Document ID: SEC-2011-1890-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-12-07T05:00Z

[Federal Register Volume 76, Number 235 (Wednesday, December 7, 2011)]
[Notices]
[Pages 76472-76474]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31334]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65858; File No. SR-NASDAQ-2011-162]

 Self-Regulatory Organizations; NASDAQ Stock Market LLC; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the Customer Rebate To Add Liquidity

December 1, 2011.
    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 November 29, 2011, 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 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

    The Exchange proposes to modify Exchange Rule 7050 governing 
pricing for NASDAQ members using the NASDAQ Options Market (``NOM''), 
NASDAQ's facility for executing and routing standardized equity and 
index options. Specifically, NOM proposes to amend the applicability of 
the Customer

[[Page 76473]]

Rebate to Add Liquidity for the Penny Pilot \3\ Options (``Penny 
Options'').
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through December 31, 2011. 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); and 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). 
See also Exchange Rule Chapter VI, Section 5.
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    While changes pursuant to this proposal are effective upon filing, 
the Exchange has designated these changes to be operative for 
transactions on December 1, 2011.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change 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. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is proposing to modify Exchange Rule 7050 governing the 
rebates and fees assessed for option orders entered into NOM. 
Specifically, the Exchange is proposing to allow NOM Participants to 
qualify for the Customer Rebate to Add Liquidity in Penny Options, at 
Tier 6, if a NASDAQ member \4\ under common ownership with a NOM 
Participant qualifies for credit under the Investor Support Program 
(``ISP'') set forth in Rule 7014.\5\ The Exchange believes the existing 
monthly volume thresholds have incentivized firms that route Customer 
orders to the Exchange to increase Customer order flow to the Exchange. 
The Exchange desires to continue to encourage firms that route Customer 
orders to increase Customer order flow to the Exchange by offering an 
opportunity for NOM Participants to qualify for the Customer rebate in 
Tier 6 by allowing a NASDAQ member under common ownership with the NOM 
Participant to qualify for the credit under ISP as required by Tier 6. 
Common ownership shall mean 75% common ownership between the NOM 
Participant and the NASDAQ member who qualifies for the ISP.
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    \4\ All NOM Participants are required to be [sic] members of the 
NASDAQ Stock Market LLC.
    \5\ For a detailed description of the Investor Support Program, 
see Securities Exchange Act Release No. 63270 (November 8, 2010), 75 
FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness) (the ``ISP Filing''). See also Securities 
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate 
effectiveness); and 63628 (January 3, 2011), 76 FR 1201 (January 7, 
2011) (NASDAQ-2010-154) (notice of filing and immediate 
effectiveness).
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    The Exchange currently pays a Customer Rebate to Add Liquidity in 
Penny Options based on six volume tiers as follows: \6\
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    \6\ The Exchange adopted these monthly volume achievement tiers 
in September 2011. See Securities Exchange Act Release No. 65317 
(September 12, 2011) (SR-NASDAQ-2011-127). The Exchange subsequently 
offered a monthly volume target for NOM Participants that qualified 
for Tiers 2 and 6. See Securities Exchange Act Release No. 65318 
(September 12, 2011) (SR-NASDAQ-2011-124). The Exchange amended the 
monthly tiers to eliminate certain tiers thereafter. See Securities 
Exchange Act Release No. 65381 (September 22, 2011), 76 FR 60103 
(September 28, 2011) (SR-NASDAQ-2011-128).

------------------------------------------------------------------------
                                                               Rebate to
                                   Monthly volume                 add
                                                               liquidity
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Tier 1...............  Participant adds Customer liquidity of      $0.26
                        up to 24,999 contracts per day in a
                        month.
Tier 2...............  Participant adds Customer liquidity of       0.36
                        25,000--59,999 contracts per day in a
                        month.
Tier 3...............  Participant adds Customer liquidity of       0.38
                        60,000--124,999 contracts per day in
                        a month.
Tier 4...............  Participant adds Customer liquidity of       0.40
                        125,000 or more contracts per day in
                        a month.
Tier 5\a\............  Participant adds (1) Customer                0.40
                        liquidity of 60,000 or more contracts
                        per day in a month, and (2) NOM
                        Market Maker liquidity of 60,000 or
                        more contracts per day in a month.
Tier 6...............  Participant adds Customer liquidity of       0.37
                        25,000 or more contracts per day in a
                        month, and (2) the Participant
                        simultaneously qualifies for credit
                        under the Investor Support Program
                        set forth in Rule 7014.
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    Currently, a NOM Participant may qualify for Tier 6 by adding 
Customer liquidity of 25,000 or more contracts per day in a month and 
also qualifying for credit under the ISP in the equity market. This 
would be true of a NASDAQ member who conducts both an options and 
equities business. There are some NASDAQ members today who separate 
their business in such a way that they conduct activity through 
separate but related broker-dealers. The Exchange proposes to permit a 
NOM Participant, who is transacting 25,000 or more Customer contracts 
per day in a month, to qualify for Tier 6 if a separate but related 
broker-dealer under 75% common ownership conducts an equities business 
and qualifies for credit under the ISP.
    The Exchange is not otherwise amending the Customer Rebates to Add 
Liquidity. While changes pursuant to this proposal are effective upon 
filing, the Exchange has designated these changes to be operative for 
transactions on December 1, 2011.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with Section 
6(b)(4) of the Act,\8\ 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.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    NASDAQ believes that it is reasonable to allow NOM Participants 
with a certain amount of Customer orders, as

[[Page 76474]]

specified in Tier 6, to qualify for a Customer rebate by allowing a 
related NASDAQ member to qualify for the ISP. NASDAQ is proposing to 
accommodate NASDAQ members who prefer to separate their equities and 
options businesses into separate but related broker-dealers.
    NASDAQ believes that the proposal to allow NOM Participants to 
qualify for the Customer Rebate to Add Liquidity in Penny Options at 
Tier 6, if a NASDAQ member under common ownership with the NOM 
Participant qualified for the ISP is equitable and not unfairly 
discriminatory because it would allow NOM Participants to achieve 
higher rebates and encourage NASDAQ members who conduct an equities 
business to add significant liquidity as part of the ISP. It would 
therefore both encourage greater Customer orders into NOM and greater 
Customer order flow into the NASDAQ's equity market. The goal of the 
Investor Support Program is to incentivize members to provide liquidity 
from individual equity investors to the NASDAQ Market Center.\9\ 
Permitting commonly owned NASDAQ members to qualify for a credit under 
the ISP in order that the related NOM Participant may qualify for the 
Customer rebate will bring increased Customer order liquidity and will 
benefit all Exchange members that participate in those markets. NASDAQ 
Rule 7018(a) already provides incentives for firms to participate in 
both NASDAQ's equity market and its options market.
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    \9\ The Commission has expressed its concern that a significant 
percentage of the orders of individual investors are executed at 
over the counter (``OTC'') markets, that is, at off-exchange 
markets; and that a significant percentage of the orders of 
institutional investors are executed in dark pools. See Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (Concept Release on Equity Market Structure, 
``Concept Release''). In the Concept Release, the Commission has 
recognized the strong policy preference under the Act in favor of 
price transparency and displayed markets. The Commission published 
the Concept Release to invite public comment on a wide range of 
market structure issues, including high frequency trading and un-
displayed, or ``dark,'' liquidity. See also Mary L. Schapiro, 
Strengthening Our Equity Market Structure (Speech at the Economic 
Club of New York, Sept. 7, 2010) (``Schapiro Speech,'' available on 
the Commission Web site) (comments of Commission Chairman on what 
she viewed as a troubling trend of reduced participation in the 
equity markets by individual investors, and that nearly 30 percent 
of volume in U.S.-listed equities is executed in venues that do not 
display their liquidity or make it generally available to the 
public).
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    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants can and do send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive or 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed rebate scheme is competitive and similar to other rebates and 
tiers opportunities in place on other exchanges. The Exchange believes 
that this competitive marketplace materially impacts the rebates 
present on the Exchange today and substantially influenced the proposal 
set forth above.

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

    The Exchange 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.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \10\ and paragraph (f)(2) of Rule 19b-4 \11\ 
thereunder. 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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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-162 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-2011-162. 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 
a.m. and 3 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-2011-162 and should 
be submitted on or before December 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31334 Filed 12-6-11; 8:45 am]
BILLING CODE 8011-01-P