Document ID: SEC-2011-1403-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-09-16T04:00Z

[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Notices]
[Pages 57778-57781]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23721]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65317; File No. SR-NASDAQ-2011-127]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Fees for Members Using the NASDAQ Options Market

September 12, 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 September 1, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``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 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to modify pricing for NASDAQ members using the 
NASDAQ Market Center. NASDAQ will implement the proposed change on 
September 1, 2011. The text of the proposed rule change is available at 
http://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 these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    NASDAQ is proposing to modify Rule 7050 governing the rebates and 
fees assessed for option orders entered into NOM. Specifically, NASDAQ 
is proposing to modify pricing for the Customer Rebate to Add Liquidity 
in Penny Options to revising [sic] existing monthly volume tiers. The 
Exchange currently pays a Customer Rebate to Add Liquidity in Penny 
Options based on four volume tiers as follows:

------------------------------------------------------------------------
                                                           Rebate to add
                                       Monthly volume        liquidity
------------------------------------------------------------------------
Tier 1............................  0-499,999...........           $0.26
Tier 2............................  500,000-799,999.....            0.32
Tier 3............................  800,000-1,199,999...            0.36
Tier 4............................  1,200,000 and up....            0.38
------------------------------------------------------------------------

By way of example, the Exchange currently pays a Rebate to Add 
Liquidity of $0.36 per contract to a NOM Participant that executed 
900,000 Customer contracts that added liquidity in Penny Options in a 
given month. If the NOM Participant executed 1,500,000 Customer 
contracts that added liquidity in Penny Options in a given month, the 
Exchange currently would pay a Rebate to Add Liquidity of $0.38 per 
contract. 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.
    To further encourage firms that route Customer orders to increase 
Customer order flow to the Exchange, the Exchange is proposing to 
modify the Customer Rebates to Add Liquidity in Penny Pilot Options in 
several ways. First, the Exchange is converting all tier measurements 
to average daily volumes from aggregate monthly volumes. This change is 
not, in and of itself, a material change.
    Second, based on its experience with the existing volume tiers, the 
Exchange is modifying the volume required to

[[Page 57779]]

qualify for each of the four existing tiers and the rebates earned by 
firms that qualify for each tier.
     Currently, Tier 1 firms add up to 499,999 contracts of 
liquidity per month (an average of up to 24,999 per day based on a 
month containing 20 trading days), and for that volume they receive a 
rebate of $0.26 per contract. The Exchange is changing Tier 1 to cover 
up to 24,999 contracts per day, and to pay the same $0.26 rebate. Based 
on past experience the Exchange anticipates that all firms currently 
receiving the $0.26 rebate will maintain their current level of rebate.
     Currently, Tier 2 firms add between 500,000 and 799,999 
contracts per month (between 25,000 and 39,999 per day), and for that 
volume they receive a rebate of $0.32 per contract. The Exchange is 
changing Tier 2 to cover between 25,000 and 59,999 contracts per day, 
and to pay a rebate of $0.34 per contract.\3\ As a result, firms that 
contribute between 25,000 and 39,999 contracts per day of Customer 
order liquidity will receive a higher rebate (up from $0.32 to $0.34 
per contract). However, firms that contribute between 40,000 and 59,999 
contracts per day of Customer order liquidity will receive a lower 
rebate (down from $0.36 to $0.34 per contract). Based upon current 
volume levels and past trading patterns, the Exchange anticipates that 
firms will contribute sufficient liquidity to avoid receiving reduced 
rebates.
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    \3\ Firms that contribute between 40,000 and 59,999 contracts 
per day are currently in Tier 3, and receive a rebate of $0.36 per 
contract.
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     Currently, Tier 3 firms add between 800,000 and 1,199,999 
contracts per month (between 40,000 and 59,999 per day), and for that 
volume they receive a rebate of $0.36 per contract. The Exchange is 
changing Tier 3 to cover between 60,000 and 124,999 contracts per day, 
and to pay a rebate of $0.38 per contract. As a result, firms that 
contribute between 40,000 and 59,999 contracts per day of Customer 
order liquidity will receive lower rebates (down from $0.36 to $0.34 
per contract) as a result of being in new Tier 2. Based upon current 
volume levels and past trading patterns, the Exchange anticipates that 
firms will contribute sufficient liquidity to avoid receiving reduced 
rebates. Firms that contribute between 60,000 and 124,999 contracts per 
day are currently in Tier 4, and receive a rebate of $0.38 per 
contract. The rebate they receive will not change as a result of now 
being in Tier 3.
     Currently, Tier 4 firms add over 1,200,000 contracts per 
month (over 60,000 per day), and for that volume they receive a rebate 
of $0.38 per contract. The Exchange is changing Tier 4 to cover over 
125,000 contracts per day, and to pay a rebate of $0.40 per contract. 
As a result, firms that contribute between 60,000 and 124,999 contracts 
per day of Customer order liquidity will receive the same rebate of 
$0.38 per contract as previously received under old Tier 4, and firms 
that provide over 125,000 contracts per day of Customer order liquidity 
will receive higher rebates ($0.40 per contract under new Tier 4 up 
from $0.38 per contract received under old Tier 4).
    Finally, the Exchange is adding two new tiers to further encourage 
the provision of Customer liquidity by participants that also add 
liquidity to the Exchange in other ways. The first new tier (Tier 5) 
will provide a higher rebate for Participants that meet two separate 
criteria: (1) Provide 60,000 or more contracts per day of Customer 
order liquidity in Penny options, and (2) provide 60,000 or more 
contracts per day of NOM Market Maker liquidity. By meeting the two 
criteria, Participants will receive a $0.02 rebate increase ($0.40 for 
meeting both criteria, as opposed to $0.38 for meeting only the first). 
For the purposes of determining qualification for this tier, the 
Exchange will aggregate the trading activity of separate NOM 
Participants in calculating the average daily volume if there is at 
least 75% common ownership between the NOM Participants.\4\
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    \4\ Aggregation is necessary and appropriate because certain NOM 
participants conduct Customer and NOM Market Maker trading activity 
through separate but related broker-dealers.
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    In other words, Participants that add significant liquidity as 
market makers can receive the same Customer rebate as Participants that 
provide substantially more Customer order liquidity (over 125,000 
contracts per day). The Exchange believes this will encourage more 
participants that also route Customer order flow to register to make 
markets on the Exchange.
    The Exchange is adding new Tier 6 to encourage participants in the 
Exchange's equity markets to also participate in the Exchange's options 
market. Specifically, firms that qualify for a credit under the 
Investor Support Program set forth in NASDAQ Rule 7014 \5\ by providing 
retail investor liquidity to NASDAQ's equity market can qualify for a 
higher rebate on NASDAQ's options market if they contribute 25,000 or 
more contracts per day of Customer order liquidity in Penny options on 
NOM. This amounts to a rebate of $0.01 per contract higher for any 
contracts between 25,000 and 59,999 per day for qualifying participants 
in both markets ($0.35 per contract) versus those that participate and 
qualify only on NOM ($0.34 per contract).
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    \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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2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\6\ in general, and with Section 
6(b)(4) of the Act,\7\ 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. All similarly situated members are 
subject to the same fee structure, and access to NASDAQ is offered on 
fair and non-discriminatory terms.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed monthly tier structure for 
Customer Rebates to Add Liquidity in Penny Options is equitable, 
reasonable and not unfairly discriminatory because by incentivizing 
broker-dealers acting as agent for Customer orders to select the 
Exchange as a venue to post Customer orders will attract Customer order 
flow and benefit all market participants. While the Exchange is 
modifying the required liquidity provision to qualify for Tiers 2, 3 
and 4, it is also increasing the rebate available to firms that do 
qualify. As a result, the Exchange believes that broker-dealers acting 
as agent for Customer orders will in fact be incentivized to bring 
additional order flow to the Exchange and that they will obtain higher 
rebates.
    Furthermore, the Exchange believes that the proposed Customer 
monthly volume tier Rebates to Add Liquidity are equitable and not 
unfairly discriminatory because the Rebates to Add Liquidity are higher 
in Tiers 2, 3 and 4 for Customers as compared to all other market 
participants. With respect to Tier 1, the Exchange is proposing to pay 
a Customer a lower Rebate to Add Liquidity as compared to a 
Professional and NOM Market Maker. The Exchange believes that this 
proposal is equitable because the participant submitting

[[Page 57780]]

Customer order liquidity has the opportunity to earn higher rebates 
with the tier structure as compared to a Professional, who will only 
receive a $0.29 per contract Rebate to Add Liquidity, and a NOM Market 
Maker, who will only receive a $0.30 per contract Rebate to Add 
Liquidity. The Exchange believes it not unreasonable to preserve the 
existing differential between different types of Participants because 
the presence of Customer liquidity enhances the quality of trading on 
the Exchange for all Participants to such a great degree. Additionally, 
with respect to NOM Market Makers, the proposed fee structure is 
equitable because market makers have obligations to the market and 
regulatory requirements,\8\ which normally do not apply to other market 
participants. Customers receive a higher Rebate to Add Liquidity for 
all tiers as compared to a Firm and Non-NOM Market Maker.\9\
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    \8\ 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.
    \9\ A Firm receives a $0.10 per contract Rebate to Add Liquidity 
and a Non-NOM Market maker receives a $0.25 per contract Rebate to 
Add Liquidity.
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    The Exchange believes that new Tier 5 is not unfairly 
discriminatory because market makers have obligations to the market and 
regulatory requirements, which normally do not apply to other market 
participants. The Exchange has set a reasonable goal of 60,000 or more 
contracts per day for market makers on NOM, an achievable goal that 
should encourage increased market maker registration and market making 
activity. The Exchange believes that the $0.02 rebate premium is 
equitable because that increased market making will, in turn, improve 
the amount of liquidity available on the Exchange and improve the 
quality of order interaction and executions on the Exchange.
    The Exchange believes that new Tier 6 is equitable and not unfairly 
discriminatory because it encourages increased activity in both the 
NASDAQ Options Market and in the Investor Support Program (``ISP'') of 
the NASDAQ equity market. The goal of the ISP is to incentivize members 
to provide liquidity from individual equity investors to the NASDAQ 
Market Center.\10\ Alternatively, new Tier 6 will encourage firms that 
already qualify for a credit under the ISP to increase the amount of 
Customer order liquidity provided to the NASDAQ Options Market. The 
addition of such liquidity, either through the ISP or through increased 
Customer order flow, will benefit all Exchange members that participate 
in those markets.\11\
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    \10\ 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. 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 website)(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).
    \11\ 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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    The Exchange believes the proposed tier structure for Customer 
Rebates to Add Liquidity in Penny Options is also reasonable because 
the amount of the rebate is similar to a tiered rebate offered by NYSE 
Arca, Inc. (``NYSE Arca''). NYSE Arca adopted a per contract rate on 
all posted liquidity in Customer Penny Pilot Issues by aggregating 
total contracts executed that added liquidity in Penny Pilot Issues in 
a given month.\12\
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    \12\ See NYSE Arca's Fee Schedule.
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    The Exchange believes that the proposed tier structure for Customer 
Rebates to Add Liquidity in Penny Options is equitable and not unfairly 
discriminatory because the Exchange will uniformly pay a Rebate to Add 
Liquidity to Customers executing Penny Options based on the monthly 
tiers proposed herein.
    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 structure and tiers are competitive and similar to 
other rebates and tiers in place on other exchanges. The Exchange 
believes that this competitive marketplace impacts the rebates present 
on the Exchange today and substantially influences the proposals set 
forth above.

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

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Because the market 
for order execution is extremely competitive, members may readily opt 
to disfavor NASDAQ's execution services if they believe that 
alternatives offer them better value. For this reason and the reasons 
discussed in connection with the statutory basis for the proposed rule 
change, the Exchange does not believe that the proposed changes 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 rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\13\ 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. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \13\ 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:

[[Page 57781]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-127 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-2011-127. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet website (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 website 
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 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 No. SR-NASDAQ-
2011-127 and should be submitted on or before October 6, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23721 Filed 9-15-11; 8:45 am]
BILLING CODE 8011-01-P