
[Federal Register Volume 76, Number 10 (Friday, January 14, 2011)]
[Notices]
[Pages 2742-2744]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-672]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63678; File No. SR-NASDAQ-2010-166]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Pricing for NASDAQ Members Using the NASDAQ Market Center

January 7, 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 30, 2010, The NASDAQ Stock Market LLC (``NASDAQ''), 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 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to modify pricing for NASDAQ members using the 
NASDAQ Market Center. NASDAQ will implement the proposed change on 
January 3, 2011.
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is amending Rule 7018 to encourage members to provide 
liquidity directly to NASDAQ that previously had been provided via a 
sponsored access relationship. Direct liquidity provision is beneficial 
to NASDAQ and to the marketplace generally. Direct liquidity provision 
improves NASDAQ's market surveillance by providing a clear view of a 
member's market activity, rather than a view of that activity under the 
aegis of the sponsored access provider. Direct liquidity provision also 
enables NASDAQ to offer rebates more equitably, based upon each 
member's unique liquidity provision rather than compensating the effort 
required to aggregate order flow.
    To encourage the direct provision of liquidity, NASDAQ is adding 
subsection Rule 7018(k). This subsection applies in the first month in 
which a member begins providing liquidity to NASDAQ directly that 
previously had been

[[Page 2743]]

provided to NASDAQ via a sponsored access relationship. In that month, 
the rebates for that member under Rule 7018 shall be based upon the 
average daily volume of liquidity provided by the sponsored access 
provider. Under this calculation, the member will receive the same 
rebate for sending orders directly to NASDAQ that that member would 
have paid had it remained in a sponsored access relationship. Because 
NASDAQ's liquidity provider rebates vary based upon volume of liquidity 
provided, absent this formulation, members might receive lower rebates 
by virtue of switching mid-month from sponsored access to direct 
provision of liquidity.\3\
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    \3\ See NASDAQ Rule 7018(a). NASDAQ's fees for accessing 
liquidity are fixed; they do not vary with volume and thus are not 
impacted by this proposal.
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    For example, assume that Member ABCD provides liquidity to NASDAQ 
via a sponsored access relationship with Member 1234. Member 1234 
provides average daily liquidity of 60 million shares of which 20 
million shares is provided by Member ABCD. Member ABCD switches on the 
20th trading day of January--a month with 25 trading days--from 
providing liquidity via Member 1234 to providing liquidity directly to 
NASDAQ. Member ABCD continues to provide 20 million shares of liquidity 
directly to NASDAQ for the final five trading days of January. Member 
1234 continues to provide 40 million shares of liquidity to NASDAQ for 
the final five trading days of January, having lost 20 million shares 
per day due to Member ABCD's changed behavior.
    Under current Rule 7018, if Member ABCD continues to provide 
liquidity via Member 1234 for the entire month of January, it receives 
rebates of $0.0029 per share of liquidity provided based on Member 1234 
providing 60 million shares of liquidity per day. If Member ABCD 
switches on the 20th trading day of the month to providing liquidity 
directly to NASDAQ, it will receive rebates for the final five trading 
days at a rate of $0.0020 per share based on 4 million shares per day 
(20 million x 5 actual trading days / 25 trading days in the month). 
Member 1234 has the ability to calculate the rebates for Member ABCD at 
less favorable rates as well because Member ABCD has lowered the 
average daily liquidity provided by Member 1234. This has the effect of 
de-valuing the liquidity provided by Member ABCD for the periods of 
time both before and after it switches from sponsored access to direct 
liquidity provision. This discourages Member ABCD from providing 
liquidity directly to NASDAQ for any partial month period.
    Under new Rule 7018(k), NASDAQ will calculate the rebate for Member 
ABCD as follows. For the first 20 trading days, Member ABCD will be 
credited with all of the liquidity that Member 1234 provides to 
NASDAQ--60 million shares. For the final five trading days of the 
month, Member ABCD will continue to be credited with the liquidity 
provided by member 1234--40 million shares--rather than the liquidity 
provided directly by member ABCD--20 million shares. Thus, both Member 
ABCD and Member 1234 will receive rebates of $0.0029 based upon average 
daily liquidity provided of 56 million shares per day (60 million 
shares per day x 20 days + 40 million shares per day x five days / 25 
days).\4\
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    \4\ This is one example of how new Rule 7018(k) will operate. 
The actual rebates provided to members will vary depending upon the 
liquidity provided by their sponsored access provider and by the 
member itself. In all cases, the rebates for all members will be 
calculated using the rebates duly filed with the Commission and set 
forth in NASDAQ's online manual.
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    NASDAQ believes that this provides an appropriate incentive for 
members to switch from sponsored access relationships to direct 
liquidity provision, while also fairly valuing the liquidity provided 
by all members. It is appropriate for NASDAQ to share with members the 
substantial benefit that NASDAQ enjoys when it receives liquidity 
directly from members. As stated above, this benefit is both monetary 
and regulatory. At the same time, there is no cost to sponsored access 
providers that, under new subsection 7018(k), continue to enjoy the 
benefit of their successful efforts to aggregate liquidity.
    This option will be available to members only once and only for the 
final five trading days of a month. The five-day period is designed to 
allow members an operating transition from sponsored access to direct 
liquidity provision. To make that transition, members must re-program 
systems and test their interaction with NASDAQ systems. Members are 
reluctant to make this transition on the first day of a trading month 
because errors could reduce monthly liquidity provision and lead to 
lower rebates. NASDAQ considered offering this benefit for a longer 
period of time but concluded, after assessing multiple factors, that a 
five-day transition period is adequate for operational continuity. 
NASDAQ believes members should make this transition only once and that 
it is appropriate to compensate them for making this transition only 
once.
    It shall be the obligation of the member to notify NASDAQ prior to 
invoking Rule 7018(k) in a form specified by NASDAQ. This will enable 
NASDAQ to monitor and measure the liquidity provision that is 
transferred from a sponsored access relationship directly to NASDAQ.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\5\ in general, and with Section 
6(b)(4) of the Act,\6\ 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.
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(4).
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    As stated above, the impact of the price changes upon the rebates 
received by a particular market participant will depend upon a number 
of variables, including the specifics of the market participant's 
sponsored access relationship, its propensity to add or remove 
liquidity, the duration of the transition period, and other factors.
    Additionally, the proposed allocation of fees is fair and 
reasonable in that it furthers NASDAQ's legitimate goal of encouraging 
members to provide liquidity directly to NASDAQ. There is a meaningful 
regulatory and economic benefit to NASDAQ when a firm provides 
liquidity directly as opposed to providing it via sponsored access. It 
is equitable and fair for NASDAQ to share that benefit with the member 
and to encourage that behavior. NASDAQ's proposal is narrowly tailored 
to the goal of encouraging direct liquidity provision, and it imposes 
no penalty on any firm for not opting to invoke new Rule 7018(k).
    NASDAQ notes that it operates in a highly competitive market in 
which market participants can readily direct order flow to competing 
venues if they deem rebate levels at a particular venue to be 
excessive. Additionally, members can choose to remain in sponsored 
access relationships rather than voluntarily choose to send order flow 
directly to NASDAQ. Accordingly, if particular market participants 
object to the proposed fee changes, they can avoid receiving the 
rebates implicated by this filing. NASDAQ believes that its fees 
continue to be reasonable and equitably allocated to members on the 
basis of whether they opt to direct orders to NASDAQ.

[[Page 2744]]

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 \7\ and subparagraph (f)(2) of Rule 19b-4 
thereunder.\8\ 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.
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    \7\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \8\ 17 CFR 240.19b-4(f)(2).
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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-2010-166 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-2010-166. 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 website 
viewing and printing in the Commission's Public Reference Room 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 offices 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-2010-166, and should be submitted on or before 
February 4, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-672 Filed 1-13-11; 8:45 am]
BILLING CODE 8011-01-P


