[Federal Register Volume 78, Number 160 (Monday, August 19, 2013)]
[Notices]
[Pages 50465-50469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20099]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70175; File No. SR-NASDAQ-2013-104]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to a Non-Penny Pilot Option Rebate To Add Liquidity
August 13, 2013.
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 5, 2013, 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 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
offer an additional rebate for transacting certain Non-Penny Pilot
Options.
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaq.cchwallstreet.
[[Page 50466]]
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 the
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 proposes to offer an additional
$0.01 per contract Non-Penny Pilot Customer Rebate to Add Liquidity to
Participants that qualify for certain rebate tiers of the Customer or
Professional Penny Pilot \3\ Options Rebates to Add Liquidity.
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\3\ The Penny Pilot was established in March 2008 and in October
2009 was expanded and extended through December 31, 2013. 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); 67325 (June 29, 2012), 77
FR 40127 (July 6, 2012) (SR-NASDAQ-2012-075) (notice of filing and
immediate effectiveness and extension and replacement of Penny Pilot
through December 31, 2012); 68519 (December 21, 2012), 78 FR 136
(January 2, 2013) (SR-NASDAQ-2012-143) (notice of filing and
immediate effectiveness and extension and replacement of Penny Pilot
through June 30, 2013); and 69787 (June 18, 2013), 78 FR 37858 (June
24, 2013) (SR-NASDAQ-2013-082). See also NOM Rules, Chapter VI,
Section 5.
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Today, the Exchange offers tiered Penny Pilot Options Rebates to
Add Liquidity to Customers,\4\ Professionals \5\ and NOM Market Makers
\6\ and a $0.10 per contract Penny Pilot Options Rebate to Add
Liquidity to Firms,\7\ Non-NOM Market Makers \8\ and Broker-Dealers.\9\
With respect to Customers and Professionals, the Exchange pays Penny
Pilot Options Rebates to Add Liquidity based on various criteria with
rebates ranging from $0.25 to $0.48 per contract as follows:
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\4\ The term ``Customer'' applies to any transaction that is
identified by a Participant for clearing in the Customer range at
The Options Clearing Corporation (``OCC'') which is not for the
account of broker or dealer or for the account of a ``Professional''
(as that term is defined in Chapter I, Section 1(a)(48).
\5\ The term ``Professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s) pursuant to Chapter
I, Section 1(a)(48). All Professional orders shall be appropriately
marked by Participants.
\6\ The term ``NOM Market Maker'' is a Participant that has
registered as a Market Maker on NOM pursuant to Chapter VII, Section
2, and must also remain in good standing pursuant to Chapter VII,
Section 4. In order to receive NOM Market Maker pricing in all
securities, the Participant must be registered as a NOM Market Maker
in at least one security. NOM Market Maker Rebates range from $0.25
to $0.38 per contract depending on various criteria.
\7\ The term ``Firm'' or (``F'') applies to any transaction that
is identified by a Participant for clearing in the Firm range at
OCC.
\8\ The term ``Non-NOM Market Maker'' or (``O'') is a registered
market maker on another options exchange that is not a NOM Market
Maker. A Non-NOM Market Maker must append the proper Non-NOM Market
Maker designation to orders routed to NOM.
\9\ The term ``Broker-Dealer'' or (``B'') applies to any
transaction which is not subject to any of the other transaction
fees applicable within a particular category.
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Rebate to Add
Monthly Volume Liquidity
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Tier 1.............. Participant adds Customer and/or $0.25
Professional liquidity of up to
0.20% of total industry customer
equity and ETF option average
daily volume (``ADV'') contracts
per day in a month.
Tier 2.............. Participant adds Customer and/or 0.40
Professional liquidity of 0.21%
to 0.30% of total industry
customer equity and ETF option
ADV contracts per day in a month.
Tier 3.............. Participant adds Customer and/or 0.43
Professional liquidity of 0.31%
to 0.49% of total industry
customer equity and ETF option
ADV contracts per day in a month.
Tier 4.............. Participant adds Customer and/or 0.45
Professional liquidity of 0.5% or
more of total industry customer
equity and ETF option ADV
contracts per day in a month.
Tier 5.............. Participant adds (1) Customer and/ 0.42
or Professional liquidity of
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.
Tier 6.............. Participant has Total Volume of 0.45
130,000 or more contracts per day
in a month, of which 25,000 or
more contracts per day in a month
must be Customer and/or
Professional liquidity.
Tier 7.............. Participant has Total Volume of 0.47
175,000 or more contracts per day
in a month, of which 50,000 or
more contracts per day in a month
must be Customer and/or
Professional liquidity.
Tier 8.............. Participant (1) has Total Volume 0.48
of 325,000 or more contracts per
day in a month, or (2)
Participant has Total Volume of
200,000 or more contracts per day
in a month, of which 70,000 or
more contracts per day in a month
must be Customer and/or
Professional liquidity or (3)
adds Customer and/or Professional
liquidity of 1.00% or more of
national customer volume in
multiply-listed equity and ETF
options classes in a month..
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The Exchange proposes to offer Participants that qualify for Tiers
7 or 8 of the Customer and Professional Penny Pilot Options Rebate to
Add Liquidity an additional $0.01 per contract Non-Penny Pilot Options
Customer Rebate to Add Liquidity on each transaction which adds
Customer liquidity in Non-Penny Pilot Options. For example, a
Participant that qualifies for Tier 8 of the Customer or Professional
Penny Pilot Options Rebate to Add Liquidity and transacted 20,000 Non-
Penny Pilot Options contracts in that month that added liquidity would
receive a rebate of $0.82 per contract on the 20,000 contracts or
$16,400. The Exchange believes that the additional rebate will
encourage Participants to add additional liquidity in both Penny and
Non-Penny Pilot Options on NOM.
[[Page 50467]]
2. Statutory Basis
NASDAQ believes that the proposed rule changes are consistent with
the provisions of Section 6 of the Act,\10\ in general, and with
Section 6(b)(4) of the Act,\11\ in particular, in that they provide for
the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility or
system which NASDAQ operates or controls as described in detail below.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the opportunity to earn an additional
Non-Penny Pilot Options Customer Rebate to Add Liquidity is reasonable
because the incentive encourages Participants to qualify for higher
Customer or Professional Penny Pilot Options rebate tiers in order to
also qualify for an additional Non-Penny Pilot Options Customer rebate.
Participants would be encouraged to add liquidity in both Penny Pilot
and Non-Penny Options liquidity because Tiers 7 and 8 allow Total
Volume to be counted in qualifying for those tiers. Total Volume is
defined at Chapter XV, Section 2(1) at note b as Customer,
Professional, Firm, Broker-Dealer, Non-NOM Market Maker and NOM Market
Maker volume in Penny Pilot Options and/or Non-Penny Pilot Options
which either adds or removes liquidity on NOM. The Exchange believes
that offering Customers and Professionals the continued opportunity to
earn higher rebates is reasonable because by incentivizing Participants
to select the Exchange as a venue to post Customer and Professional
liquidity will attract additional order flow to the benefit of all
market participants. Today the Exchange also incentivizes NOM Market
Makers to post liquidity, by offering NOM Market Makers rebates, which
also benefit market participants through increased order interaction.
Firms, Non-NOM Market Makers and Broker-Dealers are also offered
rebates under the current pricing structure.
The Exchange believes that the opportunity to earn an additional
Non-Penny Pilot Options Customer Rebate to Add Liquidity is equitable
and not unfairly discriminatory because the rebate would continue to
encourage Participants to transact a greater number of Customer and
Professional orders to obtain higher rebates. The Exchange believes
that continuing to pay Customers and Professionals tiered Rebates to
Add Liquidity in Penny Pilot Options, as compared to other market
participants, is equitable and not unfairly discriminatory because
Customer order flow brings unique benefits to the market through
increased liquidity which benefits all market participants. The
Exchange believes that continuing to offer Professionals the same Penny
Pilot Options Rebates to Add Liquidity as Customers is equitable and
not unfairly discriminatory because the Exchange believes that offering
Professionals the opportunity to earn the same rebates as Customers, as
is the case today, and higher rebates as compared to Firms, Broker-
Dealers and Non-NOM Market Makers, and in some cases NOM Market Makers,
is equitable and not unfairly discriminatory because the Exchange does
not believe that the amount of the rebate offered by the Exchange has a
material impact on a Participant's ability to execute orders in Penny
Pilot Options. By offering Professionals, as well as Customers, higher
rebates, the Exchange hopes to simply remain competitive with other
venues so that it remains a choice for market participants when posting
orders and the result may be additional Professional order flow for the
Exchange, in addition to increased Customer order flow.
In addition, a Participant may not be able to gauge the exact
rebate tier it would qualify for until the end of the month because
Professional volume would be commingled with Customer volume in
calculating tier volume.\12\ A Professional could only otherwise
presume the Tier 1 rebate would be achieved in a month when determining
price.\13\ Further, the Exchange initially established Professional
pricing in order to ``. . . bring additional revenue to the Exchange.''
\14\ The Exchange noted in the Professional Filing that it believes ``.
. . that the increased revenue from the proposal would assist the
Exchange to recoup fixed costs.'' \15\ The Exchange also noted in that
filing that it believes that establishing separate pricing for a
Professional, which ranges between that of a Customer and market maker,
accomplishes this objective.\16\ The Exchange does not believe that
providing Professionals with the opportunity to obtain higher rebates
equivalent to that of a Customer creates a competitive environment
where Professionals would be necessarily advantaged on NOM as compared
to NOM Market Makers, Firms, Broker-Dealers or Non-NOM Market Makers.
Also, a Professional is assessed the same fees as other market
participants, except Customers and NOM Market Makers, as discussed
herein.\17\ For these reasons, the Exchange believes that continuing to
offer Professionals the same rebates as Customers is equitable and not
unfairly discriminatory. The Exchange believes that continuing to offer
NOM Market Makers the opportunity to earn higher rebates as compared to
Non-NOM Market Makers, Firms and Broker Dealers is equitable and not
unfairly discriminatory because NOM Market Makers add value through
continuous quoting \18\ and a commitment of capital. Firms, Non-NOM
Market Makers and Broker-Dealers would continue to be offered a $0.10
per contract Rebate to Add Liquidity in Penny Pilot Options, as is the
case today.\19\
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\12\ Customer and Professional volume is aggregated for purposes
of determining which rebate tier a Participant qualifies for with
respect to the Professional Rebate to Add Liquidity in Penny Pilot
Options.
\13\ A Professional would be unable to determine the exact
rebate that would be paid on a transaction by transaction basis with
certainty until the end of a given month when all Customer and
Professional volume is aggregated for purposes of determining which
tier the Participant qualified for in a given month.
\14\ See Securities Exchange Act Release No. 64494 (May 13,
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066)
(``Professional Filing''). In this filing, the Exchange addressed
the perceived favorable pricing of Professionals who were assessed
fees and paid rebates like a Customer prior to the filing. The
Exchange noted in that filing that a Professional, unlike a retail
Customer, has access to sophisticated trading systems that contain
functionality not available to retail Customers.
\15\ See Securities Exchange Act Release No. 64494 (May 13,
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
\16\ See Securities Exchange Act Release No. 64494 (May 13,
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066). The Exchange
noted in this filing that it believes the role of the retail
customer in the marketplace is distinct from that of the
professional and the Exchange's fee proposal at that time accounted
for this distinction by pricing each market participant according to
their roles and obligations.
\17\ The Fee for Removing Liquidity in Penny Pilot Options is
$0.48 per contract for all market participants, except Customers and
NOM Market Makers. Customers are assessed $0.45 per contract and NOM
Market Makers would continue to be assessed $0.47 per contract.
\18\ Pursuant to Chapter VII (Market Participants), Section 5
(Obligations of Market Makers), in registering as a market maker, an
Options Participant commits himself to various obligations.
Transactions of a Market Maker in its market making capacity must
constitute a course of dealings reasonably calculated to contribute
to the maintenance of a fair and orderly market, and Market Makers
should not make bids or offers or enter into transactions that are
inconsistent with such course of dealings. Further, all Market
Makers are designated as specialists on NOM for all purposes under
the Act or rules thereunder. See Chapter VII, Section 5.
\19\ Similar to other market participants, Firms, Non-NOM Market
Makers and Broker-Dealers have the opportunity to earn a higher
Penny Pilot Options Rebate to Add Liquidity if they transact 15,000
contracts per day or more of Penny Pilot Options or Non-Penny Pilot
Options liquidity in a given month. The volume requirement for
Firms, Non-NOM Market Makers and Broker-Dealers to qualify for the
higher Penny Pilot Options Rebate to Add Liquidity is less than is
required to earn a Tier 1 Customer or Professional Rebate to Add
Liquidity in Penny Pilot Options or a Tier 1 NOM Market Maker Rebate
to Add Liquidity in Penny Pilot Option. The 15,000 contract
threshold for Firms, Non-NOM Market Makers and Broker-Dealers to
earn the Penny Pilot Options Rebate to Add Liquidity equates to
approximately 0.12% of the industry customer equity and ETF volume.
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[[Page 50468]]
The Exchange believes that offering Participants that qualify for
Tiers 7 or 8 of the Customer and Professional Penny Pilot Options
Rebate to Add Liquidity an opportunity to earn an additional $0.01 per
contract Non-Penny Pilot Customer Rebate to Add Liquidity is equitable
and not unfairly discriminatory because all Customers and Professionals
have an opportunity to qualify for a Tier 7 or 8 Penny Pilot Option
Rebate to Add Liquidity and, in turn, qualify to obtain the Customer
Non-Penny Pilot Options rebate. Today, no other market participant is
entitled to a Non-Penny Pilot Options Rebate to Add Liquidity other
than a Customer. The Exchange believes that it is reasonable, equitable
and not unfairly discriminatory to only pay Customers a rebate in Non-
Penny Pilot Options because Customer order flow is unique and benefits
all market participants through the increased liquidity that such order
flow brings to the market. The opportunity to increase the Non-Penny
Pilot Options rebate will further encourage the addition of Penny Pilot
and Non-Penny Pilot Options liquidity as well as Customer and
Professional liquidity. Today, Total Volume \20\ includes both Penny
and Non-Penny Options volume so Tiers 7 or 8 encourage Participants to
add and remove liquidity in Penny and Non-Penny Pilot Options.\21\
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\20\ For purposes of Tiers 6, 7 and 8, ``Total Volume'' is
defined as Customer, Professional, Firm, Broker-Dealer, Non-NOM
Market Maker and NOM Market Maker volume in Penny Pilot Options and/
or Non-Penny Pilot Options which either adds or removes liquidity on
NOM.
\21\ Tier 7 requires a certain amount of the Total Volume to be
comprised of Customer and/or Professional liquidity. Tier 8 provides
three options to qualify for the rebate including Total Volume, some
of which must be comprised of Customer and/or Professional
liquidity.
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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.
Customers have traditionally been paid the highest rebates offered
by options exchanges. The Exchange does not believe that continuing to
provide Professionals with the opportunity to obtain higher rebates
equivalent to that of a Customer creates an undue burden on competition
where Professionals would be necessarily advantaged on NOM as compared
to NOM Market Makers, Firms, Broker-Dealers or Non-NOM Market Makers
because the Exchange does not believe that the amount of the rebate
offered by the Exchange has a material impact on a Participant's
ability to execute orders in Penny Pilot Options. The Exchange does not
believe that offering Participants that qualify for Tier 7 or 8 of the
Customer and Professional Penny Pilot Options Rebate to Add Liquidity
an additional Non-Penny Pilot Options Customer rebate would result in
any burden on competition as between market participants because the
remaining market participants, NOM Market Makers, Firms, Non-NOM Market
Makers and Broker-Dealers would continue to have an opportunity to earn
Penny Pilot Options rebates. Today, the Exchange only pays Customers
Non-Penny Pilot Options Rebates to Add Liquidity.\22\ Customer order
flow brings unique benefits to the market through increased liquidity
which benefits all market participants.
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\22\ NASDAQ OMX BX, Inc. Options pays a Rebate to Remove
Liquidity in All Other Penny Pilot Options of $0.32 per contract to
Customers only.
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The Exchange's proposal to pay an additional Non-Penny Pilot
Options Customer Rebate to Add Liquidity, presuming the Participant
qualifies for Tier 7 or 8 of the Customer and Professional Penny Pilot
Options Rebate to Add Liquidity, will incentivize Participants to
direct Penny and Non-Penny Pilot Options order flow, as well as
Customer and Professional order flow, to NOM to the benefit of all
other market participants. The Exchange believes the proposed pricing
incentives contribute to the overall health of the market and benefit
all Participants willing to choose to transact options on NOM. For the
reasons specified herein, the Exchange does not believe this proposal
creates an undue burden on competition.
The Exchange operates in a hyper competitive market comprised of
twelve U.S. options exchanges in which many sophisticated and
knowledgeable market participants can readily and do send order flow to
competing exchanges if they deem fee levels or rebate incentives at a
particular exchange to be excessive or inadequate. These market forces
support the Exchange belief that the proposed rebate structure and
tiers proposed herein are competitive with rebates and tiers in place
on other exchanges. The Exchange believes that this competitive
marketplace continues to impact the rebates present on the Exchange
today and substantially influences the proposals set forth above.
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.\23\ 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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\23\ 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-2013-104 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-2013-104. 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
[[Page 50469]]
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-2013-104, and should be submitted on or before
September 9, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20099 Filed 8-16-13; 8:45 am]
BILLING CODE 8011-01-P