Document ID: SEC-2014-1466-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2014-09-02T04:00Z

[Federal Register Volume 79, Number 169 (Tuesday, September 2, 2014)]
[Notices]
[Pages 52086-52089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-20702]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72920; File No. SR-NASDAQ-2014-084]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to NOM Market Maker Requirements

August 26, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 21, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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 prepared by NASDAQ. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to amend Chapter VII (Market Participants) at 
Section 6 (Market Maker Quotations) on The NASDAQ Options Market 
(``NOM''), NASDAQ's facility for executing and routing standardized 
equity and index options.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; proposed deletions are in brackets.
* * * * *

Chapter VII Market Participants

* * * * *

Sec. 6 Market Maker Quotations

    (a)-(c) No change.
    (d) Continuous Quotes. A Market Maker must enter continuous bids 
and offers for the options to which it is registered, as follows:
    i. On a daily basis, a Market Maker must during regular market 
hours make markets consistent with the applicable quoting requirements 
specified in these rules, on a continuous basis [in at least sixty 
percent (60%) of the series] in options in which the Market Maker is 
registered.
    (1) To satisfy this requirement [with respect to quoting a series], 
a Market Maker must quote [such series 90]60% of the trading day (as a 
percentage of the total number of minutes in such trading day) or such 
higher percentage as Nasdaq may announce in advance. Nasdaq Regulation 
may consider exceptions to the requirement to quote [90]60% (or higher) 
of the trading day based on demonstrated legal or regulatory 
requirements or other mitigating circumstances. This obligation will 
apply to all of a Market Maker's registered options collectively to all 
appointed issues, rather than on an option-by-option basis. Compliance 
with this obligation will be determined on a monthly basis. However, 
determining compliance with the continuous quoting requirement on a 
monthly basis does not relieve a Market Maker of the obligation to 
provide continuous two-sided quotes on a daily basis, nor will it 
prohibit the Exchange from taking disciplinary action against a Market 
Maker for failing to meet the continuous quoting obligation each 
trading day.
    (2) and (3) No change.
    ii.-iii. No change.
    (e) No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change 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. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend quoting 
obligations applicable to NOM Market Makers. Currently, Chapter VII, 
Section 6(d) provides that on a daily basis, a Market Maker must during 
regular market hours make markets consistent with the applicable 
quoting requirements specified in these rules, on a continuous basis in 
at least sixty percent (60%) of the series in options in which the 
Market Maker is registered. It further provides that, to satisfy this 
requirement with respect to quoting a series, a Market Maker must quote 
such series 90% of the trading day (as a percentage of the total number 
of minutes in such trading day) or such higher percentage

[[Page 52087]]

as the Exchange may announce in advance. Nasdaq Regulation may consider 
exceptions to the requirement to quote 90% (or higher) of the trading 
day based on demonstrated legal or regulatory requirements or other 
mitigating circumstances.
    The Exchange proposes to better align its Market Maker quoting 
requirement with that of NASDAQ OMX BX, Inc. (``BX''). BX recently 
amended its market maker quoting requirements in a similar manner.\3\ 
Specifically, the Exchange proposes to reduce the quoting requirement 
for NOM Market Makers as follows: A Market Maker must quote such 
options 60% of the trading day (as a percentage of the total number of 
minutes in such trading day) or such higher percentage as NOM may 
announce in advance. Nasdaq Regulation may consider exceptions to the 
requirement to quote 60% (or higher) of the trading day based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. This obligation will apply to all of a Market Maker's 
registered options collectively, rather than on an option-by-option 
basis. Compliance with this obligation will be determined on a monthly 
basis. This is the same requirement as on BX.\4\
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    \3\ See BX Rules at Chapter VII, Section 6.
    \4\ See BX Rules at Chapter VII, Section 6.
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    The Exchange believes that this is appropriate for two reasons. 
First, the Exchange's current Market Maker quoting requirement is much 
more stringent than BX.\5\ Quoting each series 90% of the trading day 
is much more stringent than looking at all options in which a Market 
Maker is registered, because it allows for some number of series not to 
be quoted at all, as long as the overall standard is met. This better 
accommodates the occasional issues that may arise in a particular 
series, whether technical or manual. The existing requirement may at 
times discourage liquidity in particular options series because a 
Market Maker is forced to focus on a momentary lapse rather than using 
the appropriate resources to focus on the options series that need and 
consume additional liquidity. The Exchange believes that it can better 
attract Market Makers to NOM and grow its market if its quoting 
obligation is more in line with that of other exchanges.
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    \5\ Id.
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    The Exchange believes that the amendments to Section 6(d)(i)(1) of 
Chapter VII, which would allow applying the quoting requirements for 
Market Makers collectively across all options classes, is a fair and 
more efficient way for the Exchange and market participants to evaluate 
compliance with the continuous quoting requirements. Applying the 
continuous quoting requirement collectively across all option classes 
rather than on an issue-by-issue basis is beneficial to Market Makers 
by providing some flexibility to choose which series in their appointed 
classes they will continuously quote--increasing the continuous quoting 
obligation in the series of one class to allow for a decrease in the 
continuous quoting obligation in the series of another class. This 
flexibility does not, however, diminish the Market Maker's obligation 
to continuously quote a significant part of the trading day in a 
significant percentage of series. Flexibility is important for classes 
that have relatively few series and may prevent the Market Maker, in 
particular, from breaching the continuous quoting requirement when 
failing to meet the specified quote amount during the trading day (as 
proposed) in more than one series in an appointed class. Nasdaq 
Regulation may consider exceptions to the requirement to quote 60% (or 
higher) of the trading day based on demonstrated legal or regulatory 
requirements or other mitigating circumstances. This quoting obligation 
will apply to all of a Market Maker's registered options collectively 
on a daily basis, rather than on an option-by-option basis. This 
quoting obligation will be reviewed on a monthly basis, and allows the 
Exchange to review the Market Makers' daily compliance in the aggregate 
and determine the appropriate disciplinary action for single or 
multiple failures to comply with the continuous quoting requirement 
during the month period. However, determining compliance with the 
continuous quoting requirement on a monthly basis does not relieve a 
Market Maker of the obligation to provide continuous two-sided quotes 
on a daily basis, nor will it prohibit the Exchange from taking 
disciplinary action against a Market Maker for failing to meet the 
continuous quoting obligation each trading day. This is the same 
requirement as on other options exchanges.\6\
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    \6\ See NYSE Arca Rule 6.37B(c) and NYSE MKT Rule 925.1NY(c).
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    The Exchange believes that the proposal will not diminish, and in 
fact may increase, market making activity on the Exchange, by 
establishing quoting compliance standards that are reasonable and are 
already in place on other options exchanges. By amending Section 6 of 
Chapter VII to state that quoting obligations apply to a Market Maker's 
appointed issues collectively, this proposal is similar to that of 
other options markets and puts the Exchange on an equal competitive 
footing.\7\ Moreover, as discussed the Exchange believes that the 
proposal may increase market making activity on the Exchange by 
establishing quoting compliance standards that are reasonable and 
already in place on other options exchanges.
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    \7\ The proposed rule text is, as noted, similar in all material 
respects to BX Rules at Chapter VII, Section 6.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \9\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest. NOM operates in an intensely 
competitive environment and seeks to offer the same services that its 
competitors offer and in which its customers find value.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that requiring NOM Market Makers to provide 
continuous two-sided quotations 60% of the trading day (as a percentage 
of the total number of minutes in such trading day) or such higher 
percentage as the Exchange may announce in advance continues to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities. Further, the Exchange would apply the propose rule change 
to all of a Market Maker's registered options collectively to all 
appointed issues, rather than on an option-by-option basis and 
compliance with this obligation will be determined on a monthly basis.
    The proposal supports the quality of the Exchange's market by 
helping to ensure that Market Makers will continue to be obligated to 
quote in series when necessary. Ultimately, the benefit the proposed 
rule change confers upon Market Makers is offset by the continued 
responsibilities to provide significant liquidity to the market to the 
benefit of market participants. While under the proposal there are 
quoting requirements changes, the Exchange

[[Page 52088]]

does not believe that these changes reduce the overall obligations 
applicable to Market Makers.\10\ Moreover, the Exchange believes that 
the proposal may increase market making activity on the Exchange and 
the quality of the Exchange's market by establishing quoting compliance 
standards that are reasonable and already in place on other options 
exchanges.\11\
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    \10\ In this respect, the Exchange notes that such Market Makers 
are subject to many obligations aside from quoting, including, for 
example, the obligation to maintain a fair and orderly market in 
their appointed classes, and the obligation to conduct the opening 
and enter continuous quotations in all of the series of their 
appointed options classes within maximum spread requirements.
    \11\ See BX Rules at Chapter VII, Section 6.
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    The proposed rule change also protects investors and the public 
interest by creating more uniformity and consistency among the 
Exchange's rules related to NOM Market Maker quoting obligations. 
Providing Market Makers with flexibility by providing the continuous 
quoting obligation collectively across all option classes will not 
diminish the Market Makers' obligation to continuously quote a 
significant part of the trading day in a significant percentage of 
series. Additionally, with respect to compliance standards, the 
Exchange believes that adopting the proposed standards will enhance 
compliance efforts by Market Makers and the Exchange, and are 
consistent with requirements currently in place on BX.\12\ The proposal 
ensures that compliance standards for continuous quoting, in particular 
regarding quoting obligations applying to all of a Market Maker's 
appointed issues collectively, will be the same on the Exchange as on 
other options exchanges. The Exchange believes that the proposal will 
not diminish and in fact may increase, market making activity on the 
Exchange by establishing quoting compliance standards that are 
reasonable and already in place on other options exchanges.
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    \12\ Id.
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    BX's recent rule proposal lowered the BX Market Maker's obligations 
in the same manner as proposed herein. BX also heightened its 
requirements \13\ with respect to Lead Market Makers (``LMM'') because 
LMM's were also being offered certain participation entitlements \14\ 
that are not offered BX Market Markers that were not LMMs. In that 
filing, BX reasoned, ``[t]he Exchange believes that offering LMMs 
participation entitlements promotes just and equitable principles of 
trade because LMMs will be held to a higher standard as compared to 
other market participants including Market Makers. A Market Maker would 
be required, pursuant to this proposal, to quote 60% of the trading 
day. LMMs are being held to a higher obligation and therefore are being 
rewarded with participation entitlements. Similar to Market Makers, 
LMMs add value through continuous quoting and the commitment of 
capital.'' \15\ Further, ``[a]ccordingly, the proposed rule change 
supports the quality of the Exchange's trading markets by helping to 
ensure that LMMs will be required to meet a higher quoting standard in 
order to reap the benefits of the participation entitlements.'' \16\ 
The Exchange is not offering NOM Market Makers such participation 
entitlements as BX offers its LMMs.
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    \13\ A BX LMM must provide continuous two-sided quotations 
throughout the trading day in its appointed issues for 90% of the 
time the Exchange is open for trading in each issue. Such quotations 
must meet the legal quote width requirements. These obligations will 
apply to all of the LMMs appointed issues collectively, rather than 
on an option-by-option basis. Compliance with this obligation will 
be determined on a monthly basis. BX Regulation may consider 
exceptions to the requirement to quote 90% (or higher) of the 
trading day based on demonstrated legal or regulatory requirements 
or other mitigating circumstances. However, determining compliance 
with the continuous quoting requirement on a monthly basis does not 
relieve an LMM of the obligation to provide continuous two-sided 
quotes on a daily basis, nor will it prohibit the Exchange from 
taking disciplinary action against an LMM for failing to meet the 
continuous quoting obligation each trading day.
    \14\ See BX Rules at Chapter VI, Section 10 for LMM 
participation entitlements.
    \15\ See Securities Exchange Act Release No. 72883 (August 20, 
2014), 79 FR 50971 (August 26, 2014) (SR-BX-2014-035).
    \16\ Id.
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    Finally, the Exchange believes that subjecting NOM Market Makers to 
the same requirements as those offered on other exchanges removes 
impediments to and allows for a free and open market. NOM Market Makers 
would have the same requirements as BX Options Market Makers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. Market Makers will be subject to quoting obligations which are 
similar to those at BX.\17\ The Exchange would apply to all of a Market 
Maker's registered options collectively to all appointed issues, rather 
than on an option-by-option basis and compliance with this obligation 
will be determined on a monthly basis. Further, the Exchange believes 
that because this proposal establishes quoting compliance standards 
that are already in place on other options exchanges, the proposal will 
not diminish, and in fact may increase, market making activity on the 
Exchange and thereby enhance intermarket competition. Moreover, the 
proposed rule change will not impose any burden on intramarket 
competition because it will affect all Market Makers the same.
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    \17\ See BX Rules at Chapter VII, Section 6.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved. The Exchange has 
provided the Commission written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date of 
filing of the proposed rule change

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 52089]]

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-2014-084 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-084. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-NASDAQ-2014-084 and 
should be submitted on or before September 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20702 Filed 8-29-14; 8:45 am]
BILLING CODE 8011-01-P