemented within one year after the date 
of publication of the order for a two-year Pilot Period (the ``Tick 
Pilot''). See Securities Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (May 13, 2015). The start of the data collection 
is determined by the terms of the Plan.
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    The SCIP will not disrupt researchers' ability to study the impact 
of nickel trading on small capitalization stocks. There are well-
established statistical techniques that allow researchers to control 
for changes in conditions unrelated to the variable of interest, i.e., 
changes in trading conditions unrelated to nickel trading increments. 
Statisticians use control variables and modeling techniques to control 
particularities and idiosyncrasies that are inherent to all observed 
data that stem from conditions exogenous to the variable of interest 
(nickel increments).
    Apart from the SCIP, researchers will be required to control for 
macro events such as changes in interest rates, the imposition of a 
financial transaction tax, or a decrease in the taxation rate of 
capital gains. Researchers will also use

[[Page 24682]]

these techniques to contend with changes in market conditions like high 
volatility and increased trading volumes driven by unpredictable 
isolated events or continuing conditions. Changes in Exchange pricing 
programs are no different from the changed conditions that economists 
normally expect to encounter in any study period, and future Tick Pilot 
researchers can deal with them effectively.
    In fact, the Tick Pilot study might be negatively impacted by 
attempts to hold trading conditions constant throughout the data 
collection phase. If the goal of the study is to understand the effect 
of nickel increments, it is important that the pilot occur under real 
world conditions. Holding prices constant would actually create 
artificial conditions rather than real world ones. Researchers will be 
required to take into account a wide variety of changes, price changes 
are no different. Conversely, maintaining artificial conditions 
throughout the study period would skew later research results, 
rendering them inapposite for application to the real world conditions 
that will be restored after the study period ends. Finally, Nasdaq 
notes that the impact of the SCIP should also be negligible because it 
is going in before the start of the Tick Pilot data collection period, 
so it will have no statistical impact.
QMM Program
    Currently, under the QMM Program for a member to be designated as a 
QMM it must quote at the NBBO at least 25% of the time during regular 
market hours in an average of at least 1,000 securities per day during 
the month on a single market participant identifier (``MPID''). The 
Exchange proposes to modify this requirement to allow for the 
aggregation of all of a member's MPIDs to determine the number of 
securities for purposes of the 25% NBBO requirement.
    Specifically, a firm currently must on a single MPID quote 1,000 
distinct securities. The Exchange is proposing to allow each MPID a 
firm uses to count towards the 1,000 securities requirement. For 
example, if a member has four MPIDs and each MPID quotes in a single 
security at the NBBO for 30% of the time during regular market hours 
this will count as four of the required 1,000 securities. However, if a 
member has two MPIDs and one MPID quotes in a security at the NBBO for 
15% of the time during regular market hours and the other MPID quotes 
in the same security for 20% of the time during regular market hours, 
that member would not be considered to have met the 25% NBBO 
requirement and neither security would count towards the 1,000 
securities requirement.\6\
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    \6\ Aggregation of MPIDs is used frequently by Nasdaq and other 
exchanges to assess whether a firm has, in its entirety, satisfied a 
volume-based threshold. See Nasdaq Rule 7018(a) and (d)(2); see also 
Preface to Phlx Pricing Schedule (Common Ownership Aggregation).
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NBBO Program
    The Exchange proposes to increase the NBBO Program credit in Nasdaq 
Rule 7014(g) from the $0.0002 to $0.0004 per share executed. This 
credit applies to New York Stock Exchange LLC (``NYSE'')--listed 
securities and in securities listed on exchanges other than Nasdaq and 
NYSE.
Definitions and Certifications
    The Exchange also proposes to remove most of the definitions 
included under Nasdaq Rule 7014(h) and the Nasdaq Rule 7014(i) 
certification \7\ because they are no longer applicable.
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    \7\ Specifically, Nasdaq proposes to delete the definitions in 
Nasdaq Rule 7014(h)(1)-(4), 7014(h)(6), and 7014(h)(8), as well as 
the certification in Nasdaq Rule 7014(i).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of 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 its facilities which 
the Exchange operates or controls, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \10\
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    \10\ Securities Exchange Act Release No. 34-51808 (June 9, 2005) 
(``Regulation NMS Adopting Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\11\ (``NetCoalition'') the DC Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\12\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \13\
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    \11\ NetCoalition v. SEC 615 F.3d 525 (D.C. Cir. 2010).
    \12\ Id. at 534-535.
    \13\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \14\
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    \14\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
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ISP
    The Exchange believes that the proposed rule change to eliminate 
the ISP is reasonable because Nasdaq has determined that this program, 
which was intended to enable Nasdaq members to earn a monthly fee 
credit for providing targeted liquidity, no longer serves its intended 
purpose and that members can instead avail themselves of other 
potentially higher rebates such as those available in connection with 
the QMM Program.
    The Exchange also believes that the elimination of the ISP is 
equitable and not unfairly discriminatory because its elimination will 
apply uniformly and it will no longer be available for any market 
participants. Furthermore, no members currently receive credits under 
the ISP so no members will be impacted by its elimination.
    Also, the Exchange believes that eliminating references to the ISP 
throughout Nasdaq Rule 7014 is reasonable because it will lessen market 
participant confusion regarding the elimination of the ISP.
SCIP
    The SCIP is intended to encourage Nasdaq Market Makers to improve 
market quality for Nasdaq-listed companies with market caps of under 
$100 million. Nasdaq believes that this program will benefit market 
participants and the market quality of the individual securities in the 
program.
    The proposed rule change is to add the SCIP as Nasdaq Rule 7014(a).

[[Page 24683]]

Specifically, the SCIP will provide for an additional $0.0005 per share 
executed credit if a Nasdaq Market Maker satisfies the NBBO Test (as 
described previously). The SCIP Rebate will be in addition to all other 
applicable displayed rebates. Nasdaq believes that this credit is 
reasonable because the SCIP Rebate is material enough to incentivize 
market maker behavior to improve the markets in these securities. The 
Exchange also believes that the proposed credit is reasonable because 
it will serve as an effective incentive to Nasdaq Market Makers to 
provide more liquidity and align the program with improving the NBBO. 
Increasing such liquidity is reflective of the Exchange's desire to 
improve liquidity in Nasdaq small cap stocks.
    The Exchange believes that the above proposed rule change is 
equitable and not unfairly discriminatory because the SCIP will apply 
uniformly to all similarly situated members. Nasdaq Market Members that 
elect to satisfy the NBBO Test will receive the SCIP Rebate. This 
credit is available to all members that are registered market makers on 
an equal basis and provides an additional credit for activity that 
improves the Exchange's market quality in small cap Nasdaq-listed 
symbols through increased activity at the NBBO. In this regard, the 
SCIP encourages higher levels of liquidity provision into the price 
discovery process and is consistent with the overall goals of enhancing 
market quality.
    The SCIP also provides for a credit to Nasdaq Market Makers that 
add liquidity of 0.10% of the total dollar value for shares executed 
below $1.00, as well as a fee for Nasdaq Market Makers that add 
liquidity of 0.25% of the total dollar value for shares executed below 
$1.00. The Exchange believes that this credit and fee are reasonable 
because taken as a whole they should incentivize market maker behavior 
to improve the markets in these securities.
    The Exchange believes that the proposed rule change above is 
equitable and not unfairly discriminatory because the Exchange will 
apply the same credit and fee uniformly and for all similarly situated 
members. Specifically, the above credit and fee are applicable to all 
Nasdaq Market Makers on an equal basis and the Exchange believes that, 
taken together, will overall encourage activity that improves the 
Exchange's market quality in small cap Nasdaq-listed symbols through 
increased activity at the NBBO. The credit is available to all members 
on an equal basis and provides an additional credit for activity that 
improves the Exchange's market quality through increased activity at 
the NBBO, while the fee will be applied uniformly for all Nasdaq Market 
Makers that elect to remove liquidity in shares executed under $1.00.
    Additionally, Nasdaq believes it is reasonable that there will be 
no fee for all quotes and orders executed in the Nasdaq Crosses, or any 
other cross for Nasdaq Market Makers that meet the NBBO Test in SCIP 
symbols, because it is reflective of the Exchange's desire to provide 
further incentive to members to quote and execute orders in crosses 
that meet the NBBO Test in SCIP symbols. This is also reflective of the 
Exchange's goal to improve market quality through the use of reduced 
fees, as well as of the Exchange's efforts to incentivize market 
participants to improve market quality.
    The Exchange believes that the above proposed rule change, as 
described above, is equitable and not unfairly discriminatory because 
the Exchange will uniformly assess no fee across all similarly situated 
members.
    Additionally, Nasdaq believes that it is reasonable that all quotes 
and orders exclude market-on-close and limit-on-close orders executed 
in the Nasdaq Closing Cross and market-on-open, limit-on-open, good-
till-cancelled, and immediate-or-cancel orders executed in the Nasdaq 
Opening Cross because these orders are considered ``passive'' orders in 
the Nasdaq Crosses (i.e., orders that were swept into the Nasdaq 
Crosses). All other orders are orders specifically designated to become 
active or execute in the cross.
    The Exchange also believes that this proposed rule change is 
equitable and not unfairly discriminatory because the exclusion of 
these quotes and passive orders from the Nasdaq Opening Cross and the 
Nasdaq Closing Cross, as specified above, will be applied uniformly 
across all similarly situated members.
    The overall effect of the SCIP will be to encourage higher levels 
of liquidity provision into the price discovery process and is 
consistent with the overall goals of enhancing market quality.
QMM Program
    Nasdaq believes that the proposed rule change to modify the QMM 
Program requirement to allow for the aggregation of all of a member's 
MPIDs to determine the number of securities for purposes of the 25% 
NBBO requirement is reasonable because it may increase the number of 
potential members than can qualify under the program. This, in turn, 
will improve Nasdaq market quality by rewarding members that provide 
significant market-improving order flow with a rebate.
    The Exchange also believes the proposed rule change is equitable 
and not unfairly discriminatory because the easier to achieve amended 
qualification criteria for the QMM Program will apply uniformly to all 
similarly situated members and members that meet the qualification 
criteria will be eligible for the QMM rebate.
NBBO Program
    The Exchange also believes that the proposed rule change to 
increase the NBBO Program credit in Nasdaq Rule 7014(g) from the 
$0.0002 to $0.0004 per share executed and which applies to NYSE--listed 
securities and in securities listed on exchanges other than Nasdaq and 
NYSE is reasonable because the increase to the credit although modest, 
is likely to incentivize more NBBO setting on Nasdaq and thus improve 
price formation on the Exchange.
    The Exchange also believes the proposed rule change is equitable 
and not unfairly discriminatory because it is available to all members 
that qualify for this NBBO Program rebate.
Definitions and Certifications
    The Exchange also believes that the proposed rule change to remove 
most of the definitions included under Nasdaq Rule 7014(h) and the 
Nasdaq Rule 7014(i) certification \15\ are reasonable since they are no 
longer applicable. Keeping them in the rule book would only serve to 
potentially increase confusion for market participants.
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    \15\ See note 7 above.
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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 a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.\16\ In terms of 
inter-market competition, the Exchange notes that it operates in a 
highly competitive market in which market participants can readily 
favor competing venues if they deem fee levels at a particular venue to 
be excessive, or credit opportunities available at other venues to be 
more favorable.
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    \16\ 15 U.S.C. 78f(b)(8).
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    In such an environment, the Exchange must continually adjust its 
fees and credits to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because

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competitors are free to modify their own fees and credits in response, 
and because market participants may readily adjust their order routing 
practices, the Exchange believes that the degree to which fee changes 
in this market may impose any burden on competition is extremely 
limited.
    In this instance, the amendments to Nasdaq Rule 7014, which include 
the elimination of the ISP, the addition of the SCIP, as well as 
amendments to both the QMM Program and the NBBO Program, do not impose 
a burden on competition because the Exchange's execution services are 
voluntary and subject to extensive competition both from other 
exchanges and from off-exchange venues. The Exchange believes that the 
competition among exchanges and other venues will help to drive price 
formation and overall execution quality higher for investors.
    Rather than placing a burden on competition, the proposed changes 
to the programs included under Nasdaq Rule 7014, including to certain 
of the fees and rebates contained therein, are reflective of the fierce 
competition among market venues to attract order flow to the benefit of 
all market participants. Overall, the proposed changes to the incentive 
programs under Rule 7014 are designed to improve their effectiveness in 
achieving their stated purposes. If any of the changes proposed herein 
are unattractive to market participants, it is likely that the Exchange 
will lose market share as a result.
    In sum, if the rule change proposed herein is unattractive to 
market participants, it is likely that the Exchange will lose market 
share as a result. Accordingly, the Exchange does not believe that the 
proposed change will impair the ability of members or competing order 
execution venues to maintain their competitive standing in the 
financial markets.

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 change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\17\ 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.
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    \17\ 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-2016-051 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-051. 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 offices 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-2016-
051, and should be submitted on or before May 17, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-09598 Filed 4-25-16; 8:45 am]
 BILLING CODE 8011-01-P