Document ID: SEC-2014-0073-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market, LLC
Posted Date: 2014-01-15T05:00Z

[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Notices]
[Pages 2733-2735]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00584]

[[Page 2733]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71279; File No. SR-NASDAQ-2013-166]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Make Modifications to Fees and Credits Under Rules 7014 and 7018

January 9, 2014.
    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 December 30, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a 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 is proposing to make changes to its schedule of fees and 
credits applicable to execution of orders under Rule 7018, and its 
Investor Support Program (``ISP'') of credits under Rule 7014. NASDAQ 
proposes to implement the proposed rule change on January 2, 2014. 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, 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 those 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 parts 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 make two pricing changes, effective January 
2, 2014. First, NASDAQ is modifying the ISP by eliminating one of the 
set of criteria under which a member may qualify for a $0.0001 credit 
under the program; the change reflects the fact that members have not, 
in the recent past, qualified for the program under the set of criteria 
that is being eliminated, and therefore the change will not affect ISP 
participants in any respect. The ISP enables NASDAQ members to earn a 
monthly fee credit for providing additional liquidity to NASDAQ and 
increasing the NASDAQ-traded volume of what are generally considered to 
be retail and institutional investor orders in exchange-traded 
securities (``targeted liquidity''). Participants in the ISP are 
required to designate specific NASDAQ order entry ports for use under 
the ISP and to meet specified criteria focused on market participation, 
liquidity provision, and high rates of order execution. Currently, a 
member that participates in the ISP receives a credit of $0.00005, 
$0.0001, or $0.0002 per share with respect to the number of shares of 
displayed liquidity provided by the member that execute at $1 or more 
per share.\3\ The precise credit rate is determined by factors designed 
to measure the degree of the member's participation in the Nasdaq 
Market Center and the percentage of orders that it enters that 
execute--its ``ISP Execution Ratio''--which is seen as indicative of 
retail or institutional participation.
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    \3\ A participant in the ISP must designate specific order-entry 
ports for use in tabulating certain requirements under the program.
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    Under the set of criteria that is being eliminated, a member might 
qualify for a credit of $0.0002 per share with respect to shares of 
displayed liquidity executed at a price of $1 or more and entered 
through ISP-designated ports, and $0.00005 per share with respect to 
all other shares of displayed liquidity executed at a price of $1 or 
more, if the following conditions were met:
    (1) The member's Participation Ratio \4\ for the month exceeds its 
Baseline Participation Ratio \5\ by at least 0.30%. The requirement 
reflects the expectation that in order to earn a higher rebate under 
the program, a member participating in the program must increase its 
participation in NASDAQ as compared with an historical baseline.
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    \4\ ``Participation Ratio'' is defined as follows: ``[F]or a 
given member in a given month, the ratio of (A) the number of shares 
of liquidity provided in orders entered by the member through any of 
its Nasdaq ports and executed in the Nasdaq Market Center during 
such month to (B) the Consolidated Volume.'' ``Consolidated Volume'' 
is defined as follows: ``[T]he total consolidated volume reported to 
all consolidated transaction reporting plans by all exchanges and 
trade reporting facilities during a month, excluding executed orders 
with a size of less than one round lot.''
    \5\ ``Baseline Participation Ratio'' is defined as follows: 
``[W]ith respect to a member, the lower of such member's 
Participation Ratio for the month of August 2010 or the month of 
August 2011, provided that in calculating such Participation Ratios, 
the numerator shall be increased by the amount (if any) of the 
member's Indirect Order Flow for such month, and provided further 
that if the result is zero for either month, the Baseline 
Participation Ratio shall be deemed to be 0.485% (when rounded to 
three decimal places).'' ``Indirect Order Flow'' is defined as 
follows: ``[F]or a given member in a given month, the number of 
shares of liquidity provided in orders entered into the Nasdaq 
Market Center at the member's direction by another member with 
minimal substantive intermediation by such other member and executed 
in the Nasdaq Market Center during such month.''
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    (2) The member's ``ISP Execution Ratio'' for the month must be less 
than 10. The ISP Execution Ratio is defined as ``the ratio of (A) the 
total number of liquidity-providing orders entered by a member through 
its ISP-designated ports during the specified time period to (B) the 
number of liquidity-providing orders entered by such member through its 
ISP-designated ports and executed (in full or partially) in the Nasdaq 
Market Center during such time period; provided that: (i) No order 
shall be counted as executed more than once; and (ii) no Pegged Orders, 
odd-lot orders, or MIOC or SIOC orders shall be included in the 
tabulation.'' \6\ Thus, the definition requires a ratio between the 
total number of orders that post to the NASDAQ book and the number of 
such orders that actually execute that is low, a characteristic that 
NASDAQ believes to be reflective of retail and institutional order 
flow.
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    \6\ These terms have the meanings assigned to them in Rule 4751. 
MIOC and SIOC orders are forms of ``immediate or cancel'' orders and 
therefore cannot be liquidity-providing orders.
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    (3) The shares of liquidity provided through ISP-designated ports 
during the month are equal to or greater than 0.2% of Consolidated 
Volume during the month, reflecting the ISP's goals of encouraging 
higher levels of liquidity provision.
    (4) At least 80% of the liquidity provided by the member during the 
month is provided through ISP-designated ports. This requirement is 
designed to mitigate ``gaming'' of the program by firms that do not 
generally represent retail or institutional order flow but that 
nevertheless are able to channel a portion of their orders that

[[Page 2734]]

they intend to execute through ISP-designated ports and thereby receive 
a credit with respect to those orders.
    (5) The member has an average daily volume during the month of more 
than 100,000 contracts of liquidity provided through one or more of its 
Nasdaq Options Market MPIDs, provided that such liquidity is provided 
through Public Customer Orders, as defined in Chapter I, Section 1 of 
the Nasdaq Options Market rules.
    (6) The ratio between shares of liquidity provided through ISP-
designated ports and total shares accessed, provided or routed through 
ISP-designated ports during the month is at least 0.70.
    As noted above, no member has met these criteria in the recent 
past. Moreover, a member may qualify for an ISP credit at identical 
rates if it meets the following criteria:
    (1) The member's Participation Ratio for the month exceeds its 
Baseline Participation Ratio by at least 0.43% (slightly higher than 
under the set of criteria this is being eliminated).
    (2) The member's ``ISP Execution Ratio'' for the month must be less 
than 10 (identical to the set of criteria that is being eliminated).
    (3) The shares of liquidity provided through ISP-designated ports 
during the month are equal to or greater than 0.2% of Consolidated 
Volume during the month (identical to the set of criteria that is being 
eliminated).
    (4) At least 40% of the liquidity provided by the member during the 
month is provided through ISP-designated ports (lower than under the 
set of criteria that is being eliminated). This set of criteria 
contains no requirement with respect to usage of the Nasdaq Options 
Market or the ratio of shares of liquidity provided through ISP-
designated ports to total shares entered through ISP-designated ports.
    Second, NASDAQ is eliminating a special reduced fee that has 
applied to QDRK and QCST orders when they access liquidity on 
NASDAQ.\7\ Currently, the fee for such orders is $0.0029 per share 
executed, but NASDAQ is increasing the fee to $0.0030 per share 
executed. As a result, the fee charged will be identical to the fee 
charged to all other liquidity-accessing orders (other than orders 
entered by a member qualifying for a volume-based discount that will 
remain on the fee schedule). The reduced fee had been adopted as a 
promotional discount when QDRK and QCST were first introduced in early 
2013. With usage of the routing strategies now established, NASDAQ has 
concluded that the continuation of the promotional discount is no 
longer warranted.
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    \7\ QDRK is a routing option under which orders check the Nasdaq 
Market Center for available shares and simultaneously route the 
remaining shares to destinations on the applicable routing table 
that are not posting Protected Quotations within the meaning of 
Regulation NMS. If shares remain un-executed after routing, they are 
posted on the book. Once on the book, if the order is subsequently 
locked or crossed by another market center, NASDAQ will not route 
the order to the locking or crossing market center. QCST is a 
routing option under which orders check the Nasdaq Market Center for 
available shares and simultaneously route the remaining shares to 
destinations on the applicable routing table that are not posting 
Protected Quotations within the meaning of Regulation NMS and to 
certain, but not all, exchanges. If shares remain un-executed after 
routing, they are posted on the book. Once on the book, if the order 
is subsequently locked or crossed by another market center, NASDAQ 
will not route the order to the locking or crossing market center.
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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,\8\ in general, and with 
Sections 6(b)(4) and 6(b)(5) 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, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4) and (5).
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    The change with respect to the ISP are reasonable because no member 
currently qualifies or has recently qualified for the set of criteria 
that is being eliminated; accordingly, the change will have no impact 
on credits received by members. The change is consistent with an 
equitable allocation of fees and is not unfairly discriminatory because 
members may continue to qualify for the ISP under other sets of 
criteria, including a set of criteria that results in identical credits 
to the set of criteria that is being eliminated and that features 
requirements that are likely to be easier to achieve that [sic] those 
contained in the set that is being eliminated.
    The change with respect to QDRK and QCST is reasonable because the 
resulting fee of $0.0030 per share executed is identical to the fee 
charged with respect to most other orders that access liquidity at 
NASDAQ. Such fee is consistent with the requirements of Rule 610 under 
Regulation NMS \10\ with respect to the permissible level of access 
fees. The change is consistent with an equitable allocation of fees and 
is not unfairly discriminatory because it will make the fees charged 
for accessing liquidity through QCST and QDRK consistent with the fees 
charged for other orders.
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    \10\ 17 CFR 242.610.
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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. NASDAQ 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, NASDAQ must 
continually adjust its fees and rebates 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 and 
rebates in response, and because market participants may readily adjust 
their order routing practices, NASDAQ believes that the degree to which 
fee or rebate changes in this market may impose any burden on 
competition is extremely limited. In this instance, the change to the 
ISP is unlikely to have any effect on competition, since no member 
currently qualifies for the set of criteria that is being eliminated. 
However, the continuation of the ISP reflects the ongoing importance of 
incentive programs in the current competitive environment as mechanisms 
for ensuring that fees and credits are set at levels that attracts 
[sic] order flow. Similarly, the change with respect to fees for QDRK 
and QCST does not have the potential to impair competition since the 
routing services offered by NASDAQ are optional and are replicated by 
routing services offered by others; thus, members are free to use other 
means of routing orders if they believe that the fees associated with 
NASDAQ's services are too high. Thus, because members and competing 
order execution venues remain free to adopt competitive responses, the 
changes do not impair the ability of markets or market participants 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.

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

    The foregoing change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and paragraph (f) of Rule 19b-4 \12\ 
thereunder. 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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
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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-2013-166 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-2013-166. 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 20549-1090, 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 offices of 
NASDAQ. 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-2013-166, and should be submitted on or before February 5, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00584 Filed 1-14-14; 8:45 am]
BILLING CODE 8011-01-P