Document ID: SEC-2012-0577-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-04-12T04:00Z

[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Notices]
[Pages 22042-22053]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8789]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66765; File No. SR-NASDAQ-2012-043]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1 Thereto, To Establish the Market Quality Program

April 6, 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 March 23, 2012, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by NASDAQ. On March 29, 2012, 
the Exchange submitted Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1 thereto, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made a technical amendment 
to Item I of Exhibit 1 to delete an erroneous reference to the 
NASDAQ Options Market and replace it with a reference to the 
Exchange.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ (also known as the ``Exchange'') is filing with the 
Commission a proposal to add new Rule 5950 (Market Quality Program) to 
enable market makers that voluntarily commit to and do in fact enhance 
the market quality (quoted spread and liquidity) of certain securities 
listed on the Exchange to qualify for a fee credit pursuant to the 
Exchange's Market Quality Program, and to exempt the Market Quality 
Program from Rule 2460 (Payment for Market Making). NASDAQ believes 
this voluntary program will benefit investors, issuers or companies, 
and market participants by significantly enhancing the quality of the 
market and trading in such listed securities.
    The Market Quality Program set forth in Rule 5950 will be effective 
for a one-year pilot period beginning from the date of implementation 
of the program. During the pilot, NASDAQ will periodically provide 
information to the Commission about market quality in respect of the 
Market Quality Program.
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, on the Commission's Web site at www.sec.gov, 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 these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the filing is to propose new Rule 5950 to enable 
Market Makers \4\ that enhance the market quality of certain securities 
listed on the Exchange (known as ``targeted securities'') and thereby 
qualify for a fee credit pursuant to the Market Quality Program 
(``MQP'' or ``Program''), and to exempt the Program from Rule 2460.
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    \4\ The term ``Market Maker'' is defined in Rule 5005(a)(24) as 
a dealer that, with respect to a security, holds itself out (by 
entering quotations in the NASDAQ Market Center) as being willing to 
buy and sell such security for its own account on a regular and 
continuous basis and that is registered as such. Proposed Rule 
5950(e)(5).
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    Rule 5950 will be effective for a one-year pilot period. The pilot 
period will commence when the Market Quality Program is implemented by 
the Exchange and an MQP Company \5\ and one or more related Market 
Makers are accepted into the MQP in respect of a security listed 
pursuant to the Program (``MQP Security'').\6\ The pilot program will 
end one year after implementation.\7\

[[Page 22043]]

During the pilot, the Exchange will periodically provide information to 
the Commission about market quality in respect of the MQP.
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    \5\ The term ``MQP Company'' is defined in proposed Rule 
5950(e)(7) as a fund (Exchange Traded Fund) sponsor or other entity 
that lists one or more MQP Securities on NASDAQ pursuant to the 
Market Quality Program. The term ``Company'' is defined in Rule 
5005(a)(6) as the issuer of a security listed or applying to list on 
NASDAQ, and may include an issuer that is not incorporated, such as, 
for example, a limited partnership.
    \6\ The term ``MQP Security'' is defined in proposed Rule 
5950(e)(1) as a security that meets all of the requirements to be 
listed on NASDAQ as an Exchange Traded Fund, Linked Security, or 
Trust Issued Receipt pursuant to Rules 5705, 5710, or 5720, 
respectively.
    \7\ The Exchange believes that, based on discussions with the 
Financial Industry Regulatory Authority (``FINRA''), FINRA intends 
to file an immediately effective rule change that would exempt from 
FINRA Rule 5250 Exchange programs that are approved by the 
Commission. The Exchange notes that FINRA Rule 5250 does not 
preclude the Exchange from any action, but precludes FINRA members 
(not all Exchange members are FINRA members) from directly or 
indirectly accepting payment or consideration from an issuer of a 
security for acting as a market maker. See Securities Exchange Act 
Release Nos. 60534 (August 19, 2009), 74 FR 44410 (August 28, 2009) 
(SR-FINRA-2009-036) (order approving proposal to adopt NASD Rule 
2460 without substantive change into the Consolidated FINRA Rulebook 
as Rule 5250); and 38812 (July 3, 1997), 62 FR 37105 (July 10, 1997) 
(SR-NASD-97-29) (order approving adoption of NASD Rule 2460; FINRA 
Rule 5250 and NASDAQ Rule 2460 are based on NASD Rule 2460) (``1997 
order''). Being mindful of the concern in the 1997 order about 
investor confidence and market integrity, the Exchange designed the 
MQP Program to be highly transparent with: clear public notification 
requirements; clear entry, continuation, and termination 
requirements; clear market maker accountability standards; and, 
perhaps most importantly, clear market quality (liquidity) 
enhancement standards that benefit investors and market 
participants.
     The Exchange has a provision in its Rule 2460 that is, in 
respect of Exchange members, largely similar to FINRA Rule 5250. See 
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 
3550 (January 23, 2006) (File No. 10-131) (order approving 
registration of The NASDAQ Stock Market LLC as a national securities 
exchange and adopting Rule 2460). As discussed in the body of the 
proposal, the Exchange proposes to modify Rule 2460 so that it is 
not applicable to the MQP.
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    MQP Securities may include Exchange Traded Funds (``ETFs''), Linked 
Securities (``LS''), and Trust Issued Receipts (``TIRs'').\8\ However, 
the Exchange believes that MQP Securities will predominantly, if not 
entirely, consist of ETFs as reflected in the proposal.
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    \8\ For definitions of ETF, LS, and TIR, see proposed Rule 5950 
subsections (e)(2), (e)(3), and (e)(4), respectively.
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Background
    The proposed Market Quality Program is a voluntary program designed 
to promote market quality in MQP Securities.\9\ An MQP Company that 
lists an eligible MQP Security on NASDAQ will pay a listing fee as set 
forth in proposed Rule 5950 (``MQP Fee'') in addition to the standard 
(non-MQP) NASDAQ listing fee applicable to such MQP Security as set 
forth in the Rule 5000 Series (consisting of Rules 5000-5999).\10\ An 
MQP Fee will be used for the purpose of incentivizing one or more 
Market Makers in the MQP Security (``MQP Market Maker'') to enhance the 
market quality of the MQP Security. Subject to the conditions set forth 
in this rule, this incentive will be credited (``MQP Credit'') to one 
or more MQP Market Makers that make a quality market in the MQP 
Security pursuant to the Program.\11\
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    \9\ The Exchange notes that MQP Securities do not encompass 
derivatives on such securities.
    \10\ The Rule 5000 Series contains rules related to the 
qualification, listing, and delisting of Companies on the NASDAQ 
Stock Market. The Rule 5100 Series discusses NASDAQ's general 
regulatory authority. The Rule 5200 Series sets forth the procedures 
and prerequisites for gaining a listing on the NASDAQ Stock Market, 
as well as the disclosure obligations of listed Companies. The Rule 
5300, 5400, and 5500 Series contain the specific quantitative 
listing requirements for listing on the Global Select, Global 
Market, and Capital Market, respectively. The corporate governance 
requirements applicable to all Companies are contained in the Rule 
5600 Series. Special listing requirements for securities other than 
common or preferred stock and warrants are contained in the Rule 
5700 Series. The consequences of a failure to meet NASDAQ's listing 
standards are contained in the Rule 5800 Series. Finally, listing 
fees are described in the Rule 5900 Series.
    \11\ The enhanced market quality (e.g., liquidity) would, as 
discussed below, emanate from market quality standards for MQP 
Market Makers that include, for example, posting a market in an MQP 
Security that is no wider on the offer side and no wider on the bid 
side than 2% away from NBBO. Proposed Rule 5950(c)(1)(B).
    Other markets have considered various ways to increase liquidity 
in low volume securities. NYSE Euronext, for example, has advocated 
that a market-wide pilot program with wider spread increments for 
less liquid securities could be a worthwhile experiment. NYSE 
Euronext has also recognized that the creation of a program in which 
small companies could enter into agreements directly with broker-
dealers or through exchanges to provide direct payments to a broker-
dealer who agrees to make a market in the issuer's security is an 
idea that may warrant further review by FINRA and the Commission. 
See Testimony of Joseph Mecane, Executive Vice President, NYSE 
Euronext, Before the House Committee on Government Reform and 
Oversight, November 15, 2011.
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The Need for the MQP
    The Exchange believes that the MQP will be beneficial to the 
financial markets, to market participants including traders and 
investors, and to the economy in general. First, the Exchange proposes 
the MQP to encourage narrow spreads and liquid markets in situations 
that generally have not been, or may not be, conducive to naturally 
having such markets. The securities that comprise these markets may 
include less actively traded or less well known ETF products that are 
made up of securities of less well known or start-up companies as 
components.\12\ Second, in rewarding Market Makers that are willing to 
``go the extra mile'' to develop liquid markets for MQP Securities,\13\ 
the MQP would clearly benefit traders and investors by encouraging more 
quote competition, narrower spreads, and greater liquidity. Third, the 
MQP will lower transaction costs and enhance liquidity in both ETFs and 
their components, making those securities more attractive to a broader 
range of investors. In so doing, the MQP will help companies access 
capital to invest and grow. And fourth, the MQP may attract smaller, 
less developed companies and investment opportunities to a regulated 
and transparent market and thereby serve the dual function of providing 
access to on-Exchange listing while expanding investment and trading 
opportunities to market participants and investors.
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    \12\ These small companies and their securities (whether 
components of listed products like ETFs or direct listings) have 
been widely recognized as essential to job growth and creation and, 
by extension, to the health of the economy. Being included in a 
successful ETF can provide the stocks of these companies with 
enhanced liquidity and exposure, enabling them to attract investors 
and access capital markets to fund investment and growth.
    The Exchange expects, as noted, that MQP Securities will largely 
or entirely consist of ETFs, and discusses them accordingly in the 
proposal. The Exchange notes that the MQP is available and 
appropriate for LS and TIR products, which have some characteristics 
in common with ETF products. For example, TIRs are non-equity 
securities that are issued by a trust, and LS are non-equity 
securities that are linked to the performance of other assets, 
namely indexes and commodities (including currencies). See Rules 
5710 and 5720.
    \13\ By imposing quality quoting requirements to enhance the 
quality of the market for MQP Securities, the MQP will directly 
impact one of the ways that Market Makers manage risk in lower tier 
or less liquid securities (e.g., the width of bid and offer 
pricing).
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    There is support for paid for market making (also known as 
``PFMM'') at the highest governmental levels. Congressman Patrick 
McHenry, the Chairman of the House Committee on Governmental Reform and 
Oversight, for example, recently noted that agreements between issuers 
and market makers to pay for market making activity ``* * * would allow 
small companies to produce an orderly, liquid market for their stocks. 
Research has shown that these agreements, already permitted overseas, 
have led to a positive influence on liquidity for small public 
companies.'' \14\
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    \14\ See Payments to Market Makers May Improve Trading in 
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
    The Exchange believes that by establishing specific market 
quality requirements in the MQP to expand quote competition and 
liquidity in targeted securities such as ETFs, the Program will be 
conducive to capital formation--not only in the targeted securities 
or ETFs (e.g., higher trading volume and/or creation of additional 
share units), but also in the individual components that make up the 
targeted securities (e.g., higher share trading volume). Securities 
that trade in active, liquid markets are less likely to suffer from 
mispricing (that is, a discount in pricing because of a lack of 
liquidity) that can diminish a company's ability to raise capital 
for further investment and growth.
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    In a similar vein, Robert Greifeld, Chief Executive Officer of 
NASDAQ, recently noted that unlike the United States, ``[t]he U.K., 
Canada, and Sweden all have exchange markets that serve as `incubators' 
for smaller companies.'' \15\ The Exchange believes that the MQP 
proposal will, by encouraging liquid markets, enable the Exchange to 
similarly serve as an ``incubator,'' and to continue being an innovator 
in expanding markets to benefit market participants, traders, and 
investors.\16\

[[Page 22044]]

The MQP would reward Market Makers for committing capital to securities 
and meeting rigorous market quality benchmarks established by the 
Program.\17\ This approach has worked very successfully in overseas 
markets, including the NASDAQ OMX Nordic First North market (known as 
``First North'').
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    \15\ See Robert Greifeld, CEO, NASDAQ OMX Group, Sarbox and 
Immigration Reform for Jobs, Wall Street Journal, October 4, 2011. 
For a discussion of capital formation issues in the U.S., see 
letters between Mary Shapiro, Chairman of the SEC, and Congressman 
Darrel E. Issa, Chairman of the House Committee on Oversight and 
Governmental Reform, dated March 22, 2011, April 6, 2011, and April 
29, 2011.
    \16\ See Securities Exchange Act Release No. 63270 (November 8, 
2010), 75 FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of 
filing and immediate effectiveness establishing the Investor Support 
Program to attract retail order flow to the Exchange). See also 
Securities Exchange Act Release No. 64437 (May 6, 2011), 76 FR 27710 
(May 12, 2011) (NASDAQ-2010-059) (approval order creating a listing 
market, The BX Venture Market, that will have strict qualitative 
listing requirements and quantitative standards that would attract 
smaller, growth companies).
    \17\ See Testimony of Edward S. Knight, General Counsel and 
Executive Vice President, NASDAQ OMX Group, Before the Senate 
Committee on Banking, Housing, and Urban Affairs, December 1, 2011.
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    The practice of paid for market making to increase the liquidity of 
less liquid securities was examined by Johannes A. Skjeltorp and Bernt 
Arne Odegaard in a working paper from June 2011.\18\ Skjeltorp and 
Odegaard examined paid for market making on the Oslo Stock Exchange, 
which uses a market making model that is similar to that of NASDAQ's 
First North market,\19\ and noted that they ``* * * find a significant 
reduction in liquidity risk and cost of capital for firms that hire a 
market maker. Firms that prior to hiring a market maker * * * [have] a 
high loading on a liquidity risk factor, experience a significant 
reduction in liquidity risk to a level similar to that of the larger 
and more liquid stocks on the exchange.''
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    \18\ See Why do Firms Pay for Market Making in Their Own Stock? 
by Johannes A. Skjeltorp, Norges Bank, and Bernt Arne Odegaard, 
University of Stavanger and Norges Bank, June 2011. See also Why 
Designate Market Makers? Affirmative Obligations and Market Quality 
by Hendrik Bessembinder, Jia Hao, and Michael Lemmon, June 2011. 
This study suggests that future flash crashes can be avoided and 
social welfare enhanced by designating market makers and engaging 
paid for market making, and observing the positive attributes of 
direct payments from listed firms to designated market makers on the 
Stockholm Stock Exchange and Euronext Paris.
    \19\ The Exchange believes that the Skjeltorp and Odegaard 
article is therefore directly applicable to the First North paid for 
market making experience.
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    About six years prior to the Skjeltorp and Odegaard article, Amber 
Anand, Carsten Tanggaard, and Daniel G. Weaver studied liquidity 
provision through paid for market making on the Stockholm Stock 
Exchange (``SSE''), currently named NASDAQ OMX Stockholm AB.\20\ The 
researchers examined the success of fifty previously illiquid firms 
that were listed on the SSE and enjoyed, along with investors, the 
benefits of paid for market making. The researchers examined the impact 
of the paid market maker program and found that firms experienced ``* * 
* a decreased cost of capital and significant improvements in market 
quality and price discovery.'' \21\ The market makers were known as 
liquidity providers, and the firms could set maximum spread widths for 
their stocks, as is currently done. Anand, Tanggaard, and Weaver found 
that following the beginning of paid for market making services, 
spreads narrowed by a statistically significant amount and depth 
increased at the inside and in the aggregate for four price levels away 
from the inside. The researchers found that accompanying the increase 
in depth was a significant increase in average trade size, suggesting 
that traders did not find it necessary to break up their orders to 
accommodate low market depth, and found an increase in trading 
activity, suggesting that liquidity providers were actively trading 
with public customers.
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    \20\ See Paying for Market Quality, Working Paper F-2006-06, by 
Amber Anand, Carsten Tanggaard, and Daniel G. Weaver: November 2005, 
Aarhus School of Business.
    \21\ At the time of the study, SSE was owned by OMX AB. SSE 
merged into NASDAQ OMX in 2005 and retained its identity within the 
new corporate structure. The SSE paid for market making system 
matured into the current First North market.
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    More recently, Eric Noll, Executive Vice President, NASDAQ OMX 
Group, described the positive impact of paid for market making in the 
First North market, stating that NASDAQ OMX has had ``great success'' 
in increasing liquidity in stocks on First North, a European venue for 
smaller companies that has a program enabling companies to compensate 
market makers.\22\ Mr. Noll noted that in just five years, First North 
market has grown to 141 listings with a total capitalization of 2.8 
billion Euros, and that 22 of the First North companies have graduated 
to the main market since 2006.\23\
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    \22\ See Payments to Market Makers May Improve Trading in 
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
    \23\ See Testimony of Eric Noll, Executive Vice President, 
NASDAQ OMX Group, Before the House Committee on Government Reform 
and Oversight, November 15, 2011. Mr. Noll noted also that one of 
the unintended consequences of market fragmentation in the current 
U.S. securities markets has been a lack of liquidity and price 
discovery in listed securities outside of the top 100 traded names, 
and a disturbing absence of market attention paid to small growth 
companies by market participants. The Exchange believes that the MQP 
proposal offers a practical and positive solution.
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Paid for Market Making on the First North Market
    The Exchange believes that commensurate with the previously-
discussed studies regarding paid for market making,\24\ it is 
instructive to examine the paid for market making experience on the 
First North market.
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    \24\ See supra notes 18, 19, and 20.
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    By way of background, the First North market is an alternative 
listing market to the NASDAQ OMX Nordic Main Market (``Main 
Market'').\25\ Both First North and Main Market are subject to and 
regulated by European Union (``EU'') directives \26\ and exchange 
rules, and are supervised and regulated by one or more Financial 
Services Authorities (``FSAs'').\27\ While the Main Market is intended 
for listing companies that are well established, First North is 
intended for listing small, young or growth companies (not unlike the 
beneficiaries of the MQP) while providing an infrastructure and trading 
and settlement systems that are similar to those of the Main Market. 
First North offers new or small public companies the benefits of 
listing on a public market and the potential for good markets through a 
paid for market making system, and is often the first step towards 
listing on the Main Market.\28\
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    \25\ NASDAQ OMX Nordic, which has securities exchanges and 
clearing operations in the Nordic countries Sweden, Denmark, 
Iceland, and Finland and Baltic countries Latvia and Estonia, 
operates First North and the Main Market. For additional 
information, see http://www.nasdaqomxnordic.com/about_us?languageId=1.
    \26\ For example, the Markets in Financial Instruments Directive 
(``MiFID''). It should be noted that certain parts of the EU 
legislation, for example the Transparency Directive, only apply to 
companies admitted to trading on the Main Market.
    \27\ A Financial Services Authority is the regulator of 
financial services and securities exchanges in an EU country 
(including the Nordics) and as such is similar to the Commission in 
respect of involvement in market regulation and oversight.
    \28\ The First North and Main Market have increasingly higher 
listing standards, similarly to the tiered NASDAQ listings markets. 
See Rule 5300, 5400, and 5500 Series regarding the Global Select, 
Global Market, and Capital Market, respectively. In a similarly 
tiered fashion, between First North and Main Market is an 
intermediary market known as First North Premiere (a segment of 
First North) that is designed to help companies seeking higher 
investor visibility and/or preparation for Main Market listing.
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    The First North paid for market making system is based on a 
standard exchange-supplied contract between a listing firm and a 
designated market maker (``DMM'') that sets forth market obligations 
for the market maker. The Exchange sets forth obligations for the MQP 
Market Makers (as well as MQP Companies) in proposed Rule 5950 in the 
belief that this provides the greatest amount of transparency and 
accountability for all that wish to participate in the MQP.
    The paid for market making model on NASDAQ's First North has 
operated since 2002 and has been demonstrably successful to the benefit 
of issuers and investors, without material regulatory issues. One of 
the definitive market quality attributes associated with expansion of 
liquidity through paid for market making is the significant narrowing 
of bid/ask spreads. This

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phenomenon is directly and immediately beneficial for all market 
participants, including investors and listing companies (which may also 
benefit from accompanying volume increase). As depicted in the chart 
below, in 2010 and 2011 the Relative Time Weighted Average Spread 
(``RTWAS'') \29\ at First North was significantly better for securities 
with PFMM than for those without the benefit of PFMM.
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    \29\ RTWAS is the bid/ask spread relative to the stock price 
calculated at every NBBO change, then averaged with weights for how 
long each NBBO condition lasted.
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    The substantial positive advantage that market participants receive 
from PFMM is clearly demonstrated in the chart below, showing that non-
PFMM security spreads were: (a) Often more than four times wider than 
PFMM security spreads; and (b) a majority of the time more than three 
times wider than PFMM spreads. Moreover, the spreads for stock with 
PFMM were more stable through time.
[GRAPHIC] [TIFF OMITTED] TN12AP12.000

    A comparison of Relative Time Weighted Average Spread on First 
North shows the significant, consistent impact of PFMM in narrowing 
spreads.\30\ This directly benefits investors in PFMM securities by 
lowering their transaction costs.\31\
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    \30\ The Exchange believes that the volatility reflected on the 
RTWAS chart after August 2011 is due in large part to economic 
events in the EU.
    \31\ The Exchange believes that just as First North's positive 
PFMM experience is successful in its own right, so it is equally 
positive within the wider European liquidity enhancement (paid for 
market making) experience. See, e.g., How Do Designated Market 
Makers Create Value for Small-Caps? by Albert J. Menkveld and Ting 
Wang, August 1, 2011. This analysis of the 2001 Euronext system 
roll-out to the Amsterdam market, where small-caps had the 
opportunity to hire a DMM who guaranteed a minimum liquidity supply 
in their stock, found an improvement in liquidity level and a 
reduction in liquidity risk. See also Designated Sponsors and Bid-
Ask Spreads on Xetra by J[ouml]rdis Hengelbrock, October 31, 2008. 
This analysis of Deutsche B[ouml]rse Group's Xetra program that 
began in the 1990s, where issuers of less liquid stocks could 
contract with a Designated Sponsor to provide liquidity in a stock 
for a fee, found that investor costs including spreads were lower 
for those stocks that had at least one such dedicated Designated 
Sponsor.
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    In terms of regulation, the First North PFMM experience has not 
raised concerns. Based on Exchange discussions with the Office of 
General Counsel at NASDAQ OMX Nordic in respect of the First North 
market, the Exchange is not aware of regulatory oversight issues (e.g., 
Swedish FSA or Danish FSA) in respect of paid for market making on 
First North.\32\
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    \32\ Moreover, the Exchange notes that while spreads widened for 
stocks on all markets around the world during the height of the 
financial crisis in September and October 2008, First North stocks 
with PFMM experienced less spread widening than comparable stocks 
without PFMM.
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    The Exchange believes that the MQP will, like paid for market 
making on First North, achieve positive results.\33\
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    \33\ The Exchange believes that even though First North market 
lists equities while the proposed MQP market would emphasize listing 
ETF products, this does not detract from, and indeed enhances, the 
comparability of the First North PFMM experience to MQP. See infra 
note 36 (discussing the potential benefit of the unique trust 
structure of ETFs).
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The Proposal--Background
    The Exchange believes that this proposal would help raise investor 
and issuer confidence in the fairness of their transactions and the 
markets in general by enhancing market maker quote competition in 
securities on the Exchange, narrowing spreads, increasing shares 
available at the inside, reducing transaction costs, supporting the 
quality of price discovery, promoting market transparency, and 
improving investor protection.\34\
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    \34\ The Commission has recognized the strong policy preference 
under the Act in favor of price transparency and displayed markets. 
See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 
FR 3594 (January 21, 2010) (Concept Release on Equity Market 
Structure).
    To that end, the Exchange has recently put into place 
initiatives designed to expand the liquidity of certain targeted 
securities on transparent and displayed markets on the Exchange. 
See, e.g., Securities Exchange Act Release No. 63270 (November 8, 
2010), 75 FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of 
filing and immediate effectiveness of proposal to establish Investor 
Support Program in respect of retail or natural order flow).
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    As noted, the proposal would enhance the market quality of targeted

[[Page 22046]]

securities, particularly ETFs. The Exchange believes that ETFs offer 
great value to retail and institutional investment communities, as 
reflected in their popularity as investment vehicles both in the U.S. 
and abroad.\35\ ETFs offer transparency, liquidity, diversification, 
cost efficiency, and investment flexibility to gain broad market 
exposure or to express a directional view as a core or satellite 
component to one's investment portfolio, and do so while offering 
investment exposure to all asset classes--many of which would otherwise 
be inaccessible.\36\ Moreover, ETFs, particularly those that are equity 
based, also benefit listed companies. By being included in a single, 
diversified security, companies gain access to a greater audience of 
investors who may not have bought the individual stock.\37\ This means 
that the markets are deeper and more liquid, benefiting not only 
investors but the economy as a whole.\38\ This proposal will allow ETFs 
that may not otherwise see much trading or volume \39\ to be listed and 
traded on the Exchange in more liquid markets.\40\
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    \35\ The Exchange notes that foreign (non-U.S.) ETFs, 
particularly those that are derivative-based, may have certain 
negative characteristics that are not present in U.S. ETFs. In some 
cases, under the Undertakings for Collective Investment in 
Transferable Securities (UCITS, Europe's equivalent of the 
Investment Company Act of 1940) structure, individual firms are 
permitted to fulfill multiple roles within the construct of the 
product's trading and or creation/redemption process (e.g., the 
Sponsor/Issuer of a European ETF could be the same entity as the 
market maker, distributor, intraday Net Asset Value (``NAV'') 
calculation agent, custodian bank, and/or counterparty to any 
underlying asset). Under the Investment Company Act of 1940 (``1940 
Act''), this is not permitted.
    \36\ It has been noted that since the prices of ETFs are 
generally linked back to the underlying securities, there is less 
opportunity for manipulation. See Payments to Market Makers May 
Improve Trading in Smaller Stocks, by Nina Mehta, Bloomberg, 
November 15, 2011. To that end, the Exchange notes that by 
definition an ETF will have an insulating wall between Market Maker 
and product, namely a trust structure--which is not present with 
other products such as equity securities--that establishes the daily 
NAV for an ETF. NAV reflects the per-share value of an ETF, which is 
based upon the performance of a fund's underlying components and 
methodology.
    \37\ See Testimony of Eric Noll, Executive Vice President and 
Head of Transaction Services NASDAQ OMX, before the Securities 
Subcommittee of the Senate Banking Committee October 19, 2011 (``I 
can tell you from personal experience that the companies that make 
up QQQ [(the NASDAQ-100 technology ETF)] consider it a real 
achievement, and certainly NASDAQ is proud of the excellence QQQ 
represents.'').
     In addition, the Exchange believes that purchasers of ETFs that 
find success because of increased market quality (especially where 
such ETFs are smaller or niche funds with fewer components) may 
choose to invest directly in the fund components after a positive 
ETF market quality and execution experience.
    \38\ See Testimony of Eric Noll, Executive Vice President, 
NASDAQ OMX Group, before the House Committee on Oversight and 
Government Reform, November 15, 2011.
    \39\ There are a record 291 funds (216 ETFs and 75 ETNs) on the 
March 2012 ``ETF Deathwatch'' list maintained by Ron Rowland, 
president of Capital Cities Asset Management. All the funds on this 
list have limped along for at least three months with less than $5 
million in assets or fewer than $100,000 worth of shares changing 
hands daily. The list now includes about 17% of the industry's 
approximately 1,400 ETFs and exchange-traded notes, as measured by 
number of funds. Mr. Rowland states: ``The largest risk is not, 
however, that [the funds] may close in the future. No, the more 
notable risk is that they suffer from extremely poor liquidity 
today. Wide bid/ask spreads, little to no volume behind the quotes, 
and sleeping market makers can potentially inflict much more damage 
on unknowing investors than a fund closure.''
    \40\ In that this proposal is designed to provide market quality 
support to smaller, less frequently traded segments of securities 
(ETFs), subsection (d) of proposed Rule 5950 indicates that an MQP 
Security will no longer be eligible to remain in the MQP if the 
security sustains an average NASDAQ daily trading volume (``ATV'') 
of two million shares or more for three consecutive months. 
Subsection (d) also provides other reasons for termination of the 
MQP with respect to an MQP security: an MQP Company withdraws from 
the MQP, is no longer eligible to be in the MQP, or ceases to make 
MQP payments to NASDAQ; an MQP Security is delisted or is no longer 
eligible for the MQP; an MQP Security does not have at least one MQP 
Market Maker for more than one quarter; or an MQP Security does not, 
for two consecutive quarters, have at least one MQP Market Maker 
that is eligible for MQP Credit. Any MQP Credits remaining upon 
termination of the MQP in respect of an MQP Security will be 
distributed on a pro rata basis to the MQP Market Makers that made a 
market in the MQP Security and were eligible to receive MQP Credit 
pursuant to this rule. If no MQP Market Makers qualify, then the 
remaining MQP Credit will be refunded to the MQP Company. 
Termination of an MQP Company, MQP Security, or MQP Market Maker 
does not preclude the Exchange from allowing re-entry into the 
Program where the Exchange deems proper. Proposed Rule 5950(d).
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The Proposal--Specifics
Proposed Rule 2460
    Preliminarily, the Exchange is proposing to modify its Rule 2460, 
which prohibits direct or indirect payment by an issuer to a Market 
Maker, to indicate that Rule 2460 is not applicable to the MQP.\41\ 
Specifically, the Exchange is proposing new IM-2460-1 (Market Quality 
Program) \42\ to state that Rule 2460 is not applicable to a member 
that is accepted into the Market Quality Program pursuant to Rule 5950 
or to a person that is associated with such member for their conduct in 
connection with that program. The Exchange believes that this proposed 
limited clarification is proper in that it allows the MQP to go forward 
on a pilot basis without denigrating the basic premise of Rule 2460, 
which was designed to forestall problematic relationships between 
exchange members (e.g., market makers) and issuers. The Exchange's 
proposal, on the other hand, assiduously controls the exchange member/
issuer relationship by setting forth an extensive rule-based process 
with clear Program requirements for issuers (MQP Companies) and clear 
market quality requirements for members (MQP Market Makers) that can 
only be effected in a lit and highly regulated exchange environment.
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    \41\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (order 
approving registration of The NASDAQ Stock Market LLC as a national 
securities exchange and adopting Rule 2460). FINRA, with whom the 
Exchange has an agreement regarding provision of certain regulatory 
services, has a similar provision in FINRA Rule 5250. As discussed, 
the Exchange believes that FINRA intends to file an immediately 
effective rule change that would exempt from FINRA Rule 5250 
Exchange programs that are approved by the Commission.
    \42\ IM reflects interpretive material to an Exchange rule.
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    In the order approving NASD Rule 2460 (the 1997 order), upon which 
NASDAQ Rule 2460 is based (as is FINRA Rule 5250), the Commission 
discussed that NASD Rule 2460 preserved investor confidence, preserved 
the integrity of the marketplace, and established a clear standard of 
practice for member firms.\43\
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    \43\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29) (order approving 
adoption of NASD Rule 2460). In discussing the 1997 order, the 
Commission cited to NASD Notice to Members 75-16 (February 20, 
1975), and also to the letter from Kenneth S. Spirer, Attorney, 
Division of Market Regulation, SEC, to Mr. Jack Rubens, Monroe 
Securities, Inc. (May 4, 1973) (regarding acceptance of a fee or 
service charge from issuers in connection with making a market). See 
also Securities Exchange Act Release No. 39670 (February 25, 1998), 
File No. S7-3-98, 63 FR 9661) (notice for public comment of proposed 
amendments to Rule 15c2-11 under the Act in response to increasing 
incidents of fraud and manipulation in the OTC securities market 
involving thinly traded securities of thinly-capitalized issuers, 
known as microcap securities) (``15c2-11 proposal''). In the 15c2-11 
proposal, the Commission cited NASD Rule 2460 when discussing that 
microcap fraud often involves ``pump and dump'' operations, in which 
unscrupulous brokers sell the securities of less-seasoned issuers to 
retail customers by using high pressure sales tactics and a supply 
of securities under the firm's control.
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    The Exchange designed the MQP to meet the goals of market 
integrity, investor confidence, and clear member standards as discussed 
in the 1997 order. In particular, the Exchange designed the MQP to have 
precise standards for all parties in the Program (e.g., MQP Companies 
and MQP Market Makers) and to be highly transparent with clear public 
notification requirements; with clear entry, continuation, and 
termination requirements; with clear Market Maker accountability 
standards; and, perhaps most importantly, with clear market quality 
(liquidity) enhancement standards that benefit investors and

[[Page 22047]]

market participants. The positive aspects of the MQP are clear and 
unambiguous.\44\
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    \44\ In addition to the clear and unambiguous MQP market quality 
standards promoting tighter markets and increased liquidity to the 
benefit of market participants, it has been demonstrated that 
already-established paid for market making programs in Europe have 
resulted in a significant and sustained reduction in spreads. As an 
example, securities that enjoyed PFMM in NASDAQ's First North's 
market have spreads that are as much as four times narrower, and are 
more stable, than securities without PFMM. See supra notes 30, 31, 
and 32 and related text. Narrower spreads always benefits [sic] 
investors by lowering their transaction costs.
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    First, the entire Market Quality Program is clearly and accurately 
set forth in proposed Rule 5950. This includes the application and 
withdrawal process, the listing fee and credit structure, the market 
quality standards that an MQP Market Maker must meet and maintain to 
secure an MQP Credit, and the Program termination process. Second, the 
Exchange will provide notification on its public Web site regarding the 
variable aspects of the Program. Specifically, this notification will 
include the names of the MQP Companies and the MQP Market Makers that 
are accepted into the Program; how many MQP Securities an MQP Company 
may have in the Program; the specific names of the MQP Securities that 
are listed pursuant to the Program; the identity of the MQP Market 
Makers in each MQP Security; and the amount of the supplemental MQP 
Fee, if one is established by an MQP Company, in addition to the basic 
MQP Fee, as discussed below. Third, MQP Securities will be traded on a 
highly regulated and transparent exchange, namely NASDAQ, pursuant to 
the current trading and reporting rules of the Exchange, and pursuant 
to the established market surveillance and oversight procedures of the 
Exchange. And fourth, the MQP would encourage narrower spreads and 
better market quality (more liquid markets) for securities that 
generally have not been, or may not be, conducive to naturally having 
such markets. The Exchange believes that these factors, which directly 
benefit all market participants and investors, are instrumental to 
developing strong investor confidence in the MQP and the integrity of 
the market.
    Moreover, the Exchange believes that the MQP does not implicate 
conflicts of interest. That is, unlike the situation that the NASD was 
trying to address in its Rule 2460 or NASD Notice to Members 75-16, 
where issuers had the ability to directly pay a market maker to 
illegally pump up the price of an issuer's stock, the proposed MQP does 
not encourage MQP Market Makers to improperly pump up prices nor, for 
that matter, establish any direct financial connection between MQP 
Market Makers and MQP Companies. First, an MQP Company must go through 
an MQP application process, and the Exchange must accept the MQP 
Company into the Program, before an MQP Company can list a product 
pursuant to the Program.\45\ Second, an MQP Market Maker must go 
through a separate MQP application process, and the Exchange must 
accept an MQP Market Maker into the Program, before an MQP Market Maker 
can make a market in a product listed pursuant to the Program.\46\ 
Third, in terms of flow of funds, the Exchange stands between an MQP 
Company and an MQP Market Maker. An MQP Company cannot and does not, 
under any circumstances, pay any funds to an MQP Market Maker that 
makes a market in the MQP Company's product pursuant to the Program. 
This is crucial. The Program is constructed so that the only way that 
an MQP Market Maker can earn an MQP Credit--the payment of which is 
administered by the Exchange--is to maintain a quality market in terms 
of the spread and liquidity of an MQP Security.\47\ The Program does 
not afford any other way for an MQP Market Maker to earn an MQP Credit. 
The Exchange firmly believes that the clear, unambiguous, and 
transparent nature of the Program and its established market quality 
standards are counter-indicative of any inherent conflict of 
interest.\48\
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    \45\ Moreover, an MQP Company approved to be in the Program must 
meet both the non-MQP initial and continued listing standards (e.g., 
Rules 5300, 5400, 5500) and the MQP initial and continued listing 
standards to list a security pursuant to the MQP.
    \46\ Moreover, an MQP Market Maker must be approved to be a 
member on NASDAQ to be eligible for the MQP, and thereafter must 
attain the general market making requirements (e.g., Rule 4613) and 
the specific MQP market quality standards to be able to attain an 
MQP Credit.
    \47\ One of the eligibility criteria for an MQP Market Maker to 
receive an MQP Credit, for example, is that the MQP Market Maker 
must maintain at least 2,500 shares of attributable, displayed 
posted liquidity on the NASDAQ Market Center that are priced no 
wider on the offer side and no wider on the bid side than 2% away 
from NBBO. Proposed Rule 5950(c)(1)(B).
    \48\ The Exchange notes that the MQP as proposed (e.g., fully 
transparent and with clear market quality standards) would not be 
susceptible to the ``pump and dump'' fraud and manipulation schemes 
noted in the 15c2-11 proposal. See also supra note 36 discussing 
that ETFs afford less opportunity for manipulation and that the ETF 
trust structure acts as an insulating wall between market maker and 
product.
---------------------------------------------------------------------------

    Additionally, the Exchange notes that the MQP is proposed initially 
as a pilot program. This is significant for several reasons. First, 
NASDAQ is proposing the pilot as an attempt to repair a gap in market 
structure, namely the challenge of certain small or start-up securities 
lacking access to quality markets with adequate liquidity.\49\ Second, 
the Exchange has agreed, as part of the MQP pilot, to submit periodic 
reports to the Commission about market quality in respect of the MQP. 
These reports will endeavor to compare, to the extent practicable, 
securities before and after they are in the MQP. The reports will 
provide information regarding, for example, volume metrics, number of 
MQP Market Makers in target securities, and spread size, and will help 
the Commission and NASDAQ to evaluate the efficacy of the Program and 
the PFMM concept. And third, if the Exchange desires to expand the 
pilot program or make the MQP permanent, the Exchange will need to file 
a new rule change proposal with the Commission.
---------------------------------------------------------------------------

    \49\ These securities may include less actively traded or less 
well known ETF products that have less well known or start-up 
companies as components.
---------------------------------------------------------------------------

    The Exchange believes that the MQP proposal would help raise 
investor and issuer confidence in the fairness of their transactions 
and the markets in general by enhancing market maker quote competition 
in securities on the Exchange, narrowing spreads, increasing shares 
available at the inside, reducing transaction costs, supporting the 
quality of price discovery, promoting market transparency, and 
improving investor protection.
Proposed Rule 5950--Securities Eligible for the MQP
    The MQP is available to Companies that choose to list certain MQP 
Securities on the Exchange. To be eligible for listing, MQP Securities 
must meet the requirements to be listed on NASDAQ as an ETF, LS, or TIR 
pursuant to Rules 5705, 5710, and 5720, respectively.\50\ In addition, 
the MQP Security must meet all NASDAQ requirements for continued 
listing during the period of time that the MQP Security is in the 
MQP.\51\
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    \50\ The Exchange believes that the Companies most likely to 
list on the MQP, and pay the requisite MQP listing fees, will be ETF 
family sponsors.
    \51\ Proposed Rule 5950(b)(1).
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Proposed Rule 5950--Application and Withdrawal
    The first step for an entity wishing to participate in the MQP by 
listing a security on the Exchange, and for a Market Maker wishing to 
participate in the MQP as an MQP Market Maker, is to submit an MQP 
application to the

[[Page 22048]]

Exchange.\52\ Once the Exchange determines that the MQP Company and the 
MQP Market Maker are eligible to be in the MQP according to the 
parameters of the proposed rule, the Exchange will indicate acceptance 
to the MQP Company and the MQP Market Maker. NASDAQ will provide 
notification on its Web site regarding acceptance of an MQP Company and 
an MQP Market Maker into the Program.\53\ NASDAQ may, on a Program-wide 
basis, limit the number of MQP Securities that any one MQP Company may 
list in the MQP; any limitation would be uniformly applied to all MQP 
Companies.\54\ In determining to limit the number of MQP Securities in 
the MQP, NASDAQ may consider information that it believes will be of 
assistance to it, such as whether a restriction, if any, is in the best 
interest of NASDAQ, the MQP Company and the goals of the MQP, and 
investors.\55\
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    \52\ See Proposed Rule 5950(a). Thus for an MQP Company to be 
liable for payment of MQP Fees pursuant to the Program, and for an 
MQP Market Maker to be eligible to receive an MQP Credit for his 
market making activities, the Exchange must have accepted the 
application of each of these parties in respect of an MQP Security, 
and, the parties must each have fulfilled their obligations pursuant 
to the MQP. Proposed Rule 5950(b)(1) and (c)(1).
    \53\ Proposed Rule 5950(a)(1)(C).
    \54\ NASDAQ may also, on a Program-wide basis, limit the number 
of MQP Market Makers permitted to register in an MQP Security. 
NASDAQ will provide notification on its Web site of any such limit. 
If a limit is established, NASDAQ will allocate available MQP Market 
Maker registrations in a first-come-first-served fashion based on 
successful completion of an MQP Market Maker application. Proposed 
Rule 5950(c)(3).
    \55\ Proposed Rule 5950(a)(1)(A) and (B). Factors that may be 
considered by the Exchange are set forth in subsection (a)(1)(B)(i) 
and include, but are not limited to, the following: the current and 
expected liquidity characteristics of MQP Securities; the projected 
initial and continuing market quality needs of MQP Securities; and 
the trading characteristics of MQP Securities (e.g., quoting, 
trading, and volume).
---------------------------------------------------------------------------

    Moreover, to further enhance the transparency of the Program, 
proposed Rule 5950(a)(1)(C) indicates that NASDAQ will also provide 
notification on its Web site regarding the following: the total number 
of MQP Securities that any one MQP Company may have in the Program; and 
the names of MQP Securities that are listed on NASDAQ and the MQP 
Market Maker(s) in each listed MQP Security.
    An MQP Company and an MQP Market Maker may choose to withdraw from 
the Program. After an MQP Company is in the MQP for six consecutive 
months but less than one year, it may voluntarily withdraw from the MQP 
on a quarterly basis. The MQP Company must notify NASDAQ in writing not 
less than one month prior to withdrawing from the MQP. NASDAQ may 
determine, however, to allow an MQP Company to withdraw from the MQP 
earlier.\56\ After an MQP Company is in the MQP for one year or more, 
it may voluntarily withdraw from the MQP on a monthly basis. The MQP 
Company must notify NASDAQ in writing one month prior to 
withdrawing.\57\ After an MQP Market Maker is in the MQP for not less 
than one quarter, he may withdraw from the MQP on a quarterly basis. 
The MQP Market Maker must, similarly to an MQP Company, notify NASDAQ 
in writing one month prior to withdrawing.\58\
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    \56\ In making this determination, NASDAQ may take into account 
the volume and price movements in the MQP Security; the liquidity, 
size quoted, and quality of the market in the MQP Security; and any 
other relevant factors. Proposed Rule 5950(a)(2)(A).
    \57\ Proposed Rule 5950(a)(2)(B).
    \58\ Proposed Rule 5950(a)(2)(C).
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    After an MQP Company is in the MQP for one year, the MQP and all 
obligations and requirements of the Program will automatically continue 
on an annual basis unless NAQSAQ [sic] terminates the Program by 
providing not less than one month prior notice of intent to terminate; 
the MQP Company withdraws from the Program pursuant to subsection 
(a)(2) of this rule; or the MQP Company is terminated from the Program 
pursuant to subsection (d) of this rule.\59\
---------------------------------------------------------------------------

    \59\ Proposed Rule 5950(a)(3).
---------------------------------------------------------------------------

Proposed Rule 5950--MQP Fees From MQP Companies
    An MQP Company seeking to participate in the MQP must pay to NASDAQ 
an annual basic MQP Fee of $50,000 per MQP Security. The basic MQP Fee 
must be paid in quarterly installments as billed by NASDAQ. The basic 
MQP Fee will be allocated as follows: 50% will fund the Quote Share 
Payment that is based on Qualified Quotes; and 50% will fund the Trade 
Share Payment that is based on Qualified Trades, as defined and 
described below.\60\
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    \60\ Proposed Rule 5950(b)(2)(A). Moreover, Trade Share Payments 
will be based upon each MQP Market Maker's share of total Qualified 
Trades in an MQP Security executed on the NASDAQ Market Center. 
Quote Share Payments will be based in equal proportions on: (a) 
Average quoted size at or better than NBBO; and (b) average time 
spent quoting at or better than NBBO. Proposed Rule 5950(c)(2)(B).
     The Exchange believes that allocation of MQP Fees to Quote 
Share Payments and Trade Share Payments properly reflects the 
efforts of MQP Market Makers to improve the quality, depth, and/or 
liquidity of these securities (e.g., from initial quotation to final 
trade and execution). The Exchange believes that the combination of 
quote and trade payments in the Program is more effective in 
measuring the participation of an MQP Market Maker and the resulting 
liquidity that is added to the marketplace. A traditional per share 
incentive plan (e.g., a make-take pricing model) often is not 
attractive to market makers in respect of low volume securities 
because of the risk associated with the liquidity characteristics of 
the security coupled with the low volume and reduced revenue 
opportunity; from the perspective of market makers the costs may 
outweigh the benefit of liquidity provision. Additionally, by 
including a component dedicated to quote quality, the program 
provides an incentive to narrow spreads and increase the size at 
NBBO even when there are few or no trades occurring. As such, the 
Exchange believes that as MQP Market Makers increase the overall 
quality of the market it is important to compensate them for both 
their quote and trade participation in targeted securities.
---------------------------------------------------------------------------

    An MQP Company may also choose to pay an annual supplemental MQP 
Fee per MQP Security. The basic MQP Fee and supplemental MQP Fee when 
combined will not exceed $100,000 per year. The supplemental MQP Fee 
must be paid, together with the basic MQP Fee, in quarterly 
installments as billed by NASDAQ. The amount of the supplemental MQP 
Fee, if any, will be determined by the MQP Company on an annual basis. 
The supplemental MQP Fee must be paid, together with the basic MQP Fee, 
to NASDAQ in quarterly installments. An MQP Company shall indicate the 
proportions between 0% and 100% in which the supplemental MQP Fee will 
be allocated to the Quote Share Payment and/or Trade Share Payment. 
NASDAQ will provide notification on its Web site regarding the amount, 
if any, of the supplemental MQP Fee and the Quote Share Payment/Trade 
Share Payment allocation determined by an MQP Company.\61\
---------------------------------------------------------------------------

    \61\ Proposed Rule 5950(b)(2)(B).
---------------------------------------------------------------------------

    The MQP Fee is in addition to the standard (non-MQP) NASDAQ listing 
fee applicable to the MQP Security and does not offset such standard 
listing fee.\62\
---------------------------------------------------------------------------

    \62\ Proposed Rule 5950(b)(2)(C).
---------------------------------------------------------------------------

    The MQP Fee will be paid to the Exchange on a quarterly basis as 
billed by the Exchange, and will be credited to one or more MQP Market 
Makers that qualify for such credit for an MQP Security pursuant to 
proposed Rule 5950. NASDAQ will bill MQP Companies in arrears. NASDAQ 
will, at the beginning of a quarter, bill each MQP Company for the 
quarterly portion of an MQP Company's MQP Fee (basic and supplemental) 
for an MQP Security. Each such quarterly bill will be based on the MQP 
Credit that one or more MQP Market Makers in an MQP Security qualified 
for in the immediately preceding quarter pursuant to this rule.\63\ All 
revenue from MQP Fees (basic and supplemental) will be credited pro 
rata to the eligible MQP

[[Page 22049]]

Market Maker(s) in an MQP Security. Any portion of an MQP Fee that is 
not credited to eligible MQP Market Makers will be refunded to the MQP 
Company.\64\
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    \63\ Proposed Rule 5950(b)(2)(D).
    \64\ Proposed Rule 5950(b)(2)(E).
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Proposed Rule 5950--MQP Credit to Market Makers
    When making a market in an MQP Security, an MQP Market Maker must, 
in addition to fulfilling the market making obligations per Rule 
4613,\65\ meet or exceed several market quality requirements on a 
monthly basis to be eligible for an MQP Credit. First, for at least 25% 
of the time when quotes can be entered in the Regular Market Session 
\66\ as averaged over the course of a month, an MQP Market Maker must 
maintain: (a) At least 500 shares of attributable, displayed quotes 
\67\ or orders at the NBBO or better on the bid side of an MQP 
Security; and (b) at least 500 shares of attributable, displayed quotes 
or orders at the NBBO or better on the offer side of an MQP Security. 
And second, for at least 90% of the time when quotes can be entered in 
the Regular Market Session as averaged over the course of a month, a 
MQP Market Maker must maintain: (a) At least 2,500 shares of 
attributable, displayed posted liquidity on the NASDAQ Market Center 
that are priced no wider than 2% away from the NBBO on the bid side of 
an MQP Security; and (b) at least 2,500 shares of attributable, 
displayed posted liquidity on the NASDAQ Market Center that are priced 
no wider than 2% away from the NBBO on the offer side of an MQP 
Security.\68\
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    \65\ Rule 4613 states that market making obligations applicable 
to NASDAQ members that are registered as Market Makers include, 
among other things, quotation requirements and obligations as 
follows: For each security in which a member is registered as a 
Market Maker, the member shall be willing to buy and sell such 
security for its own account on a continuous basis during regular 
market hours and shall enter and maintain a two-sided trading 
interest (``Two-Sided Obligation'') that is identified to the 
Exchange as the interest meeting the obligation and is displayed in 
the Exchange's quotation montage at all times. Interest eligible to 
be considered as part of a Market Maker's Two-Sided Obligation shall 
have a displayed quotation size of at least one normal unit of 
trading (or a larger multiple thereof); provided, however, that a 
Market Maker may augment its Two-Sided Obligation size to display 
limit orders priced at the same price as the Two-Sided Obligation. 
Unless otherwise designated, a ``normal unit of trading'' shall be 
100 shares. After an execution against its Two-Sided Obligation, a 
Market Maker must ensure that additional trading interest exists in 
the Exchange to satisfy its Two-Sided Obligation either by 
immediately entering new interest to comply with this obligation to 
maintain continuous two-sided quotations or by identifying existing 
interest on the Exchange book that will satisfy this obligation.
    \66\ The term ``Regular Market Session'' shall have the meaning 
given in Rule 4120(b)(4)(D). Proposed Rule 5950(e)(8).
    \67\ These are quotes that are attributable to members and not 
hidden quotes.
    \68\ Proposed Rule 5950(c)(1)(B).
     For example, regarding the first market quality standard 
(25%)--in an MQP Security where the NBBO is $25.00 x $25.10, for a 
minimum of 25% of the time when quotes can be entered in the Regular 
Market Session as averaged over the course of a month, an MQP Market 
Maker must maintain bids at or better than $25.00 for at least 500 
shares and must maintain offers at or better than $25.10 for at 
least 500 shares. Thus, if there were 20 trading days in a given 
month and the MQP Market Maker met this requirement 20% of the time 
when quotes can be entered in the Regular Market Session for 10 
trading sessions and 40% of the time when quotes can be entered in 
the Regular Market Session for 10 trading sessions then the MQP 
Market Maker would have met the requirement 30% of the time in that 
month.
     For example, regarding the second market quality standard 
(90%)--in an MQP Security where the NBBO is $25.00 x $25.10, for a 
minimum of 90% of the time when quotes can be entered in the Regular 
Market Session as averaged over the course of a month, an MQP Market 
Maker must post bids for an aggregate of 2,500 shares between $24.50 
and $25.00, and post offers for an aggregate of 2,500 shares between 
$25.10 and $25.60. Thus, if there were 20 trading days in a given 
month and the MQP Market Maker met this requirement 88% of the time 
when quotes can be entered in the Regular Market Session for 10 
trading sessions and 98% of the time when quotes can be entered in 
the Regular Market Session for 10 trading sessions then the MQP 
Market Maker would have met the requirement 93% of the time in that 
month.
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    MQP Credits for each MQP Security will be calculated monthly and 
credited quarterly on a pro rata basis to one or more eligible MQP 
Market Makers. Each MQP Credit will be comprised of a Quote Share 
Payment that is based on Qualified Quotes, and a Trade Share Payment 
that is based on Qualified Trades.\69\ Trade Share Payments will, as 
discussed, be based upon the total aggregate share amount of Qualified 
Trades in an MQP Security executed on the NASDAQ Market Center, and 
Quote Share Payments will be based in equal proportions on: (a) Average 
quoted size at or better than NBBO; and (b) average time spent quoting 
at or better than NBBO.\70\
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    \69\ Proposed Rule 5950(c)(2)(A). This subsection indicates that 
a Qualified Quote represents attributable and displayed liquidity 
(either quotes or orders) in an MQP Security; that a quote or order 
entered by an MQP Market Maker in an MQP Security is only a 
Qualified Quote if it is posted within 2% of the NBBO; and that a 
Qualified Trade in an MQP Security represents a liquidity-providing 
execution of a Qualified Quote on the NASDAQ Market Center.
    \70\ Proposed Rule 5950(c)(2)(B). See also supra note 60.
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    An MQP Credit will be credited quarterly to an MQP Market Maker on 
a pro rata basis for each month during such quarter that an MQP Market 
Maker is eligible to receive a credit pursuant to the proposed rule. 
However, the calculation to establish the eligibility of an MQP Market 
Maker will be done on a monthly basis. Thus, for example, if during a 
quarter an MQP Market Maker was eligible to receive a credit for two 
out of three months, he would receive a quarterly pro rata MQP Credit 
for those two months.\71\
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    \71\ Proposed Rule 5950(c)(2)(C).
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    NASDAQ may limit, on a Program-wide basis, how many MQP Market 
Makers are permitted to register in an MQP Security, and will provide 
notification on its Web site of any such limitation. As discussed 
above, if a limit is established, NASDAQ will allocate available MQP 
Market Maker registrations in a first-come-first-served fashion based 
on successful completion of an MPQ [sic] Market Maker application.\72\
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    \72\ Proposed Rule 5950(c)(3). See also supra note 54.
---------------------------------------------------------------------------

    Finally, to give the Exchange and the Commission an opportunity to 
evaluate the impact of the MQP on the quality of markets in MQP 
Securities, the Exchange is proposing that the MQP will be effective 
for a one-year pilot period. During the pilot period, the Exchange will 
submit monthly reports to the Commission about market quality in 
respect of the MQP. The reports will endeavor to compare, to the extent 
practicable, securities before and after they are in the MQP and will 
include information regarding the MQP such as: (1) Rule 605 metrics; 
\73\ (2) volume metrics; (3) number of MQP Market Makers in target 
securities; (4) spread size; and (5) availability of shares at the 
NBBO.
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    \73\ 17 CFR 242.605.
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    The first report will be submitted within sixty days after the MQP 
becomes operative.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of targeted securities (including ETFs) 
on the Exchange during all trading sessions, and to detect and deter 
violations of Exchange rules and applicable federal securities laws. 
Trading of the targeted MQP Securities through the Exchange will be 
subject to FINRA's surveillance procedures for derivative products 
including ETFs.\74\ The Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges that are 
members or affiliates of the ISG \75\ and from listed MQP Companies and 
public and non-public

[[Page 22050]]

data sources such as, for example, Bloomberg.
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    \74\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
    \75\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
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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,\76\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\77\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers or Companies and other persons 
using any facility or system which NASDAQ operates or controls, and it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78f.
    \77\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The goal of the MQP--to incentivize members to make high-quality, 
liquid markets--supports the primary goal of the Act to promote the 
development of a resilient and efficient national market system. 
Congress instructed the Commission to pursue this goal by emphasizing 
multiple policies, including the promotion of price discovery, order 
interaction, and competition among orders and markets. The MQP promotes 
all of these policies; it will enhance quote competition, improve 
NASDAQ liquidity, support the quality of price discovery, promote 
market transparency and increase competition for listings and trade 
executions while reducing spreads and transaction costs. Maintaining 
and increasing liquidity in exchange-listed securities executed on a 
registered exchange will help raise investors' confidence in the 
fairness of the market and their transactions. Improving liquidity in 
this manner is particularly important with respect to ETFs and low-
volume securities, as noted by the Joint CFTC/SEC Advisory Commission 
on Emerging Regulatory Issues.\78\
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    \78\ See Recommendations Regarding Regulatory Responses To The 
Market Events Of May 6, 2010, February 18, 2011 (Recommendation that 
the SEC evaluate whether incentives or regulations can be developed 
to encourage persons who engage in market making strategies to 
regularly provide buy and sell quotations that are ``reasonably 
related to the market.''). Available at http://www.sec.gov/spotlight/sec-cftcjointcommittee/021811-report.pdf.
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    Each aspect of the MQP adheres to and supports the Act. First, the 
Program promotes the equitable allocation of fees and dues among 
issuers. The MQP is completely voluntary in that it will provide an 
additional means by which issuers may relate to the Exchange without 
modifying the existing listing options. Issuers can supplement the 
standard listing fees (which have already been determined to be 
consistent with the Act) with those of the MQP (which are consistent 
with the Act as well). While the MQP will result in higher fees for 
issuers that choose to participate, the issuers receive significant 
benefits for participating, including committed Market Makers, greater 
liquidity, and lower transaction costs for their investors. 
Additionally, issuers will have the ability to withdraw from the 
Program after an initial commitment in the event they determine that 
participation is not beneficial. In that case, the withdrawing issuers 
will automatically revert to the already-approved fee schedule 
applicable to the market tier in which their shares are listed.
    The MQP also represents an equitable allocation of fees and dues 
among Market Makers. Again, the MQP is completely voluntary with 
respect to Market Maker participation in that it will provide an 
additional means by which members may qualify for a credit, without 
eliminating any of the existing means of qualifying for incentives on 
the Exchange. Currently, NASDAQ and other exchanges use multiple fee 
arrangements to incentivize Market Makers to maintain high quality 
markets or to improve the quality of executions, including various 
payment for order flow arrangements, liquidity provider credits, and 
NASDAQ's Investor Support Program (set forth in NASDAQ Rule 7014). 
Market Makers that choose to undertake increased burdens pursuant to 
the MQP will be rewarded with increased credits; those that do not 
undertake such burdens will receive no added benefit. As with issuers, 
Market Makers that choose to participate in the MQP will be permitted 
to withdraw from it after an initial commitment if they determine that 
the burdens imposed by the MQP outweigh the benefits provided.
    Additionally, the MQP establishes an equitable allocation of fees 
among Market Makers that choose to participate and fulfill the 
obligations imposed by the rule. If one Market Maker fulfills those 
obligations, the MQP Fee will be distributed to that Market Maker; if 
multiple Market Makers satisfy the standard, the MQP Fee will be 
distributed pro rata among them. Any portion of an MQP Fee that is not 
credited to eligible MQP Market Makers will be refunded to the relevant 
MQP Company. All fees paid by issuers choosing to participate in the 
MQP, both initial and supplemental MQP Fees, will be available for 
distribution to eligible NASDAQ Market Makers. In other words, all of 
the benefit of the MQP Fees will flow to high-performing Market Makers 
rather than to NASDAQ, provided that at least one Market Maker fulfills 
the obligations under the proposed rule.
    The MQP is designed to avoid unfair discrimination among Market 
Makers and issuers. The proposed rule contains objective, measurable 
(universal) standards that NASDAQ will apply with care. These 
standards, both for issuers and for Market Makers, will be applied 
equally to ensure that similarly situated parties are treated 
similarly. This is equally true for inclusion of issuers and Market 
Makers, withdrawal of issuers and Market Makers, and termination of 
eligibility for the MQP. The standards are carefully constructed to 
protect the rights of all parties wishing to participate in the Program 
by providing notice of requirements and a description of the selection 
process. NASDAQ will apply these standards with the same care and 
experience with which it applies the many similar rules and standards 
in NASDAQ's rule manuals.
    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 program 
offerings to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. NASDAQ believes 
that all aspects of the proposed rule change reflect this competitive 
environment because the MQP is designed to increase the credits 
provided to members that enhance NASDAQ's market quality.
    Finally, NASDAQ notes that the proposed paid for market making 
system has been used successfully for years on NASDAQ OMX Nordic's 
First North market. The First North paid for market making system has 
been quite beneficial to market participants including investors and 
listing companies (issuers) that have experienced market quality and 
liquidity with narrowed spreads. The Exchange believes that the 
proposed MQP will similarly enjoy positive results to the benefit of 
investors in MQP Securities and Companies related to them and the 
financial markets as a whole.

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

[[Page 22051]]

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall:
    (a) By order approve or disapprove such proposed rule change; or
    (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. The Commission requests comment, in 
particular, on the following aspects of the proposed rule change:
    1. Much of the reasoning, empirical data, and academic literature 
discussed by NASDAQ in its proposal is based on providing market making 
incentives to enhance the market quality of, and capital formation for, 
smaller operating companies. However, the MQP proposed by NASDAQ would 
apply only to certain exchange-traded derivative securities products 
(defined in the proposal as MQP Securities to include Exchange Traded 
Funds, Linked Securities, and Trust Issued Receipts), and not to 
operating companies. Are the same arguments and rationale discussed by 
NASDAQ for operating companies equally applicable to exchange-traded 
products? Would the reported effects of other market-making incentive 
programs designed to enhance the market quality of traded operating 
companies be similar if applied to exchange-traded products? If so, how 
so? If not, why not?
    2. How, if at all, might a market-making incentive program applied 
to exchange-traded products impact the operating companies that 
comprise the index underlying such exchange-traded products? Under what 
circumstances could an impact on those companies be beneficial or 
harmful? Could any impact differ depending on whether or not an 
exchange-traded product uses derivatives to gain exposure to such 
companies, or uses leverage or inverse leverage?
    3. What are commenters' views on NASDAQ's assertion that being 
included as a ``component'' of an exchange-traded product (such as an 
ETF) results in benefits to an individual operating company? Do 
commenters agree with this assertion? Why or why not? Could such 
benefits arise independently from a company's inclusion in an 
underlying index, regardless of whether an exchange-traded product 
tracking such an index is traded? Is there any data available that 
analyzes the impact on a company when it becomes a component of an 
underlying index versus when it becomes a portfolio component of an 
exchange-traded product that tracks such an index?
    4. How does the rationale in support of trading lesser-known or 
smaller operating companies translate to the need for similar support 
of an exchange-traded product that tracks these companies? What about 
an exchange-traded product that tracks and invests in very liquid 
companies, but itself has low levels of liquidity? Is there an 
independent rationale for needing to support these types of exchange-
traded products when the market does not? Are there unintended 
consequences of incentivizing such products? If so, what are they?
    5. Given the inherent arbitrage link between trading exchange-
traded products and their underlying holdings, why would a lack of 
liquidity in such a product impact the ability of market makers to 
quote relatively narrow bids and offers? What, if anything, does a lack 
of liquidity or wide bid-ask spread in an exchange-traded product 
indicate about the ability of a market maker to make effective use of 
arbitrage and the creation/redemption mechanisms often associated with 
exchange-traded products? How, if at all, would a market-making 
incentive program affect any intraday premium (discount) of the traded 
price of an exchange-traded product above (below) its intraday 
indicative value?
    6. NASDAQ states that the MQP is designed to promote market quality 
in MQP Securities by, among other things, encouraging narrow spreads 
and greater liquidity. Under the proposal, MQP Market Makers would 
receive MQP Credits for quoting at or near the NBBO, regardless of the 
actual NBBO spread. The Commission seeks specific commentary on any 
potential impact of the proposed rules on the market quality of the MQP 
Securities. Do commenters agree with the Exchange that the MQP would 
encourage tighter quoted prices and greater quoted size at the NBBO for 
MQP Securities? If so, please explain. If not, why not?
    7. Do commenters believe that the MQP would result in MQP Market 
Makers quoting at better prices (and larger sizes) than they would 
otherwise quote without the incentives provided by the Program? Why or 
why not?
    8. If the market qualities of two securities share similar 
characteristics (quoted spread, size, volume, etc.) but one is 
supported by MQP incentives and the other is not, what, if anything, 
does that suggest about the comparative robustness of those market 
qualities? Are there aspects of this type of incentivized market 
quality that should concern investors? Are such apparent improvements 
in market quality consistent with the Act and investor protection? Why 
or why not?
    9. FINRA Rule 5250 prohibits FINRA members from directly or 
indirectly accepting payment from an issuer of a security for acting as 
a market maker. NASDAQ notes in its filing that it expects FINRA to 
file a proposed rule change to amend its Rule 5250 to exempt NASDAQ 
programs, such as the MQP, that are approved by the Commission. In 
addition, NASDAQ has its own rule, substantially similar to FINRA Rule 
5250, which prohibits direct or indirect payment by an issuer to a 
market maker. The Exchange stated that it designed the MQP to meet the 
goals of market integrity, investor confidence, and clear member 
standards discussed in the Commission's order approving NASD Rule 2460 
(which is now FINRA Rule 5250).\79\ Do commenters believe the MQP would 
or would not raise concerns regarding investor confidence, market 
integrity, and member standards? For example, NASD Rule 2460 was 
implemented, in part, to address concerns about issuers paying market 
makers to improperly influence the price of an issuer's stock.\80\ What 
are commenters' views on

[[Page 22052]]

whether, and if so, how, the MQP would be consistent with this basis?
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    \79\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29).
    \80\ See id. at 37107 (``Specifically, the Commission finds that 
the rule preserves the integrity of the marketplace by ensuring that 
quotations accurately reflect a broker-dealer's interest in buying 
or selling a security. The decision by a firm to make a market in a 
given security and the question of price generally are dependent on 
a number of factors, including, among others, supply and demand, the 
firm's expectations toward the market, its current inventory 
position, and exposure to risk and competition. This decision should 
not be influenced by payments to the member from issuers or 
promoters. Public investors expect broker-dealers' quotations to be 
based on the factors described above. If payments to broker-dealers 
by promoters and issuers were permitted, investors would not be able 
to ascertain which quotations in the marketplace are based on actual 
interest and which quotations are supported by issuers or promoters. 
This structure would harm investor confidence in the overall 
integrity of the marketplace. The Commission finds that the proposed 
rule supports a longstanding policy and position of the NASD and 
establishes a clear standard of fair practice for member firms.'')
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    10. Could there be conflicts of interest between an MQP Company 
(the issuer) and the designated MQP Market Maker(s) for such MQP 
Securities participating in the Program? If so, what are those 
conflicts of interest? \81\ Please explain whether NASDAQ's proposal 
adequately addresses such potential conflicts.
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    \81\ The Commission's order approving NASD Rule 2460 discussed 
conflicts of interest that may exist between issuers and market 
makers. See id. at 37106 (``It has been a longstanding policy and 
position of the NASD that a broker-dealer is prohibited from 
receiving compensation or other payments from an issuer for quoting, 
making a market in an issuer's securities or for covering the 
member's out-of-pocket expenses for making a market, or for 
submitting an application to make a market in an issuer's 
securities. As stated in Notice to Members 75-16 (February 20, 
1975), such payments may be viewed as a conflict of interest since 
they may influence the member's decision as to whether to quote or 
make a market in a security and, thereafter, the prices that the 
member would quote.'')
---------------------------------------------------------------------------

    11. In order to address concerns about potential conflicts of 
interest between issuers and market makers, NASDAQ stated that it 
designed the MQP to have clear and precise standards for all parties in 
the Program (e.g., MQP Companies and MQP Market Makers).\82\ Should 
such participation standards also be objective to ensure that there is 
a level playing field in determining who the issuers and market makers 
are for a particular MQP Security in the Program? Are the proposed 
criteria for participation by potential MQP Market Makers and/or 
potential MQP Companies in the MQP sufficiently clear, precise, and 
objective? Why or why not?
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    \82\ See supra note 44 and accompanying text.
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    12. Is it appropriate and consistent with the Act to allow MQP 
Companies to pay the additional Supplemental MQP Fee at their 
discretion? Why or why not? Is it appropriate and consistent with the 
Act to allow MQP Companies to be able to decide how to allocate their 
Supplemental MQP Fee between Quote Share Payments and Trade Share 
Payments? Why or why not? What would be the impact on market maker 
incentives of allowing MQP Companies to pay the additional Supplemental 
MQP Fee and to decide how to allocate its Supplement MQP Fee between 
Quote Share Payments and Trade Share Payments? Please explain.
    13. With respect to a series of MQP Securities, should the MQP 
Company paying the MQP Fee be the sponsor or the fund? What impact, if 
any, would it have on fund investors if the fund pays the MQP Fee as 
opposed to the sponsor? Are the proposed Rules sufficiently clear as to 
which entity will be paying the MQP Fee?
    14. Section 11(d)(1) of the Act generally prohibits a firm that is 
both a broker and a dealer in securities from extending or maintaining 
any credit on any new issue security if the broker-dealer participated 
in the distribution of the new issue security within the preceding 30 
days. The Commission has granted relief to authorized participants from 
these restrictions if, among other things, neither the broker-dealer 
authorized participant, nor any natural person associated with such 
broker-dealer authorized participant, directly or indirectly, receives 
from the fund complex any payment, compensation, or other economic 
incentive to promote or sell the shares of the fund to persons outside 
the fund complex, other than non-cash compensation permitted under NASD 
Rule 2380. Should authorized participants participating in the creation 
and redemption of shares of MQP Securities that are also MQP Market 
Makers in those same MQP Securities be eligible to receive MQP Credits 
derived from Trade Share Payments? Would MQP Credits derived from Trade 
Share Payments give these authorized participants economic incentives 
to promote or sell shares of the MQP Security? Should such payments be 
viewed by the Commission as coming directly or indirectly from the fund 
complex of the MQP Security? Should MQP Credits derived from Trade 
Share Payments disqualify broker-dealer authorized participants from 
relying on the Commission's exemption from Section 11(d)(1) of the Act?
    15. Could the MQP have an impact (either positive or negative) on 
incentives for market making in other exchange-traded products listed 
and traded on NASDAQ that are not eligible for and/or do not 
participate in the Program, either because NASDAQ has limited the total 
number of MQP Securities that any one MQP Company may have in the MQP, 
the MQP Company does not qualify for the MQP, or the MQP Company's 
application for participation is otherwise denied? If so, what type of 
impact, and why? If not, why not? Please explain.
    16. Proposed Rule 5950(d)(1)(A) states that the MQP will terminate 
if an MQP Security sustains an average NASDAQ ATV of two million shares 
or more for three consecutive months. Is this proposed threshold for 
discontinuance in the Program reasonable? If so, why? If not, why not? 
Should there be an alternative threshold or measure to determine 
termination from the Program? Please explain.
    17. Could the MQP have unintended consequences on fair and orderly 
markets in an MQP Security when such security leaves the program? If 
so, what could these consequences be? If not, why not? Please explain.
    18. NASDAQ has proposed to implement the MQP on a one-year pilot 
basis. Is one-year a reasonable time period during which to assess the 
impact of the proposed rules? If not, why not? Please explain.
    19. What additional data, if any, should be provided by NASDAQ to 
help assess during the pilot period whether the MQP is achieving its 
stated goals? For example, if the Exchange required MQP Securities to 
be listed and traded outside the MQP for a period of time before being 
eligible for the MQP, could such a requirement provide useful ``before 
and after'' data for MQP Securities to permit the Exchange and the 
Commission to more accurately assess the market quality of the 
securities before participating in the Program and the market quality 
of the same securities while participating in the Program? If so, how? 
If not, please explain.
    20. The MQP proposed rule provides for certain public disclosures 
relating to the Program (i.e., notifications on NASDAQ's Web site will 
include names of the MQP Companies and the MQP Market Makers that are 
accepted into the Program, how many MQP Securities an MQP Company may 
have in the Program, the specific names of the MQP Securities that are 
listed pursuant to the Program, the identity of the MQP Market Makers 
in each MQP Security, the amount of the supplemental MQP Fee, 
etc.).\83\ Do commenters believe that these disclosures would provide 
sufficient information to investors? If not, why not? Is there any 
other information that the Exchange should provide on its Web site 
regarding the MQP and participating MQP Securities, MQP Companies, and 
MQP Market Makers? For example, should NASDAQ be required to provide 
notification on its Web site of any notices from an MQP Company or MQP 
Market Maker to withdraw from the Program? What

[[Page 22053]]

advantages or disadvantages would such disclosure provide? Please 
explain.
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    \83\ See Proposed Rule 5950(a)(1)(C) and (b)(2)(B)(iii).
---------------------------------------------------------------------------

    21. Would it be helpful to investors to have public notice of an 
MQP Company's participation in the Program through means other than on 
the Exchange's Web site, such as in the MQP Company's periodic reports 
to the Commission, on the MQP Company's Web site, or through a ticker 
symbol identifier on the consolidated tape? Why or why not?
    22. What are commenters' views on whether the proposed disclosures 
are sufficient to enable all investors, even less sophisticated 
investors, to understand the potential impact of the proposed MQP on 
the market quality of an MQP Security, including that an MQP Company's 
participation in the Program is voluntary and subject to withdrawal, or 
that the MQP Security may become ineligible for the Program if its 
trading volume reaches sufficiently high levels?
    23. Should the Exchange be required to publicly (and anonymously) 
disclose statistics on the performance of MQP Market Makers? Would such 
disclosure provide meaningful information to investors (e.g., would 
such disclosure provide investors the opportunity to assess how much 
perceived liquidity is being provided by MQP Market Makers, as opposed 
to liquidity provided by market makers and other market participants 
who are not paid an MQP Credit)? If so, what information should be 
disclosed and why? If not, why not? What advantages or disadvantages 
would such disclosure provide? Please explain.
    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-2012-043 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-2012-043. 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 Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between 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-2012-043 and should 
be submitted on or before May 3, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
---------------------------------------------------------------------------

    \84\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8789 Filed 4-11-12; 8:45 am]
BILLING CODE 8011-01-P