[Federal Register Volume 79, Number 61 (Monday, March 31, 2014)]
[Notices]
[Pages 18091-18094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07038]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71793; File No. SR-NASDAQ-2014-026]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to
the Qualified Market Maker Program and NBBO Setter Incentive Program
Under Rule 7014, and To Modify the Rules Governing Fees Assessed for
Orders Executed in the NASDAQ Opening Cross Under Rule 7018
March 25, 2014.
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 March 13, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is proposing to make changes Qualified Market Maker
(``QMM'') Program under NASDAQ Rule 7014 and the removal of the NBBO
Setter Incentive Program as a separate section thereunder, as well as
to modify the rules governing fees assessed for orders executed in the
NASDAQ Opening Cross under NASDAQ Rule 7018.
The text of the proposed rule change is available 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 those 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 parts 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 is proposing to modify NASDAQ Rule 7014 to effect the
restriction of NBBO Setter Incentives exclusively to Qualified Market
Makers (``QMMs''). In doing so, the Exchange is proposing to
incorporate the relevant language from NASDAQ Rule 7014 relating to
NBBO Setter Incentives and QMMs (i.e., NASDAQ Rule 7018(g)(3) into the
section relating to QMMs generally (i.e., NASDAQ Rule 7014(e)(1)). The
Exchange is also proposing to modify the rules governing fees assessed
for orders executed in the NASDAQ Opening Cross and, in particular, to
modify the criteria in which executions will be deemed fee liable.
QMM and NBBO Setter Incentive Programs
A QMM is a member that makes a significant contribution to market
quality by providing liquidity at the NBBO in a large number of stocks
for a significant portion of the day. In addition, the member must
avoid imposing the burdens on NASDAQ and its market participants that
may be associated with excessive rates of entry of orders away from the
inside and/or order cancellation. The designation reflects the QMM's
commitment to provide meaningful and consistent support to market
quality and price discovery by extensive quoting at the NBBO in a large
number of securities. In return for its contributions, certain
financial benefits are provided to a QMM with respect to a particular
MPID (a ``QMM MPID''), as described under NASDAQ Rule 7014(e).
Currently, one of these benefits pertains to the credits available
under NASDAQ's NBBO Setter Incentive Program. The NBBO Setter Incentive
Program was intended to provide an incentive to members to set the NBBO
or quote at the NBBO on NASDAQ, with the expectation that the
additional competition to set the best prices on NASDAQ would improve
the quality of the market. Since the introduction of the incentives,
however, NASDAQ has not seen a substantial increase in the amount of
competition among firms setting the inside market and, as a
consequence, has not witnessed a material improvement in market quality
(e.g., as defined by quoted spreads). The outcome of the program has
been, instead, a simple increase in the average rebate firms
collectively receive for providing liquidity. A member currently
receives an NBBO Setter Incentive credit of either $0.0001 or $0.0002
per share executed in addition to regularly assessed trading rebates,
depending upon certain trading qualifications. Every member is
currently eligible to receive at least a $0.0001 credit as long as that
member executes an order that at the time of execution either sets the
NBBO or causes the NASDAQ BBO to improve to the NBBO.
The Exchange has observed that for the vast majority of
participants these rebates do not provide meaningful incentives to
modify behavior, (i.e., participants do not quote more aggressively or
increase the frequency with which they execute orders at the NBBO). As
a consequence, NASDAQ has concluded that providing these rebates
without tying them to some additional requirement is ineffective and
will thus provide NBBO Setter rebates only to members that qualify for
the QMM Program.
Therefore, the Exchange proposes to merge the incentives pertaining
to the QMM Program in NASDAQ Rule 7014(e) and delete the remaining
portions of NASDAQ Rule 7014(f) and
[[Page 18092]]
(g). The method by which the QMMs will attain the additional rebates
(the ``Additional Rebate'') in NASDAQ Rule 7014(e)(1) associated with
NBBO setting/joining activity will be unchanged. They will be available
to those orders under the QMM Program that (a) displayed a quantity of
at least one round lot at the time of execution; (b) either established
the NBBO or was the first order posted on NASDAQ that had the same
price as an order posted at another trading center with a protected
quotation that established the NBBO; and (c) were entered through a QMM
MPID. Note that these conditions are simply a carryover from the
pertinent parts of the NBBO Setter Incentive Program currently set
forth in NASDAQ Rule 7014(g)(3)(A)-(C), and that remain applicable to
the Additional Rebate and will be included in NASDAQ Rule 7014(e)(1).
NASDAQ Rule 7014, as revised, will remain consistent with the
current rule in that the current requirement that a QMM may not receive
both an ISP credit and NBBO Setter Incentive credit but only the
greater credit of the two, will continue just in an updated form.
Specifically, NASDAQ Rule 7014(e)(1) will similarly state that if a QMM
participates in the ISP, NASDAQ will only pay the greater of any
applicable credit under the ISP or the Additional Rebate, but not both.
Additionally, Designated Retail Orders will continue to be ineligible
for NBBO Setter Rebates.
NASDAQ Opening Cross
The Exchange is proposing three modifications to its fee structure
relating to executions in the NASDAQ Opening Cross (the ``Open''): (1)
To adjust the fee cap governing executions in the Open from $15,000 to
$20,000; (2) to make the fee cap applicable to all orders in the Open,
and not just Market-on-Open and Limit-on-Open (MOO/LOO), Good-till-
Cancelled and Immediate-or-Cancel orders; and (3) to eliminate rule
language that stipulates that only the buy/sell imbalance of MOO/LOO,
Good-till-Cancelled and Immediate-or-Cancel orders are fee liable.
The purpose of the changes above are primarily to rationalize
pricing for Imbalance Only orders with pricing for all other executions
in the Opening Cross. Imbalance Only orders are orders that, given an
imbalance of buy and sell interest in an Opening Cross at the time its
[sic] execution, will always buy in the event of a sell imbalance and
always sell in the event of a buy imbalance. As a consequence, firms
submitting Imbalance Only orders typically act to offset ``natural''
interest in the auction by acting as counterparties for orders
specifically marked with buy or sell requirements. The Exchange has
traditionally considered such executions conceptually equivalent to
liquidity providing orders during the continuous market, since in both
instances the firm submitting such orders are providing a benefit to
the market as a whole by increasing the ability of firms to trade into
and out of positions at a given price. As such, the Exchange seeks to
encourage the use of liquidity providing orders and Imbalance Only
orders appropriately.
To that end, NASDAQ is proposing to expand the applicability of the
fee cap currently available only to orders other than Imbalance Only
orders (i.e., Market-on-Open, Limit-on-Open (MOO/LOO), Good-till-
Cancelled and Immediate-or-Cancel orders) to Imbalance Only orders. By
making this modification, the Exchange believes it will encourage
continued use of Imbalance Only orders and rationalize pricing for
Imbalance Only orders with all other orders. NASDAQ further proposes to
increase the value of the fee cap to $20,000 from $15,000 in light of
the increased pool of orders subject to the cap.
Finally, NASDAQ proposes to remove language that makes fee liable
only those orders that represent a net buy and sell imbalance in the
opening cross. As with the above, NASDAQ seeks to rationalize pricing
for Opening Cross executions, in particular, with the other crossing
mechanisms currently available (e.g., the Closing Cross) which do not
have such a provision. The Exchange believes that in order to
appropriately offset the costs of maintaining the technology and
infrastructure of the Opening Cross it must assess fees on all
executions that it enables. The restriction to buy sell imbalances is
both inconsistent with pricing for other mechanisms and prevents the
Exchange from appropriately funding the Opening Cross.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\3\ in general, and with
Sections 6(b)(4) and 6(b)(5) of the Act,\4\ 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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\3\ 15 U.S.C. 78f.
\4\ 15 U.S.C. 78f(b)(4) and (5).
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The proposed changes are reflective of NASDAQ's ongoing efforts to
use pricing incentive programs to attract orders that NASDAQ believes
will improve market quality. The QMM Program is intended to encourage
members to promote price discovery and market quality by quoting at the
NBBO for a significant portion of each day in a large number of
securities, thereby benefitting NASDAQ and other investors by
committing capital to support the execution of orders.
Generally, NASDAQ seeks to provide customers with rewards that they
deem helpful, and to eliminate those that they do not. By reframing and
refocusing the NBBO Incentive Program, NASDAQ believes it will be able
to further promote these goals by providing better targeted incentives
for market participants to achieve these goals. The proposed changes
will immediately improve the incentive to participate in the QMM
Program (by making NBBO setter/joiner credits exclusively available to
QMMs) while eliminating unsuccessful aspects of the NBBO Setter
Incentive Program.
Specifically, the proposed changes are consistent with statutory
requirements. The proposal to replace in the QMM Program the NBBO
Setter Incentive credit of $0.0002 per share executed with the
Additional Rebate for the same amount is consistent with an equitable
allocation of fees and is not unfairly discriminatory because the
amount of the credit is in essence not being changed and it is
continuing to be offered to market participants that make significant
contributions to market quality by satisfying the QMM requirements,
thereby benefitting other NASDAQ market participants. Additionally,
NASDAQ believes that it is an equitable allocation of reasonable fees
and is not unfairly discriminatory to convert the restriction on
receiving multiple credits currently imposed on QMMs from participating
in the ISP and the NBBO Setter Incentive Program (NASDAQ will pay the
greater of any applicable credit), to now applying it to QMMs from
participating in the ISP and receiving the Additional Rebate, but not
both.
The elimination of NASDAQ Rule 7014(g)(1) and (2) is consistent
with a fair allocation of reasonable fees and not unfairly
discriminatory since the removal of the rule language pertaining to the
incentives, as discussed above, impacts all firms equally (to the
extent that their activity would result in receiving a benefit) unless
the firm has committed to additional quoting
[[Page 18093]]
requirements under NASDAQ Rule 7014(e).
The restriction of NBBO Setter Incentives to QMMs is also
consistent with a fair allocation of reasonable fees and not unfairly
discriminatory since the QMM Program remains open to all members that
satisfy the voluntary trading requirements set forth in NASDAQ Rule
7014(e).
The modifications to the Open are consistent with a fair allocation
of reasonable fees and not unfairly discriminatory because they are
applied equally across all members with absolutely no exclusions.
Moreover, the changes bring the fee structure for the Opening Cross in
line with the fee structure for other NASDAQ crosses, which are well-
understood and accepted by the marketplace. By expanding the fee cap to
include Imbalance Only orders, NASDAQ believes its fee structure will
be more fair and equitable, in particular by providing a similar
benefit for firms that provide a service to the market by offsetting
``natural'' interest in the Opening Cross that is currently only
available to firms trading with non-Imbalance Only orders.
Raising the fee cap from $15,000 to $20,000 is consistent with a
fair allocation of reasonable fees and not unfairly discriminatory
because it impacts only those firms that trade in the auction, and
impacts these firms equally given their usage of the Opening Cross.
The same is true for the elimination of the language stipulating
that only the net buy and sell imbalance will be fee liable. This
change further improves fairness of the allocation of fees by removing
an arbitrary restriction on fee liability that brings fee allocation
more in line with actual usage of the Opening Cross.
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.\5\ 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. Because competitors are free to modify their own fees in
response, and because market participants may readily adjust their
order routing practices, NASDAQ believes that the degree to which fee
changes in this market may impose any burden on competition is
extremely limited. In this instance, the elimination of portions of the
NBBO Setter Incentive Program and changes to the QMM Program, as well
as the proposed changes to modify the rules governing fees assessed for
orders executed in the Open reflect this.
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\5\ 15 U.S.C. 78f(b)(8).
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The QMM Program is entirely voluntary, and as a consequence members
may elect to participate in other incentive programs under which they
may receive benefits for improving the market. The very fact that the
NBBO Setter Incentive credit continues in the form of the Additional
Rebate, is itself reflective of the need for exchanges to offer
significant financial incentives to attract order flow. In sum, if the
changes proposed herein, including the modifications to the fee
structure relating to executions in the Open, are unattractive to
market participants, it is likely that NASDAQ will lose market share as
a result.
Accordingly, 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing change has become effective pursuant to Section
19(b)(3)(A) of the Act,\6\ and paragraph (f)\7\ of Rule 19b-4,
thereunder. 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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\6\ 15 U.S.C. 78s(b)(3)(A).
\7\ 17 CFR 240.19b-4(f).
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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-2014-026 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-026. 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-2014-026, and should
be submitted on or before April 21, 2014.
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\8\ 17 CFR 200.30-3(a)(12).
[[Page 18094]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07038 Filed 3-28-14; 8:45 am]
BILLING CODE 8011-01-P