
[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]
[Notices]
[Pages 1201-1203]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-90]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63628; File No. SR-NASDAQ-2010-154]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the NASDAQ Stock Market LLC 
To Enhance the Investor Support Program

January 3, 2011.
    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 December 21, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``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-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 proposes changes to the fee provisions of Rule 7014 
(Investor Support Program) to enhance the Investor Support Program in 
respect of: Certain assumed Baseline Participation Ratio values for 
firms that did not add liquidity in August 2010; the addition of 
liquidity through Indirect Order Flow; liquidity executed at or above 
$1; and a certification provision.
    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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing changes to the fee provisions of Rule 
7014 to enhance the Investor Support Program in respect of: Certain 
assumed Baseline Participation Ratio values for firms that did not add 
liquidity in August 2010; the addition of liquidity through Indirect 
Order Flow; liquidity executed at or above $1; and a certification 
provision.
    The Exchange established an Investor Support Program (``ISP'') that 
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'').\3\ The goal of the ISP is to incentivize members to 
provide such targeted liquidity to the NASDAQ Market Center.\4\ The 
Exchange noted in the ISP Filing that 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) 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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    \3\ For a detailed description of the Investor Support Program, 
see Securities Exchange Act Release No. 63270 (November 8, 2010), 75 
FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness)(the ``ISP Filing''). See also Securities 
Exchange Act Release No. 76505 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153)(notice of filing and immediate 
effectiveness regarding exclusion of partial trading days from 
certain ISP calculations).
    \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''). In the Concept Release, 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 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, and that 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).
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    The Exchange now proposes several adjustments to the Investor 
Support Program. The primary objective in making these adjustments is 
to moderate the ability of members (firms), on a prospective basis, 
from gaining ISP fee credits without effectively adding targeted 
liquidity to NASDAQ. This proposal clearly furthers the ISP goal of 
incentivizing members to provide targeted liquidity to the Exchange.
    First, the ISP generally compares a member's Participation Ratio 
for the current month to the same member's Participation Ratio in 
August 2010 (known as the ``Baseline Participation Ratio'').\5\ This 
ratio is determined by

[[Page 1202]]

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 \6\ traded in the given month.\7\
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    \5\ The term ``Participation Ratio'' is defined as: For a given 
member in a given month, the ratio of (i) 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 (ii) 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. Rule 7014(d)(4). Using the 
consolidated volume language of subsection (d)(4)(ii), the term 
``Consolidated Volume'' is defined as 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. Rule 7014(d)(5). The term 
Consolidated Volume is substituted for current consolidated volume 
language throughout the rule.
    \6\ 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).
    \7\ See Proposed Rule 7014(d)(2).
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    The Exchange recognizes that some current members may not be able 
to establish a Baseline Participation Ratio for August 2010 (e.g., they 
did not add liquidity in August, or were not members). For such 
members, the Exchange proposes to add a provision that assumes a 
specified value in the Participation Ratio for August 2010. 
Specifically, the Exchange proposes new language in subsection (d)(2) 
stating that in calculating the August 2010 Participation Ratio, if the 
result is zero (no liquidity was added), the Baseline Participation 
Ratio shall be deemed to be 0.485% (when rounded to three decimal 
places \8\), which corresponds to an average daily volume (``adv'') of 
35 million shares in August 2010 (the ``deemed ratio'').\9\ The 
Exchange believes that 35 million adv is reasonable in light of the 
daily trading volumes in the competitive equity trading market. The 
Exchange believes further that the deemed ratio (which would be 
uniformly applicable to all members that did not contribute liquidity 
in August) is fair and equitable in that it should minimize such 
members gaining an advantage over members that contributed liquidity in 
August, and would not tend to unfairly exclude members adding targeted 
liquidity to the Exchange from the ISP.
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    \8\ The Exchange notes that while the Baseline Participation 
Ratio is rounded to three decimal places in the rule for ease of 
notation, for ISP billing purposes the Baseline Participation Ratio 
will not be rounded in this manner.
    \9\ The .485% Baseline Participation Ratio is calculated as 
follows:
    (22 * 35 million shares)/(August consolidated volume * 22). 
There were 22 trading days in the month of August 2010. The 
consolidated volume for August 2010 was 165.846 billion (rounded).
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    Second, the Baseline Participation Ratio now captures the number of 
shares of liquidity provided in orders that are entered by the member 
directly through any of its NASDAQ ports and executed in the NASDAQ 
Market Center in August 2010. A member might have provided liquidity to 
NASDAQ, however, through means other than directly through its own 
NASDAQ ports (e.g., indirectly thorough other members). The Exchange 
proposes an amendment to capture this indirect liquidity (indirect 
order flow) when establishing a member's Participation Ratio for the 
month of August 2010. Specifically, the Exchange proposes new language 
in subsection (d)(2) stating that in calculating the August 2010 
Participation Ratio, the numerator shall be increased by the amount (if 
any) of the member's August 2010 Indirect Order Flow.
    Indirect Order Flow is defined in new subsection (d)(5), for 
purposes of the rule, as 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. 
NASDAQ will assess whether a member entering orders provided 
substantive intermediation to another member based on how much 
discretion the entering member had in selecting such key order 
attributes as symbol, price, size and time in force.
    The Exchange believes that including Indirect Order Flow when 
calculating the August 2010 ratio should discourage (and properly 
account for) members simply changing how, or through whom (e.g., via 
aggregation) they send liquidity to the Exchange to gain ISP fee 
payment without effectively increasing the amount of targeted liquidity 
sent to the Exchange. This proposal, which is equally applicable to 
all, is directly conducive to the goal of adding new liquidity to the 
Exchange. As such, the Indirect Order Flow proposal is fair and 
equitable to all members. Moreover, the Exchange believes that it is 
decidedly non-discriminatory because it promotes accurate accounting of 
flow from all sources, thus minimizing the ability of any particular 
group of members from gaining an advantage over others.\10\
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    \10\ The Exchange notes that the Indirect Order Flow proposal is 
not discriminatory against anyone, but to the contrary affords the 
Exchange a clearer picture of how all ISP participants provided flow 
in August. The Exchange notes further that while the Baseline 
Participation Ratio by definition always refers to August 2010, 
Indirect Order Flow was not applied during the ISP's initial months 
of operation (November and December) and will be applied 
prospectively.
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    Third, to determine the amount of the ISP credit pursuant to the 
program, NASDAQ would multiply $0.0003 by the lower of: 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 the amount of Added Liquidity \11\ 
for the given month. The established goal of the ISP is to attract 
certain targeted retail and institution liquidity. The Exchange 
believes that this type of retail and institutional liquidity would 
generally be executed at or above $1. The Exchange therefore proposes 
to amend the definition of shares of displayed liquidity in subsection 
(b)(1) to clarify that such liquidity must be executed at a price at or 
above $1 in the NASDAQ Market Center in order to qualify for the ISP.
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    \11\ The term ``Added Liquidity'' is defined as: For a given 
member in a given month, the number of shares calculated by (i) 
subtracting from such member's Participation Ratio for that month 
the member's Baseline Participation Ratio, and then (ii) multiplying 
the resulting difference by the average daily 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; provided that if the result 
is a negative number, the Added Liquidity amount shall be deemed 
zero. Rule 7014(d)(1). 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).
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    Fourth, the Exchange adds a methodology by which members can 
demonstrate their compliance with the requirements of Rule 7014 and the 
ISP. The Exchange proposes to add new subsection (e) to state that a 
member will certify to the reasonable satisfaction of the Exchange its 
Baseline Participation Ratio and its compliance with any other sections 
or requirements of this Rule if requested by NASDAQ. The Exchange 
limits such certification, which would be applicable to all program 
participants, to not more often that once a month during a member's 
participation in the ISP. The Exchange believes that the certification 
provision would particularly help to ensure that all ISP participants 
may participate in the program on an equal, verifiable basis.
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

[[Page 1203]]

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.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(4) and (5).
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    The Investor Support Program encourages members to add targeted 
liquidity that is executed in the NASDAQ Market Center. The rule change 
enhances the Investor Support Program by proposing minor changes 
regarding certain assumed Participation Rate values for firms that did 
not add liquidity in August 2010; the addition of liquidity through 
Indirect Order Flow; liquidity executed at or above $1; and a 
certification provision. The primary objective in making these 
enhancements to the Investor Support Program is to minimize the ability 
of members (firms), on a prospective basis, from gaining ISP fee 
credits while effectively adding little or no targeted liquidity to 
NASDAQ. The rule change proposals ``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. 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, the proposals enhance the goal of the ISP. 
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 enhanced program, is equitable. 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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    \14\ See Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
    \15\ See Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4).
    \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-2010-154 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-2010-154. 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, 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 a.m. and 3 p.m. Copies of such 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-2010-154 and should be submitted on or before January 28, 2011.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-90 Filed 1-6-11; 8:45 am]
BILLING CODE 8011-01-P


