Document ID: SEC-2013-1681-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market, LLC
Posted Date: 2013-09-30T04:00Z

[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Notices]
[Pages 60005-60008]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23729]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70489; File No. SR-NASDAQ-2013-120]

Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify Chapter XV, at Section 2 Governing Pricing for NASDAQ Members 
Using the NASDAQ Options Market (``NOM'')

September 24, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 12, 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 is proposing changes to modify Chapter XV, entitled 
``Options Pricing,'' at Section 2 governing pricing for NASDAQ members 
using the NASDAQ Options Market (``NOM'').
    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 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 proposes to (1) lower the Tier 6 
volume threshold from 130,000 or more contracts per day in a month to 
115,000 or more contracts per day in a month; (2) lower the Tier 7 
volume threshold from 175,000 or more contracts per day in a month to 
150,000 or more contracts per day in a month; and (3) include Non-Penny 
Pilot Options Customer and/or Professional volume that adds liquidity 
to compute the numerator in the calculation of percentage of total 
industry customer equity and ETF option average daily volume to qualify 
for certain tiers of the Customer or Professional Penny Pilot Options 
rebate program.
    Today, the Exchange offers tiered Penny Pilot Options Rebates to 
Add Liquidity to Customers,\3\ Professionals \4\ and NOM Market Makers 
\5\ and a $0.10 per contract rebate in Penny Pilot Options to liquidity 
added by Firms,\6\ Non-NOM Market Makers \7\ and Broker-Dealers.\8\ 
With respect to Customers and Professionals, the Exchange pays Penny 
Pilot Options Rebates to Add Liquidity based on various criteria with 
rebates currently ranging from $0.25 to $0.48 per contract as follows:
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    \3\ The term ``Customer'' 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).
    \4\ 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.
    \5\ The term ``NOM Market Maker'' 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. NOM Market Maker Rebates range from $0.25 
to $0.38 per contract depending on various criteria.
    \6\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \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 ``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
                       Monthly volume                            add
                                                              liquidity
------------------------------------------------------------------------
Tier 1 Participant adds Customer and/or Professional               $0.25
 liquidity of up to 0.20% of total industry customer equity
 and ETF option average daily volume (``ADV'') contracts
 per day in a month........................................
Tier 2 Participant adds Customer and/or Professional                0.40
 liquidity of 0.21% to 0.30% of total industry customer
 equity and ETF option ADV contracts per day in a month....
Tier 3 Participant adds Customer and/or Professional                0.43
 liquidity of 0.31% to 0.49% of total industry customer
 equity and ETF option ADV contracts per day in a month....
Tier 4 Participant adds Customer and/or Professional                0.45
 liquidity of 0.5% or more of total industry customer
 equity and ETF option ADV contracts per day in a month....
Tier 5 Participant adds (1) Customer and/or 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.....

[[Page 60006]]

 
Tier 6 Participant has Total Volume of 130,000 or more              0.45
 contracts per day in a month, of which 25,000 or more
 contracts per day in a month must be Customer and/or
 Professional liquidity....................................
Tier 7 Participant has Total Volume of 175,000 or more              0.47
 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....................................
Tier 8 Participant (1) has Total Volume of 325,000 or more          0.48
 contracts per day in a month, or (2) Participant has Total
 Volume of 200,000 or more contracts per day in a month, of
 which 70,000 or more contracts per day in a month must be
 Customer and/or Professional liquidity or (3) adds
 Customer and/or Professional liquidity of 1.00% or more of
 national customer volume in multiply-listed equity and ETF
 options classes in a month................................
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    With respect to Customers and Professionals, the Exchange proposes 
to modify the criteria for achieving Tiers 6 and 7, while continuing to 
offer rebates ranging from $0.25 to $0.48 per contract. Specifically, 
NASDAQ will change Tiers 6 and 7 as follows:

------------------------------------------------------------------------
                                                              Rebate to
                       Monthly volume                            add
                                                              liquidity
------------------------------------------------------------------------
Tier 6 Participant has Total Volume of 115,000 or more             $0.45
 contracts per day in a month, of which 25,000 or more
 contracts per day in a month must be Customer and/or
 Professional liquidity....................................
Tier 7 Participant has Total Volume of 150,000 or more              0.47
 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 addition, the Exchange proposes to include the volume 
denominated as ``Customer'' and/or ``Professional'' that adds liquidity 
in Non-Penny Pilot Options in the calculation of the above of total 
industry customer equity and ETF option average daily volume (``ADV'') 
contracts per day in a month. For example, a NOM Participants adds 
Customer and/or Professional liquidity of 25,000 contracts per day on 
Penny Pilot Options and 10,000 contracts per day in Non-Penny Pilot 
Options. Total industry customer equity and ETF option average daily 
volume is 10,000,000. Under the current program, the industry customer 
equity and ETF option average daily volume would be .25% (25,000/
10,000,000). When the Non-Penny Pilot Options volume referenced above 
is included, the percentage increases to .35% (35,000/10,000,000). The 
Exchange believes the above proposal will incentivize NOM Participants 
to increase the liquidity on the NOM market place.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with Section 
6(b)(4) of the Act,\10\ 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 as described in detail below.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that it is reasonable, fair and equitable, 
and not unreasonably discriminatory to offer the opportunity to earn an 
additional Penny Pilot Options Customer Rebate to Add Liquidity by 
lowering the qualifications of Tiers 6 and 7, and by including Non-
Penny Pilot Options volume that adds liquidity in the calculation of 
the total industry customer equity and ETF option ``ADV'' contracts per 
day in a month (the ``Proposal''). The proposal is reasonable because 
the added incentive encourages Participants to qualify for higher 
Customer or Professional Penny Pilot Options rebate tiers. Participants 
would be encouraged to add liquidity in both Penny Pilot and Non-Penny 
Options liquidity because the Proposal provides for lower tiers and 
additional volume to be counted toward earning rebates in Penny Pilot 
Options. Further, by amending the calculation of the total industry 
customer equity and ETF option ``ADV'' contracts per day in a month 
improves the incentives to add Customer and/or Professional liquidity 
on the Exchange for NOM Participants who would not otherwise benefit 
from the Total Volume qualification metric employed as part of Tiers 6 
and 7. Total Volume is defined at Chapter XV, Section 2(1) at note b as 
Customer, Professional, Firm, Broker-Dealer, Non-NOM Market Maker and 
NOM Market Maker volume in Penny Pilot Options and/or Non-Penny Pilot 
Options which either adds or removes liquidity on NOM.
    The Exchange believes that offering Customers and Professionals the 
continued opportunity to earn higher rebates by modifying its tiers is 
reasonable because 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. Today 
the Exchange also incentivizes NOM Market Makers to post liquidity by 
offering NOM Market Makers rebates, which also benefit market 
participants through increased order interaction. Firms, Non-NOM Market 
Makers and Broker-Dealers are also offered rebates under the current 
pricing structure.
    The Exchange believes that continuing to pay Customers and 
Professionals tiered Rebates to Add Liquidity in Penny Pilot Options, 
as compared to other market participants, is equitable and not unfairly 
discriminatory 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 
Professionals the same Penny Pilot Options Rebates to Add Liquidity as 
Customers is equitable and not unfairly discriminatory because 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

[[Page 60007]]

Penny Pilot Options. By 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, Participants may be unable 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.\11\ A Professional could only otherwise 
presume the Tier 1 rebate would be achieved in a month when determining 
price.\12\ Further, the Exchange initially established Professional 
pricing in order to ``. . . bring additional revenue to the Exchange.'' 
\13\ 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.'' \14\ The Exchange also noted there 
that establishing separate pricing for a Professional, which ranges 
between that of a Customer and market maker, accomplishes this 
objective.\15\ 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 and NOM Market Makers, as discussed herein.\16\ For 
these reasons, the Exchange believes that continuing to offer 
Professionals the same rebates as Customers is equitable and not 
unfairly discriminatory. The Exchange believes that continuing to offer 
NOM Market Makers the opportunity to earn higher rebates as compared to 
Non-NOM Market Makers, Firms and Broker Dealers is equitable and not 
unfairly discriminatory because NOM Market Makers add value through 
continuous quoting \17\ and a commitment of capital. Firms, Non-NOM 
Market Makers and Broker-Dealers would continue to be offered a $0.10 
per contract Rebate to Add Liquidity in Penny Pilot Options, as is the 
case today.\18\
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    \11\ Customer and Professional volume is aggregated for purposes 
of determining which rebate tier a Participant qualifies for with 
respect to the Professional Rebate to Add Liquidity in Penny Pilot 
Options.
    \12\ A Professional would be unable to determine the exact 
rebate that would be paid on a transaction by transaction basis with 
certainty until the end of a given month when all Customer and 
Professional volume is aggregated for purposes of determining which 
tier the Participant qualified for in a given month.
    \13\ 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.
    \14\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
    \15\ 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.
    \16\ The Fee for Removing Liquidity in Penny Pilot Options is 
$0.48 per contract for all market participants, except Customers and 
NOM Market Makers. Customers are assessed $0.45 per contract and NOM 
Market Makers would continue to be assessed $0.47 per contract.
    \17\ 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.
    \18\ Similar to other market participants, Firms, Non-NOM Market 
Makers and Broker-Dealers have the opportunity to earn a higher 
Penny Pilot Options Rebate to Add Liquidity if they transact 15,000 
contracts per day or more of Penny Pilot Options or Non-Penny Pilot 
Options liquidity in a given month. The volume requirement for 
Firms, Non-NOM Market Makers and Broker-Dealers to qualify for the 
higher Penny Pilot Options Rebate to Add Liquidity is less than is 
required to earn a Tier 1 Customer or Professional Rebate to Add 
Liquidity in Penny Pilot Options or a Tier 1 NOM Market Maker Rebate 
to Add Liquidity in Penny Pilot Option. The 15,000 contract 
threshold for Firms, Non-NOM Market Makers and Broker-Dealers to 
earn the Penny Pilot Options Rebate to Add Liquidity equates to 
approximately 0.12% of the industry customer equity and ETF volume.
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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. The Exchange does not believe that continuing to 
provide Professionals with the opportunity to obtain higher rebates 
equivalent to that of a Customer creates an undue burden on competition 
where Professionals would be necessarily advantaged on NOM as compared 
to NOM Market Makers, Firms, Broker-Dealers or Non-NOM Market Makers 
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 believes the proposed pricing incentives contribute to 
the overall health of the market and benefit all Participants willing 
to choose to transact options on NOM. For the reasons specified herein, 
the Exchange does not believe this proposal creates an undue burden on 
competition.
    The Exchange operates in a hyper competitive market comprised of 
twelve U.S. options exchanges in which many sophisticated and 
knowledgeable market participants can readily and do send options order 
flow of all types 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's belief that the 
proposed rebate structure and tiers proposed herein are competitive 
with rebates and tiers in place on other exchanges. The Exchange 
believes that this competitive marketplace continues to materially 
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 
19(b)(3)(A) of the Act \19\ and paragraph (f) of Rule 19b-4 
thereunder.\20\ 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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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f).
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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

[[Page 60008]]

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-2013-120 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-2013-120. 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-2013-120, and should 
be submitted on or before October 21, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23729 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P