Document ID: SEC-2012-0256-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-02-14T05:00Z

[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Notices]
[Pages 8312-8315]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3334]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66360; File No. SR-NASDAQ-2012-022]

Self-Regulatory Organizations; NASDAQ Stock Market LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Options Fees

February 8, 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 January 31, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASDAQ Stock Market LLC proposes to modify Chapter XV, entitled 
``Option Fees,'' at Sec. 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 the applicability of the Customer Rebate to Add 
Liquidity and Fee for Removing Liquidity for the Penny Pilot \3\ 
Options (``Penny Options'').
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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 extension and replacement of 
Penny Pilot). See also Exchange Rule Chapter VI, Section 5.
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    While changes to the Fee Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on February 1, 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 modify Chapter XV, entitled ``Option Fees,'' at 
Sec. 2 governing the rebates and fees assessed for option orders 
entered into NOM. Specifically, the Exchange is proposing to modify the 
four tier structure for paying Customer Rebates to Add Liquidity in 
Penny Pilot Options. The Exchange proposes to increase the tiers to 
five tiers and further incentivize NOM Participants to route Customer 
orders to the Exchange by paying an additional rebate for certain 
orders after the NOM Participant has met a volume criteria. The 
Exchange believes that incentivizing NOM Participants to send 
additional Customer orders 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:

------------------------------------------------------------------------
                                                          Rebate to add
                                  Monthly volume            liquidity
------------------------------------------------------------------------
Tier 1....................  Participant adds Customer              $0.26
                             liquidity of up to 49,999
                             contracts per day in a
                             month.
Tier 2....................  Participant adds Customer               0.42
                             liquidity of 50,000 or
                             more contracts per day in
                             a month.
Tier 3 \a\................  Participant adds (1)                    0.43
                             Customer liquidity of
                             100,000 or more contracts
                             per day in a month, and
                             (2) NOM Market Maker
                             liquidity of 40,000 or
                             more contracts per day in
                             a month.

[[Page 8313]]

 
Tier 4 \b\................  Participant adds (1)                    0.40
                             Customer liquidity of
                             25,000 or more contracts
                             per day in a month, and
                             (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.
------------------------------------------------------------------------
\a\ For purposes of Tier 3, the Exchange will aggregate the trading
  activity of separate NOM Participants when computing average daily
  volumes where 75 percent common ownership or control exists between
  NOM Participants.
\b\ For purposes of Tier 4, the Exchange will allow a NOM Participant to
  qualify for the rebate if a NASDAQ member under common ownership with
  the NOM Participant has certified for the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common
  ownership is defined as 75 percent common ownership or control.

    The Exchange proposes to amend the Customer Rebate to Add Liquidity 
in Penny Pilot Options to a five tier structure as follows:

------------------------------------------------------------------------
                                                          Rebate to add
                                  Monthly volume            liquidity
------------------------------------------------------------------------
Tier 1....................  Participant adds Customer              $0.26
                             liquidity of up to 14,999
                             contracts per day in a
                             month.
Tier 2....................  Participant adds Customer               0.38
                             liquidity of 15,000 to
                             49,999 contracts per day
                             in a month.
Tier 3....................  Participant adds Customer               0.42
                             liquidity of 50,000 or
                             more contracts per day in
                             a month.
Tier 4 \a\................  Participant adds (1)                    0.43
                             Customer liquidity of
                             100,000 or more contracts
                             per day in a month, and
                             (2) NOM Market Maker
                             liquidity of 40,000 or
                             more contracts per day in
                             a month.
Tier 5 \b\................  Participant adds (1)                    0.40
                             Customer liquidity of
                             25,000 or 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.
------------------------------------------------------------------------
\a\ For purposes of Tier 4, the Exchange will aggregate the trading
  activity of separate NOM Participants when computing average daily
  volumes where 75 percent common ownership or control exists between
  NOM Participants.
\b\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
  qualify for the rebate if a NASDAQ member under common ownership with
  the NOM Participant has certified for the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common
  ownership is defined as 75 percent common ownership or control.

    Currently, Tier 1 firms that add up to 49,999 contracts per day in 
a month of liquidity, in a Penny Pilot Option, receive a rebate of 
$0.26 per contract. The Exchange is proposing to amend Tier 1 to change 
the contract amount to 14,999 contracts with the same $0.26 per 
contract rebate. Based on past experience, the Exchange anticipates 
that all firms currently receiving the $0.26 rebate will maintain their 
current level of rebate or achieve a higher rebate in Tier 2.
    The Exchange is proposing a new Tier 2 with a $0.38 per contract 
rebate for firms that add Customer liquidity in Penny Pilot Options 
between 15,000 to 49,999 contracts per day in a month. This proposed 
new tier would result in a greater rebate for current Tier 1 
Participants who add liquidity between 15,000 and 49,999 contracts.
    The Exchange is not proposing any changes to current Tiers 2, 3 and 
4 other than to rename them as Tiers 3, 4 and 5, respectively. The 
Exchange would also make conforming amendments to current notes ``a'' 
and ``b'' to reference newly named Tiers 4 and 5, respectively, as 
well.
    The Exchange currently pays an additional $0.01 per contract rebate 
on each Customer order of 5,000 or more, displayed or non-displayed 
contracts, which adds liquidity in a Penny Pilot Option, as long as 
that NOM Participant has qualified for a rebate in Tier 2, 3 or 4 for 
that month.\4\ The Exchange proposes to amend the language in the rule 
text to include ``Tier 5'' as well. The Exchange would continue to 
apply this additional $0.01 per contract rebate on all tiers except 
Tier 1.
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    \4\ This rebate is in addition to the rebate for the qualifying 
tier.
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    The Exchange also proposes to further incentivize NOM Participants 
by reducing the Customer Fee for Removing Liquidity in a Penny Pilot 
Option from $0.45 per contract to $0.44 per contract. The Exchange 
believes that this decrease in the amount assessed a Customer to remove 
liquidity will also attract additional order flow to the Exchange.
    The Exchange is also proposing to make a typographical correction 
to the Fee Schedule to remove unnecessary punctuation. While changes to 
the Fee Schedule pursuant to this proposal are effective upon filing, 
the Exchange has designated these changes to be operative on February 
1, 2012.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\5\ in general, and with Section 
6(b)(4) of the Act,\6\ 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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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed new pricing tiers are 
reasonable, equitable and not unfairly discriminatory because they 
continue an existing program \7\ 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 offering greater Customer 
rebates for greater liquidity added to the Exchange.
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    \7\ 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) and 66126 (January 10, 2012), 77 FR 2335 
(January 17, 2012) (SR-NASDAQ-2012-003).
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    Specifically, the Exchange believes that the increased rebates 
would further incentivize firms to continue to send more Customer 
volume to the Exchange.

[[Page 8314]]

Today, the Exchange pays any Customer order up to 49,999 contracts per 
day in a given month a rebate of $0.26 per contract for adding 
liquidity in Penny Pilot Options. The Exchange would continue to pay 
this same rebate for Tier 1 for any Customer order up to 14,999 
contracts per day in a given month that adds liquidity in Penny Pilot 
Options. Any Participant that adds between 15,000 and 49,999 contracts 
per day in a month would receive an increased rebate of $0.38 per 
contract with this proposal (up from $0.26 per contract). The Exchange 
believes that its proposal to create a new Tier 2 and pay a greater 
rebate for certain Tier 1 orders is reasonable, equitable and not 
unfairly discriminatory because a greater rebate would incentivize NOM 
Participants to send a greater number of Customer orders that add 
liquidity in Penny Pilot Options between 15,000 and 49,999 contracts, 
which in turn would benefit all market participants by increasing 
liquidity on NOM. Also, all NOM Participants transacting Customer 
orders continue to have the ability to earn a rebate on NOM because 
there is no minimum order requirement.
    The Exchange believes that it continues to be reasonable to offer a 
rebate of $0.01 per contract on each Customer order of 5,000 or more 
displayed or non-displayed contracts, which adds liquidity in a Penny 
Pilot Option, as long as that NOM Participant has qualified for a 
rebate in Tier 2, 3, 4 and now 5 for that month. This $0.01 per 
contract rebate is in addition to the rebate for the qualifying tier. 
With this proposal, more participants that are currently in Tier 1 
would qualify for the additional rebate if they transacted a Customer 
order of 5,000 or more displayed or non-displayed contracts, which adds 
liquidity in Penny Pilot Options.\8\ The Exchange believes that this 
enhanced incentive, which will be available to a greater number of NOM 
Participants, will encourage those NOM Participants to send larger 
orders to the Exchange, which in turn would also assist those 
Participants that send Customer orders in Penny Pilot Options to earn 
higher rebates by qualifying for a higher tier as well as bringing 
additional liquidity to the Exchange. The Exchange further believes 
that continuing to limit the enhanced $0.01 per contract rebate to 
firms qualifying for Tiers 2, 3, 4 or 5 (and not those that qualify for 
Tier 1) is equitable and not unfairly discriminatory because generally 
NOM Participants in proposed Tier 1 that add up to 14,999 contracts per 
day in a month are not sending Customer orders of 5,000 or more 
contracts. If those Participants in Tier 1 sent three Customer orders 
of 5,000 or more per day in a given month to the Exchange, they would 
qualify for the Tier 2 rebate as well as the additional enhanced 
rebate. The Exchange believes that it is equitable and not unfairly 
discriminatory to incentivize those NOM Participants that qualify for 
higher volume tiers as they are the most likely to obtain the enhanced 
rebate and continue to send larger orders, which provides more 
liquidity to the Exchange. Finally, the Exchange would pay the enhanced 
rebate uniformly to those NOM Participants that qualify for Tiers 2, 3, 
4 or 5 and meet the Customer order volume discussed herein for Penny 
Pilot Options.
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    \8\ Specifically, those Participants adding between 15,000 and 
49,999 contracts per day in a month.
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    The Exchange also believes that it is reasonable to lower the 
Customer Fee for Removing Liquidity in Penny Pilot Options because a 
lower fee will attract more NOM Participants to remove Customer orders. 
The Exchange also believes that it is equitable and not unfairly 
discriminatory to lower the fee for Customers, as compared to other 
market participants, because encouraging NOM Participants to transact 
Customer orders will benefit all market participants by increasing 
liquidity on NOM. Also, all NOM Participants that transact Customer 
orders would be uniformly impacted by the proposal.
    The Exchange's proposal to correct a typographical error within the 
Rule is reasonable, equitable and not unfairly discriminatory because 
it will make the Rule more consistent with the current text.
    The Exchange operates in a highly competitive market comprised of 
nine 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 fee and rebate scheme are competitive and similar to other 
fees, rebates and tier opportunities 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.

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.

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.\9\ 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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    \9\ 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-2012-022 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-2012-022. 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

[[Page 8315]]

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-2012-022 and should be submitted on or before 
March 6, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3334 Filed 2-13-12; 8:45 am]
BILLING CODE 8011-01-P