Document ID: SEC-2010-0392-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2010-03-15T04:00Z

[Federal Register: March 15, 2010 (Volume 75, Number 49)]
[Notices]               
[Page 12318-12320]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr10-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61666; File No. SR-NASDAQ-2010-027]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Pricing for Option Orders Routed to Away Markets

March 5, 2010.
    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 March 2, 2010, 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. 
Pursuant to Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) 
thereunder,\4\ NASDAQ has designated this proposal as establishing or 
changing a due, fee, or other charge, which renders the proposed rule 
change effective upon filing. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 Rule 7050 governing pricing for NASDAQ 
members using the NASDAQ Options Market (``NOM''), NASDAQ's facility 
for executing and routing standardized equity and index options. NASDAQ 
will make the proposed rule change effective for transactions settling 
on or after March 2, 2010.
    The text of the proposed rule change is available at http://
nasdaqomx.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 fees assessed 
for execution of options orders entered into NOM but routed to and 
executed on away markets (``routing fees''). When NASDAQ began trading 
standardized options on March 31, 2008, it assessed a routing fee based 
upon an approximation of the cost to NASDAQ of executing such orders at 
those markets. NASDAQ later determined that the superior approach for 
executions on away markets at the time was to pass-through to NASDAQ 
members the actual fees assessed by away markets plus the clearing fees 
for the execution of orders routed from NASDAQ.
    NASDAQ proposes to simplify Rule 7050 by eliminating entirely all 
current NOM pass-through fees and replacing those fees with the 
following new routing fees: (i) A $0.36 per contract side fee for 
customer orders routed to BATS Exchange, Inc. (``BATS'') in all 
options, (ii) a $.06 per contract side fee for customer orders routed 
to the Boston Options Exchange Group LLC (``BOX'') in all options; 
(iii) a $0.06 per contract side fee for customer orders routed to the 
Chicago Board Options Exchange, Inc. (``CBOE'') in all options; (iv) a 
$.06 per contract side fee for customer orders routed to International 
Securities Exchange, LLC (``ISE'') in all options; (v) a $0.50 per 
contract side fee for customer orders routed to NYSE Arca, Inc. 
(``NYSEArca'') in options included in the penny pilot (``penny 
options''); (vi) a $0.06 per contract side fee for customer orders 
routed to NYSE Arca non-penny options; (vii) a $0.06 per contract side 
fee for customer orders routed to NYSE Amex LLC (``NYSE Amex'') in all 
options; (viii) a $0.30 per contract side fee for customer orders 
routed to NASDAQ OMX PHLX, Inc. (``Phlx'') in AMZN, C, BAC, DELL, DIA, 
DRYS, EK, GDX, GE, GS, IWM, MSFT, QCOM, QQQQ, RIMM, SBUX, SKF, SLV, 
SMH, SPY, UNG, USO, UYG, WYNN, and XLF options; (ix) a $0.06 per 
contract side fee for customer orders routed to Phlx in all other 
options; and (x) a $0.55 per contract side fee for all Firm and Market 
Maker orders routed by the Exchange to away markets.

[[Page 12319]]

Recovery of Transaction and Clearing Costs
    NASDAQ Options Services LLC (``NOS''), a member of the Exchange, is 
the Exchange's exclusive order router. Each time NOS routes to away 
markets NOS is charged a $0.06 clearing fee and, in the case of BATS, 
NYSEArca, and Phlx, is charged a transaction fee in certain symbols, 
which are passed through to the Exchange. The following routing fees 
are proposed in order to recoup these costs:
     The Exchange is proposing a $.06 per contract routing fee 
for orders routed to NYSE, AMEX, BOX, CBOE, ISE and NYSEArca in order 
to recoup clearing charges which are incurred by the Exchange when 
customer orders are routed to these away markets.
     The Exchange is proposing a $0.36 per contract routing fee 
for orders routed to BATS in order to recoup transaction and clearing 
charges incurred by the Exchange when customer orders are routed to 
BATS.
     The Exchange is proposing a $0.50 per contract routing fee 
for orders routed to NYSE Arca, Inc. (``NYSEArca'') in penny options.
     The Exchange is proposing a $0.30 per contract routing fee 
for orders routed to Phlx in order to recoup transaction and partial 
clearing charges incurred by the Exchange when customer orders in the 
symbols listed above (subject to Phlx ``taker'' fees), are routed to 
Phlx.\5\
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    \5\ Phlx charges a transaction fee of $0.25, together with a 
clearing charge of $0.06 in the symbols. The Exchange proposes to 
recoup $0.05 of the $0.06 clearing charge for customer orders.
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    The Exchange is proposing these fees to recoup the majority of 
transaction and clearing costs associated with routing customer orders 
to each destination market. As with all fees, the Exchange may adjust 
these routing fees by filing a new proposed rule change.
    The Exchange has designated this proposal to be operative for 
trades settling on or after March 2, 2010.
Routing Fees for Firms and Market Makers
    The Exchange proposes a fixed routing fee of $0.55 for routing 
orders for the account(s) of Firms (i.e., an order that clears as 
``Firm'' with the Options Clearing Corporation (``OCC'')) and Market 
Makers to away markets.
    The Exchange notes that all U.S options exchanges charge fees for 
Firm and Market Maker \6\ orders and that they are consistently higher 
than fees for customer orders. Additionally, the pricing on the various 
U.S options exchanges for such orders varies significantly from 
exchange to exchange, with much more variation than for customer 
orders.\7\ Accordingly, the Exchange is proposing the $0.55 per 
contract side routing fee in order to capture the majority of the 
transaction and clearing fees for Firm and Market Maker orders, while 
making the Exchange's routing fees easier to calculate and predict for 
members whose proprietary orders are routed away.
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    \6\ The Exchange notes that some other options exchanges include 
Market Maker transaction and clearing fees as ``broker-dealer'' 
fees.
    \7\ There are, in fact, no customer transaction fees applicable 
on BOX, CBOE, ISE, NYSEArca non-penny options, and Phlx options not 
subject to the ``taker'' fee.
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    Simply put, fixed routing fees are easier to comprehend by the 
members whose orders are routed away. There is no uncertainty and it is 
simpler for members acting as agent for other members to pass-through 
fees to its customer. Currently, predicting, calculating and charging 
back ``pass-through'' fees is an unduly burdensome, expensive and 
complicated task for Exchange members whose orders are routed away. The 
fixed routing fees for Firm and Market Maker orders should ease the 
burden, expense and complexity of this task. Furthermore, fixed fees 
are easier to manage and maintain for the Exchange, ensuring accurate 
billing and accounting.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with Section 
6(b)(4) of the Act,\9\ 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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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
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    NASDAQ further believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \10\ in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange.
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    \10\ 15 U.S.C. 78f(b)(5).
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Routing Fees for Customer Orders
    The Exchange believes that the proposed routing fees applicable to 
customer orders 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, 
and are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The proposed routing fees applicable to 
customer orders are equitable and reasonable, in that they would apply 
to all customer orders equally on the reasonable basis that the routing 
fees are approximately equal to the transaction and clearing fees 
charged to NOS and ultimately to the Exchange.\11\
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    \11\ The Exchange notes that it will recoup less than the $0.06 
clearing fee for orders routed to Phlx in options subject to the 
Phlx ``taker'' fee.
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    The routing fees applicable to customer orders are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers because, the Exchange believes, they are much easier to follow 
and calculate, and as stated above, most U.S. options exchanges do not 
charge transaction fees for customer orders. Therefore, the amount of 
the routing fees are naturally less than the proposed fees applicable 
to Firm and Market Maker orders routed to away markets.
Routing Fees for Firm and Market Maker Orders
    The Exchange believes its proposed fixed routing fees applicable to 
Firm and Market Maker orders are equitable, in that they would apply to 
all such orders equally. Such orders are reasonably distinguished from 
customer orders because most U.S. options exchanges do not charge 
transaction fees for customer orders, whereas all U.S. options 
exchanges assess transaction and clearing charges for Firm and Market 
Maker orders. The Exchange believes that the proposed routing fees for 
Firm and Market Maker orders are a reasonable approximation of across-
the-board transaction and clearing fees charged to NOS and ultimately 
to the Exchange for such orders.
    The Exchange believes that the fixed routing fee for Firm and 
Market Maker orders schedule is reasonable and not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers 
because as

[[Page 12320]]

stated above, the away market transaction and clearing fees for 
customer orders are generally significantly less than such fees for 
Firm and Market Maker orders. The $0.55 fee is intended to approximate 
the charges to the Exchange for routing such orders to away markets.
    Additionally, the proposed fixed routing fees are intended to 
simplify the process by which members calculate, predict and account 
for routing fees. There is no consistent formula among the exchanges 
for determining such charges. Members routing such orders are faced 
with the monumental task of determining exactly what charges apply to 
each exchange, and accounting for such charges relative to routing fees 
charged by the various exchanges. Simply put, it is easier for members 
to make such determinations on a real-time basis with one fixed rate 
instead of seven different, often complicated, rates.
    NASDAQ is one of eight options market in the national market system 
for standardized options. Joining NASDAQ and electing to trade options 
is entirely voluntary. Under these circumstances, NASDAQ's fees must be 
competitive and low in order for NASDAQ to attract order flow, execute 
orders, and grow as a market. NASDAQ thus believes that its fees are 
fair and reasonable and consistent with the Exchange Act.

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

    NASDAQ does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \12\ and paragraph (f)(2) of Rule 19b-4 \13\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \13\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2010-027 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-2010-027. 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 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 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 
publicly available. All submissions should refer to File Number SR-
NASDAQ-2010-027 and should be submitted on or before April 5, 2010.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5529 Filed 3-12-10; 8:45 am]
BILLING CODE 8011-01-P