Document ID: SEC-2016-0262-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-02-18T05:00Z

[Federal Register Volume 81, Number 32 (Thursday, February 18, 2016)]
[Notices]
[Pages 8319-8323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03268]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77116; File No. SR-NASDAQ-2016-012]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend NOM Rules at Chapter XV, Section 2

February 11, 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 January 28, 2016, The NASDAQ Stock Market LLC (``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 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 amend Chapter XV, entitled ``Options 
Pricing,'' at Section 2, which governs pricing for Exchange members 
using the NASDAQ Options Market (``NOM''), the Exchange's facility for 
executing and routing standardized equity and index options.
    While changes to the Pricing Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on February 1, 2016.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at

[[Page 8320]]

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
    The Exchange proposes certain amendments to the NOM transaction 
fees set forth at Chapter XV, Section 2 for executing and routing 
standardized equity and index options under the Penny Pilot Options 
program. The Exchange desires to continue to offer an incentive to NOM 
Participants to add an even greater amount of liquidity to NOM. 
Specifically, the Exchange proposes to continue to incentivize 
Participants by continuing to offer the opportunity to reduce the NOM 
Market Maker \3\ and Non-NOM Market Maker \4\ Penny Pilot Options Fees 
for Removing Liquidity from $0.50 to $0.48 per contract, provided the 
Participant adds 1.30% of Customer,\5\ Professional,\6\ Firm,\7\ 
Broker-Dealer \8\ or Non-NOM Market Maker liquidity in Penny Pilot 
Options and/or Non-Penny Pilot Options of total industry customer 
equity and ETF option ADV contracts per day in a month and the 
Participant is (i) both the buyer and seller or (ii) the Participant 
removes liquidity from another Participant under Common Ownership.\9\
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    \3\ 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.
    \4\ The term ``Non-NOM Market Maker'' 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.
    \5\ The term ``Customer'' or (``C'') applies to any transaction 
that is identified by a Participant for clearing in the Customer 
range at The Options Clearing Corporation 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)).
    \6\ The term ``Professional'' or (``P'') 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.
    \7\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at The 
Options Clearing Corporation.
    \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.
    \9\ The term ``Common Ownership'' shall mean Participants under 
75% common ownership or control. Common Ownership shall apply to all 
pricing in Chapter XV, Section 2 for which a volume threshold or 
volume percentage is required to obtain the pricing.
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    The Exchange is removing the current date range, January 11, 2016 
through January 26 [sic], 2016, so the Exchange may continue to offer 
this incentive going forward. For purposes of clarity, the Exchange 
proposes to add rule text to make clear that Participants that add 
1.30% of Customer, Professional, Firm, Broker-Dealer or Non-NOM Market 
Maker liquidity in either Penny Pilot Options and/or Non-Penny Pilot 
Options may qualify for the incentive. Also, the Exchange proposes to 
clarify that the 1.30% applies to total industry customer equity and 
ETF option ADV contracts per day in a month. While the Exchange 
believes that there is no confusion among market participants as to the 
qualifying volume for this incentive, the Exchange proposes to add this 
rule text language for clarity.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\10\ in general, and with Section 6(b)(4) and 
6(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 the Exchange operates or controls, and is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers. 
Attracting order flow to the Exchange benefits all Participants who 
have the opportunity to interact with this order flow.
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    \10\ 15 U.S.C. 78f.
    \11\ 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. 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'. . . .'' \12\ Although the court and the SEC were discussing 
the cash equities markets, the Exchange believes that these views apply 
with equal force to the options markets and this proposal is consistent 
with those views in that it is a price cut driven by competition.
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    \12\ Id. [sic] at 539 (quoting Securities Exchange [sic] Release 
No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) (SR-
NYSEArca-2006-21) at 73 FR at 74782-74783).
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    The Exchange's proposal to continue to incentivize Participants to 
send order flow to NOM by offering the opportunity to reduce the NOM 
Market Maker and Non-NOM Market Maker Penny Pilot Options Fees for 
Removing Liquidity from $0.50 to $0.48 per contract, provided the 
Participant qualifies for the incentive,\13\ is reasonable because the 
Exchange believes NOM will continue to attract a greater amount of 
order flow by offering this discounted rate. The Exchange believes that 
this additional fee reduction for Non-NOM Market Makers and NOM Market 
Makers should further incentivize Participants to add liquidity in 
Penny Pilot Options on NOM to obtain the discounted rate going forward.
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    \13\ Participants are required to add 1.30% of Customer, 
Professional, Firm, Broker-Dealer or Non-NOM Market Maker liquidity 
in Penny Pilot Options and/or Non-Penny Pilot Options of total 
industry customer equity and ETF option ADV contracts per day in a 
month and the Participant must be (i) both the buyer and seller or 
(ii) the Participant must remove liquidity from another Participant 
under Common Ownership.
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    The Exchange's proposal to continue to incentivize Participants to 
send order flow to NOM by offering the opportunity to reduce the NOM 
Market Maker and Non-NOM Market Maker Penny Pilot Options Fees for 
Removing Liquidity from $0.50 to $0.48 per contract, provided the 
Participant qualifies for the incentive,\14\ is equitable and not 
unfairly discriminatory for the reasons which follow. NOM Market Makers 
have obligations to the market and regulatory requirements, which 
normally do not apply to other market participants.\15\ A NOM Market 
Maker

[[Page 8321]]

has the obligation, for example, to make continuous markets, engage in 
a course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, and not make bids or offers 
or enter into transactions that are inconsistent with a [sic] course of 
dealings. The proposed differentiation as between NOM Market Makers and 
other market participants recognizes the differing contributions made 
to the trading environment on the Exchange by NOM Market Makers. For 
the above reasons, the Exchange believes that NOM Market Makers are 
entitled to discounted fees, provided they qualify for the discount. 
The Exchange believes it is equitable and not unfairly discriminatory 
to offer the fee discount to Non-NOM Market Makers because the Exchange 
is offering Participants flexibility in the manner in which they are 
submitting their orders. Non-NOM Market Makers have obligations on 
other exchanges to qualify as a market maker. Also, the Exchange 
believes that market makers not registered on NOM will be encouraged to 
send orders to NOM as an away market maker (Non-NOM Market Maker) with 
this incentive. Because the incentive is being offered to both market 
makers registered on NOM and those not registered on NOM, the Exchange 
believes that the proposal is equitable and not unfairly discriminatory 
because it encourages market makers to direct liquidity to NOM to the 
benefit of all Participants. This proposal recognizes the overall 
contributions made by market makers to a listed options market.
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    \14\ Id.
    \15\ 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 believes that it is reasonable, equitable and not 
unfairly discriminatory to only offer the fee reduction to NOM Market 
Makers and Non-NOM Market Makers because the Exchange is offering this 
$0.02 per contract fee discount to the Penny Pilot Options Fees for 
Removing Liquidity to continue to incentivize NOM Participants to 
select NOM as a venue to send Customer, Professional, Firm, Broker-
Dealer or Non-NOM Market Maker order flow. Participants may send either 
Penny or Non-Penny Pilot Options to qualify for the discount.
    The Exchange believes that it is reasonable, equitable and not 
unfairly discriminatory to permit NOM Participants with 75 percent 
common ownership to aggregate their volume for purposes of obtaining 
the fee discount because certain NOM Participants chose to segregate 
their businesses into different legal entities for purposes of 
conducting business. The Exchange believes that these NOM Participants 
should be treated as one entity for purposes of qualifying for the 
discounted Fee for Removing Liquidity in Penny Pilot Options, as long 
as there is at least 75% Common Ownership or control among the NOM 
Participants. The Exchange also believes that it is reasonable, 
equitable and not unfairly discriminatory to offer a $0.02 per contract 
reduced Penny Pilot Option Fee for Removing Liquidity to Non-NOM Market 
Makers and NOM Market Makers for transactions in which the same NOM 
Participant or a NOM Participant under Common Ownership is the buyer 
and the seller. NOM Participants that chose to segregate their 
businesses into different legal entities should still be afforded the 
opportunity to receive the discount as if they were the same NOM 
Participant on both sides of the transaction.
    It is important to note that NOM Participants are unaware at the 
time the order is entered of the identity of the contra-party. Because 
contra-parties are anonymous, the Exchange believes that NOM 
Participants would aggressively pursue order flow in order to receive 
the benefit of the reduction. NOM Participants would only receive the 
incentive if they interact with their own order flow, recognizing 
Common Ownership where applicable. Offering the additional fee 
reduction is reasonable, equitable and not unfairly discriminatory 
because Participants would be entitled to receive the fee reduction 
only when the Participant is both the buyer and seller. By way of 
example, if a NOM Participant that is assigned the firm code \16\ 
``ABC'' by the Exchange posted an order utilizing its Customer order 
router, and the order was removed by an ABC NOM Market Maker order, the 
NOM Participant would receive the $0.02 per contract fee reduction for 
that trade ($0.50 to $0.48 per contract). The Exchange proposes to 
utilize the Exchange assigned firm code to determine which NOM 
Participant executed an order and to apply the fee reduction to the 
Non-NOM Market Maker or NOM Market Maker Penny Pilot Option Fee for 
Removing Liquidity if the same NOM Participant was the buyer and the 
seller to a transaction.\17\ This concept is not novel. Today NASDAQ 
OMX PHLX LLC (``Phlx'') assesses a Firm Floor Options Transaction 
Charge based on which side of the transaction the member represents as 
well [sic] whether the same member or its affiliates under Common 
Ownership was represented.\18\
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    \16\ Each NOM Participant is assigned a firm code by the 
Exchange.
    \17\ In this example, the same Participant that added and 
removed the order would be entitled to the fee reduction because the 
NOM Participant was the buyer and seller on the transaction.
    \18\ The Firm Floor Options Transaction Charges will be waived 
for members executing facilitation orders pursuant to Exchange Rule 
1064 when such members are trading in their own proprietary account 
(including Cabinet Options Transaction Charges). The Firm Floor 
Options Transaction Charges will be waived for the buy side of a 
transaction if the same member or its affiliates under Common 
Ownership represents both sides of a Firm transaction when such 
members are trading in their own proprietary account. In addition, 
the Broker-Dealer Floor Options Transaction Charge (including 
Cabinet Options Transaction Charges) will be waived for members 
executing facilitation orders pursuant to Exchange Rule 1064 when 
such members would otherwise incur this charge for trading in their 
own proprietary account contra to a Customer (``BD-Customer 
Facilitation''), if the member's BD-Customer Facilitation average 
daily volume (including both FLEX and non-FLEX transactions) exceeds 
10,000 contracts per day in a given month. See Phlx's Pricing 
Schedule.
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    Finally, the Exchange's proposal to count all order flow (Penny and 
Non-Penny Pilot Options) toward the 1.30% requisite volume, except for 
NOM Market Maker order flow is reasonable, equitable and not unfairly 
discriminatory because NOM Market Makers are entitled to rebates today 
similar to Customers and Professionals. Customer volume is important 
because it continues to attract liquidity to the Exchange, which 
benefits all market participants. Further, with respect to Professional 
liquidity, the Exchange initially established Professional pricing in 
order to ``. . . bring additional revenue to the Exchange.'' \19\ 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.'' \20\ Further, the Exchange noted in that filing 
that it believes that establishing separate pricing for a Professional, 
which ranges between that of a Customer and market maker,

[[Page 8322]]

accomplishes this objective.\21\ The Exchange offers NOM Market Makers 
rebates in acknowledgment of the obligations\22\ these Participants 
bear in the market. The Exchange believes that it is not necessary to 
count NOM Market Maker volume toward the volume to qualify for the fee 
reduction because that volume is counted toward the qualifiers for the 
NOM Market Maker rebates.
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    \19\ 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.
    \20\ See Professional Filing.
    \21\ See Professional Filing. The Exchange also in [sic] the 
Professional 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.
    \22\ See note 15.
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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. 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 rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees 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 
competitors are free to modify their own fees 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 continuation of the proposed amendments to 
NOM Market Maker and Non-NOM Market Maker Penny Pilot Options Fees for 
Removing Liquidity do not impose an undue burden on inter-market 
competition because the Exchange's execution services are completely 
voluntary and subject to extensive competition.
    The Exchange's proposal to incentivize Participants by continuing 
to offer the opportunity to reduce the NOM Market Maker and Non-NOM 
Market Maker Penny Pilot Options Fees for Removing Liquidity from $0.50 
to $0.48 per contract, provided the Participant adds 1.30% of Customer, 
Professional, Firm, Broker-Dealer or Non-NOM Market Maker liquidity in 
Penny Pilot Options and/or Non-Penny Pilot Options of total industry 
customer equity and ETF option ADV contracts per day in a month and the 
Participant is (i) both the buyer and seller or (ii) the Participant 
removes liquidity from another Participant under Common Ownership does 
not create an undue burden on intra-market competition because NOM 
Market Makers have obligations to the market and regulatory 
requirements, which normally do not apply to other market 
participants.\23\ Offering the fee discount to Non-NOM Market Makers 
provides Participants with flexibility in the manner in which they are 
submitting their orders. Non-NOM Market Makers have obligations on 
other exchanges to qualify as a market maker. Also, the Exchange 
believes that market makers not registered on NOM will be encouraged to 
send orders to NOM as an away market maker (Non-NOM Market Maker) with 
this incentive. Because the incentive is being offered to both market 
makers registered on NOM and those not registered on NOM, the Exchange 
believes that the proposal does not impose an undue burden on intra-
market competition because it encourages market makers to direct 
liquidity to NOM to the benefit of all Participants.
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    \23\ See note 15.
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    The Exchange believes that permitting NOM Participants with 75 
percent common ownership to aggregate their volume for purposes of 
obtaining the fee discount does not create an undue burden on intra-
market competition because certain NOM Participants chose to segregate 
their businesses into different legal entities for purposes of 
conducting business. NOM Participants that chose to segregate their 
businesses into different legal entities should still be afforded the 
opportunity to receive the discount as if they were the same NOM 
Participant on both sides of the transaction.
    Participants would be entitled to receive the fee reduction when 
the Participant is both the buyer and seller and therefore this 
qualifier does not create an undue burden on intra-market competition. 
NOM Participants are unaware at the time the order is entered of the 
identity of the contra-party, therefore, since contra-parties are 
anonymous, the Exchange believes that NOM Participants would 
aggressively pursue order flow in order to receive the benefit of the 
reduction, to the benefit of all Participants.
    The Exchange's proposal to continue to count all order flow toward 
the 1.30% requisite volume, except for NOM Market Maker order flow does 
not impose an undue burden on intra-market competition because the 
Exchange believes it is not necessary to count NOM Market Maker volume 
in qualifying for the fee discount as that volume is counted toward 
qualifying for NOM Market Maker rebates.

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.\24\
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    \24\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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.

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-2016-012 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-2016-012. 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

[[Page 8323]]

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 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-2016-012, and should 
be submitted on or before March 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-03268 Filed 2-17-16; 8:45 am]
 BILLING CODE 8011-01-P