Document ID: SEC-2012-1699-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-10-16T04:00Z

[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Notices]
[Pages 63384-63388]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25357]

[[Page 63384]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68029; File No. SR-NASDAQ-2012-114]

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

October 10, 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 October 1, 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 
``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 the Non-Penny Pilot Options and 
Penny Pilot \3\ Options pricing.
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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); and 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). 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 Non-
Penny Pilot pricing and the Penny Pilot Options pricing. This proposal 
seeks to incentivize NOM Participants to send additional Customer order 
flow to the Exchange in both Penny Pilot Options and Non-Penny Pilot 
Options in order to obtain rebates.
    The Exchange proposes to assess fees and pay rebates on options 
overlying the Nasdaq 100 Index traded under the symbol NDX (``NDX'') as 
a Non-Penny Pilot Option. Today, NDX has its own pricing separate and 
apart from other Non-Penny Pilot pricing. The Exchange proposes to 
eliminate the separate NDX pricing and instead assess fees and pay 
rebates for NDX as a Non-Penny Pilot Option. In addition, the Exchange 
proposes to assess a surcharge to all market participants, except 
Customers, for transactions in NDX of $0.10 per contract. The surcharge 
would be in addition to both the Fee for Adding Liquidity and the Fee 
for Removing Liquidity in Non-Penny Pilot Options. Customers would not 
be assessed a surcharge for transactions in NDX.
    The Exchange also proposes to amend the Non-Penny Pilot Option 
pricing (including NDX) to be equivalent to the rebates and fees 
currently in place for options overlying Facebook, Inc. (``FB''), 
Google Inc. (``GOOG'') and Groupon, Inc. (``GRPN''), except for the 
proposed changes to the Customer Rebate to Add Liquidity, which the 
Exchange is amending as described herein.\4\ The Exchange would also 
eliminate the FB, GOOG and GRPN separate pricing as those symbols would 
be subject to the Non-Penny Pilot Option pricing pursuant to this 
proposal.
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    \4\ The Exchange currently assesses FB, GOOG and GRPN the 
following Fees for Adding Liquidity: Customers are not assessed a 
fee, Professionals, Firms and Non-NOM Market Makers are assessed a 
$0.45 per contract fee and NOM Market Makers are assessed a $0.25 
per contract fee. The Fees for Removing Liquidity are as follows: 
Customers and NOM Market Makers are assessed a $0.79 per contract 
fee and Professionals, Firms and Non-NOM Market Makers are assessed 
an $0.85 per contract fee. FB, GOOG and GRPN Customer transactions 
receive a Rebate to Add Liquidity of $0.77 per contract. This rebate 
is being amended by this proposal for the Non-Penny Pilot Options.
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    The Exchange proposes to amend the Non-Penny Pilot Option Pricing, 
which will include NDX, FB, GOOG and GRPN, by increasing the 
Professional Fee for Adding Liquidity from $0.30 to $0.45 per contract 
and decreasing the NOM Market Maker Fee for Adding Liquidity from $0.30 
to $0.25 per contract. Pursuant to this proposal, a Professional 
transacting NDX would be assessed a decreased Fee for Adding Liquidity, 
from $0.70 to $0.45 per contract,\5\ and a NOM Market Maker would be 
assessed an increased or decreased fee depending on the market 
participant that was on the contra-side of the order. For example, 
today, if a NOM Market Maker transacts an order in NDX and the contra-
party is a Professional, Firm, NOM Market Maker or Non-NOM Market 
Maker, the NOM Market Maker is paid a Rebate to Add Liquidity of $0.20 
per contract or would be assessed a $0.65 per contract Fee to Add 
Liquidity if the contra-party is a Customer. The Exchange proposes to 
assess a NOM Market Maker a $0.25 per contract Fee for Adding Liquidity 
in Non-Penny Pilot Options, regardless of the contra-party and proposes 
to not pay a NOM Market Maker a Rebate to Add Liquidity.
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    \5\ Today a Professional is assessed a Fee to Add Liquidity of 
$0.70 per contract in NDX.
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    Likewise, a Customer today receives a Rebate to Add Liquidity of 
$0.20 per contra when the contra-party is a Professional, Firm, NOM 
Market Maker or Non-NOM Market Maker, and is assessed a Fee to Add 
Liquidity of $0.65 per contract when contra to another Customer. Under 
this proposal, a Customer would be assessed no Fee for Adding Liquidity 
in Non-Penny Pilot Options and would receive a Rebate to Add Liquidity 
of $0.75 per contract or $0.77 per contract as described more fully 
below.

[[Page 63385]]

    The Exchange is proposing to increase the current Customer Rebate 
to Add Liquidity in Non-Penny Pilot Options (including NDX) from $0.20 
to $0.75 per contract, unless a market participant adds Customer 
liquidity in either or both Penny or Non-Penny Pilot Options of 115,000 
contracts per day in a month, in which case the rebate would be 
increased to $0.77 per contract. The Exchange also proposes to permit 
NOM Participants under 75 percent common ownership or control to 
aggregate their Customer volume to obtain the higher rebate.\6\ The 
Exchange is also proposing to eliminate the Customer Rebate to Remove 
Liquidity in NDX along with other NDX pricing. The Exchange is not 
proposing to offer a Rebate to Remove Liquidity in Non-Penny Pilot 
Options.\7\
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    \6\ As noted previously, the NDX pricing would be removed from 
Section 2(1) of Chapter XV. Today, a Customer receives a Rebate to 
Remove Liquidity of $0.40 per contract.
    \7\ No other market participant, other than a Customer receives 
a Customer Rebate to Remove Liquidity today.
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    The Exchange proposes to eliminate note 1 which relates to the NDX 
Rebate to Add Liquidity and Fee to Add Liquidity, which pricing is 
eliminated with this proposal. The Exchange also proposes to rename 
note ``+'' as note 1. The Exchange also proposes to add a new note 2 to 
describe the $0.10 per contract NDX surcharge described herein as well 
as a new note 3 to reflect the Customer Rebates to Add Liquidity 
applicable to Non-Penny Pilot Options described herein. The Exchange 
also proposes to delete the pricing for options on the one-tenth value 
of the Nasdaq 100 Index traded under the symbol MNX (``MNX''). This 
option was delisted on September 13, 2012 from NOM. The Exchange is 
proposing to eliminate the MNX pricing from Sec. 2, Chapter XV of the 
NOM Rules because the pricing is no longer necessary.
    The Exchange also proposes to amend the Non-Penny Pilot Option 
(including NDX) Fee for Removing Liquidity by increasing those fees as 
follows: a Customer that is today assessed $0.45 per contract would be 
assessed an increased fee of $0.79 per contract; a Professional, Firm 
and Non-NOM Market Maker that today is assessed a $0.50 per contract 
fee would be assessed an increased fee of $0.85 per contract; and a NOM 
Market Maker that today is assessed $0.50 per contract fee would be 
assessed a $0.79 per contract fee. With respect to NDX, a Customer 
transacting NDX today is not assessed a Fee for Removing Liquidity. The 
Customer would now be assessed an increased Fee for Removing Liquidity 
of $0.79 per contract in Non-Penny Pilot Options (including NDX). A 
Professional, Firm or Non-NOM Market Maker that today pays $0.70 per 
contract would pay an increased Fee for Removing Liquidity of $0.85 per 
contract in Non-Penny Pilot Options (including NDX). Finally, a NOM 
Market Maker that today pays a $0.70 Fee for Removing Liquidity in NDX 
would pay a $0.79 per contract fee in Non-Penny Pilot Options 
(including NDX).
    The Exchange also proposes to amend its Penny Pilot Option Customer 
Rebate to Add Liquidity. The Exchange proposes to amend Tier 1 which 
currently pays a $0.26 per contract rebate to market participants that 
add Customer liquidity of up to 14,999 contracts per day in a month. 
The Exchange would continue to pay a $0.26 per contract rebate, but 
would increase the level of contracts from 14,999 to 34,999 contracts 
per day. The Exchange proposes to eliminate current Tier 2 which pays a 
$0.38 per contract rebate for market participants that add Customer 
liquidity of 15,000 to 49,999 contracts per day in month. The Exchange 
proposes to renumber Tier 3 as Tier 2. Tier 3 today pays market 
participants $0.43 per contract for market participants that add 
Customer liquidity between 50,000 and 74,999 contracts per day in a 
month. The Exchange would continue to pay $0.43 per contract for newly 
named Tier 2 but would lower the level of contracts to between 35,000 
to 74,999 contracts per day in a month. The Exchange proposes to 
renumber Tier 4 as Tier 3, Tier 5 as Tier 4 and Tier 6 as Tier 5 and 
not otherwise amend these tiers.\8\ The Exchange also proposes to 
conform notes a, b and c to the new tiers by reassigning the proper 
letters to coordinate to the same tiers as today.
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    \8\ Tier 4 today pays $0.44 per contract for market participants 
that add Customer liquidity of 75,000 or more contract per day in a 
month. Tier 5 today pays market participants $0.42 per contact if 
they (1) add Customer liquidity of 25,000 or more contracts per day 
in a month, (2) have certified for the Investor Support Program set 
forth in Rule 7014; and (3) executed at least one order on NASDAQ's 
equity market. Tier 6 today pays market participants $0.45 per 
contract if they have total volume of 130,000 contracts per day in a 
month. The Exchange is simply proposing to renumber these last three 
tiers.
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    The Exchange also proposes to amend the Penny Pilot Option Fee for 
Removing Liquidity which today provides that Professionals, Firms, Non-
NOM Market Makers and NOM Market Makers Penny Pilot Options Fees for 
Removing Liquidity will be reduced by $0.01 per contract for 
transactions in which the same NOM Participant is the buyer and seller. 
The Exchange proposes to also permit NOM Participants under common 
ownership to also receive the $0.01 per contract reduction if a NOM 
Participant under common ownership is the buyer and seller. The 
Exchange is not amending the Penny Pilot Option Fees for Removing 
Liquidity otherwise.\9\
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    \9\ Today, the Exchange assesses the following Penny Pilot 
Option Fees for Removing Liquidity: Customers pay $0.45 per contract 
and Professionals, Firms, Non-NOM Market Makers and NOM Market 
Makers pay a $0.47 per contract fee.
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2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\10\ in general, and with 
Section 6(b)(4) of the Act,\11\ 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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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed elimination of separate 
fees and rebates for NDX and inclusion of NDX in the Non-Penny Pilot 
Options is reasonable, equitable and not unfairly discriminatory 
because the Exchange is proposing to amend the Non-Penny Pilot Options 
fees and rebates to approximate those fees and rebates currently 
subject to FB, GOOG and GRPN pricing. The Exchange believes that it is 
reasonable to assess NDX the amended Non-Penny Pilot Option fees which 
are substantially similar to the fees assessed today for FB, GOOG and 
GRPN \12\ because NDX has the same minimum trading increments as other 
Non-Penny Pilot Options. Additionally, the Exchange believes that it is 
reasonable to pay Customers transacting options in NDX the amended Non-
Penny Pilot Options Rebate to Add Liquidity because the higher Customer 
Rebate to Add Liquidity of $0.75 per contract with the possibility of 
qualifying for a $0.77 per contract rebate approximates the rebates 
currently offered for FB, GOOG and GRPN.\13\ The Exchange would also 
not assess Customers a Fee for Adding Liquidity,

[[Page 63386]]

as is the case today with FB, GOOG and GRPN and would also not continue 
to pay a Rebate to Remove Liquidity as that rebate would be eliminated. 
The Exchange believes that it is reasonable to assess Non-Penny Pilot 
Option fees and pay rebates similar to FB, GOOG and GRPN today, with 
the amended Customer Rebate to Add Liquidity, and eliminate NDX, FB, 
GRPN and GOOG pricing, as well as the delisted MNX pricing which is no 
longer necessary from Section 2, Chapter XV.
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    \12\ The Exchange currently assesses FB, GOOG and GRPN the 
following Fees for Adding Liquidity: Customers are not assessed a 
fee, Professionals, Firm and Non-NOM Market Makers are assessed a 
$0.45 per contract fee and NOM Market Makers are assessed a $0.25 
per contract fee. The Fees for Removing Liquidity are as follows: 
Customers and NOM Market Makers are assessed a $0.79 per contract 
fee and Professionals, Firms and Non-NOM Market Makers are assessed 
an $0.85 per contract fee. FB, GOOG and GRPN Customer transactions 
receive a Rebate to Add Liquidity of $0.77 per contract. This rebate 
is being amended by this proposal for the Non-Penny Pilot Options.
    \13\ Today, FB, GOOG and GRPN pay a Customer Rebate to Add 
Liquidity of $0.77 per contract.
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    The Exchange believes that it is equitable and not unfairly 
discriminatory to assess/pay the Non-Penny Pilot Option pricing to the 
various market participants as noted in this proposal and not assess/
pay separate pricing for NDX, FB, GRPN and GOOG. All market 
participants transacting Non-Penny Pilot Options would be subject to 
the fees and rebates noted herein. The Exchange would no longer pay a 
Rebate to Remove Liquidity to any market participant under the 
proposal. Customers would be subject to a $0.79 per contract Fee to 
Remove Liquidity in Non-Penny Pilot Options as compared to no fee today 
in NDX. Also, NOM Market Makers would be assessed a $0.25 per contract 
Fee for Adding Liquidity regardless of the contra-party and would no 
longer be entitled to a Rebate to Add Liquidity as is the case with NDX 
today.\14\ Professionals would be subject to the same decreased $0.45 
per contract Fee for Adding Liquidity as Firms and Non-NOM Market 
Makers.\15\ Also, the elimination of the MNX pricing is equitable and 
not unfairly discriminatory because no market participant is subject to 
this pricing as of the date it was delisted. In summary, the Exchange 
believes that assessing all Non-Penny Pilot Options securities the 
amended Non-Penny Pilot Option pricing is reasonable, equitable and not 
unfairly discriminatory for the reasons discussed hereafter which 
describes the basis for the amendments to that pricing. These 
amendments conform the pricing for all Non-Penny Pilot options symbols. 
Also, the additional $0.10 per contact NDX surcharge that will be added 
to the Fees for Adding and Removing Liquidity in Non-Penny Pilot 
Options for transactions in NDX, except for Customers, is reasonable, 
equitable and not unfairly discriminatory because the Exchange 
currently pays a license fee \16\ to list NDX on NOM and is seeking to 
recoup a portion of that fee.\17\
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    \14\ Today, NOM Market Makers are assessed a $0.65 per contract 
Fee to Add Liquidity when transacting an order in NFX [sic] contra a 
Customer and are paid a Rebate to Add Liquidity of $0.20 per 
contract when transacting an order in NDX contra a Professional, 
Firm, Non-NOM Market Maker or NOM Market Maker.
    \15\ Professionals currently are assessed a $0.70 per contract 
Fee to Add Liquidity in NDX similar to Firms and Non-NOM Market 
Makers.
    \16\ NOM is assessed a license fee of $0.22 per contract to list 
NDX.
    \17\ Non-Penny Pilot Options, other than NDX, are not subject to 
a license fee.
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    The Exchange believes that increasing the Professional Fee for 
Adding Liquidity and the Fees for Removing Liquidity in Non-Penny Pilot 
Options is reasonable because the higher fees would enable the Exchange 
to reward Customers that remove liquidity with higher Customer Rebates 
to Add Liquidity in Non-Penny Pilot Options. 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. Additionally, the proposed fees and rebates 
for Non-Penny Pilot Options are similar to fees and rebates currently 
in place at the BATS Exchange, Inc. (``BATS'').\18\ The Exchange also 
believes that decreasing the NOM Market Maker Fee for Removing [sic] 
Liquidity in Non-Penny Pilot Options is reasonable because the Exchange 
seeks to encourage NOM Market Makers to post liquidity on NOM.
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    \18\ See BATS BZX Exchange Fee Schedule. BATS assesses a Non-
Penny Pilot Option Fee for Accessing Liquidity of $0.80 per contract 
for a Professional, Firm or Market Maker order that removes 
liquidity from the BATS Options order book and a $0.75 per contract 
rebate for a Customer order that remove liquidity from the BATS 
Options order book. Additionally, BATS pays a $0.70 per contract 
rebate for a Professional, Firm or Market Maker order that adds 
liquidity to the BATS Options order book and a $0.75 rebate per 
contract for a Customer order that adds liquidity to the BATS 
Options order book. Also, the Fees for Removing Liquidity for FB, 
GOOG and GRPN as well as the Fees for Adding Liquidity are the same 
as those proposed for Non-Penny Pilot Options.
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    The Exchange believes that increasing the Professional Fee for 
Adding Liquidity in Non-Penny Pilot Options is equitable and not 
unfairly discriminatory because Professionals, Firms and Non-NOM Market 
Makers will be assessed the same $0.45 per contract fee. The Exchange 
also believes that not assessing a Customer a Fee for Adding Liquidity 
in Non-Penny Pilot Options and assessing a NOM Market Maker a lower Fee 
for Adding Liquidity of $0.25 per contract, as compared to 
Professionals, Firms and Non-NOM Market Makers is equitable and not 
unfairly discriminatory because Customers and NOM Market Makers differ 
from other market participants. Customer order flow benefits all market 
participants by improving liquidity, the quality of order interaction 
and executions at the Exchange. Also, NOM Market Makers have 
obligations to the market and regulatory requirements,\19\ which 
normally do not apply to other market participants. A NOM Market Maker 
has the obligation to make continuous markets, engage in 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 course of dealings. The 
proposed differentiation as between Customers and NOM Market Makers and 
other market participants recognizes the differing contributions made 
to the liquidity and trading environment on the Exchange by Customers 
and NOM Market Makers, as well as the differing mix of orders entered. 
The Exchange believes that increasing the Professional, Firm and Non-
NOM Market Maker Fees for Removing Liquidity in Non-Penny Pilot Options 
to $0.85 per contract is equitable and not unfairly discriminatory 
because Professionals, Firms and Non-NOM Market Makers will be assessed 
the same fee. Customers and NOM Market Makers would be assessed a lower 
Fee for Removing Liquidity in Non-Penny Pilot Options as compared to 
Professionals, Firms and Non-NOM Market Makers because as mentioned 
herein the fees recognize the differing contributions made to the 
liquidity and trading environment on the Exchange by Customers and NOM 
Market Makers, as well as the differing mix of orders entered.
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    \19\ 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.
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    The Exchange also believes that overall the higher Fees for 
Removing Liquidity are equitable and not unfairly discriminatory 
because in the current U.S. options market, many of the contracts are 
quoted in pennies. Under this pricing structure, the minimum penny tick 
increment equates to a $1.00 economic value difference per contract, 
given that a single standardized U.S. option contract covers 100 shares 
of the underlying stock. Where contracts are quoted in $0.05 increments 
(non-pennies), the value per tick is $5.00 in proceeds to the investor 
transacting in these contracts. Liquidity rebate and

[[Page 63387]]

access fee structures on the make-take exchanges, including NOM, for 
securities quoted in penny increments are commonly in the $0.30 to 
$0.45 per contract range.\20\ A $0.30 per contract rebate in a penny 
quoted security is a rebate equivalent to 30% of the value of the 
minimum tick. A $0.45 per contract fee in a penny quoted security is a 
charge equivalent to 45% of the value of that minimum tick. In other 
words, in penny quoted securities, where the price is improved by one 
tick with an access fee of $0.45 per contract, an investor paying to 
access that quote is still $0.55 better off than trading at the wider 
spread, even without the access fee ($1.00 of price improvement--$0.45 
access fee = $0.55 better economics). This computation is equally true 
for securities quoted in wider increments. Rebates and access fees near 
the $0.85 per contract level equate to only 17% of the value of the 
minimum tick in Non-Penny Pilot Options, less than the experience today 
in Penny Pilot Options. For example, a retail investor transacting a 
single contract in a non-penny quoted security quoted a single tick 
tighter than the rest of the market, and paying an access fee of $0.79 
per contract, is receiving an economic benefit of $4.21 ($0.05 improved 
tick = $5.00 in proceeds - $0.79 access fee = $4.21). The Exchange 
believes that encouraging NOM Market Makers to quote more aggressively 
by reducing transaction fees \21\ and incentivizing Customer orders to 
post on NOM will narrow the spread in Non-Penny Pilot Options to the 
benefit of investors and all market participants by improving the 
overall economics of the resulting transactions that occur on the 
Exchange, even if the access fee paid in connection with such 
transactions is higher. Accordingly, the Exchange believes that the 
proposed fees and rebates for the Non-Penny Pilot Options are 
reasonable, equitable and not unfairly discriminatory.
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    \20\ NOM is proposing to only pay a Customer a Rebate to Add 
Liquidity in Non-Penny Pilot Options. Other market participants 
would not be entitled to a rebate.
    \21\ The Exchange notes that the proposed $0.25 per contract NOM 
Market Maker Fee for Adding in FB, GOOG and GRPN is significantly 
less than transaction fees plus payment for order flow fees assessed 
by other options exchanges. For example, on NASDAQ OMX PHLX LLC 
(``Phlx''), the combined payment for order flow fee plus the 
transaction fee is $0.92 per contract. See Phlx's Pricing Schedule. 
Unlike Penny Pilot Options, the Exchange believes this significant 
reduction in fees for adding liquidity will have the same effect as 
a rebate in non-Penny Pilot Options in terms of a narrower spread.
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    The Exchange believes that its proposal to offer a higher Customer 
Rebate to Add Liquidity in Non-Penny Pilot Options (from $0.20 to $0.75 
per contract) is reasonable, equitable and not unfairly discriminatory 
because other market participants will benefit from the increased order 
flow to the Exchange. The proposal to offer an even higher Customer 
Rebate to Add Liquidity in Non-Penny Pilot Options ($0.77 per 
contract), provided a market participant adds Customer liquidity of 
115,000 contracts per day in a month in either or both a Penny Pilot or 
Non-Penny Pilot Option, is reasonable, equitable and not unfairly 
discriminatory because the benefits to the Exchange of increased 
liquidity will benefit all market participants because market 
participants will strive to post and remove liquidity on NOM to achieve 
the higher rebate.
    The Exchange believes that the proposed amendments to the notes 
associated with the Penny and Non-Penny Pilot Options Pricing, 
specifically renumbering note ``+'' as note 1, eliminating current note 
1 and adding notes 3 and 4, are reasonable, equitable and not unfairly 
discriminatory because the notes add more clarity to the rule.
    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 a 
higher Customer Rebate to Add Liquidity in Non-Penny Pilot Options. 
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 increased Customer Rebate to 
Add Liquidity in Non-Penny Pilot Options 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 provide that Professionals, Firms, Non-NOM 
Market Makers, and NOM Market Makers Penny Pilot Option Fees will be 
reduced by $0.01 per contract for transactions in which the same NOM 
Participant or a NOM Participant under common ownership is the buyer 
and the seller. For the reasons mentioned herein, the Exchange believes 
that 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.
    The Exchange's proposed amendments to the Customer Rebate to Add 
Liquidity in Penny Pilot Options are reasonable because the Exchange is 
attempting to incentivize market participants to send additional 
Customer order flow to the Exchange. By increasing the Tier 1 to 
encompass up to 34,999 contracts per day in a month and amending new 
Tier 2 to between 35,000 and 74,999 contracts, the Exchange is 
attempting to encourage market participants that are receiving rebates 
by qualifying for Tiers 1 and 2 to send additional orders to the 
Exchange to continue to qualify for those rebates. The Customer 
liquidity that the Exchange attracts by offering Customer rebates 
benefits all market participants. The Exchange believes that the 
amendments to the Customer Rebate to Add Liquidity in Penny Pilot 
Options are equitable and not unfairly discriminatory because there is 
no required minimum volume of Customer orders to qualify for a Customer 
Rebate to Add Liquidity. Tier 1 will pay a rebate for NOM Participants 
that add Customer liquidity from 1 contract to 34,999 contracts under 
the proposal. All NOM Participants that transact Customer orders in 
Penny Pilot Options are eligible for the Customer rebates.
    The Exchange believes that the technical amendments to the Customer 
Rebate to Add Liquidity in Penny Pilot Options which assign a new 
letter to the tiers to coordinate with the amended rule are reasonable, 
equitable and not unfairly discriminatory because they clarify the 
Rule.
    The Exchange operates in a highly competitive market comprised of 
ten 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 rebate scheme and fees 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 
rebates and fees present on the Exchange today and substantially 
influences the proposal set forth above.

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. To the contrary, 
NASDAQ has designed its rebates and fees to compete effectively for the 
execution and routing of options contracts and to reduce the overall 
cost to investors of options trading. The Exchange believes that

[[Page 63388]]

incentivizing NOM Participants to transact greater Customer volume on 
the Exchange benefits all market participants because of the increased 
liquidity to the market.

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\ 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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    \22\ 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-2012-114 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-2012-114. 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-2012-114 and should 
be submitted on or before November 6, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25357 Filed 10-15-12; 8:45 am]
BILLING CODE 8011-01-P