
[Federal Register Volume 77, Number 50 (Wednesday, March 14, 2012)]
[Notices]
[Pages 15163-15166]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66544; File No. SR-NASDAQ-2012-032]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ's Investor Support Program

March 8, 2012.
    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 February 27, 2012, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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 the Investor Support Program (the 
``ISP'') under Rule 7014 to introduce an additional method for members 
to earn an enhanced rebate under the ISP. NASDAQ will implement the 
proposed change on March 1, 2012. 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
    NASDAQ is proposing to modify the Investor Support Program (the 
``ISP'') under Rule 7014 to introduce an additional method for members 
to earn an enhanced rebate under the ISP. The ISP 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 
as originally implemented, 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 Nos. 63414 
(December 2, 2010), 75 FR 76505 (December 8, 2010) (NASDAQ-2010-153) 
(notice of filing and immediate effectiveness); 63628 (January 3, 
2011), 76 FR 1201 (January 7, 2011) (NASDAQ-2010-154) (notice of 
filing and immediate effectiveness); 63891 (February 11, 2011), 76 
FR 9384 (February 17, 2011) (NASDAQ-2011-022) (notice of filing and 
immediate effectiveness); 64050 (March 8, 2011), 76 FR 13694 (March 
14, 2011) (SR-NASDAQ-2011-034); 65717 (November 9, 2011), 76 FR 
70784 (November 15, 2011) (SR-NASDAQ-2011-150) (notice of filing and 
immediate effectiveness).
    \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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    Without modifying any existing aspects of the ISP, the Exchange now 
proposes to provide an additional method for members to qualify for an 
ISP rebate that includes a new criterion focused on liquidity provision 
through Public Customer Orders in the NASDAQ Options Market. The change 
recognizes the extent to which members that represent retail and/or 
institutional investors are active in trading both cash equities and 
options on behalf of such customers. In fact, to an increasing extent 
the customers that such members represent simultaneously trade 
different asset classes within a single investment strategy. NASDAQ 
also notes that cash equities and options markets are linked, with 
liquidity and trading patterns on one market affecting those on the 
other. Accordingly, pricing incentives that encourage market 
participant activity in both markets recognize that activity in the 
options markets also supports price discovery and liquidity provision 
in the NASDAQ Market Center. The NASDAQ Market Center fee schedule for 
order execution and routing in Rule 7018 already recognizes the 
convergence between cash equities and options trading through liquidity 
provider rebate tiers available to members active in both the NASDAQ 
Market Center and the NASDAQ Options Market.
    Participants in the ISP are required to designate specific NASDAQ 
order entry

[[Page 15164]]

ports for use under the ISP and to meet specified criteria focused on 
market participation, liquidity provision, and high rates of order 
execution. For members qualifying for the new ISP tier, NASDAQ will pay 
a credit of $0.0003 per share with respect to shares of displayed 
liquidity executed at a price of $1 or more and entered through ISP-
designated ports, and $0.0001 per share with respect to all other 
shares of displayed liquidity executed at a price of $1 or more. The 
specific criteria for the proposed new ISP tier are as follows:
    (1) The member's Participation Ratio \5\ for the month exceeds its 
Baseline Participation Ratio \6\ by at least 0.30%. In general terms, 
the Baseline Participation Ratio is the ratio of shares of liquidity 
provided by the member in NASDAQ for the month of August 2010 or August 
2011 (whichever is lower) to the total consolidated volume for that 
month. To the extent that a member's participation in NASDAQ equals or 
exceeds its Baseline Participation Ratio (i.e., to the extent that the 
member at least matches its participation in NASDAQ during the lower of 
August 2010 or August 2011), the member may be eligible for the 
program. Exceeding the Baseline Participation Ratio by specified 
amounts may qualify the member for higher credits under the ISP. The 
requirement reflects the expectation that a member participating in the 
program must maintain or increase its participation in NASDAQ as 
compared with an historical baseline. All of the ISP's existing tiers 
have a criterion focused on the member's Participation Ratio.
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    \5\ ``Participation Ratio'' is defined as follows: ``[F]or a 
given member in a given month, the ratio of (A) 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 (B) the Consolidated Volume.'' ``Consolidated Volume'' 
is defined as follows: ``[F]or a given member in a given month, 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.'' 
``System Securities'' means all securities listed on NASDAQ and all 
securities subject to the Consolidated Tape Association Plan and the 
Consolidated Quotation Plan.
    \6\ ``Baseline Participation Ratio'' is defined as follows: 
``[W]ith respect to a member, the lower of such member's 
Participation Ratio for the month of August 2010 or the month of 
August 2011, provided that in calculating such Participation Ratios, 
the numerator shall be increased by the amount (if any) of the 
member's Indirect Order Flow for such month, and provided further 
that if the result is zero for either month, the Baseline 
Participation Ratio shall be deemed to be 0.485% (when rounded to 
three decimal places).''
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    (2) The member's ``ISP Execution Ratio'' for the month must be less 
than 10. The ISP Execution Ratio is defined as ``the ratio of (A) the 
total number of liquidity-providing orders entered by a member through 
its ISP-designated ports during the specified time period to (B) the 
number of liquidity-providing orders entered by such member through its 
ISP-designated ports and executed (in full or partially) in the Nasdaq 
Market Center during such time period; provided that: (i) No order 
shall be counted as executed more than once; and (ii) no Pegged Orders, 
odd-lot orders, or MIOC or SIOC orders shall be included in the 
tabulation.'' \7\ Thus, the definition requires a ratio between the 
total number of orders that post to the NASDAQ book and the number of 
such orders that actually execute that is low, a characteristic that 
NASDAQ believes to be reflective of retail and institutional order 
flow. All of the ISP's existing tiers have a criterion focused on the 
member's ISP Execution Ratio.
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    \7\ These terms have the meanings assigned to them in Rule 4751. 
MIOC and SIOC orders are forms of ``immediate or cancel'' orders and 
therefore cannot be liquidity-providing orders.
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    (3) The shares of liquidity provided through ISP-designated ports 
during the month are equal to or greater than 0.2% of Consolidated 
Volume during the month, reflecting the ISP goals of encouraging higher 
levels of liquidity provision. All of the ISP's existing tiers have a 
criterion focused on the liquidity provided through ISP-designated 
ports as a percentage of Consolidated Volume.
    (4) At least 80% of the liquidity provided by the member during the 
month is provided through ISP-designated ports. This requirement is 
designed to mitigate ``gaming'' of the program by firms that do not 
generally represent retail or institutional order flow but that 
nevertheless are able to channel a portion of their orders that they 
intend to execute through ISP-designated ports and thereby receive a 
credit with respect to those orders. All of the ISP's existing tiers 
have a criterion requiring the member to provide a specified percentage 
of liquidity through ISP-designated ports.
    In addition to these criteria, which are similar or identical to 
criteria for existing ISP tiers, members seeking to qualify for the new 
tier would also be required to satisfy the following criteria:
    (5) The member has an average daily volume during the month of 
100,000 or more contracts of liquidity provided through one or more of 
its Nasdaq Option Market market participant identifiers (``MPIDs''), 
provided that such liquidity is provided through Public Customer 
Orders, as defined in Chapter I, Section 1 of the Nasdaq Options Market 
Rules. That rule defines Public Customer Order as an order for the 
account of a person that is not a broker or a dealer. Thus, in keeping 
with the goal of the ISP to encourage participation by retail and 
institutional investors and the members that represent them in exchange 
markets, the new criterion focused on options would require a specified 
level of liquidity provision through orders that are directly 
identified under Nasdaq Options Market rules as having characteristics 
consistent with this goal.
    (6) The member's ratio between shares of liquidity provided through 
ISP-designated ports and total shares accessed, provided, or routed 
through ISP-designated ports during the month is at least 0.80. This 
additional criterion reflects a goal of ensuring that the qualifying 
member is using its ISP-designated ports substantially for liquidity 
provision, in keeping with the ISP's overall goal of drawing liquidity-
providing orders to exchange markets. A similar criterion is applicable 
to NASDAQ's Extended Hours Investor Program (the ``EHIP''), which is 
also provided for under Rule 7014.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\9\ 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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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4) and (5).
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    The ISP encourages members to add targeted liquidity that is 
executed in the NASDAQ Market Center. The primary objective in making 
the enhancements to the ISP reflected in the proposed rule change is to 
add an even greater amount of targeted liquidity to the NASDAQ Market 
Center and also the NASDAQ Options Market by adding an additional 
method by which members may qualify for the ISP, but without 
eliminating or modifying any of the existing methods.
    The rule change proposal, like the original ISP, is not designed to 
permit unfair discrimination, but rather is intended to promote 
submission of liquidity--providing orders to NASDAQ, which benefits all 
NASDAQ members and all investors. The change recognizes the extent to 
which members that represent retail and/or institutional investors are 
active in trading both cash

[[Page 15165]]

equities and options on behalf of such customers. In fact, to an 
increasing extent the customers that such members represent 
simultaneously trade different asset classes within a single strategy. 
NASDAQ also notes that cash equities and options markets are linked, 
with liquidity and trading patterns on one market affecting those on 
the other. Accordingly, pricing incentives that encourage market 
participant activity in both markets recognize that activity in the 
options markets also supports price discovery and liquidity provision 
in the NASDAQ Market Center. Thus, the new tier, like existing tiers, 
is designed to benefit all market participants by encouraging 
submission of liquidity--providing orders to the NASDAQ Market Center, 
and further broadens this incentive by encouraging the submission of 
liquidity--providing options contracts to the NASDAQ Options Market.
    Likewise, the proposal, like the ISP, is consistent with the Act's 
requirement for the equitable allocation of reasonable dues, fees, and 
other charges. Members who choose to significantly increase the volume 
of liquidity--providing orders that they submit to the NASDAQ Market 
Center and the NASDAQ Options Market in order to qualify for the new 
tier, or existing tiers, would be benefitting all investors, and 
therefore providing credits to them, as contemplated by the ISP, is 
equitable. Moreover, NASDAQ believes that the level of the credit 
available through the new tier--$0.0003 per share for displayed 
liquidity provided through ISP-designated ports and $0.0001 per share 
for other displayed liquidity--is reasonable, in that it is comparable 
to the added rebates of $0.0001, $0.0003, or $0.0004 per share executed 
already provided under other ISP tiers, and does not reflect a 
disproportionate increase above the rebates provided to all members 
with respect to provision of displayed liquidity under Rule 7018, which 
range from $0.0020 to $0.00295 per share executed. NASDAQ further notes 
that by adding an additional tier to the ISP without altering any of 
the existing tiers, NASDAQ is effectively reducing fees for members 
qualifying for the new tier without making any offsetting fee 
increases.
    Finally, 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. NASDAQ believes that the proposed rule change 
reflects this competitive environment because the changes to the ISP 
are designed to increase the credits provided to members that enhance 
NASDAQ's market quality through liquidity provision.

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. Because the market 
for order execution is extremely competitive, members may readily opt 
to disfavor NASDAQ's execution services if they believe that 
alternatives offer them better value. For this reason and the reasons 
discussed in connection with the statutory basis for the proposed rule 
change, 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. In fact, because 
it institutes a reduction in fees, NASDAQ believes that the proposed 
rule change will enhance the degree of competition between NASDAQ and 
other trading venues.

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 \10\ and subparagraph (f)(2) of Rule 19b-4 
thereunder.\11\ 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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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-032 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-2012-032. 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 
a.m. and 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-2012-032 and should 
be submitted on or before April 4, 2012.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6186 Filed 3-13-12; 8:45 am]
BILLING CODE 8011-01-P


