[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Notices]
[Pages 73097-73103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29563]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 68336; File No. SR-NASDAQ-2012-129]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Establish the Retail Price
Improvement Program on a Pilot Basis Until 12 Months From the Date of
Implementation
December 3, 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 November 19, 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 self-
[[Page 73098]]
regulatory organization. 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 is filing with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change that would adopt new
Nasdaq Rule 4780 to establish a Retail Price Improvement (``RPI'')
Program (the ``Program'' or ``proposed rule change'') to attract
additional retail order flow to the Exchange while also providing the
potential for price improvement to such order flow.
The text of the proposed rule change is available from NASDAQ's Web
site at http://nasdaq.cchwallstreet.com/Filings/, 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, NASDAQ 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. NASDAQ 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
Background
The Exchange is proposing a one-year pilot program that would add
new Nasdaq Rule 4780 to establish an RPI Program to attract additional
retail order flow to the Exchange while also providing the potential
for price improvement to such order flow. Under the proposed rule
change, the Exchange would create a new class of market participant
called a Retail Member Organization (``RMO''), which would be eligible
to submit certain retail order flow (``Retail Orders'') to the
Exchange. As proposed, Nasdaq members (``Members'') will be permitted
to provide potential price improvement for Retail Orders in the form of
non-displayed interest that is priced more aggressively than the
Protected National Best Bid or Offer (``Protected NBBO'').\3\
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\3\ The term Protected Quotation is defined in Chapter XII, Sec.
1(19) and has the same meaning as is set forth in Regulation NMS
Rule 600(b)(58). The Protected NBBO is the best-priced protected bid
and offer. Generally, the Protected NBBO and the national best bid
and offer (``NBBO'') will be the same. However, a market center is
not required to route to the NBBO if that market center is subject
to an exception under Regulation NMS Rule 611(b)(1) or if such NBBO
is otherwise not available for an automatic execution. In such case,
the Protected NBBO would be the best-priced protected bid or offer
to which a market center must route interest pursuant to Regulation
NMS Rule 611.
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Definitions
The Exchange proposes to adopt the following definitions under
proposed Nasdaq Rule 4780. First, the term ``Retail Member
Organization'' (or ``RMO'') would be defined as a Member (or a division
thereof) that has been approved by the Exchange to submit Retail
Orders.
Second, the term ``Retail Order'' would be defined as an agency or
riskless principal order that originates from a natural person and is
submitted to the Exchange by an RMO, provided that no change is made to
the terms of the order with respect to price (except in the case of a
market order being changed to a marketable limit order) or side of
market and the order does not originate from a trading algorithm or any
other computerized methodology.
Finally, the term ``Retail Price Improvement Order'' or ``RPI
Order'' or collectively ``RPI interest'' would be defined as non-
displayed liquidity on the Exchange that is priced more aggressively
than the Protected NBBO by at least $0.001 and that is identified as an
RPI Order in a manner prescribed by the Exchange.\4\ RPI orders can be
priced either as an explicitly priced limit order or implicitly priced
as relative to the NBBO with an offset of at least $0.001. The price of
an RPI Order with an offset would be determined by a Member's entry of
the following into the Exchange: (1) RPI buy or sell interest; (2) an
offset from the Protected NBBO, if any; and (3) a ceiling or floor
price. RPI Orders submitted with an offset would be similar to other
peg orders available to Members in that the order is tied or ``pegged''
to a certain price, and would have its price automatically set and
adjusted upon changes in the Protected NBBO, both upon entry and any
time thereafter. The Exchange expects that RPI sell or buy interest
typically would be entered to track the Protected NBBO, that is, RPI
Orders typically would be submitted with an offset. The offset would be
a predetermined amount by which the Member is willing to improve the
Protected NBBO, subject to a ceiling or floor price. The ceiling or
floor price would be the amount above or below which the Member does
not wish to trade. RPI Orders in their entirety (the buy or sell
interest, the offset, and the ceiling or floor) will remain non-
displayed. The Exchange will also allow Members to enter RPI Orders
which establish the exact limit price, which is similar to a non-
displayed limit order currently accepted by the Exchange today except
the Exchange will accept sub-penny limit prices on RPI Orders in
increments of $0.001. The Exchange will monitor whether RPI buy or sell
interest, adjusted by any offset and subject to the ceiling or floor
price, is eligible to interact with incoming Retail Orders.
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\4\ Exchange systems would prevent Retail Orders from
interacting with RPI Orders if the RPI Order is not priced at least
$0.001 better than the Protected NBBO. The Exchange notes, however,
that price improvement of $0.001 would be a minimum requirement and
Members could enter RPI Orders that better the Protected NBBO by
more than $0.001. Exchange systems will accept RPI Orders without a
minimum price improvement value; however, such interest will execute
at its floor or ceiling price only if such floor or ceiling price is
better than the Protected NBBO by $0.001 or more. Concurrently with
this filing, the Exchange has submitted a request for an exemption
under Regulation NMS Rule 612 that would permit it to accept and
rank the non-displayed RPI Orders. As outlined in the request, the
Exchange believes that the minimum price improvement available under
the Program, which would amount to $0.50 on a 500 share order, would
be meaningful to the small retail investor. See Letter from Jeffrey
S. Davis, Deputy General Counsel, The NASDAQ Stock Market LLC to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission
dated November 19, 2012 (``Sub-Penny Rule Exemption Request'').
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Members and RMOs may enter odd lots, round lots or mixed lots as
RPI Orders and as Retail Orders respectively. As discussed below, RPI
Orders will be ranked and allocated according to price and time of
entry into the System consistent with Nasdaq Rule 4757 and therefore
without regard to whether the size entered is an odd lot, round lot or
mixed lot amount. Similarly, Retail Orders will interact with RPI
Orders and other price-improving orders available on the Exchange
(e.g., non-displayed liquidity priced more aggressively than the NBBO)
\5\ according to the Priority and Allocation rules of the Program and
without regard to whether they are odd
[[Page 73099]]
lots, round lots or mixed lots. Finally, Retail Orders may be
designated as Type 1 or Type 2 without regard to the size of the order.
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\5\ Other price improving liquidity may include, but is not
limited to: booked non-displayed orders with a limit price that is
more aggressive than the then-current NBBO; midpoint-pegged orders
(which are by definition non-displayed and priced more aggressively
than the NBBO); non-displayed orders pegged to the NBBO with an
aggressive offset. Orders that do not constitute other price
improving liquidity include, but are not limited to: orders with a
time-in-force instruction of IOC; displayed orders; limit orders
priced less aggressively than the NBBO.
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RPI Orders would interact with Retail Orders as follows. Assume a
Member enters RPI sell interest with an offset of $0.001 and a floor of
$10.10 while the Protected NBO is $10.11. The RPI Order could interact
with an incoming buy Retail Order at $10.109. If, however, the
Protected NBO was $10.10, the RPI Order could not interact with the
Retail Order because the price required to deliver the minimum $0.001
price improvement ($10.099) would violate the Member's floor of $10.10.
If a Member otherwise enters an offset greater than the minimum
required price improvement and the offset would produce a price that
would violate the Member's floor, the offset would be applied only to
the extent that it respects the Member's floor. By way of illustration,
assume RPI buy interest is entered with an offset of $0.005 and a
ceiling of $10.112 while the Protected NBBO is at $10.11. The RPI Order
could interact with an incoming sell Retail Order at $10.112, because
it would produce the required price improvement without violating the
Member's ceiling, but it could not interact above the $10.112 ceiling.
Finally, if a Member enters an RPI Order without an offset (i.e., an
explicitly priced limit order), the RPI Order will interact with Retail
Orders at the level of the Member's limit price as long as the minimum
required price improvement is produced. Accordingly, if RPI sell
interest is entered with a limit price of $10.098 and no offset while
the Protected NBBO is $10.11, the RPI Order could interact with the
Retail Order at $10.098, producing $0.012 of price improvement. The
System will not cancel RPI interest when it is not eligible to interact
with incoming Retail Orders; such RPI interest will remain in the
System and may become eligible again to interact with Retail Orders
depending on the Protected NBBO. RPI Orders will not be accepted during
halts.
RMO Qualifications and Approval Process
Under proposed Nasdaq Rule 4780(b), any Member could qualify as an
RMO if it conducts a retail business or handles retail orders on behalf
of another broker-dealer. Any Member that wishes to obtain RMO status
would be required to submit: (1) An application form; (2) an
attestation, in a form prescribed by the Exchange, that any order
submitted by the Member as a Retail Order would meet the qualifications
for such orders under proposed Nasdaq Rule 4780(b); and (3) supporting
documentation sufficient to demonstrate the retail nature and
characteristics of the applicant's order flow.\6\
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\6\ For example, a prospective RMO could be required to provide
sample marketing literature, Web site screenshots, other publicly
disclosed materials describing the retail nature of their order
flow, and such other documentation and information as the Exchange
may require to obtain reasonable assurance that the applicant's
order flow would meet the requirements of the Retail Order
definition.
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An RMO would be required to have written policies and procedures
reasonably designed to assure that it will only designate orders as
Retail Orders if all requirements of a Retail Order are met. Such
written policies and procedures must require the Member to (i) exercise
due diligence before entering a Retail Order to assure that entry as a
Retail Order is in compliance with the requirements of this rule, and
(ii) monitor whether orders entered as Retail Orders meet the
applicable requirements. If the RMO represents Retail Orders from
another broker-dealer customer, the RMO's supervisory procedures must
be reasonably designed to assure that the orders it receives from such
broker-dealer customer that it designates as Retail Orders meet the
definition of a Retail Order. The RMO must (i) obtain an annual written
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders
that entry of such orders as Retail Orders will be in compliance with
the requirements of this rule, and (ii) monitor whether its broker-
dealer customer's Retail Order flow continues to meet the applicable
requirements.\7\
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\7\ The Exchange or another self-regulatory organization on
behalf of the Exchange will review an RMO's compliance with these
requirements through an exam based review of the RMO's internal
controls.
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If the Exchange disapproves the application, the Exchange would
provide a written notice to the Member. The disapproved applicant could
appeal the disapproval by the Exchange as provided in proposed Nasdaq
Rule 4780(d), and/or reapply for RMO status 90 days after the
disapproval notice is issued by the Exchange. An RMO also could
voluntarily withdraw from such status at any time by giving written
notice to the Exchange.
Failure of RMO To Abide by Retail Order Requirements
Proposed Nasdaq Rule 4780(c) addresses an RMO's failure to abide by
Retail Order requirements. If an RMO designates orders submitted to the
Exchange as Retail Orders and the Exchange determines, in its sole
discretion, that those orders fail to meet any of the requirements of
Retail Orders, the Exchange may disqualify a Member from its status as
an RMO. When disqualification determinations are made, the Exchange
would provide a written disqualification notice to the Member. A
disqualified RMO could appeal the disqualification as provided in
proposed Nasdaq Rule 4780(d) and/or reapply for RMO status 90 days
after the disqualification notice is issued by the Exchange.
Appeal of Disapproval or Disqualification
Proposed Nasdaq Rule 4780(d) provides appeal rights to Members. If
a Member disputes the Exchange's decision to disapprove it as an RMO
under Nasdaq Rule 4780(b) or disqualify it under Nasdaq Rule 4780(c),
such Member (``appellant'') may request, within five business days
after notice of the decision is issued by the Exchange, that the Retail
Price Improvement Program Panel (``RPI Panel'') review the decision to
determine if it was correct.
The RPI Panel would consist of the Exchange's Chief Regulatory
Officer (``CRO''), or a designee of the CRO, and two officers of the
Exchange designated by the Chief Executive Officer of Nasdaq. The RPI
Panel would review the facts and render a decision within the time
frame prescribed by the Exchange. The RPI Panel could overturn or
modify an action taken by the Exchange and all determinations by the
RPI Panel would constitute final action by the Exchange on the matter
at issue.
Retail Liquidity Identifier
Under proposed Nasdaq Rule 4780(e), the Exchange proposes to
disseminate an identifier when RPI interest priced at least $0.001
better than the Exchange's Protected Bid or Protected Offer for a
particular security is available in the System (``Retail Liquidity
Identifier''). The Retail Liquidity Identifier will be disseminated
through consolidated data streams (i.e., pursuant to the Consolidated
Tape Association Plan/Consolidated Quotation System, or CTA/CQS, for
Tape A and Tape B securities, and the Nasdaq UTP Plan for Tape C
securities) as well as through proprietary Exchange data feeds.\8\ The
[[Page 73100]]
Retail Liquidity Identifier will reflect the symbol and the side (buy
or sell) of the RPI interest, but will not include the price or size of
the RPI interest. In particular, CQS and UTP quoting outputs will
include a field for codes related to the Retail Liquidity Identifier.
The codes will indicate RPI interest that is priced better than the
Exchange's Protected Bid or Protected Offer by at least the minimum
level of price improvement as required by the Program.
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\8\ The Exchange notes that the Retail Liquidity Identifier for
Tape A and Tape B securities will be disseminated pursuant to the
CTA/CQS Plan as soon as the Program, if approved, becomes
operational. The identifier will also be available through the
consolidated public market data stream for Tape C securities. The
processor for the Nasdaq UTP quotation stream will disseminate the
Retail Liquidity Identifier and analogous identifiers from other
market centers that operate programs similar to the RPI Program.
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Retail Order Designations
Under proposed Nasdaq Rule 4780(f), an RMO can designate how a
Retail Order would interact with available contra-side interest as
follows.
As proposed, a Type 1-designated Retail Order would interact with
available contra-side RPI Orders and other price improving liquidity
but would not interact with other available contra-side interest in the
System or route to other markets. The shares remaining from a Type 1-
designated Retail Order that do not fully execute against contra-side
RPI Orders or other price improving liquidity, if any, would be
immediately and automatically cancelled.
A Type 2-designated Retail Order would also interact first with
available contra-side RPI Orders and other price improving liquidity,
but would also be eligible to interact with other available contra-side
interest in the System or optionally route to other market centers
pursuant to Rule 4758. Accordingly, the shares remaining from a Type 2-
designated Retail Order that do not fully execute against contra-side
RPI Orders or other price improving liquidity, if any, would execute
against other liquidity available on the Exchange or be routed to other
market centers for execution. The remaining unexecuted portion would
then be cancelled.
Priority and Order Allocation
Under proposed Nasdaq Rule 4780(g), the Exchange proposes that
competing RPI Orders in the same security would be ranked and allocated
according to price then time of entry into the System. The Exchange
further proposes that executions will occur in price/time priority in
accordance with Nasdaq Rule 4757. Any remaining unexecuted RPI interest
will remain available to interact with other incoming Retail Orders if
such interest is at an eligible price. Any remaining unexecuted portion
of the Retail Order will cancel or execute in accordance with proposed
Nasdaq Rule 4780(f). The following example illustrates this proposed
method:
Protected NBBO for security ABC is $10.00-$10.05
Member 1 enters an RPI Order to buy ABC at $10.015 for 500
Member 2 then enters an RPI Order to buy ABC at $10.02 for 500
Member 3 then enters an RPI Order to buy ABC at $10.035 for 500
An incoming Retail Order to sell 1,000 shares of ABC for $10.00
executes first against Member 3's bid for 500 at $10.035, because it is
the best priced bid, then against Member 2's bid for 500 at $10.02,
because it is the next best priced bid. Member 1 is not filled because
the entire size of the Retail Order to sell 1,000 is depleted. The
Retail Order executes against RPI Orders in price/time priority.
However, assume the same facts above, except that Member 2's RPI
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to
sell 1,000 executes first against Member 3's bid for 500 at $10.035,
because it is the best priced bid, then against Member 2's bid for 100
at $10.02, because it is the next best priced bid. Member 1 then
receives an execution for 400 of its bid for 500 at $10.015, at which
point the entire size of the Retail Order to sell 1,000 is depleted.
As a final example, assume the same facts as above, except that
Member 3's order was not an RPI Order to buy ABC at $10.035, but
rather, a non-displayed order to buy ABC at $10.03. The result would be
similar to the result immediately above, in that the incoming Retail
Order to sell 1,000 executes first against Member 3's bid for 500 at
$10.03, because it is the best priced bid, then against Member 2's bid
for 100 at $10.02, because it is the next best priced bid. Member 1
then receives an execution for 400 of its bid for 500 at $10.015, at
which point the entire size of the Retail Order to sell 1,000 is
depleted.
Implementation
The Exchange proposes that all Regulation NMS securities traded on
the Exchange would be eligible for inclusion in the RPI Program. The
Exchange proposes to limit the Program during the pilot period to
trades occurring at prices equal to or greater than $1.00 per share.
Toward that end, Exchange trade validation systems would prevent the
interaction of RPI buy or sell interest (adjusted by any offset) and
Retail Orders at a price below $1.00 per share.\9\ For example, if
there was RPI buy interest tracking the Protected NBB at $0.99 with an
offset of $0.001 and a ceiling of $1.02, Exchange trade validation
systems would prevent the execution of the RPI Order at $0.991 with a
sell Retail Order with a limit of $0.99. However, if the Retail Order
was Type 2 as defined the Program,\10\ it would be able to interact at
$0.99 with liquidity outside the Program in the Exchange's order book.
In addition to facilitating an orderly \11\ and operationally intuitive
pilot, the Exchange believes that limiting the Program to trades equal
to or greater than $1.00 per share during the pilot will enable it
better to focus its efforts to monitor price competition and to assess
any indications that data disseminated under the Program is potentially
disadvantaging retail orders. As part of that review, the Exchange will
produce data throughout the pilot, which will include statistics about
participation, the frequency and level of price improvement provided by
the Program, and any effects on the broader market structure.
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\9\ As discussed above, the price of an RPI would be determined
by a Member's entry of buy or sell interest, an offset (if any) and
a ceiling or floor price. The Exchange expects that RPI sell or buy
interest typically would track the Protected NBBO.
\10\ Type 2 Retail Orders are treated as IOC orders that execute
against displayed and non-displayed liquidity in the Exchange's
order book where there is no available liquidity in the Program.
Type 2 Retail Orders can either be designated as eligible for
routing or as non-routable, as described above.
\11\ Given the proposed limitation, the pilot Program would have
no impact on the minimum pricing increment for orders priced less
than $1.00 and therefore no effect on the potential of markets
executing those orders to lock or cross. In addition, the non-
displayed nature of the liquidity in the Program simply has no
potential to disrupt displayed, protected quotes. In any event, the
Program would do nothing to change the obligation of exchanges to
avoid and reconcile locked and crossed markets under NMS Rule
610(d).
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Comparison to Existing Programs
Proposed Nasdaq Rule 4780 is based on NYSE Rule 107C, governing
NYSE's ``Retail Liquidity Program,'' which was recently approved by the
Commission and commenced operations on August 1, 2012 \12\ and on
recently proposed BATS Y-Exchange, Inc. (``BATS'') Rule 11.24.\13\
Proposed Nasdaq Rule 4780 is
[[Page 73101]]
similar to both BATS Rule 11.24 and NYSE Rule 107C with three key
distinctions to the latter.\14\ The first distinction is that NYSE Rule
107C includes a class of participant that is registered as a provider
of liquidity and provides specific procedures and rules related to such
participants and their role in the NYSE RLP. NYSE Rule 107C does permit
all participants to submit RPI Orders to NYSE, but provides the
specific class of registered retail liquidity providers with execution
fees that are lower than fees charged to other participants in exchange
for a requirement to maintain RPI Orders on NYSE at least 5% of the
trading day.\15\ The Exchange believes that equal treatment for all
Exchange Members that enter RPI Orders will result in a higher level of
competition and maximize price improvement to incoming Retail Orders.
Accordingly, the Exchange has not proposed to adopt a special category
of retail liquidity provider.
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\12\ Securities Exchange Act Release No. 67347 (July 3, 2012),
77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84)
(the ``RLP Approval Order''). In conjunction with the approval of
the NYSE Retail Liquidity Program, a nearly identical program was
proposed and approved to operate on NYSE MKT LLC (formerly, the
American Stock Exchange). For ease of reference, the comparisons
made in this section only refer to NYSE Rule 107C, but apply equally
to NYSE MKT Rule 107C.
\13\ Securities Exchange Act Release No. 67734 (August 27, 2012)
77 FR 53242 (August 31, 2012) (SR-BYX-2012-019).
\14\ The Exchange has proposed to accept RPIs in a manner
similar to the explicitly accepted method at NYSE and NYSE MKT,
specifically, with an offset as well as a ceiling or a floor (i.e.,
the entry of an RPI bid with an offset of $0.015 and a ceiling of
$10.04; when the NBBO is $10.02 by $10.04, an incoming sell order
would execute against such RPI at $10.035). The Exchange notes that
like NYSE and NYSE MKT, Members will be able to submit retail price
improving orders with an explicit sub-penny floor or ceiling and no
offset, effectively creating a static sub-penny limit order, and the
Exchange has proposed rule text to make this ability clear.
\15\ NYSE Rule 107C(f).
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The second distinction between proposed Nasdaq Rule 4780 and NYSE
Rule 107C is that the Exchange proposes to in all cases execute
incoming Retail Orders against resting RPI Orders and other resting
non-displayed liquidity to maximize the price improvement available to
the incoming Retail Order. As proposed, the Exchange will maintain its
strict price/time priority model and will provide all available price
improvement to incoming Retail Orders, whether such price improvement
is submitted pursuant to the Program or as an order type currently
accepted by the Exchange, such as non-displayed orders. In contrast,
pursuant to NYSE Rule 107C(k)(1), a Type 1-designated Retail Order,
``will interact only with available contra-side Retail Price
Improvement Orders and will not interact with other available contra-
side interest in Exchange systems.'' \16\ The Exchange is proposing in
all cases to provide the maximum price improvement available to
incoming Retail Orders. Accordingly, Retail Orders under the Exchange's
Program will always interact with available contra-side RPI Orders and
any other price improving contra-side interest, in price/time priority
consistent with Nasdaq Rule 4780(b). Such ``other'' price improving
contra-side interest will of course remain available to all
participants, as it is today, while RPI Orders will only be available
to RMOs, as described above.
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\16\ Moreover, although pursuant to NYSE Rules 107C(k)(2) and
107C(k)(3), a Type 2-designated Retail Order and a Type 3-designated
Retail Order can interact with other non-RPI interest in the NYSE
systems, such interaction only occurs after a Retail Order first
executes against RPI Orders.
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Finally, as proposed the Exchange will provide applicable price
improvement to incoming Retail Orders at potentially multiple price
levels. In contrast, pursuant to NYSE Rule 107C an incoming Retail
Order to NYSE will execute at the single clearing price level at which
the incoming order will be fully executed. To illustrate, assume the
same facts set forth in the second example above, where Member 2's RPI
Order to buy ABC at $10.02 was for 100 shares. Pursuant to NYSE Rule
107C, an incoming Retail Order to sell 1,000 shares at $10.00 would
execute first against Member 3's bid for 500 shares, because it is the
best priced bid, then against Member 2's bid for 100 shares, because it
is the next best priced bid, then against 400 of the 500 shares bid by
Member 1. However, rather than executing at each of these price levels
for the number of shares available (i.e., 500 shares at $10.035, 100
shares at $10.02 and 400 shares at $10.015), as it would under proposed
Nasdaq Rule 4780(b), the Retail Order submitted to NYSE pursuant to
NYSE Rule 107C executes at the single clearing price that completes the
order's execution, which is $10.015 to complete the entire order to
sell 1,000 shares. The Exchange intends to provide all of the price
improvement in these examples to the incoming Retail Order, and thus
has proposed to execute orders under the Program consistent with its
existing price/time market model.
Fee Structure of Program
The Exchange will submit a separate proposal to amend its fee
schedule in connection with the proposed RPI Program. Under that
proposal, the Exchange expects to charge Members a fee for executions
of their RPI Orders against Retail Orders and in turn would provide a
credit or free executions to RMOs for executions of their Retail Orders
against RPI Orders. The fees and credits for liquidity providers and
RMOs will be determined based on experience with the Program in the
first several months.
As explained above, the Exchange proposes to execute incoming
Retail Orders against all available contra-side interest that will
provide price improvement to the Retail Order, including non-displayed
orders other than RPI Orders. In the event non-displayed interest
priced better than the NBBO other than an RPI Order interacts with a
Retail Order, the Exchange anticipates proposing to rebate the Member
that entered such non-displayed interest a credit rather than the
charge which is imposed for an RPI Order execution. In such cases, the
rebate credited to the Member that entered the non-displayed interest
may be less than the rebate credited that same Member for an execution
against a non-Retail Order.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\17\ In particular,
the Exchange believes the proposed change furthers the objectives of
Section 6(b)(5) of the Act,\18\ 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, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. The Exchange believes that the
proposed rule change is consistent with these principles because it
would increase competition among execution venues, encourage additional
liquidity, and offer the potential for price improvement to retail
investors. The Exchange notes that a significant percentage of the
orders of individual investors is executed over-the-counter.\19\ The
Exchange believes that it is appropriate to create a financial
incentive to bring more retail order flow to a public market. The
Exchange also notes that the Commission recently approved a similar
proposal by NYSE
[[Page 73102]]
and NYSE MKT.\20\ Accordingly, the proposal generally encourages
competition between exchange venues. In this connection, the Exchange
believes that the proposed distinctions between the Exchange's proposal
and the approved programs for NYSE and NYSE MKT, as well as the similar
program proposed by BATS, will both enhance competition amongst market
participants and encourage competition amongst exchange venues.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ See Concept Release on Equity Market Structure, Securities
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594
(January 21, 2010) (noting that dark pools and internalizing broker-
dealers executed approximately 25.4% of share volume in September
2009). See also Mary L. Schapiro, Strengthening Our Equity Market
Structure (Speech at the Economic Club of New York, Sept. 7, 2010)
(available on the Commission's Web site). In her speech, Chairman
Schapiro noted that nearly 30 percent of volume in U.S.-listed
equities was executed in venues that do not display their liquidity
or make it generally available to the public and the percentage was
increasing nearly every month.
\20\ See RLP Approval Order, supra note 12.
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The Exchange understands that Section 6(b)(5) of the Act \21\
prohibits an exchange from establishing rules that treat market
participants in an unfairly discriminatory manner. However, Section
6(b)(5) of the Act does not prohibit exchange members or other broker-
dealers from discriminating, so long as their activities are otherwise
consistent with the federal securities laws. Nor does Section 6(b)(5)
of the Act require exchanges to preclude discrimination by broker-
dealers. Broker-dealers commonly differentiate between customers based
on the nature and profitability of their business.
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\21\ 15 U.S.C. 78f(b)(5).
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While the Exchange believes that markets and price discovery
optimally function through the interactions of diverse flow types, it
also believes that growth in internalization has required
differentiation of retail order flow from other order flow types. The
differentiation proposed herein by the Exchange is not designed to
permit unfair discrimination, but instead to promote a competitive
process around retail executions such that retail investors would
receive better prices than they currently do through bilateral
internalization arrangements. The Exchange believes that the
transparency and competitiveness of operating a program such as the RPI
Program on an exchange market would result in better prices for retail
investors. The Exchange recognizes that sub-penny trading and pricing
could potentially result in undesirable market behavior. The Exchange
will monitor the Program in an effort to identify and address any such
behavior.
The Exchange will separately propose fees applicable to the
Program, including fees or rebates for non-displayed orders offering
price improvement other than RPI Orders that interact with Retail
Orders. The Exchange believes any such proposal to treat such non-
displayed orders differently depending on the parties with whom they
interact is consistent with Section 6(b)(5) of the Act,\22\ which
requires that the rules of an exchange are not designed to permit
unfair discrimination. The Exchange believes that such a differential
pricing structure for non-displayed orders is not unfairly
discriminatory. As stated in the NYSE RLP Approval Order, the
``Commission has previously recognized that the markets generally
distinguish between individual retail investors, whose orders are
considered desirable by liquidity providers because such retail
investors are presumed on average to be less informed about short-term
price movements, and professional traders, whose orders are presumed on
average to be more informed.'' \23\ The Exchange's proposed
differential pricing structure for non-displayed orders raises
substantively identical policy considerations as the rules approved by
the Commission in the NYSE RLP Approval Order, which account for the
difference of assumed information and sophistication level between
different trading participants by providing Retail Orders access to
better execution prices as well as more favorable access fees.
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\22\ 15 U.S.C. 78f(b)(5).
\23\ See RLP Approval Order, supra note 12, at 40679-40680
(citing Concept Release on Equity Market Structure and approval of
an options exchange program related to price improvement for retail
orders). Certain options exchanges deploy this same rationale today
through pricing structures that vary for a trading participant based
on the capacity of the contra-side trading participant. See, e.g.,
Securities Exchange Act Release No. 67171 (June 8, 2012), 77 FR
35732 (June 14, 2012) (SR-NASDAQ-2012-068) (notice of filing and
immediate effectiveness of proposal to modify fees for the NASDAQ
Options Market, including certain fees and rebates that are variable
depending on the capacity of the contra-party to the transaction);
see also Securities Exchange Act Release No. 63632 (January 3,
2011), 76 FR 1205 (January 7, 2011) (SR-BATS-2010-038) (notice of
filing and immediate effectiveness of proposal to modify fees for
BATS Options, including liquidity rebates that are variable
depending on the capacity of the contra-party to the transaction).
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Finally, the Exchange proposes that the Commission approve the
proposed rule for a pilot period of twelve months from the date of
implementation, which shall occur no later than 90 days after
Commission approval of Nasdaq Rule 4780. The Program shall expire on
[Date to be determined upon adoption of Nasdaq Rule 4780]. The Exchange
believes that this pilot period is of sufficient length to permit both
the Exchange and the Commission to assess the impact of the rule change
described herein.
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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
or disapprove 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 email to [email protected]. Please include
File Number SR-NASDAQ-2012-129 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-2012-129. 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
[[Page 73103]]
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 such filing also will be available
for inspection and copying at the principal office of NASDAQ. 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-2012-129 and should
be submitted on or before December 28, 2012.
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\24\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29563 Filed 12-6-12; 8:45 am]
BILLING CODE 8011-01-P