
[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69489-69491]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28545]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63270; File No. SR-NASDAQ-2010-141]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Add New Rule 7014 To Enable NASDAQ Members To Qualify for a Monthly Fee 
Credit

November 8, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 26, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to add new Rule 7014 (Investor Support Program) to 
enable NASDAQ members to qualify for a monthly fee credit.
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com, 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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is adding new Rule 7014 to establish an Investor Support 
Program (``ISP''), which would enable 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.\3\ The 
goal of the ISP is to incentivize members to provide such targeted 
liquidity to the Nasdaq Market Center.\4\ Maintaining and increasing 
the proportion of orders in exchange-listed securities executed on a 
registered exchange (rather than relying on any of the available off-
exchange execution methods) \5\ would help raise investors' confidence 
in the fairness of their transactions and would benefit all investors 
by deepening NASDAQ's liquidity pool, supporting the quality of price 
discovery, promoting market transparency and improving investor 
protection.\6\
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    \3\ The liquidity would, as discussed below, emanate from 
members that have a low order to execution ratio.
    \4\ The Commission has recently expressed its concern that a 
significant percentage of the orders of individual investors are 
executed at over the counter (``OTC'') markets, that is, at off-
exchange markets; and that a significant percentage of the orders of 
institutional investors are executed in dark pools. Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (Concept Release on Equity Market Structure, 
``Concept Release''). See also Mary L. Schapiro, Strengthening Our 
Equity Market Structure (Speech at the Economic Club of New York, 
Sept. 7, 2010) (``Schapiro Speech,'' available on the Commission Web 
site) (comments of Commission Chairman on what she viewed as a 
troubling trend of reduced participation in the equity markets by 
individual investors).
    \5\ In the January 2010 Concept Release, the Commission noted 
that dark pools and internalizing broker-dealers executed 
approximately 25.4% of share volume. See Concept Release, Figure 6. 
In her September 2010 speech, Chairman Schapiro referenced that 
figure and the fact that it continued to grow: ``today, nearly 30 
percent of volume in U.S.-listed equities is executed in venues that 
do not display their liquidity or make it generally available to the 
public. The percentage executed by these dark, non-public markets is 
increasing nearly every month.'' Schapiro Speech.
    \6\ The Commission has recognized the strong policy preference 
under the Act in favor of price transparency and displayed markets. 
The Commission published the Concept Release to invite public 
comment on a wide range of market structure issues, including high 
frequency trading and un-displayed, or ``dark,'' liquidity. See 
Concept Release. Moreover, Chairman Schapiro identified ``two 
concerns that go to the core of our equity market structure: First, 
whether the quality of price discovery has declined, and second, 
whether these changes in our market structure could undermine the 
fair and level playing field essential to investor protection, 
capital formation and vibrant capital markets generally.'' Schapiro 
Speech.
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    The first step for a NASDAQ member wishing to participate in the 
ISP is to designate one or more of its NASDAQ ports for ISP use.\7\ 
Orders entered through ISP-designated ports will be used for ISP credit 
calculations.
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    \7\ Subsequent to initial port designation, a member may add or 
remove designated ports for ISP use no later than the first trading 
day of the month when the desired change is to become effective.
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    Subsection (b) of Rule 7014 describes how the ISP credit will be 
calculated. The ISP credit formula provides for a monthly credit of 3 
cents per 100 shares of displayed liquidity provided through an ISP-
designated port to the extent that such liquidity results in an 
increase (compared with August 2010) in the overall level of liquidity 
that the member provides to NASDAQ measured as a proportion of the 
consolidated share volume traded by all market participants across all 
trading venues. To this end, a member's ``Baseline Participation 
Ratio'' is determined by measuring the number of shares in liquidity-
providing orders entered by the member (through any NASDAQ port) and 
executed on NASDAQ and dividing this number by the consolidated (across 
all trading venues) share volume of System Securities \8\ traded in 
August 2010.\9\ To determine whether a member added liquidity to NASDAQ 
in a given month, NASDAQ would perform the same calculation on a 
monthly basis for the then-current month and compare the resulting 
ratio to the Baseline Participation Ratio. If the member's then-current 
month's ratio is higher than the Baseline Participation Ratio, then the 
member's ``Added Liquidity'' for that month would be calculated by 
multiplying the difference between the two ratios by such month's 
consolidated average daily share volume of System Securities traded 
across all venues (if the result is a negative number, then Added 
Liquidity would be deemed zero).\10\ To determine the amount of the ISP 
credit, NASDAQ would multiply $0.0003 by the lower of: (1) The number 
of shares of displayed liquidity provided in orders entered by the 
member thorough its ISP-designated ports and executed in the Nasdaq 
Market Center during the given month, or (2) the amount of Added 
Liquidity for the given month. Any ISP credit issued pursuant to Rule 
7014 will be in addition to (and will not replace) any other credit or 
rebate for which a member may qualify.
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    \8\ The term ``System Securities'' is defined as all securities 
listed on NASDAQ and all securities subject to the Consolidated Tape 
Association Plan and the Consolidated Quotation Plan. Rule 4751(b).
    \9\ See Proposed Rule 7014(d)(2).
    \10\ See Proposed Rule 7014(d)(1).
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    Subsection (c) contains requirements designed to limit ISP credit 
eligibility to targeted orders. This is accomplished by establishing a 
maximum ratio (set at 10) of (i) liquidity-providing orders placed from 
all of given member's ISP-designated ports to (ii) liquidity-providing 
orders placed from such

[[Page 69490]]

member's ISP-designated ports and actually executed (at least 
partially) in the Nasdaq Market Center. If in a given month this ratio 
is 10 or higher for a given member (usually because the member 
cancelled a large portion of the orders placed), then the member would 
not receive ISP credit for that month. In calculating the ratio, NASDAQ 
will exclude pegged, odd-lot and System Hours and Market Hours 
Immediate-or-Cancel orders,\11\ and will not double-count in the event 
of multiple partial executions of a single order.
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    \11\ See Nasdaq Rule 4751(f)(4), (g)(3) and (h)(1) and (5).
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    The rule sets 10 million shares daily on average as the minimum 
qualifying volume of shares in executed liquidity-providing orders 
entered from a member's ISP-designated ports. This is done to attract 
firms with substantive amounts or retail and institutional order flow 
that may provide such targeted liquidity to NASDAQ. If, in a given 
month, this daily average is lower than 10 million shares, the member 
would not qualify for ISP credit. It is expected that both the 
execution ratio and the volume minimum would serve to encourage members 
to enter orders that are likely to be executed.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\12\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ 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 it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest. The rule 
change establishes a program that enables NASDAQ members to earn a 
monthly fee credit for increasing the NASDAQ-traded volume of what are 
generally retail and institutional investor orders in exchange-traded 
securities. The goal of the program is to encourage members to enter 
such orders in the Nasdaq Market Center.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(4) and (5).
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    While the program distinguishes among orders, such distinctions 
``are not designed to permit unfair discrimination'' \14\ but, rather, 
are intended to promote submission of liquidity-providing orders to 
NASDAQ, which would benefit all NASDAQ members and all investors. 
Maintaining and increasing the proportion of retail and institutional 
orders in exchange-listed securities executed on a registered national 
securities exchange (rather than relying on any of the available off-
exchange execution methods) would help raise investors' confidence in 
the fairness of their transactions and would benefit all investors by 
deepening NASDAQ's liquidity pool, supporting the quality of price 
discovery, promoting market transparency and improving investor 
protection.
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    \14\ See Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
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    Furthermore, setting a minimum monthly volume of eligible ISP 
orders as a condition for any fee credit eligibility (and therefore 
establishing a minimum threshold amount for any monthly credit) is not 
designed to discriminate unfairly, but rather to attract targeted 
retail and institutional investor liquidity. Likewise, the program is 
consistent with the Act's requirement ``for the equitable allocation of 
reasonable dues, fees, and other charges.'' \15\ As explained in the 
immediately preceding paragraphs, members who choose to increase the 
volume of ISP-eligible liquidity-providing orders that they submit to 
NASDAQ would be benefitting all investors, and therefore an additional 
credit, as contemplated in the proposed program, is equitable.
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    \15\ See Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4).
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    Finally, NASDAQ notes that the intense competition among several 
national securities exchanges and numerous OTC venues effectively 
guarantees that fees and credits for the execution of trades in NMS 
securities remain equitable and are not unfairly discriminatory.\16\
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    \16\ See, e.g., Concept Release (discusses the various venues 
where trades are executed).
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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.

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 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2010-141 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-2010-141. This 
file number should be included on the subject line if e-mail 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, \18\ 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, on official business days between the hours of 10 a.m. 
and

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3 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-2010-141 and should be submitted 
on or before December 3, 2010.
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    \18\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28545 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P


