[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Notices]
[Pages 22015-22019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8838]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66768; File No. SR-NASDAQ-2012-048]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Customer Fees and Rebates in Penny Pilot Options
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 April 2, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by NASDAQ. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 22016]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ proposes to modify Chapter XV, entitled ``Option Pricing,''
at Section 2 governing pricing for NASDAQ members using the NASDAQ
Options Market (``NOM''), NASDAQ's facility for executing and routing
standardized equity and index options. Specifically, NOM proposes to
amend the Penny Pilot \3\ Options (``Penny Options'') Customer Rebates
to Add Liquidity and Penny Options Customer Fee for Removing Liquidity.
The Exchange also proposes to make other minor amendments to the
Section 2.
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\3\ The Penny Pilot was established in March 2008 and in October
2009 was expanded and extended through June 30, 2012. See Securities
Exchange Act Release Nos. 57579 (March 28, 2008), 73 FR 18587 (April
4, 2008) (SR-NASDAQ-2008-026) (notice of filing and immediate
effectiveness establishing Penny Pilot); 60874 (October 23, 2009),
74 FR 56682 (November 2, 2009) (SR-NASDAQ-2009-091) (notice of
filing and immediate effectiveness expanding and extending Penny
Pilot); 60965 (November 9, 2009), 74 FR 59292 (November 17, 2009)
(SR-NASDAQ-2009-097) (notice of filing and immediate effectiveness
adding seventy-five classes to Penny Pilot); 61455 (February 1,
2010), 75 FR 6239 (February 8, 2010) (SR-NASDAQ-2010-013) (notice of
filing and immediate effectiveness adding seventy-five classes to
Penny Pilot); 62029 (May 4, 2010), 75 FR 25895 (May 10, 2010) (SR-
NASDAQ-2010-053) (notice of filing and immediate effectiveness
adding seventy-five classes to Penny Pilot); 65969 (December 15,
2011, 76 FR 79268 (December 21, 2011) (SR-NASDAQ-2011-169) (notice
of filing and immediate effectiveness extension and replacement of
Penny Pilot). See also Exchange Rule Chapter VI, Section 5.
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The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaq.cchwallstreet.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ proposes to modify Chapter XV, entitled ``Option Pricing,''
at Section 2 governing the rebates and fees assessed for option orders
entered into NOM. Specifically, the Exchange is proposing to modify the
five tier structure for paying Customer Rebates to Add Liquidity in
Penny Options. The Exchange proposes to amend various rebate tiers to
further incentivize NOM Participants to route Customer orders in Penny
Options to the Exchange by paying additional rebates for certain orders
after the NOM Participant has met a volume criteria and also removing
certain criteria to qualify for a rebate. The Exchange believes that
incentivizing NOM Participants to send additional Customer orders in
Penny Options to the Exchange will benefit all market participants by
adding liquidity to the market.
Specifically, the Exchange currently pays a Customer Rebate to Add
Liquidity in Penny Options based on the following tier structure:
* * * The Customer Rebate to Add Liquidity in Penny Pilot Options
will be paid as noted below. Each Customer order of 5,000 or more,
displayed or non-displayed contracts, which adds liquidity in Penny
Pilot Options, will qualify for an additional rebate of $0.01 per
contract provided the NOM Participant has qualified for a rebate in
Tier 2, 3, 4 or 5 for that month.
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Rebate to add
Monthly volume liquidity
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Tier 1 Participant adds Customer liquidity of up to $0.26
14,999 contracts per day in a month....................
Tier 2 Participant adds Customer liquidity of 15,000 to 0.38
49,999 contracts per day in a month....................
Tier 3 Participant adds Customer liquidity of 50,000 or 0.42
more contracts per day in a month......................
Tier 4 \a\ Participant adds (1) Customer liquidity of 0.43
100,000 or more contracts per day in a month, and (2)
NOM Market Maker liquidity of 40,000 or more contracts
per day in a month.....................................
Tier 5 \b\ Participant adds (1) Customer liquidity of 0.41
25,000 or more contracts per day in a month, (2) the
Participant has certified for the Investor Support
Program set forth in Rule 7014; and (3) the Participant
executed at least one order on NASDAQ's equity market..
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\a\ For purposes of Tier 4, the Exchange will aggregate the trading
activity of separate NOM Participants when computing average daily
volumes where 75 percent common ownership or control exists between
NOM Participants.
\b\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
qualify for the rebate if a NASDAQ member under common ownership with
the NOM Participant has certified for the Investor Support Program and
executed at least one order on NASDAQ's equity market. Common
ownership is defined as 75 percent common ownership or control.
The Exchange proposes to amend the tier structure for Customer
Rebates to Add Liquidity in Penny Options as follows:
* * * The Customer Rebate to Add Liquidity in Penny Pilot Options
will be paid as noted below. Each Customer order of 5,000 or more,
displayed or non-displayed contracts, which adds liquidity in Penny
Pilot Options, will qualify for an additional rebate of $0.01 per
contract provided the NOM Participant has qualified for a rebate in
Tier 2, 3, 4 or 5 for that month.
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Rebate to add
Monthly volume liquidity
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Tier 1 Participant adds Customer liquidity of up to $0.26
14,999 contracts per day in a month....................
Tier 2 Participant adds Customer liquidity of 15,000 to 0.38
49,999 contracts per day in a month....................
Tier 3 Participant adds Customer liquidity of 50,000 to 0.43
74,999 contracts per day in a month....................
Tier 4 Participant adds Customer liquidity of 75,000 or 0.44
more contracts per day in a month......................
[[Page 22017]]
Tier 5 \a\ Participant adds (1) Customer liquidity of 0.42
25,000 or more contracts per day in a month, (2) the
Participant has certified for the Investor Support
Program set forth in Rule 7014; and (3) the Participant
executed at least one order on NASDAQ's equity market..
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\a\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
qualify for the rebate if a NASDAQ member under common ownership with
the NOM Participant has certified for the Investor Support Program and
executed at least one order on NASDAQ's equity market. Common
ownership is defined as 75 percent common ownership or control.
Currently, Tier 3 firms that add 50,000 or more contracts per day
in a month of Customer liquidity, in Penny Options, receive a rebate of
$0.42 per contract. The Exchange is proposing to increase the Tier 3
Customer rebate from $0.42 per contract to $0.43 per contract. The
Exchange also proposes to amend the number of contracts required to
qualify for Tier 3 from 50,000 or more contracts per day in a month to
require NOM Participants to add between 50,000 to 74,999 contracts per
day in a month of Customer liquidity in Penny Options to qualify for
the increased $0.43 Customer rebate.
Currently, Tier 4 firms that (1) add Customer liquidity of 100,000
or more contracts per day in a month of Customer order liquidity in
Penny Options, and (2) provide 40,000 or more contracts per day of NOM
Market Maker liquidity per day in a month receive a rebate of $0.43 per
contract if both criteria are met. For purposes of determining
qualification for this tier, the Exchange currently aggregates \4\ the
trading activity of separate NOM Participants in calculating the
average daily volume if there is at least 75% common ownership or
control between the NOM Participants. The Exchange proposes to amend
the criteria to qualify for Tier 4 from 100,000 or more contracts per
day in a month to 75,000 or more contracts per day in a month of
Customer liquidity in Penny Options and also remove the second criteria
to qualify for Tier 4. The Exchange would therefore remove the
requirement that a NOM Market Maker add liquidity of 40,000 or more
contracts per day in a month. In addition the Exchange proposes to
increase the current Tier 4 Customer rebate of $0.43 per contract to
$0.44 per contract. The Exchange would also remove note ``(a)'', which
was associated with the second criteria of Tier 4, which is no longer
necessary as the NOM Marker Maker requirement would no longer be a
condition to receive the Tier 4 Customer rebate.
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\4\ Aggregation is necessary and appropriate because certain NOM
participants conduct Customer and NOM Market Maker trading activity
through separate but related broker-dealers.
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Currently, Tier 5 firms that (1) provide 25,000 or more contracts
per day in a month of Customer order liquidity in Penny Options, (2)
where the Participant has certified for the Investor Support Program
(``ISP'') as set forth in Rule 7014 \5\; and (3) where the Participant
executed at least one order on NASDAQ's equity market receive a $0.41
per contract Customer rebate. The Exchange proposes to amend Tier 5 to
increase the Customer rebate in Penny Options from $0.41 per contract
to $0.42 per contract. The Exchange would also renumber the current
note ``(b)'' as note ``(a).'' The Exchange is not proposing any changes
to current Tiers 1 and 2.\6\
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\5\ For a detailed description of the ISP, 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) (the ``ISP Filing''). See also Securities
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate
effectiveness); and 63628 (January 3, 2011), 76 FR 1201 (January 7,
2011) (NASDAQ-2010-154) (notice of filing and immediate
effectiveness).
\6\ The Exchange currently pays an additional rebate of $0.01
per contract for each Customer order of 5,000 or more, displayed or
non-displayed contracts, which adds liquidity in Penny Options as
long as the NOM Participant qualified for a rebate in Tier 2, 3, 4
or 5 for that month. This is not being amended in this proposal.
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The Exchange also proposes to subsidize the proposed increased
Customer Rebates to Add Liquidity in Penny Options by increasing the
Customer Fee for Removing Liquidity in Penny Options from $0.44 per
contract to $0.45 per contract. The Exchange believes that this
increase will allow the Exchange to compete more effectively by
subsidizing rebates offered on Customer orders.
The Exchange also proposes to make minor amendments to Section 2
including amending the title of Section 2 from ``NASDAQ Options Market
-Fees'' to ``NASDAQ Options Market -Fees and Rebates.'' to more
specifically describe the Rule. The Exchange also proposes to correct a
cross-reference to the NASDAQ OMX PHLX LLC (``Phlx'') ``Fee Schedule.''
The Exchange proposes to update the title of the ``Fee Schedule'' to
the ``Pricing Schedule'' in accordance with a recent amendment filed by
Phlx.\7\
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\7\ See SR-Phlx-2012-35.
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2. Statutory Basis
NASDAQ believes that the proposed rule changes are consistent with
the provisions of Section 6 of the Act,\8\ in general, and with Section
6(b)(4) of the Act,\9\ in particular, in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility or system
which NASDAQ operates or controls.
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposed new pricing tiers are
reasonable, equitable and not unfairly discriminatory because they
continue an existing program \10\ to encourage broker-dealers acting as
agent for Customer orders to select the Exchange as a venue to post
Customer orders. The Exchange believes that its success at attracting
Customer order flow benefits all market participants by improving the
quality of order interaction and executions at the Exchange. The
Exchange believes the existing monthly volume thresholds have
incentivized firms that route Customer orders to the Exchange to
increase Customer order flow to the Exchange. The Exchange desires to
continue to encourage firms that route Customer orders to increase
Customer order flow to the Exchange by offering greater Customer
rebates for greater liquidity added to the Exchange.
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\10\ The Exchange adopted these monthly volume achievement tiers
in September 2011. See Securities Exchange Act Release Nos. 65317
(September 12, 2011), 76 FR 57778 (September 16, 2011) (SR-NASDAQ-
2011-124), 65317 (September 12, 2011), 76 FR 61129 (October 3, 2011)
(SR-NASDAQ-2011-127), 66126 (January 10, 2012), 77 FR 2335 (January
17, 2012) (SR-NASDAQ-2012-003) and 66360 (February 8, 2012), 77 FR
8312 (February 14, 2012) (SR-NASDAQ-2012-022).
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Specifically, the Exchange believes that the increased Customer
rebates in Penny Options would further incentivize firms to continue to
send more Customer volume to the Exchange. By increasing the Customer
rebates in Tiers 3, 4 and 5 by $0.01 per contract each, the Exchange
would further encourage NOM Participants to transact a greater number
of Customer rebates in Penny Options. With respect to Tier 3, NOM
Participants that qualify for these Customer rebates today should
qualify
[[Page 22018]]
for the increased rebate which continues to require at least 50,000
contracts per day in a month of Customer liquidity, but also amends the
criteria to between 50,000 and 74,999 contracts of Customer liquidity
in Penny Options to qualify for the increased rebate of $0.43 per
contract. NOM Participants who currently transact greater than 74,999
contracts per day in a month today would be entitled to an even greater
rebate because they would qualify for the increased Tier 4 rebate of
$0.44 per contract. The Exchange is amending Tier 4 to lower the first
criteria from 100,000 or more contracts of Customer liquidity to 75,000
or more contracts of Customer liquidity in Penny Options and remove the
second criteria to qualify for the Customer rebate.\11\ Therefore NOM
Participants would only be required to add 75,000 or more contracts per
day in a month of Customer liquidity in Penny Options to receive the
increased Customer rebate of $0.44 per contract. The lower criteria in
Tier 4 would allow NOM Participants that currently qualify for Tier 3,
because they add greater than 75,000 contracts per day in a month of
Customer liquidity in Penny Options, to qualify for the $0.44 per
contract rebate and also encourage other NOM Participants to add more
Customer liquidity to qualify for an even greater rebate than that
offered for Tier 3.
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\11\ As previously mentioned, the Exchange would no longer
require 40,000 or more contracts per day in a month of NOM Market
Maker liquidity.
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The Exchange's proposal to increase the rebates in Tiers 3, 4 and 5
and amend the Tier 3 and 4 criteria as described herein is reasonable
because it should further encourage NOM Participants to qualify for
Customer rebates in Penny Options by transacting a greater number of
Customer contracts in Penny Options and increase liquidity on NOM.
Increased liquidity benefits all market participants on the Exchange.
In addition, the increased Tier 5 Customer rebate should further
encourage increased activity in both the NASDAQ Options Market and in
the ISP of the NASDAQ equity market. The Exchange's proposal to
increase the rebates in Tiers 3, 4 and 5 as well as amend the criteria
for Tiers 3 and 4 is equitable and not unfairly discriminatory because
all NOM Participants that transact Customer orders in Penny Options are
eligible for the Customer rebates.\12\ In addition, the proposals to
amend the Tier 3 criteria to between 50,000 and 74,999 contracts of
Customer liquidity in Penny Options and lower the Tier 4 criteria to
75,000 or more contracts of Customer liquidity in Penny Options and
eliminate the second criteria are equitable and not unfairly
discriminatory because they should encourage NOM Participants that
currently qualify for Tier 3 today to obtain the increased Tier 4
rebate and encourage other NOM Participants to transact additional
Customer orders in Penny Options to obtain the increased rebates.
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\12\ Tier 1 pays a rebate for NOM Participants that add Customer
liquidity of up to 14,999 contracts per day in a month of Penny
Options. There is no required minimum volume of Customer orders to
qualify for a Customer Rebate to Add Liquidity.
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The Exchange's proposal to increase the Customer Fee for Removing
Liquidity in Penny Options is reasonable because the Exchange is
seeking to recoup costs associated with offering Customer rebates in
Penny Options to attract greater liquidity to the Exchange. The
increased liquidity benefits all market participants. The Exchange's
proposal to increase the Customer Fee for Removing Liquidity in Penny
Options is equitable and not unfairly discriminatory because all market
participants would uniformly be assessed a $0.45 per contract Customer
Fee for Removing Liquidity in Penny Options. Currently, Professionals,
Firms, Non-NOM Market Makers and NOM Market Makers are assessed a $0.45
per contract Fee for Removing Liquidity in Penny Options. The Exchange
believes that increasing the Customer Fee for Removing Liquidity by
$0.01 per contract ($0.44 per contract to $0.45 per contract) allows
the Exchange to recoup costs and offer even greater Customer rebates,
thereby benefitting all market participants by attracting Customer
order flow to NOM.
The Exchange's proposals to amend the title of Section 2 to reflect
the rebates offered and also update a cross-reference to the Phlx fees
are reasonable, equitable and not unfairly discriminatory because these
amendments provide greater clarity and accuracy to the Rule text.
The Exchange operates in a highly competitive market comprised of
nine U.S. options exchanges in which sophisticated and knowledgeable
market participants can and do send order flow to competing exchanges
if they deem fee levels at a particular exchange to be excessive or
rebate opportunities to be inadequate. The Exchange believes that the
proposed fee and rebate scheme are competitive and similar to other
fees, rebates and tier opportunities in place on other exchanges. The
Exchange believes that this competitive marketplace materially impacts
the fees and rebates present on the Exchange today and substantially
influences the proposal set forth above.
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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\13\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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\13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2012-048 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-2012-048. 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
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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 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-2012-048 and should be submitted
on or before May 3, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8838 Filed 4-11-12; 8:45 am]
BILLING CODE 8011-01-P