Document ID: SEC-2012-1543-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2012-09-18T04:00Z

[Federal Register Volume 77, Number 181 (Tuesday, September 18, 2012)]
[Notices]
[Pages 57614-57617]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22910]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67837; File No. SR-NASDAQ-2012-102]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Pricing of Options on Facebook, Inc., Google, Inc. and 
Groupon, Inc.

September 12, 2012.
    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 August 31, 2012, 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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[[Page 57615]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASDAQ Stock Market LLC proposes to modify pricing for NASDAQ 
members using the NASDAQ Options Market (``NOM''), NASDAQ's facility 
for executing and routing standardized equity and index options. 
Specifically, NASDAQ proposes to amend Chapter XV, Section 2 entitled 
``NASDAQ Options Market--Fees and Rebates'' to adopt rebates and fees 
relating to options on Facebook, Inc. (``FB''), Google, Inc. (``GOOG'') 
and Groupon, Inc. (``GRPN'').
    While the changes proposed herein are effective upon filing, the 
Exchange has designated these changes to be operative on September 4, 
2012.
    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. 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 proposes to amend Chapter XV, Section 2 to adopt rebates and 
fees relating to FB, GOOG and GRPN options.\3\ The Exchange has 
previously adopted pricing specific to certain securities as have other 
options exchanges. The Exchange proposes to assess the following 
Rebates to Add Liquidity \4\, Fees for Adding Liquidity and Fees for 
Removing Liquidity \5\ for transactions in FB, GOOG and GRPN:
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    \3\ FB, GOOG and GRPN are Non-Penny Pilot Options.
    \4\ An order that adds liquidity is one that is entered into NOM 
and rests on the NOM book.
    \5\ An order that removes liquidity is one that is entered into 
NOM and that executes against an order resting on the NOM book.

----------------------------------------------------------------------------------------------------------------
                                                                                  Non-NOM market    NOM market
                                     Customer      Professional        Firm            maker           maker
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Rebate to Add Liquidity.........           $0.77             N/A             N/A             N/A             N/A
Fee for Adding Liquidity........             N/A            0.45            0.45            0.45            0.25
Fee for Removing Liquidity......            0.79            0.85            0.85            0.85            0.79
----------------------------------------------------------------------------------------------------------------

    The Exchange is proposing to increase the Customer Rebate to Add 
Liquidity for FB, GOOG and GRPN. Today, Customers receive the Non-Penny 
Pilot Option Rebate to Add Liquidity. The FB, GOOG and GRPN Customer 
Rebate to Add Liquidity would increase from $0.20 per contract (Non-
Penny Pilot Options Rebate to Add Liquidity) to $0.77 per contract (FB, 
GOOG and GRPN Rebate to Add Liquidity). No other market participant 
would be entitled to a Rebate to Add Liquidity in FB, GOOG and GRPN, as 
is the case today.\6\
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    \6\ Today, only a Customer receives a Rebate to Add Liquidity in 
Non-Penny Pilot Options.
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    The Exchange is proposing to increase the Professional Fee for 
Adding Liquidity from $0.30 per contract (Non-Penny Pilot Options Fee 
for Adding Liquidity) to $0.45 per contract Professional Fee for Adding 
Liquidity in FB, GOOG and GRPN. Firms and Non-NOM Market Makers would 
continue to pay a $0.45 per contract Fee for Adding Liquidity in FB, 
GOOG and GRPN as they do today for Non-Penny Pilot Options. The 
Exchange would decrease the NOM Market Maker Fee for Adding Liquidity 
from $0.30 per contract (Non-Penny Pilot Options Fee for Adding 
Liquidity) to a $0.25 per contract NOM Market Maker Fee for Adding 
Liquidity in FB, GOOG and GRPN. Customers would continue to incur no 
Fee for Adding Liquidity in FB, GOOG and GRPN, as is the case today.\7\
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    \7\ Today, Customers are not assessed a Fee for Adding Liquidity 
in Non-Penny Pilot Options.
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    The Exchange is proposing to increase the Fees for Removing 
Liquidity for FB, GOOG and GRPN. The FB, GOOG and GRPN Fees for 
Removing Liquidity would increase as follows: A Customer that today 
pays a Non-Penny Pilot Options Fee for Removing Liquidity of $0.45 per 
contract would pay a $0.79 per contract Fee for Removing Liquidity in 
FB, GOOG and GRPN, a Professional, Firm and Non-NOM Market Maker that 
today pays a $0.50 per contract Non-Penny Pilot Fee for Removing 
Liquidity would pay $0.85 per contract Fee for Removing Liquidity in 
FB, GOOG and GRPN and a NOM Market Maker that today pays $0.50 per 
contract Non-Penny Pilot Options Fee for Removing Liquidity would pay a 
$0.79 per contract Fee for Removing Liquidity in FB, GOOG and GRPN.\8\
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    \8\ With respect to the Opening Cross, all orders would be 
subject to Chapter XV, Section 2(2).
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    The Exchange believes that this pricing will incentivize members to 
transact FB, GOOG and GRPN on NOM. The Exchange notes that if FB, GOOG 
and GRPN are included in the Penny Pilot at a later date, the Exchange 
would file to eliminate the specific fees and rebates for FB, GOOG and/
or GRPN in order that FB, GOOG and GRPN would be subject to the 
Exchange's Penny Pilot Options \9\ pricing.
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    \9\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through June 30, 2012. 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); 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); 65969 (December 15, 
2011), 76 FR 79268 (December 21, 2011) (SR-NASDAQ-2011-169) (notice 
of filing and immediate effectiveness extension and replacement of 
Penny Pilot); and 67325 (June 29, 2012), 77 FR 40127 (July 6, 2012) 
(SR-NASDAQ-2012-075) (notice of filing and immediate effectiveness 
extension and replacement of Penny Pilot through December 31, 2012). 
See also NOM Rules, Chapter VI, Section 5.
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    The Exchange is also proposing to make a technical amendment to the 
pricing in Section 2(1) of Chapter XV to replace any reference to 
``$0.00'' to ``N/A'' for clarity. The Exchange believes that using ``N/
A'' reduces confusion when no rebate is being paid or fee is being 
assessed by the Exchange.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the

[[Page 57616]]

provisions of Section 6 of the Act,\10\ in general, and with Section 
6(b)(4) of the Act,\11\ 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.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange operates in a highly competitive market comprised of 
ten 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 the 
rebate offered to be inadequate. The Exchange believes that the 
proposed fee and rebate scheme is competitive and similar to other fees 
and rebates in place on other exchanges. The Exchange believes that 
this competitive marketplace materially impacts the fees and rebates 
present on the Exchange today and substantially influences the proposal 
set forth above.
    The Exchange believes that its proposed Customer Rebate to Add 
Liquidity for FB, GOOG and GRPN is reasonable because the Exchange is 
continuing to incentivize NOM Participants to transact Customer order 
flow on NOM. Customer order flow benefits all market participants 
through the increased liquidity in the market. The Exchange believes 
that its proposed Customer Rebate to Add Liquidity for FB, GOOG and 
GRPN is equitable and not unfairly discriminatory because today in the 
non-Penny Pilot names the Exchange only offers Customers a Rebate to 
Add Liquidity. The Exchange will continue to only offer Customers a 
rebate but increase that rebate.
    The Exchange believes the proposed increased Professional Fee for 
Adding Liquidity in FB, GOOG and GRPN (from $0.30 to $0.45 per 
contract) is reasonable because it is within the range of fees assessed 
today to Firms and Non-NOM Market Makers transacting Non-Penny Pilot 
Options on NOM today when those market participants are adding 
liquidity.\12\ The Exchange believes that decreasing the NOM Market 
Maker Fee for Adding Liquidity is reasonable because the Exchange is 
seeking to incentivize NOM Market Makers to continue to add liquidity 
on NOM by lowering the transaction fee from $0.30 to $0.25 per 
contract. The Firm and Non-NOM Market Maker Fees for Adding Liquidity 
in FB, GOOG and GRPN will remain at $0.45 per contract.
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    \12\ Firms and Non-NOM Market Makers are assessed a Non-Penny 
Pilot Option Fee for Adding Liquidity of $0.45 per contract. These 
market participants would continue to be assessed the same fees.
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    The Exchange believes that assessing Professionals a similar Fee 
for Adding Liquidity in FB, GOOG and GRPN as Firms and Non-NOM Market 
Makers is equitable and not unfairly discriminatory because the 
Exchange is assessing all market participants the same fee, except 
Customers who are not assessed a fee and NOM Market Makers who are 
assessed a lower fee. As previously mentioned, attracting Customer 
orders enhances liquidity on the Exchange for the benefit of all market 
participants. The Exchange believes that assessing NOM Market Makers a 
lower Fee for Adding Liquidity in FB, GOOG and GRPN is equitable and 
not unfairly discriminatory because NOM Market Makers have obligations 
to the market and regulatory requirements,\13\ which normally do not 
apply to other market participants. A NOM Market Maker has the 
obligation 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 course of dealings. The proposed 
differentiation as between NOM Market Makers and other market 
participants recognizes the differing contributions made to the 
liquidity and trading environment on the Exchange by NOM Market Makers, 
as well as the differing mix of orders entered.
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    \13\ 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 the proposed Fees for Removing Liquidity 
for FB, GOOG and GRPN are reasonable because the Exchange is proposing 
to increase the fees for all market participants in order to offer 
Customers an increased Rebate to Add Liquidity in FB, GOOG and GRPN of 
$0.77 per contract. The Exchange believes that offering Customers a 
financial incentive will attract additional Customer order flow to the 
Exchange. Also, the proposed Fees for Removing Liquidity in FB, GOOG 
and GRPN are similar to the non-Penny Pilot Options fees at BATS 
Exchange, Inc. (``BATS'').\14\
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    \14\ BATS has a $0.75 per contract fee for Customer orders that 
remove liquidity from the BATS Options book in non-Penny Pilot 
securities. BATS also has an $0.80 per contract fee for 
Professionals, Firms and Market Maker orders that remove liquidity 
from the BATS Options order book in non-Penny Pilot Securities. See 
BATS BZX Exchange Fee Schedule.
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    The Exchange believes that the proposed Fees for Removing Liquidity 
for FB, GOOG and GRPN are equitable and not unfairly discriminatory 
because all market participants would be assessed the same $0.85 per 
contract fee except Customers and NOM Market Makers who would be 
assessed a lower fee of $0.79 per contract. As mentioned previously, 
attracting Customer orders enhances liquidity on the Exchange for the 
benefit of all market participants and the increased fees for removing 
liquidity cover the cost of offering Customers a rebate to add 
liquidity in FB, GOOG and GRPN. Also, the Non-Penny Pilot Customer Fee 
for Removing Liquidity is lower today for Customers as compared to 
other market participants ($0.45 per contract vs. $0.50 per contract), 
the proposed Customer Fee for Removing Liquidity in FB, GOOG and GRPN 
would be lower for Customers as compared to Professionals, Firms and 
Non-NOM Market Makers. The Exchange believes that providing NOM Market 
Makers a lower Fee for Removing Liquidity in FB, GOOG and GRPN as 
compared to Professionals, Firms and Non-NOM Market Makers is equitable 
and not unfairly discriminatory because NOM Market Makers have 
obligations to the market and regulatory requirements, which normally 
do not apply to other market participants. The proposed differentiation 
as between Customers and NOM Market Makers and other market 
participants recognizes the differing contributions made to the 
liquidity and trading environment on the Exchange by Customers and NOM 
Market Makers, as well as the differing mix of orders entered.
    In the current U.S. options market, many of the contracts are 
quoted in pennies. Under this pricing structure, the minimum penny tick 
increment equates to a $1.00 economic value difference per contract, 
given that a single standardized U.S. option contract covers 100 shares 
of the underlying stock. Where contracts are quoted in $0.05 increments 
(non-pennies), the value per tick is $5.00 in proceeds to the investor 
transacting in these contracts. Liquidity rebate and access fee 
structures on the make-take exchanges, including NOM, for securities 
quoted in penny increments are commonly in the $0.30 to $0.45 per 
contract range.\15\ A

[[Page 57617]]

$0.30 per contract rebate in a penny quoted security is a rebate 
equivalent to 30% of the value of the minimum tick. A $0.45 per 
contract fee in a penny quoted security is a charge equivalent to 45% 
of the value of that minimum tick. In other words, in penny quoted 
securities, where the price is improved by one tick with an access fee 
of $0.45 per contract, an investor paying to access that quote is still 
$0.55 better off than trading at the wider spread, even without the 
access fee ($1.00 of price improvement - $0.45 access fee = $0.55 
better economics). This computation is equally true for securities 
quoted in wider increments. Rebates and access fees near the $0.85 per 
contract level equate to only 17% of the value of the minimum tick in 
Non-Penny Pilot Options, less than the experience today in Penny Pilot 
Options. For example, a retail investor transacting a single contract 
in a non-penny quoted security quoted a single tick tighter than the 
rest of the market, and paying an access fee of $0.79 per contract, is 
receiving an economic benefit of $4.21 ($0.05 improved tick = $5.00 in 
proceeds - $0.79 access fee = $4.21). The Exchange believes that 
encouraging NOM Market Makers to quote more aggressively by reducing 
transaction fees \16\ and incentivizing Customer orders to post on NOM 
will narrow the spread in FB, GOOG and GRPN to the benefit of investors 
and all market participants by improving the overall economics of the 
resulting transactions that occur on the Exchange, even if the access 
fee paid in connection with such transactions is higher. Accordingly, 
the Exchange believes that the proposed fees and rebates for FB, GOOG 
and GRPN are reasonable, equitable and not unfairly discriminatory.
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    \15\ NOM is proposing to only pay a Customer a Rebate to Add 
Liquidity in FB, GOOG and GRPN. Other market participants would not 
be entitled to a rebate.
    \16\ The Exchange notes that the proposed $0.25 per contract NOM 
Market Maker Fee for Adding in FB, GOOG and GRPN is significantly 
less than transaction fees plus payment for order flow fees assessed 
by other options exchanges. For example, on NASDAQ OMX PHLX LLC 
(``Phlx''), the combined payment for order flow fee plus the 
transaction fee is $0.92 per contract. See Phlx's Pricing Schedule. 
Unlike Penny Pilot Options, the Exchange believes this significant 
reduction in fees for adding liquidity will have the same effect as 
a rebate in non-Penny Pilot Options in terms of a narrower spread.
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    Further, the Exchange believes that it is reasonable, equitable, 
and not unfairly discriminatory to adopt specific pricing for FB, GOOG 
and GRPN because pricing by symbol is a common practice on many U.S. 
options exchanges as a means to incentivize order flow to be sent to an 
exchange for execution in the most actively traded options classes. The 
Exchange notes that FB, GOOG and GRPN are some of the most actively 
traded options in the U.S.\17\ Finally, the Exchange believes the 
proposed technical amendments to Section 2(1) of Chapter XV to replace 
any reference to ``$0.00'' to ``N/A'' is reasonable, equitable and not 
unfairly discriminatory because the Exchange is identifying when no 
fees are assessed and no rebates paid with an ``N/A'' to avoid any 
confusion.
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    \17\ From August 1, 2012 through August 21, 2012, FB was the 5th 
most actively traded equity option class, GOOG was the 28th most 
actively traded equity option class and GRPN was the 51st most 
actively traded equity option class.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
NASDAQ has designed its fees and rebates to compete effectively for the 
execution and routing of options contracts and to reduce the overall 
cost to investors of options trading. The Exchange believes that the 
proposed fee/rebate pricing structure would attract liquidity to and 
benefit order interaction at the Exchange to the benefit of all market 
participants.

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.\18\ 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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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-102 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-2012-102. 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-2012-102 and should 
be submitted on or before October 9, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22910 Filed 9-17-12; 8:45 am]
BILLING CODE 8011-01-P