[Federal Register Volume 77, Number 181 (Tuesday, September 18, 2012)]
[Notices]
[Pages 57614-57617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22910]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67837; File No. SR-NASDAQ-2012-102]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Pricing of Options on Facebook, Inc., Google, Inc. and
Groupon, Inc.
September 12, 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 August 31, 2012, 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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[[Page 57615]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASDAQ Stock Market LLC proposes to modify pricing for NASDAQ
members using the NASDAQ Options Market (``NOM''), NASDAQ's facility
for executing and routing standardized equity and index options.
Specifically, NASDAQ proposes to amend Chapter XV, Section 2 entitled
``NASDAQ Options Market--Fees and Rebates'' to adopt rebates and fees
relating to options on Facebook, Inc. (``FB''), Google, Inc. (``GOOG'')
and Groupon, Inc. (``GRPN'').
While the changes proposed herein are effective upon filing, the
Exchange has designated these changes to be operative on September 4,
2012.
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 amend Chapter XV, Section 2 to adopt rebates and
fees relating to FB, GOOG and GRPN options.\3\ The Exchange has
previously adopted pricing specific to certain securities as have other
options exchanges. The Exchange proposes to assess the following
Rebates to Add Liquidity \4\, Fees for Adding Liquidity and Fees for
Removing Liquidity \5\ for transactions in FB, GOOG and GRPN:
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\3\ FB, GOOG and GRPN are Non-Penny Pilot Options.
\4\ An order that adds liquidity is one that is entered into NOM
and rests on the NOM book.
\5\ An order that removes liquidity is one that is entered into
NOM and that executes against an order resting on the NOM book.
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Non-NOM market NOM market
Customer Professional Firm maker maker
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Rebate to Add Liquidity......... $0.77 N/A N/A N/A N/A
Fee for Adding Liquidity........ N/A 0.45 0.45 0.45 0.25
Fee for Removing Liquidity...... 0.79 0.85 0.85 0.85 0.79
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The Exchange is proposing to increase the Customer Rebate to Add
Liquidity for FB, GOOG and GRPN. Today, Customers receive the Non-Penny
Pilot Option Rebate to Add Liquidity. The FB, GOOG and GRPN Customer
Rebate to Add Liquidity would increase from $0.20 per contract (Non-
Penny Pilot Options Rebate to Add Liquidity) to $0.77 per contract (FB,
GOOG and GRPN Rebate to Add Liquidity). No other market participant
would be entitled to a Rebate to Add Liquidity in FB, GOOG and GRPN, as
is the case today.\6\
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\6\ Today, only a Customer receives a Rebate to Add Liquidity in
Non-Penny Pilot Options.
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The Exchange is proposing to increase the Professional Fee for
Adding Liquidity from $0.30 per contract (Non-Penny Pilot Options Fee
for Adding Liquidity) to $0.45 per contract Professional Fee for Adding
Liquidity in FB, GOOG and GRPN. Firms and Non-NOM Market Makers would
continue to pay a $0.45 per contract Fee for Adding Liquidity in FB,
GOOG and GRPN as they do today for Non-Penny Pilot Options. The
Exchange would decrease the NOM Market Maker Fee for Adding Liquidity
from $0.30 per contract (Non-Penny Pilot Options Fee for Adding
Liquidity) to a $0.25 per contract NOM Market Maker Fee for Adding
Liquidity in FB, GOOG and GRPN. Customers would continue to incur no
Fee for Adding Liquidity in FB, GOOG and GRPN, as is the case today.\7\
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\7\ Today, Customers are not assessed a Fee for Adding Liquidity
in Non-Penny Pilot Options.
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The Exchange is proposing to increase the Fees for Removing
Liquidity for FB, GOOG and GRPN. The FB, GOOG and GRPN Fees for
Removing Liquidity would increase as follows: A Customer that today
pays a Non-Penny Pilot Options Fee for Removing Liquidity of $0.45 per
contract would pay a $0.79 per contract Fee for Removing Liquidity in
FB, GOOG and GRPN, a Professional, Firm and Non-NOM Market Maker that
today pays a $0.50 per contract Non-Penny Pilot Fee for Removing
Liquidity would pay $0.85 per contract Fee for Removing Liquidity in
FB, GOOG and GRPN and a NOM Market Maker that today pays $0.50 per
contract Non-Penny Pilot Options Fee for Removing Liquidity would pay a
$0.79 per contract Fee for Removing Liquidity in FB, GOOG and GRPN.\8\
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\8\ With respect to the Opening Cross, all orders would be
subject to Chapter XV, Section 2(2).
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The Exchange believes that this pricing will incentivize members to
transact FB, GOOG and GRPN on NOM. The Exchange notes that if FB, GOOG
and GRPN are included in the Penny Pilot at a later date, the Exchange
would file to eliminate the specific fees and rebates for FB, GOOG and/
or GRPN in order that FB, GOOG and GRPN would be subject to the
Exchange's Penny Pilot Options \9\ pricing.
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\9\ 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); and 67325 (June 29, 2012), 77 FR 40127 (July 6, 2012)
(SR-NASDAQ-2012-075) (notice of filing and immediate effectiveness
extension and replacement of Penny Pilot through December 31, 2012).
See also NOM Rules, Chapter VI, Section 5.
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The Exchange is also proposing to make a technical amendment to the
pricing in Section 2(1) of Chapter XV to replace any reference to
``$0.00'' to ``N/A'' for clarity. The Exchange believes that using ``N/
A'' reduces confusion when no rebate is being paid or fee is being
assessed by the Exchange.
2. Statutory Basis
NASDAQ believes that the proposed rule changes are consistent with
the
[[Page 57616]]
provisions of Section 6 of the Act,\10\ in general, and with Section
6(b)(4) of the Act,\11\ in particular, in that they provide for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility or system
which NASDAQ operates or controls.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(4).
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The Exchange operates in a highly competitive market comprised of
ten U.S. options exchanges in which sophisticated and knowledgeable
market participants can and do send order flow to competing exchanges
if they deem fee levels at a particular exchange to be excessive or the
rebate offered to be inadequate. The Exchange believes that the
proposed fee and rebate scheme is competitive and similar to other fees
and rebates 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.
The Exchange believes that its proposed Customer Rebate to Add
Liquidity for FB, GOOG and GRPN is reasonable because the Exchange is
continuing to incentivize NOM Participants to transact Customer order
flow on NOM. Customer order flow benefits all market participants
through the increased liquidity in the market. The Exchange believes
that its proposed Customer Rebate to Add Liquidity for FB, GOOG and
GRPN is equitable and not unfairly discriminatory because today in the
non-Penny Pilot names the Exchange only offers Customers a Rebate to
Add Liquidity. The Exchange will continue to only offer Customers a
rebate but increase that rebate.
The Exchange believes the proposed increased Professional Fee for
Adding Liquidity in FB, GOOG and GRPN (from $0.30 to $0.45 per
contract) is reasonable because it is within the range of fees assessed
today to Firms and Non-NOM Market Makers transacting Non-Penny Pilot
Options on NOM today when those market participants are adding
liquidity.\12\ The Exchange believes that decreasing the NOM Market
Maker Fee for Adding Liquidity is reasonable because the Exchange is
seeking to incentivize NOM Market Makers to continue to add liquidity
on NOM by lowering the transaction fee from $0.30 to $0.25 per
contract. The Firm and Non-NOM Market Maker Fees for Adding Liquidity
in FB, GOOG and GRPN will remain at $0.45 per contract.
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\12\ Firms and Non-NOM Market Makers are assessed a Non-Penny
Pilot Option Fee for Adding Liquidity of $0.45 per contract. These
market participants would continue to be assessed the same fees.
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The Exchange believes that assessing Professionals a similar Fee
for Adding Liquidity in FB, GOOG and GRPN as Firms and Non-NOM Market
Makers is equitable and not unfairly discriminatory because the
Exchange is assessing all market participants the same fee, except
Customers who are not assessed a fee and NOM Market Makers who are
assessed a lower fee. As previously mentioned, attracting Customer
orders enhances liquidity on the Exchange for the benefit of all market
participants. The Exchange believes that assessing NOM Market Makers a
lower Fee for Adding Liquidity in FB, GOOG and GRPN is equitable and
not unfairly discriminatory because NOM Market Makers have obligations
to the market and regulatory requirements,\13\ which normally do not
apply to other market participants. A NOM Market Maker has the
obligation to make continuous markets, engage in a course of dealings
reasonably calculated to contribute to the maintenance of a fair and
orderly market, and not make bids or offers or enter into transactions
that are inconsistent with a course of dealings. The proposed
differentiation as between NOM Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by NOM Market Makers,
as well as the differing mix of orders entered.
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\13\ Pursuant to Chapter VII (Market Participants), Section 5
(Obligations of Market Makers), in registering as a market maker, an
Options Participant commits himself to various obligations.
Transactions of a Market Maker in its market making capacity must
constitute a course of dealings reasonably calculated to contribute
to the maintenance of a fair and orderly market, and Market Makers
should not make bids or offers or enter into transactions that are
inconsistent with such course of dealings. Further, all Market
Makers are designated as specialists on NOM for all purposes under
the Act or rules thereunder. See Chapter VII, Section 5.
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The Exchange believes that the proposed Fees for Removing Liquidity
for FB, GOOG and GRPN are reasonable because the Exchange is proposing
to increase the fees for all market participants in order to offer
Customers an increased Rebate to Add Liquidity in FB, GOOG and GRPN of
$0.77 per contract. The Exchange believes that offering Customers a
financial incentive will attract additional Customer order flow to the
Exchange. Also, the proposed Fees for Removing Liquidity in FB, GOOG
and GRPN are similar to the non-Penny Pilot Options fees at BATS
Exchange, Inc. (``BATS'').\14\
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\14\ BATS has a $0.75 per contract fee for Customer orders that
remove liquidity from the BATS Options book in non-Penny Pilot
securities. BATS also has an $0.80 per contract fee for
Professionals, Firms and Market Maker orders that remove liquidity
from the BATS Options order book in non-Penny Pilot Securities. See
BATS BZX Exchange Fee Schedule.
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The Exchange believes that the proposed Fees for Removing Liquidity
for FB, GOOG and GRPN are equitable and not unfairly discriminatory
because all market participants would be assessed the same $0.85 per
contract fee except Customers and NOM Market Makers who would be
assessed a lower fee of $0.79 per contract. As mentioned previously,
attracting Customer orders enhances liquidity on the Exchange for the
benefit of all market participants and the increased fees for removing
liquidity cover the cost of offering Customers a rebate to add
liquidity in FB, GOOG and GRPN. Also, the Non-Penny Pilot Customer Fee
for Removing Liquidity is lower today for Customers as compared to
other market participants ($0.45 per contract vs. $0.50 per contract),
the proposed Customer Fee for Removing Liquidity in FB, GOOG and GRPN
would be lower for Customers as compared to Professionals, Firms and
Non-NOM Market Makers. The Exchange believes that providing NOM Market
Makers a lower Fee for Removing Liquidity in FB, GOOG and GRPN as
compared to Professionals, Firms and Non-NOM Market Makers is equitable
and not unfairly discriminatory because NOM Market Makers have
obligations to the market and regulatory requirements, which normally
do not apply to other market participants. The proposed differentiation
as between Customers and NOM Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by Customers and NOM
Market Makers, as well as the differing mix of orders entered.
In the current U.S. options market, many of the contracts are
quoted in pennies. Under this pricing structure, the minimum penny tick
increment equates to a $1.00 economic value difference per contract,
given that a single standardized U.S. option contract covers 100 shares
of the underlying stock. Where contracts are quoted in $0.05 increments
(non-pennies), the value per tick is $5.00 in proceeds to the investor
transacting in these contracts. Liquidity rebate and access fee
structures on the make-take exchanges, including NOM, for securities
quoted in penny increments are commonly in the $0.30 to $0.45 per
contract range.\15\ A
[[Page 57617]]
$0.30 per contract rebate in a penny quoted security is a rebate
equivalent to 30% of the value of the minimum tick. A $0.45 per
contract fee in a penny quoted security is a charge equivalent to 45%
of the value of that minimum tick. In other words, in penny quoted
securities, where the price is improved by one tick with an access fee
of $0.45 per contract, an investor paying to access that quote is still
$0.55 better off than trading at the wider spread, even without the
access fee ($1.00 of price improvement - $0.45 access fee = $0.55
better economics). This computation is equally true for securities
quoted in wider increments. Rebates and access fees near the $0.85 per
contract level equate to only 17% of the value of the minimum tick in
Non-Penny Pilot Options, less than the experience today in Penny Pilot
Options. For example, a retail investor transacting a single contract
in a non-penny quoted security quoted a single tick tighter than the
rest of the market, and paying an access fee of $0.79 per contract, is
receiving an economic benefit of $4.21 ($0.05 improved tick = $5.00 in
proceeds - $0.79 access fee = $4.21). The Exchange believes that
encouraging NOM Market Makers to quote more aggressively by reducing
transaction fees \16\ and incentivizing Customer orders to post on NOM
will narrow the spread in FB, GOOG and GRPN to the benefit of investors
and all market participants by improving the overall economics of the
resulting transactions that occur on the Exchange, even if the access
fee paid in connection with such transactions is higher. Accordingly,
the Exchange believes that the proposed fees and rebates for FB, GOOG
and GRPN are reasonable, equitable and not unfairly discriminatory.
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\15\ NOM is proposing to only pay a Customer a Rebate to Add
Liquidity in FB, GOOG and GRPN. Other market participants would not
be entitled to a rebate.
\16\ The Exchange notes that the proposed $0.25 per contract NOM
Market Maker Fee for Adding in FB, GOOG and GRPN is significantly
less than transaction fees plus payment for order flow fees assessed
by other options exchanges. For example, on NASDAQ OMX PHLX LLC
(``Phlx''), the combined payment for order flow fee plus the
transaction fee is $0.92 per contract. See Phlx's Pricing Schedule.
Unlike Penny Pilot Options, the Exchange believes this significant
reduction in fees for adding liquidity will have the same effect as
a rebate in non-Penny Pilot Options in terms of a narrower spread.
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Further, the Exchange believes that it is reasonable, equitable,
and not unfairly discriminatory to adopt specific pricing for FB, GOOG
and GRPN because pricing by symbol is a common practice on many U.S.
options exchanges as a means to incentivize order flow to be sent to an
exchange for execution in the most actively traded options classes. The
Exchange notes that FB, GOOG and GRPN are some of the most actively
traded options in the U.S.\17\ Finally, the Exchange believes the
proposed technical amendments to Section 2(1) of Chapter XV to replace
any reference to ``$0.00'' to ``N/A'' is reasonable, equitable and not
unfairly discriminatory because the Exchange is identifying when no
fees are assessed and no rebates paid with an ``N/A'' to avoid any
confusion.
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\17\ From August 1, 2012 through August 21, 2012, FB was the 5th
most actively traded equity option class, GOOG was the 28th most
actively traded equity option class and GRPN was the 51st most
actively traded equity option class.
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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 necessary or appropriate in
furtherance of the purposes of the Act, as amended. To the contrary,
NASDAQ has designed its fees and rebates to compete effectively for the
execution and routing of options contracts and to reduce the overall
cost to investors of options trading. The Exchange believes that the
proposed fee/rebate pricing structure would attract liquidity to and
benefit order interaction at the Exchange to the benefit of all market
participants.
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.\18\ 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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\18\ 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-2012-102 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-2012-102. 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
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-2012-102 and should
be submitted on or before October 9, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22910 Filed 9-17-12; 8:45 am]
BILLING CODE 8011-01-P