Document ID: SEC-2016-0143-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2016-01-27T05:00Z

[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4731-4734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01666]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76967; File No. SR-NASDAQ-2016-004]

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

January 22, 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 11, 2016, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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.
    The Exchange purposes [sic] to amend its NOM Market Maker \3\ and 
Non-NOM Market Maker \4\ Fees for Removing Liquidity in Penny Pilot 
Options to offer Participants an incentive to direct a greater amount 
of order flow to NOM from January 11, 2016 through January 29, 2016.
---------------------------------------------------------------------------

    \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\ A ``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.
---------------------------------------------------------------------------

    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
    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 incentivize NOM Participants to add an 
even greater amount of liquidity to NOM from January 11, 2016 through 
January 29, 2016. Specifically, the Exchange proposes to incentivize 
Participants 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, for the time period from 
January 11, 2016 through January 29, 2016, provided the Participant 
adds 1.30% of Customer,\5\ Professional,\6\ Firm,\7\ Broker-Dealer \8\ 
or Non-NOM Market Maker liquidity and the Participant is (i) both the 
buyer and seller or (ii) the Participant removes liquidity from another 
Participant under Common Ownership.\9\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    This incentive offer will not apply to volume transacted prior to 
January 11, 2016 or after January 29, 2016.
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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    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

[[Page 4732]]

is consistent with those views in that it is a price cut driven by 
competition.
---------------------------------------------------------------------------

    \12\ Id. [sic] at 539 (quoting Securities Exchange Release No. 
59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) (SR-
NYSEArca-2006-21) at 73 FR at 74782-74783).
---------------------------------------------------------------------------

    The Exchange's proposal to incentivize Participants 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, for the time period from January 11, 2016 through January 29, 
2016, provided the Participant adds 1.30% of Customer, Professional, 
Firm, Broker-Dealer or Non-NOM Market Maker liquidity and the 
Participant is (i) both the buyer and seller or (ii) the Participant 
removes liquidity from another Participant under Common Ownership is 
reasonable because the Exchange believes NOM will 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 
from January 11, 2016 through January 29, 2016.
    The Exchange's proposal to incentivize Participants 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, for the time period from January 11, 2016 through January 29, 
2016, provided the Participant adds 1.30% of Customer, Professional, 
Firm, Broker-Dealer or Non-NOM Market Maker liquidity and the 
Participant is (i) both the buyer and seller or (ii) the Participant 
removes liquidity from another Participant under Common Ownership 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.\13\ A NOM Market Maker 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 incentivize NOM Participants to select NOM as a 
venue to send Customer, Professional, Firm, Broker-Dealer or Non-NOM 
Market Maker order flow from January 11, 2016 through January 29, 2016.
    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, from 
January 11, 2016 through January 29, 2016, 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 
from January 11. 2016 through January 29, 2016. 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. Offering the additional fee reduction is 
reasonable, equitable and not unfairly discriminatory because 
Participants would be entitled to receive the fee reduction when the 
Participant is both the buyer and seller. By way of example, if a NOM 
Participant that is assigned the firm code \14\ ``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 fee reduction would only be applicable from 
January 11, 2016 through January 29, 2016. 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.\15\ 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 whether the same member or its affiliates under Common Ownership 
was represented.\16\
---------------------------------------------------------------------------

    \14\ Each NOM Participant is assigned a firm code by the 
Exchange.
    \15\ 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.
    \16\ 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.

---------------------------------------------------------------------------

[[Page 4733]]

    Finally, the Exchange's proposal to count all order flow 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.'' \17\ 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.'' \18\ 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, accomplishes this 
objective.\19\ The Exchange offers NOM Market Makers rebates in 
acknowledgment of the obligations \20\ 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.
---------------------------------------------------------------------------

    \17\ 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.
    \18\ See Professional Filing.
    \19\ 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.
    \20\ See note 13.
---------------------------------------------------------------------------

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 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 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, for the time period from January 11, 2016 through January 29, 
2016, provided the Participant adds 1.30% of Customer, Professional, 
Firm, Broker-Dealer or Non-NOM Market Maker liquidity 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.\21\ 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.
---------------------------------------------------------------------------

    \21\ See note 13.
---------------------------------------------------------------------------

    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 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.\22\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 4734]]

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-2016-004 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-2016-004. 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 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-2016-004, and should 
be submitted on or before February 17, 2016.
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Brent J. Fields,
Secretary.
[FR Doc. 2016-01666 Filed 1-26-16; 8:45 am]
BILLING CODE 8011-01-P