Document ID: SEC-2013-0355-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2013-02-19T05:00Z

[Federal Register Volume 78, Number 33 (Tuesday, February 19, 2013)]
[Notices]
[Pages 11711-11714]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03684]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68911; File No. SR-NASDAQ-2013-025]

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

February 12, 2013.
    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 February 1, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described

[[Page 11712]]

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

    NASDAQ proposes to modify Chapter XV, entitled ``Options 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 its Customer and Professional Rebates to Add Liquidity in Penny 
Pilot Options.\3\
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through December 31, 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); 67325 (June 29, 2012), 77 
FR 40127 (July 6, 2012) (SR-NASDAQ-2012-075) (notice of filing and 
immediate effectiveness and extension and replacement of Penny Pilot 
through December 31, 2012); and 68519 (December 21, 2012), 78 FR 136 
(January 2, 2013) (SR-NASDAQ-2012-143) (notice of filing and 
immediate effectiveness and extension and replacement of Penny Pilot 
through June 30, 2013). See also NOM Rules, Chapter VI, Section 5.
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    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 ``Options Pricing,'' 
at Section 2(1) governing the rebates and fees assessed for option 
orders entered into NOM. The Exchange is proposing to amend the 
Customer and Professional Rebates to Add Liquidity in Penny Pilot 
Options by adding an additional rebate tier to attract additional order 
flow to the Exchange to the benefit of all market participants. The 
Exchange believes that increasing the current rebate will attract 
additional Customer and Professional order flow.
    The Exchange proposes to amend the Customer and Professional 
Rebates to Add Liquidity in Penny Pilot Options from a five tier rebate 
structure to a six tier rebate structure. Today, the Exchange pays 
Customer and Professional Rebates to Add Liquidity in Penny Pilot 
Options as follows:

------------------------------------------------------------------------
                                                               Rebate to
                       Monthly volume                            add
                                                              liquidity
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Tier 1 Participant adds Customer and Professional liquidity        $0.26
 of up to 34,999 contracts per day in a month..............
Tier 2 Participant adds Customer and Professional liquidity         0.43
 of 35,000 to 74,999 contracts per day in a month..........
Tier 3 Participant adds Customer and Professional liquidity         0.44
 of 75,000 or more contracts per day in a month............
Tier 4 Participant adds (1) Customer and Professional               0.42
 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.....
Tier 5 Participant has Total Volume of 130,000 or more              0.46
 contracts per day in a month..............................
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    The Exchange proposes to amend Tier 1 which currently pays a $0.26 
per contract Rebate to Add Liquidity in Penny Pilot Options to 
Participants that add Customer and Professional liquidity of up to 
34,999 contracts per day in a month and offer the same $0.26 per 
contract rebate to Participants that add Customer and Professional 
liquidity of up to a decreased 24,999 contracts per day in a month. The 
Exchange proposes to add another rebate tier as new ``Tier 2'' and pay 
a $0.40 per contract Rebate to Add Liquidity in Penny Pilot Options to 
Participants that add Customer and Professional liquidity of 25,000 to 
34,999 contracts per day in a month. The Exchange would renumber 
current Tiers 2 through 5 as Tiers 3 through 6. The Exchange would also 
renumber corresponding notes a, b and c.
    Participants that add Customer and Professional liquidity between 
25,000 to 34,999 contracts per day in a month today receive a $0.26 per 
contract rebate. Pursuant to this proposal, these Participants would 
receive a $0.40 per contract rebate for adding Customer and 
Professional liquidity between 25,000 to 34,999 contracts per day in a 
month.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\4\ in general, and with Section 
6(b)(4) of the Act,\5\ in particular, in that they provide 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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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that increasing the Customer and Professional 
Rebates to Add Liquidity in Penny Pilot Options for Participants that 
add Customer and Professional liquidity between 25,000 and 34,999 
contracts per day in a month from $0.26 to $0.40 per contract is 
reasonable because the increased rebate should encourage Participants 
to transact a greater number of Customer and Professional orders on 
NOM. The Exchange believes the existing monthly volume thresholds have 
incentivized Participants to increase Customer and Professional order 
flow to the Exchange.

[[Page 11713]]

The Exchange desires to continue to encourage Participants to route 
Customer and Professional orders to the Exchange by offering increased 
Customer and Professional Rebates to Add Liquidity in Penny Pilot 
Options for Participants adding between 25,000 to 34,999 contracts of 
Customer and Professional liquidity.
    The Exchange believes that increasing the Customer and Professional 
Rebates To Add Liquidity in Penny Pilot Options for Participants that 
add Customer and Professional liquidity between 25,000 and 34,999 
contracts per day in a month from $0.26 to $0.40 per contract is 
equitable and not unfairly discriminatory because the Exchange is 
proposing to offer an even higher Customer and Professional rebate in 
Penny Pilot Options to all Participants that qualify for new Tier 2. 
All NOM Participants that transact Customer and Professional orders in 
Penny Pilot Options are and will continue to be eligible for the 
Customer and Professional rebates.\6\
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    \6\ Pursuant to this proposal, Tier 1 pays a rebate of $0.26 per 
contract to NOM Participants that add Customer and Professional 
liquidity of up to 24,999 contracts per day in a month of Penny 
Pilot Options. There is no required minimum volume of Customer and 
Professional orders to qualify for the Customer or Professional 
Rebate To Add Liquidity in Penny Pilot Options.
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    The Exchange believes that its proposal to amend Tier 1 to reduce 
the number of contracts from ``up to 34,999 contracts per day in a 
month'' to ``up to 24,999 contracts per day in a month'' of Customer 
and Professional liquidity to qualify for the Tier 1 rebate is 
reasonable because as mentioned above the Exchange is increasing the 
rebate for those contracts between 25,000 to 34,999 to attract 
additional Customer and Professional order flow in Penny Pilot Options 
to the Exchange. The Exchange believes that its proposal to amend Tier 
1 to reduce the number of contracts from ``up to 34,999 contracts per 
day in a month'' to ``up to 24,999 contracts per day in a month'' of 
Customer and Professional liquidity to qualify for the Tier 1 rebate is 
equitable and not unfairly discriminatory because, as mentioned, all 
Participants that transact one Customer or one Professional order in 
Penny Pilot Options would continue to qualify for the Tier 1 rebate. 
Those Participants that transact between 25,000 to 34,999 contracts per 
day in a month of Customer and Professional liquidity would earn an 
even greater rebate pursuant to this proposal.
    The Exchange believes that paying Customers and Professionals a 
tiered Rebate To Add Liquidity in Penny Pilot Options, as proposed 
herein, is equitable and not unfairly discriminatory as compared to 
other market participants. The Exchange pays the highest Rebates To Add 
Liquidity in Penny Pilot Options to Customers and Professionals as 
compared to other market participants, with the exception of the Tier 1 
rebate. NOM Market Makers are entitled to a higher $0.30 per contract 
Rebate to Add Liquidity in Penny Pilot Options as compared to the 
Customer and Professional rebate in Tier 1 because NOM Market Makers 
add value through continuous quoting \7\ and the commitment of capital. 
With respect to the proposed rebates in Tiers 2, 3, 4, 5 and 6, 
Customers and Professionals earn higher rebates as compared to a NOM 
Market Makers. Also, a Customer and a Professional are paid higher 
Rebates to Add Liquidity in Penny Pilot Options in all proposed tiers 
as compared to a Firm,\8\ Broker-Dealer \9\ and Non-NOM Market 
Maker.\10\ The Exchange believes that Customers are entitled to higher 
rebates because Customer order flow brings unique benefits to the 
market through increased liquidity which benefits all market 
participants. The Exchange believes that paying Professionals higher 
Tier 2, 3, 4, 5 and 6 rebates as compared to NOM Market Makers and 
paying Professionals higher rebates as compared to Firms, Broker-
Dealers and Non-NOM Market Makers with any tier is equitable and not 
unfairly discriminatory because the Exchange does not believe that the 
amount of the rebate offered by the Exchange has a material impact on a 
Participant's ability to execute orders in Penny Pilot Options. The 
Exchange has been assessing the impact of rebates since it first began 
to offer them and has also observed the impact of fees and rebates on 
other options exchanges in terms of quoting and liquidity. The Exchange 
believes that the Fees for Adding Liquidity in Penny Pilot Options, as 
compared to Rebates to Add Liquidity, impact a market participant's 
decision-making more prominently with respect to posting order flow on 
different venues and price. In modifying its rebates, the Exchange 
hopes to simply remain competitive with other venues so that it remains 
a choice for market participants when posting orders and the result may 
be additional Professional order flow for the Exchange, in addition to 
increased Customer order flow. In addition, a NOM Participant may not 
be able to gauge the exact rebate tier it would qualify for until the 
end of the month because Professional volume would be commingled with 
Customer volume in calculating tier volume. Other market participants 
have a known rebate rate at which they would execute the entire month. 
A Professional could only otherwise presume the Tier 1 rebate would be 
achieved in a month when determining price. Further, the Exchange 
initially established Professional pricing in order to `` * * * bring 
additional revenue to the Exchange.'' \11\ 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.'' \12\ The Exchange also 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.\13\ The Exchange does not believe that providing 
Professionals with the opportunity to obtain higher rebates equivalent 
to that of a Customer creates a competitive environment where 
Professionals would be necessarily advantaged on NOM as compared to 
other NOM Market Makers, Firms, Broker-Dealers or Non-NOM Market 
Makers. First, a Professional is assessed the same fees as other market

[[Page 11714]]

participants, except Customers.\14\ Second, a Professional only has the 
opportunity to achieve the higher rebate by sending in more than 24,999 
contracts per day in a month, otherwise the Professional only achieves 
a Tier 1 rebate with at least one trade and the differential in that 
scenario as between market participants remains the same.\15\ The 
Exchange recognizes that the rebate tiers provide an incentive to 
Professionals, but it is not a guaranteed rebate.
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    \7\ 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.
    \8\ A Firm is paid a Rebate to Add Liquidity in Penny Pilot 
Options of $0.10 per contract.
    \9\ A Broker-Dealer is paid a Rebate to Add Liquidity in Penny 
Pilot Options of $0.10 per contract.
    \10\ A Non-NOM Market Maker is paid a Rebate to Add Liquidity in 
Penny Pilot Options of $0.25 per contract.
    \11\ 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.
    \12\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
    \13\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066). The Exchange 
noted in this 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.
    \14\ The Fee for Removing Liquidity in Penny Pilot Options is 
$0.47 per contract for all market participants, except Customers.
    \15\ If a Professional earned a Tier 1 rebate, the Professional 
would continue to receive a lower rebate as compared to a NOM Market 
Maker and a higher rebate as compared to a Firm, Broker-Dealer and a 
Non-NOM Market Maker, as is the case today.
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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. Customers have 
traditionally been paid the highest rebates offered by options 
exchanges. While the Exchange's proposal would also result in a 
Professional receiving higher rebates as compared to a NOM Market Maker 
if a Professional qualified for a Tier 2, 3, 4, 5 or 6 rebate and the 
differential in rebates would increase as between a Professional and a 
Firm, a Broker-Dealer and a Non-NOM Market Maker with this proposal, 
the Exchange does not believe the proposed rebate tiers would result in 
any burden on competition as between market participants on NOM. The 
Exchange does not believe that the amount of the rebate offered by the 
Exchange has a material impact on a Participant's ability to execute 
orders in Penny Pilot Options. The Exchange has been assessing the 
impact of rebates since it first began to offer them and has also 
observed the impact of fees and rebates on other options exchanges in 
terms of quoting and liquidity. The Exchange believes that the Fees for 
Adding Liquidity, as compared to rebates, impact a market participant's 
decision-making more prominently with respect to posting order flow on 
different venues and price. The Exchange does not believe that allowing 
a Professional to obtain a higher rebate as compared to other market 
participants, if a certain number of contracts where to be executed on 
the Exchange, results in a burden on competition among market 
participants on NOM for the reasons noted herein.
    The Exchange believes that offering Customers and Professionals the 
proposed tiered rebates creates competition among options exchanges 
because the Exchange believes that the rebates may cause market 
participants to select NOM as a venue to send Customer and Professional 
order flow. The Exchange is offering to pay increased rebates for 
Customer and Professional liquidity between 25,000 to 34,999 contracts 
per day in a month, which additional order flow should benefit other 
market participants.
    The Exchange operates in a highly competitive market comprised of 
eleven U.S. options exchanges in which sophisticated and knowledgeable 
market participants can readily send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive. The 
Exchange believes that the proposed rebate structure and tiers are 
competitive with rebates and tiers in place on other exchanges. The 
Exchange believes that this competitive marketplace impacts the rebates 
present on the Exchange today and substantially influences the 
proposals set forth above.

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.\16\ 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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    \16\ 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-2013-025 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-2013-025. 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-2013-025 and should 
be submitted on or before March 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03684 Filed 2-15-13; 8:45 am]
BILLING CODE 8011-01-P