Document ID: SEC-2010-0183-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2010-02-04T05:00Z

[Federal Register: February 4, 2010 (Volume 75, Number 23)]
[Notices]               
[Page 5829-5831]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe10-86]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61443; File No. SR-NASDAQ-2010-007]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1, Relating To Elimination of Market Maker Requirement for Each Option 
Series

January 29, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 14, 2009, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASDAQ. On January 26, 2009, the Exchange 
filed Amendment No. 1 to the proposal. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, 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 is filing a proposal for the NASDAQ Options Market (``NOM'' 
or ``Exchange'') to delete from the NASDAQ rulebook Section 5, Minimum 
Participation Requirement for Opening Trading of Option Series,\3\ of 
Chapter IV, Securities Traded on NOM.
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    \3\ See Amendment No. 1.
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    The text of the proposed rule change is available from NASDAQ's 
website at http://nasdaq.cchwallstreet.com, at NASDAQ's principal 
office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change 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
    NASDAQ is proposing the elimination of a requirement that at least 
one Options Market Maker be registered for trading a particular series 
before it may be opened for trading on NOM.
    An Options Market Maker is a Participant \4\ registered with NASDAQ 
as a Market Maker.\5\ Market Makers on NOM have certain obligations 
such as maintaining two-sided markets and participating in transactions 
that are ``reasonably calculated to contribute to the maintenance of a 
fair and orderly market.'' \6\ To register as a Market Maker, a 
Participant must file a written application with NASDAQ Regulation, 
which will consider an applicant's market making ability and other 
factors it deems appropriate in determining whether to approve an 
applicant's registration.\7\ All Market Makers are designated as 
specialists on NOM for all purposes under the Act or rules 
thereunder.\8\ The NOM Rules place no limit on the number of qualifying 
entities that may become Market Makers.\9\ The good standing of a 
Market Maker may be suspended, terminated, or withdrawn if the 
conditions for approval cease to be maintained or the Market Maker 
violates any of its agreements with NASDAQ or any provisions of the NOM 
Rules.\10\ A Participant that has qualified as a Market Maker may 
register to make markets in individual series of options.\11\
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    \4\ The term ``Options Participant'' or ``Participant'' means a 
firm, or organization that is registered with the Exchange pursuant 
to Chapter II of the NOM Rules for purposes of participating in 
options trading on NOM as a ``NASDAQ Options Order Entry Firm'' or 
``NASDAQ Options Market Maker.''
    \5\ See NOM Rules, Chapter VII, Section 2.
    \6\ See NOM Rules, Chapter VII, Section 5(a).
    \7\ See NOM Rules, Chapter VII, Section 2(a).
    \8\ See NOM Rules, Chapter VII, Section 2.
    \9\ See NOM Rules, Chapter VII, Rule 2(c).
    \10\ See NOM Rules, Chapter VII, Section 4(b).
    \11\ See NOM Rules, Chapter VII, Section 3(a).
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    Currently Section 5 of Chapter IV of the NOM rulebook provides in 
relevant part that after a particular class of options has been 
approved for listing on

[[Page 5830]]

NOM by NASDAQ Regulation, NASDAQ will allow trading in series of 
options in that class only if there is at least one Market Maker 
registered for trading that particular series. The Exchange is 
proposing to eliminate this requirement in order to expand the number 
of series available to investors for trading and for hedging risks 
associated with securities underlying those options, as well as to 
enhance markets in products which are likely to receive customer order 
flow. The Exchange places a high value on its Market Makers and 
believes that eliminating the listing requirement to have a Market 
Maker in every series would permit Market Makers, who currently may 
choose to serve as Market Makers solely to permit an options to trade 
on NOM, to focus their expertise on the products that are more 
consistent with their business objectives or more likely to receive 
customer order flow.
    Eliminating the Market Maker listing requirement would provide the 
Exchange the opportunity to trade options that may have occasional 
interest but that do not necessarily require a two-sided market at all 
times. The lack of a two-sided or tight market would not cause customer 
orders to receive prices inferior to the best prices available across 
all exchanges. In fact, NOM is designed to systematically avoid trading 
through protected quotations on other options exchanges, and as such, 
orders accepted into NOM in options that do not have Market Makers will 
not trade at inferior prices even if there is not a two-sided market on 
NOM. As a result of NOM's design, incoming orders are protected from 
receiving dislocated execution prices simply by the fact that there is 
robust quote competition in the exchange listed options business with 
seven competing options exchanges and a multitude of competing Market 
Makers and liquidity providers. Additionally, the Options Order 
Protection and Locked/Crossed Market Plan requires plan participants to 
``establish, maintain and enforce written policies and procedures that 
are reasonably designed to prevent Trade-Throughs in that participant's 
market in Eligible Options Classes.'' \12\ With the implementation of 
this plan, a more robust network of private routing has been 
constructed that ensures routable customer orders can access the best 
prevailing prices in the market.
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    \12\ See Securities Exchange Act Release Nos. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (approval order 
for the Protection and Locked/Crossed Plan); and 60525 (August 18, 
2009), 74 FR 43188 (August 26, 2009) (approval order for NOM's 
proposed rule change to implement the Protection and Locked/Crossed 
Plan).
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    Moreover, in its approval order for the proposed rule change 
establishing NOM, the Commission agreed that the Act does not mandate a 
particular market model for national securities exchanges, and stated 
that it believed that many different types of market models could 
satisfy the requirements of the Act. The Commission stated that it does 
not believe that the Act requires an exchange to have Market 
Makers.\13\ It noted that although Market Makers could be an important 
source of liquidity on NOM, they likely would not be the only 
source.\14\ It observed that, in particular, the NOM System is designed 
to match buying and selling interest of all Participants on NOM. The 
Exchange here is proposing simply to remove the Market Maker 
participation requirement as superfluous to the existence of a vibrant 
options market, nevertheless acknowledging the value Market Makers 
provide to the Exchange.
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    \13\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (File No. SR-NASDAQ-2007-004). 
As the Commission noted in its approval order for the NOM market, in 
its release adopting Regulation ATS, the Commission rejected the 
suggestion that a guaranteed source of liquidity was a necessary 
component of an exchange. See Securities Exchange Act Release No. 
40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) 
(``Regulation ATS Release''). See also Securities Exchange Act 
Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) 
(File No. SR-PCX-00-25) (order approving Archipelago Exchange as the 
equities trading facility of the Pacific Exchange).
    \14\ Indeed, NASDAQ believes that Market Makers are valuable 
sources of liquidity and important components of a highly 
competitive marketplace with various Participant types who provide 
liquidity.
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    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of an 
expanded number of series as proposed by this filing.
    The Exchange also proposes to delete paragraph (b) of Section 5, 
Chapter IV, which states that a class of options will be put into a 
non-regulatory halt if at least one series for that class is not open 
for trading. Originally, this provision was put in place so that the 
exchange could approve underlying securities for the listing of options 
but delay the listing if the Market Makers on the Exchange were not yet 
ready to register in any series of options for that class. With the 
elimination of the other paragraphs in Section 5 requiring a Market 
Maker, the Exchange will no longer need to delay the listings of 
particular series and thus will no longer need this provision.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that 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 a national 
market system, and, in general to protect investors and the public 
interest, by expanding the ability of investors to hedge risks 
associated with securities underlying options which are not currently 
listed.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

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

    Within 35 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 
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. 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 e-mail to rule-comments@sec.gov. Please include 
File

[[Page 5831]]

Number SR-NASDAQ-2010-007 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-2010-007. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2010-007 and should 
be submitted on or before February 25, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-2337 Filed 2-3-10; 8:45 am]
BILLING CODE 8011-01-P