Document ID: SEC-2012-1159-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-07-17T04:00Z

[Federal Register Volume 77, Number 137 (Tuesday, July 17, 2012)]
[Notices]
[Pages 42073-42075]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17273]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67388; File No. SR-NASDAQ-2012-83]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Customer Rebates in Penny Pilot Options

July 10, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on June 29, 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 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

    NASDAQ proposes to modify Chapter XV, entitled ``Option Pricing,'' 
at Section 2 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 a Penny Pilot \3\ Option Customer Rebate to Add Liquidity. The 
Exchange also proposes a minor technical amendment.
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    \3\ 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 extending and replacing Penny 
Pilot); SR-NADAQ-2012-075 (not published) (notice of filing and 
immediate effectiveness extending and replacing Penny Pilot). See 
also Exchange Rule Chapter VI, Section 5.
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    While the changes proposed herein are effective upon filing, the 
Exchange has designated these changes to be operative on July 2, 2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change 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 proposes to modify Chapter XV, entitled ``Option Pricing,'' 
at Section 2(1) governing the rebates and fees assessed for option 
orders entered into NOM. Specifically, the Exchange is proposing to 
modify the five tier structure for paying Customer Rebates to Add 
Liquidity in Penny Pilot Options. The Exchange proposes to amend the 
qualifications for a Tier 4 Customer Rebate to Add Liquidity to further 
incentivize NOM Participants to route Customer orders in Penny Pilot 
Options to the Exchange by providing NOM Participants another means of 
achieving a certain volume criteria to qualify for a rebate. The 
Exchange believes that incentivizing NOM Participants to send 
additional Customer orders in Penny Pilot Options to the Exchange will 
benefit all market participants by adding liquidity to the market.
    Specifically, the Exchange currently pays a Customer Rebate to Add 
Liquidity in Penny Pilot Options based on the following tier structure:

[[Page 42074]]

------------------------------------------------------------------------
                                                              Rebate to
                       Monthly volume                            add
                                                              liquidity
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Tier 1 Participant adds Customer liquidity of up to 14,999         $0.26
 contracts per day in a month..............................
Tier 2 Participant adds Customer liquidity of 15,000 to             0.38
 49,999 contracts per day in a month.......................
Tier 3 Participant adds Customer liquidity of 50,000 to             0.43
 74,999 contracts per day in a month.......................
Tier 4 Participant adds Customer liquidity of 75,000 or             0.44
 more contracts per day in a month.........................
Tier 5 Participant adds (1) Customer liquidity of 25,000 or         0.42
 more contracts per day in a month, (2) the Participant has
 certified for the Investor Support Program set forth in
 Rule 7014; and (3) the Participant executed at least one
 order on NASDAQ's equity market...........................
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    Currently, Tier 4 firms that add Customer liquidity of 75,000 or 
more contracts per day in a month of Customer order liquidity in Penny 
Pilot Options receive a rebate of $0.44 per contract. The Exchange 
proposes to amend the Tier 4 Customer rebate by also paying the $0.44 
per contract Customer Rebate to Add Liquidity in Penny Pilot Options 
when a Participant has a total volume of 100,000 or more contracts per 
day in a month. Therefore, in order to qualify for the Tier 4 Customer 
Rebate to Add Liquidity in Penny Pilot Options, a Participant that add 
Customer liquidity of 75,000 or more contracts per day in a month or a 
has total volume of 100,000 or more contracts per day in a month would 
receive a rebate of $0.44 per contract.\4\ For purposes of Tier 4, 
``Total Volume'' shall be defined as Customer, Professional, Firm, NOM 
Market Maker \5\ and Non-NOM Market Maker volume in Penny Pilot Options 
which either adds or removes liquidity. The Exchange is also proposing 
to add this definition of Total Volume in Chapter XV, Section 2(1).
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    \4\ The Exchange is not proposing to amend the $0.44 per contact 
rebate or any other Customer rebate tier.
    \5\ A NOM Participant must be registered as such pursuant to 
Chapter VII, Section 2 of the NOM Rules, and must also remain in 
good standing pursuant to Chapter VII, Section 4.
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    The Exchange also proposes a minor technical amendment to 
redesignate note ``a'' currently referencing Tier 5 with ``b'' and 
insert a new note ``a'' related to Tier 4.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are 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.
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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 amended pricing tier is 
reasonable, equitable and not unfairly discriminatory because it is 
part of an existing program \8\ to encourage broker-dealers acting as 
agent for Customer orders to select the Exchange as a venue to post 
Customer orders. The Exchange believes that its success at attracting 
Customer order flow benefits all market participants by improving the 
quality of order interaction and executions at the Exchange. 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 providing an additional 
opportunity to qualify for a Customer Rebate and earn a rebate.
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    \8\ The Exchange adopted these monthly volume achievement tiers 
in September 2011. See Securities Exchange Act Release Nos. 65317 
(September 12, 2011), 76 FR 57778 (September 16, 2011) (SR-NASDAQ-
2011-124), 65317 (September 12, 2011), 76 FR 61129 (October 3, 2011) 
(SR-NASDAQ-2011-127), 66126 (January 10, 2012), 77 FR 2335 (January 
17, 2012) (SR-NASDAQ-2012-003), 66360 (February 8, 2012), 77 FR 8312 
(February 14, 2012) (SR-NASDAQ-2012-022) and 66768 (April 6, 2012), 
77 FR 22015 (April 12, 2012) (SR-NASDAQ-2012-048).
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    The Exchange believes that amending Tier 4 to provide that NOM 
Participants that have total volume of 100,000 or more contracts per 
day in a month may also qualify for the Tier 4 rebate of $0.44 per 
contract in addition to those NOM Participants that add Customer 
liquidity of 75,000 or more contracts in Penny Pilot Options in a month 
is reasonable because it allows additional NOM Participants to qualify 
for the Customer rebate. Total Volume includes a Customer, 
Professional, Firm, NOM Market Maker and Non-NOM Market Maker Penny 
Pilot Option that either added or removed liquidity. The Exchange 
believes that this added incentive would allow additional NOM 
Participants to qualify and receive the Customer rebate.
    The Exchange believes that amending Tier 4 to provide that NOM 
Participants who have total volume of 100,000 or more contracts per day 
in a month may also qualify for the Tier 4 rebate of $0.44 per contract 
in addition to those NOM Participants that add Customer liquidity of 
75,000 or more contracts in Penny Pilot Options in a month is equitable 
and not unfairly discriminatory because all NOM Participants that 
transact Customer orders in Penny Options are eligible for the Customer 
rebates.\9\
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    \9\ Tier 1 pays a rebate for NOM Participants that add Customer 
liquidity of up to 14,999 contracts per day in a month of Penny 
Options. There is no required minimum volume of Customer orders to 
qualify for a Customer Rebate to Add Liquidity.
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    The Exchange believes that the calculation of Total Volume for 
purposes of qualifying for amended Tier 4 is reasonable because the 
Exchange is providing NOM Participants with an added opportunity to 
receive a Tier 4 Customer rebate by adding volume from all market 
participants, not only Customer volume. The Exchange believes this 
amendment will allow a greater number of NOM Participants to qualify 
for the Tier 4 rebate.
    The Exchange believes that the calculation of Total Volume for 
purposes of qualifying for amended Tier 4 is equitable and not unfairly 
discriminatory because all NOM Participants that transact Customer 
orders in Penny Pilot Options would be eligible to qualify for a rebate 
starting with the first executed contract that added Customer 
liquidity.\10\ The Exchange's proposal to renumber the notes to add a 
new note referencing Tier 4 is reasonable, equitable and not unfairly 
discriminatory because these amendments provide greater clarity and 
accuracy to the Rule text.
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    \10\ See note 9.
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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 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed rebate scheme is competitive and similar to other fees, 
rebates and tier opportunities in place on other exchanges. The 
Exchange believes that this competitive marketplace materially impacts 
rebates present on the Exchange

[[Page 42075]]

today and substantially influences the proposal set forth above.

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

    NASDAQ does not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
NASDAQ has designed its fees 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 incentivizing 
NOM Participants to transact greater Customer volume on the Exchange 
benefits all market participants because of the increased liquidity to 
the market.

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.\11\ 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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    \11\ 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-2012-83 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-2012-83. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-83 and should be 
submitted on or before August 7, 2012.

    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. 2012-17273 Filed 7-16-12; 8:45 am]
BILLING CODE 8011-01-P