[Federal Register Volume 78, Number 12 (Thursday, January 17, 2013)]
[Notices]
[Pages 3931-3934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00869]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68626; File No. SR-NASDAQ-2012-149]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Modify NASDAQ's Order Execution Rebates and Investor Support Program
January 11, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on December 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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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is proposing (i) to amend its schedule of execution rebates
under Rule 7018(a), and (ii) to modify the Investor Support Program
(the ``ISP'') under Rule 7014. While changes pursuant to this proposal
are effective upon filing, the Exchange will implement the proposed
rule on January 2, 2013.
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.
[[Page 3932]]
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ is proposing (i) to amend its schedule of execution rebates
under Rule 7018(a), and (ii) to modify the ISP under Rule 7014. As a
general matter, the changes are designed to increase and broaden
incentives for participation in NASDAQ by liquidity providers.
Execution Rebates
NASDAQ is making a number of changes to its general schedule of
rebates for execution of securities priced at $1 or more per share, as
set forth in Rule 7018(a). Overall, the changes are aimed at providing
greater incentives for the entry of liquidity-providing orders in
NASDAQ. Specifically, NASDAQ is proposing to make the following
changes:
Currently, NASDAQ pays a credit of $0.0029 per share
executed with respect to displayed quotes/orders for a member with
shares of liquidity provided in all securities through one or more of
its NASDAQ Market Center market participant identifiers (``MPIDs'')
that represent more than 0.50% of Consolidated Volume \3\ during the
month. NASDAQ is modifying this rebate tier to decrease the threshold
to more than 0.45% of Consolidated Volume. This change reverses a price
increase made by NASDAQ in September 2012.\4\
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\3\ ``Consolidated Volume'' is defined as ``the total
consolidated volume reported to all consolidated transaction
reporting plans by all exchanges and trade reporting facilities.''
\4\ Securities Exchange Act Release No. 67849 (September 13,
2012), 77 FR 58190 (September 19, 2012) (SR-NASDAQ-2012-103).
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Similarly, NASDAQ is restoring a rebate tier that was
eliminated in September 2012.\5\ Under the restored tier, NASDAQ will
pay a credit of $0.0029 per share executed with respect to displayed
quotes/orders for a member with shares of liquidity accessed in all
securities through one or more of its MPIDs that represent more than
0.65% of Consolidated Volume during the month, and that provides a
daily average of at least 2 million shares of liquidity in all
securities through one or more of its NASDAQ Market Center MPIDs during
the month.\6\
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\5\ Id.
\6\ Along with the rule language providing for this new rebate
tier, NASDAQ is also including language applicable to rebates for
midpoint pegged orders and midpoint post-only orders (``midpoint
orders''), and non-displayed orders. This language is being added
simply to make it clear that existing rebates for these orders apply
to members qualifying for the new tier with respect to their
displayed orders.
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NASDAQ currently pays a credit of $0.0029 per share
executed with respect to displayed quotes/orders for a member with
shares of liquidity provided in all securities through one or more of
its NASDAQ Market Center MPIDs representing more than 0.25% of
Consolidated Volume during the month, and with an average daily volume
during the month of more than 100,000 contracts of liquidity accessed
or provided through one or more of its NASDAQ Options Market MPIDs.
NASDAQ is proposing to decrease the Consolidated Volume requirement for
this tier to shares representing more than 0.15% of Consolidated
Volume, thereby reversing another change made in September 2012.\7\
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\7\ Supra n.4.
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NASDAQ is also introducing a new rebate tier of $0.00305
per share executed with respect to displayed quotes/orders for a member
that either (i) provides shares of liquidity in all securities through
one of its MPIDs that represent 1.60% or more of Consolidated Volume
during the month, or (ii) provides shares of liquidity in all
securities through one or more of its MPIDs that represent 1.60% or
more of Consolidated Volume during the month, and provides liquidity
through one of its MPIDs that represent 0.75% or more of Consolidated
Volume during the month.\8\
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\8\ As discussed in Securities Exchange Act Release No. 64003
(March 2, 2011), 76 FR 12784 (March 8, 2011) (SR-NASDAQ-2011-028),
some pricing incentives in NASDAQ's fee and rebate schedule require
members to achieve certain volume thresholds through a single MPID
to avoid providing excessive encouragement to members to aggregate
the activity of several firms to which they provide sponsored access
(some of whom may not themselves be members of NASDAQ) for the sole
purpose of earning a higher rebate.
Along with the rule language providing for this new rebate
tier, NASDAQ is also including language applicable to rebates for
midpoint orders and non-displayed orders. This language is being
added simply to make it clear that existing rebates for these orders
apply to members qualifying for the new tier with respect to their
displayed orders. NASDAQ is also making a conforming change to move
the location of the definition of ``midpoint orders''.
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Similarly, NASDAQ is introducing a new rebate tier of
$0.0030 per share executed with respect to displayed quotes/orders for
a member that either (i) provides shares of liquidity in all securities
through one of its MPIDs that represent 1.20% or more of Consolidated
Volume during the month, or (ii) provides shares of liquidity in all
securities through one or more of its MPIDs that represent 1.20% or
more of Consolidated Volume during the month, and provides liquidity
through one of its MPIDs that represent 0.75% or more of Consolidated
Volume during the month.\9\
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\9\ Along with the rule language providing for this new rebate
tier, NASDAQ is also including language applicable to rebates for
midpoint orders and non-displayed orders. This language is being
added simply to make it clear that existing rebates for these orders
apply to members qualifying for the new tier with respect to their
displayed orders.
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Investor Support Program
The ISP enables NASDAQ members to earn a monthly fee credit for
providing additional liquidity to NASDAQ and increasing the NASDAQ-
traded volume of what are generally considered to be retail and
institutional investor orders in exchange-traded securities (``targeted
liquidity''). However, in order to partially offset the cost of the
broad rebate incentives discussed above, NASDAQ is partially reducing
the rebates payable under the ISP.
Participants in the ISP are required to designate specific NASDAQ
order entry ports for use under the ISP and to meet specified criteria
focused on market participation, liquidity provision, and high rates of
order execution. Currently, a member that participates in the ISP
receives a credit of $0.00005, $0.0001, or $0.000375 per share with
respect to the number of shares of displayed liquidity provided by the
member that execute at $1 or more per share.\10\ The precise credit
rate is determined by factors designed to measure the degree of the
member's participation in the Nasdaq Market Center and the percentage
of orders that it enters that execute--its ``ISP Execution Ratio''--
which is seen as indicative of retail or institutional participation.
Without making any other modifications to the program, NASDAQ will
reduce the credit paid to market participants that currently qualify
for a $0.000375 per share credit to $0.0002 per share. The specific
requirements for qualifying for the $0.0002 credit are described below.
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\10\ A participant in the ISP must designate specific order-
entry ports for use in tabulating certain requirements under the
program.
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As provided in Rule 7014(c)(4), NASDAQ will pay a credit of $0.0002
per share \11\ with respect to shares of displayed liquidity executed
at a price of $1 or more and entered through ISP-designated ports, and
$0.00005 per share with respect to all other shares of displayed
liquidity executed at a price of $1 or more, if the following
conditions are met:
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\11\ A reduction from $0.000375 per share.
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(1) The member's Participation Ratio \12\ for the month exceeds its
[[Page 3933]]
Baseline Participation Ratio \13\ by at least 0.86%. The requirement
reflects the expectation that in order to earn a higher rebate under
the program, a member participating in the program must increase its
participation in NASDAQ as compared with an historical baseline.
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\12\ ``Participation Ratio'' is defined as follows: ``[F]or a
given member in a given month, the ratio of (A) the number of shares
of liquidity provided in orders entered by the member through any of
its Nasdaq ports and executed in the Nasdaq Market Center during
such month to (B) the Consolidated Volume.'' ``Consolidated Volume''
is defined as follows: ``[F]or a given member in a given month, the
consolidated volume of shares of System Securities in executed
orders reported to all consolidated transaction reporting plans by
all exchanges and trade reporting facilities during such month.''
``System Securities'' means all securities listed on NASDAQ and all
securities subject to the Consolidated Tape Association Plan and the
Consolidated Quotation Plan.
\13\ ``Baseline Participation Ratio'' is defined as follows:
``[W]ith respect to a member, the lower of such member's
Participation Ratio for the month of August 2010 or the month of
August 2011, provided that in calculating such Participation Ratios,
the numerator shall be increased by the amount (if any) of the
member's Indirect Order Flow for such month, and provided further
that if the result is zero for either month, the Baseline
Participation Ratio shall be deemed to be 0.485% (when rounded to
three decimal places).'' ``Indirect Order Flow'' is defined as
follows: ``[F]or a given member in a given month, the number of
shares of liquidity provided in orders entered into the Nasdaq
Market Center at the member's direction by another member with
minimal substantive intermediation by such other member and executed
in the Nasdaq Market Center during such month.''
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(2) The member's ``ISP Execution Ratio'' for the month must be less
than 10. The ISP Execution Ratio is defined as ``the ratio of (A) the
total number of liquidity-providing orders entered by a member through
its ISP-designated ports during the specified time period to (B) the
number of liquidity-providing orders entered by such member through its
ISP-designated ports and executed (in full or partially) in the Nasdaq
Market Center during such time period; provided that: (i) No order
shall be counted as executed more than once; and (ii) no Pegged Orders,
odd-lot orders, or MIOC or SIOC orders shall be included in the
tabulation.'' \14\ Thus, the definition requires a ratio between the
total number of orders that post to the NASDAQ book and the number of
such orders that actually execute that is low, a characteristic that
NASDAQ believes to be reflective of retail and institutional order
flow.
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\14\ These terms have the meanings assigned to them in Rule
4751. MIOC and SIOC orders are forms of ``immediate or cancel''
orders and therefore cannot be liquidity-providing orders.
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(3) The shares of liquidity provided through ISP-designated ports
during the month are equal to or greater than 0.2% of Consolidated
Volume during the month, reflecting the ISP's goals of encouraging
higher levels of liquidity provision.
(4) At least 40% of the liquidity provided by the member during the
month is provided through ISP-designated ports. This requirement is
designed to mitigate ``gaming'' of the program by firms that do not
generally represent retail or institutional order flow but that
nevertheless are able to channel a portion of their orders that they
intend to execute through ISP-designated ports and thereby receive a
credit with respect to those orders.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\15\ in general, and with
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ 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, and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(4) and (5).
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Changes to Rebates
NASDAQ believes that the proposed changes to rebate tiers are
reasonable, because they will increase the rebates payable to eligible
market participants. NASDAQ further believes that the changes are
consistent with an equitable allocation of fees because the modified
rebate schedule will provide increased incentives for provision of
displayed liquidity that NASDAQ believes benefit all market
participants by dampening price volatility and promoting price
discovery. Finally, NASDAQ believes that the changes are not
unreasonably discriminatory because opportunities for enhanced rebates
to liquidity providers will be broadened under the modified schedule.
Specifically:
The changes to the rebate tiers through which members may
earn a $0.0029 per share executed rebate are reasonable because they
will make it easier for members to receive a rebate at that level, by
lowering the volume requirements for existing tiers and by adding a new
tier through which members may qualify. In addition, the changes are
consistent with an equitable allocation of fees because they reflect an
allocation of rebates to liquidity providers designed to encourage
beneficial market activity, with greater incentives for market
participants to provide liquidity. Finally, the changes are not
unreasonably discriminatory because they increase the availability of
higher rebates without eliminating any of the other means by which a
member may earn a higher rebate under Rule 7018(a).
The addition of two new rebate tiers focused on members
that provide high levels of liquidity is reasonable because it will
reduce the costs of market participants that make significant
contributions to market quality. The change is consistent with an
equitable allocation of fees because NASDAQ believes that it is
equitable to provide incentives to members that are capable of
providing high levels of liquidity (1.2% to 1.6% of Consolidated
Volume) to participate in NASDAQ to a greater extent, because doing so
has the potential to increase NASDAQ's market quality to the benefit of
all its market participants. Finally, NASDAQ believes that these new
rebate tiers are not unreasonably discriminatory because the rebates
they would provide are not significantly higher than rebates otherwise
available through Rule 7018(a) and Rule 7014, and are being offered to
increase the quality of the NASDAQ market.
Changes to the ISP
The ISP encourages members to add targeted liquidity that is
executed in the Nasdaq Market Center. NASDAQ believes that the
reduction in the rebates paid under the ISP from $0.000375 to $0.0002
with respect to certain tiers of the ISP is reasonable, because it
provides a means for NASDAQ to reduce costs during a period of
persistently low trading volumes, in addition to partially offsetting
the costs of the general increased rebates instituted by this filing,
but while still maintaining the overall structure of the ISP for the
purpose of providing incentives for retail and institutional investors
to provide targeted liquidity at NASDAQ. The change is consistent with
an equitable allocation of fees: Although the change maintains the
ISP's purpose of paying higher rebates to certain market participants
in order to encourage them to benefit all NASDAQ members through the
submission of targeted liquidity, the change reduces the disparity
between rebates paid to ISP participants and other members for
providing liquidity. In conjunction with the other changes made by this
filing, this may serve to broaden the availability of enhanced rebates.
Similarly, although NASDAQ believes that the price differentiation
inherent in the ISP is fair, because it is designed to benefit all
market participants by drawing targeted liquidity to the Exchange, the
change reduces the level of differentiation between the rebates
[[Page 3934]]
paid to ISP participants and those paid to other liquidity providers.
Finally, NASDAQ notes that it operates in a highly competitive
market in which market participants can readily favor competing venues
if they deem fee levels at a particular venue to be excessive, or
rebate opportunities available at other venues to be more favorable. In
such an environment, NASDAQ must continually adjust its fees to remain
competitive with other exchanges and with alternative trading systems
that have been exempted from compliance with the statutory standards
applicable to exchanges. These competitive forces help to ensure that
NASDAQ's fees are reasonable, equitably allocated, and not unfairly
discriminatory since market participants can largely avoid fees to
which they object by changing their trading behavior.
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. Specifically,
NASDAQ believes that the change, which will generally result in an
increase in the rebates paid to encourage market participants to use
NASDAQ, reflects the high degree of competition in the cash equities
markets and will further enhance that competition by lowering fees and
possibly encouraging NASDAQ's competitors to make competitive
responses. Moreover, the decreased ISP rebate contained in the proposed
rule change will not burden competition because the market for order
execution is extremely competitive and members may readily opt to
disfavor NASDAQ's execution services if they believe that alternatives
offer them better value. Accordingly, NASDAQ believes that the degree
to which fee changes in this market may impose any burden on
competition is extremely limited. Because competitors are free to
modify their own fees in response, and because market participants may
readily adjust their order routing practices, NASDAQ does not believe
that the proposed changes will impair the ability of members or
competing order execution venues to maintain their competitive standing
in the financial markets.
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.\17\ 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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\17\ 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-2012-149 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-2012-149. 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
10:00 a.m. and 3:00 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-2012-149 and should
be submitted on or before February 7, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00869 Filed 1-16-13; 8:45 am]
BILLING CODE 8011-01-P