[Federal Register Volume 77, Number 181 (Tuesday, September 18, 2012)]
[Notices]
[Pages 57618-57621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22915]
[[Page 57618]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67843; File No. SR-NASDAQ-2012-104]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to the Customer Rebate To Add Liquidity and Non-Customer Fees
for Removing Liquidity in Penny Pilot Options
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
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the Exchange. 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
The NASDAQ Stock Market LLC proposes to modify Chapter XV, entitled
``Options 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 Customer Rebate to Add
Liquidity and Non-Customer Fees for Removing Liquidity in Penny Pilot
\3\ Options.
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\3\ The Penny Pilot was established in March 2008 and in October
2009 was expanded and extended through June 30 [sic], 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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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 modify Chapter XV, entitled ``Options Pricing,''
at Section 2(1) governing the rebates and fees assessed for option
orders entered into NOM. The Exchange is proposing to increase the Non-
Customer Penny Pilot Options Fees for Removing Liquidity in order to
offer additional Penny Pilot Options Customer Rebates to Add Liquidity
to attract additional order flow to the Exchange to the benefit of all
market participants.
Specifically, the Exchange is proposing to modify the five tier
structure for paying Customer Rebates to Add Liquidity in Penny Pilot
Options. Today, the Exchange pays Rebates to Add Liquidity in Penny
Pilot 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
Monthly volume add
liquidity
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Tier 1 Participant adds Customer liquidity of up to 14,999 $0.26
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 \a\ Participant adds Customer liquidity of 75,000 or 0.44
more contracts per day in a month or has Total Volume of
100,000 or more contracts per day in a month..............
Tier 5 \b\ 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 4, ``Total Volume'' shall be defined as
Customer, Professional, Firm, NOM Market Maker and Non-NOM Market
Maker volume in Penny Pilot Options which either adds or removes
liquidity.
\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 add a Tier 6 to the Penny Pilot Options
Customer Rebates to Add Liquidity and pay Customers a rebate of $0.45
per contract when a Participant has Total Volume of 130,000 or more
contracts per day in month. Total Volume is defined as Customer,
Professional, Firm, NOM Market Maker and Non-NOM Market Maker volume in
Penny Pilot Options and Non-Penny Pilot Options which either adds or
removes liquidity. In addition, NOM Participants under common ownership
will be permitted to aggregate their volume to qualify for the Tier 6
rebate. The Exchange defines common ownership as 75 percent common
ownership or control.\4\
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\4\ NOM Participants may be requested by the Exchange's
Membership Department to demonstrate that they are under 75% common
ownership if the information is not readily available in Web CRD.
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In connection with offering the Tier 6 rebate, the Exchange
proposes to eliminate the current incentive for Customer orders of
5,000 or more, displayed or non-displayed contracts, which add
liquidity in Penny Pilot Options provided the NOM Participant
[[Page 57619]]
has qualified for Tier 2, 3, 4 or 5 for that month. The Exchange
believes that the Tier 6 incentive will encourage NOM Participants to
send additional order flow to the Exchange and is therefore eliminating
the incentive at this time.
The Exchange also proposes to amend Tier 4 which currently provides
that a NOM Participant that adds Customer liquidity of 75,000 or more
contracts per day in a month or has Total Volume of 100,000 or more
contracts per day in month qualifies for a $0.44 per contract rebate.
The Exchange proposes to amend Tier 4 to state that only a NOM
Participant that adds Customer liquidity of 75,000 or more contracts
per day in a month qualifies for a $0.44 per contract rebate.\5\ The
Exchange would eliminate the qualifier of 100,000 or more contracts of
Total Volume because it is instead offering the Tier 6 rebate. The
Exchange would also eliminate note ``a,'' which is no longer relevant
because it applied to Total Volume in Tier 4. The remainder of the
notes would change lettering.
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\5\ The Exchange is not proposing to amend the amount of the
$0.44 per contract rebate at this time.
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The Exchange also proposes to amend the Fees for Removing Liquidity
in Penny Pilot Options. Professionals, Firms, Non-NOM Market Makers and
NOM Market Makers who are currently assessed a $0.45 per contract fee
would be assessed a $0.47 per contact Fee for Removing Liquidity in a
Penny Pilot Option.\6\ In addition, the Exchange proposes to reduce the
Professional, Firm, Non-NOM Market Maker and NOM Market Maker Penny
Pilot Option Fees for Removing Liquidity by $0.01 per contract for
transactions in which the same participant is the buyer and the seller
to further incentivize these NOM Participants to add and remove
liquidity in the market.
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\6\ The Customer Penny Pilot Fee for Removing Liquidity of $0.45
per contract is not being amended.
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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,\7\ in general, and with Section
6(b)(4) of the Act,\8\ 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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\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposed addition of Tier 6 is
reasonable because it is part of an existing program \9\ 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. Also, the Exchange believes the existing
monthly volume thresholds have incentivized firms that route Customer
orders to send additional 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 providing an
additional opportunity to qualify for a Customer Rebate. The Exchange
would allow a NOM Participant to total both Penny Pilot Option Volume
and Non-Penny Pilot Option volume that adds or removes liquidity to
qualify for the $0.45 per contract Customer Rebate to Add Liquidity in
Penny Pilot Options proposed in Tier 6. The Exchange believes that
additional NOM Participants would be able to qualify for this tier,
including NOM Participants who do not qualify for rebates today, as
long as the 130,000 volume requirement was met. Proposed Tier 6 is a
broader category because it includes Non-Penny Pilot Option volume to
qualify for the rebate. The proposed Tier 6 Total Volume qualifier is
similar to pricing currently in place on BATS Exchange, Inc.
(``BATS'').\10\
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\9\ 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), 66360 (February 8, 2012), 77 FR 8312
(February 14, 2012) (SR-NASDAQ-2012-022), 66768 (April 6, 2012), 77
FR 22015 (April 12, 2012) (SR-NASDAQ-2012-048) 67388 (July 10,
2012), 77 FR 42073 (July 17, 2012) (SR-NASDAQ-2012-083).
\10\ BATS pays rebates for certain Customer Penny Pilot orders
based on, among other factors, total consolidated volume. BATS
defines total consolidated volume as the volume reported by all
exchanges to the consolidated transaction reporting plan for the
month for which the fees apply. See BATS BZX Exchange Fee Schedule.
The Exchange is proposing to utilize Total Volume which would
include Penny Pilot Option and Non-Penny Pilot Option volume which
either adds or removes liquidity to qualify for the Customer Rebate
to Add Liquidity in Penny Pilot Options.
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The Exchange believes that proposed Tier 6 is equitable and not
unfairly discriminatory because the Exchange is proposing to offer an
even higher Customer rebate in Penny Pilot Options of $0.45 per
contract to NOM Participants which will be based on Total Volume. NOM
Participants may total all Penny Pilot Option and Non-Penny Pilot
Option volume that either adds or removes liquidity to qualify for this
new tier. The Exchange believes that this added incentive would allow
additional NOM Participants to qualify and receive the Customer rebate.
All NOM Participants that transact Customer orders in Penny Pilot
Options are eligible for the Customer rebates.\11\ The Exchange
believes that allowing NOM Participants to qualify for proposed Tier 6
by totaling Penny and Non-Penny Option volume that adds or removes
liquidity would enable a greater number of NOM Participants to qualify
for the rebate because NOM Participants can utilize either Penny or
Non-Penny Pilot volume to reach the 130,000 volume requirement. All NOM
Participants may transact orders in both Penny and Non-Penny Pilot
Options and the Exchange would equally apply the criteria for Tier 6 to
all NOM Participants.
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\11\ 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
Pilot 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 believes that it is reasonable, equitable and not
unfairly discriminatory to permit NOM Participants under common
ownership to aggregate their volume for purposes of qualifying for the
Tier 6 rebate. Certain NOM Participants chose to segregate their
businesses into different legal entities for purposes of conducting
business. The Exchange believes that these NOM Participants should be
treated as one entity for purposes of qualifying for the Tier 6 rebate
as long as there is at least 75% common ownership or control present
among the NOM Participants. The Exchange currently permits a similar
aggregation for the Tier 5 Total Volume calculation.
The Exchange believes that its proposal to eliminate the $0.01 per
contract rebate incentive for Customer orders of 5,000 or more,
displayed or non-displayed, contracts that add liquidity in Penny Pilot
Options for NOM Participants that qualified for certain tiers is
reasonable because the Exchange has proposed an alternative incentive
for NOM Participants in its proposal to adopt Tier 6 with a higher
rebate. The Exchange believes the Tier 6 rebate will increase order
flow to the Exchange because all Penny Pilot Option and Non-Penny Pilot
Option volume that either adds or removes liquidity would count toward
the 130,000 volume requirement to qualify for the rebate.
The Exchange believes that the proposal to eliminate the $0.01
incentive is equitable and not unfairly
[[Page 57620]]
discriminatory because it is being replaced with the Tier 6 rebate
which offers a higher rebate to NOM Participants who may currently
qualify for other tiers or a new rebate for NOM Participants that
currently do not qualify for a rebate. Today, the $0.01 incentive is
applicable to NOM Participants that qualified for Tiers 2, 3, 4 and 5.
Proposed Tier 6 would be applicable to the Total Volume of contracts in
Penny and Non-Penny Pilot Options which either adds or removes
liquidity for any market participant. The Exchange believes a greater
number of NOM Participants may qualify for proposed Tier 6 as compared
to other tiers which are limited to Customer volume in Penny Pilot
Options.
The Exchange believes that the proposal to eliminate the text of
Tier 4, which provides that NOM Participants may qualify for Tier 4 by
achieving Total Volume of 100,000 or more contracts per day in a month,
is reasonable, equitable and not unfairly discriminatory because the
Exchange is proposing to offer a new Tier 6 rebate which would allow
NOM Participants to achieve an even higher rebate if the NOM
Participant is able to meet the increased volume requirement of 130,000
contracts per day in a month. The Exchange believes the new tier may
further incentivize NOM Participants to send additional volume to the
Exchange that either adds or removes liquidity in Penny or Non-Penny
Pilot Options to qualify for the $0.45 per contract rebate.
The Exchange believes that the increased Fees for Removing
Liquidity in Penny Pilot Options are reasonable because they permit the
Exchange to offer an increased Tier 6 rebate to attract additional
order flow to NOM. The Exchange believes that the increased Fees for
Removing Liquidity in Penny Pilot Options are equitable and not
unfairly discriminatory because all market participants, other than
Customers, are being assessed the same Fees for Removing Liquidity in
Penny Pilot Options. The Exchange believes that Customer order flow
brings unique benefits to the market which benefits all market
participants and therefore Customers are assessed lower fees as
compared to other market participants. Additionally, the Exchange is
offering NOM Participants, other than Customers, the ability to reduce
the Fees for Removing Liquidity by $0.01 per contract when the same
participant is the buyer and the seller. The Exchange believes that
this additional fee reduction should further incentivize non-Customer
NOM Participants to both add and remove liquidity in Penny Pilot
Options on NOM. It is important to note that NOM Participants are
unaware at the time the order is entered of the identity of the contra-
party. Because contra-parties are anonymous, NOM Participants would
aggressively pursue order flow in order to receive the benefit of the
reduction. Providing the additional incentive is reasonable for this
reason and also is equitable and not unfairly discriminatory because
all NOM Participants are entitled to receive the fee reduction when
they are both the buyer and seller. By way of example, if a NOM
Participant that is assigned the firm code ``ABC'' by the Exchange
posted an order utilizing its Customer order router, which order was
removed by an ABC firm proprietary order, the NOM Participant would
receive the $0.01 per contract fee reduction. The Exchange proposes to
utilize the Exchange assigned firm code \12\ to determine which NOM
Participant executed an order and to apply the fee reduction to the
Penny Pilot Option Fee for Removing Liquidity if the same non-Customer
NOM Participant was the buyer and the seller to a transaction.\13\ The
Exchange believes that it is reasonable, equitable and not unfairly
discriminatory to not offer the same fee reduction to Customers because
the Customer fee is not being increased and will now be $0.02 per
contract lower than the Penny Pilot Options Fees for Removing Liquidity
applicable to all other market participants.
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\12\ Each NOM Participant is assigned a firm code by the
Exchange.
\13\ In this example, the same NOM Participant added and removed
the order and would be entitled to the fee reduction because the NOM
Participant was the buyer and seller on the transaction.
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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
rebate opportunities to be inadequate. The Exchange believes that the
proposed rebate scheme and fees 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
rebates and fees present on the Exchange today and substantially
influences the proposal set forth above.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule changes 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 rebates and fees 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
incentivizing NOM Participants to transact greater Customer volume on
the Exchange benefits all market participants because of the increased
liquidity to the market.
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.\14\ 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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\14\ 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-2012-104 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-2012-104. This
file number should be included on the subject line if email is used. To
help the
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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 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-2012-104 and should be submitted
on or before October 9, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22915 Filed 9-17-12; 8:45 am]
BILLING CODE 8011-01-P