
[Federal Register Volume 77, Number 94 (Tuesday, May 15, 2012)]
[Notices]
[Pages 28647-28649]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11699]



[[Page 28647]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66951; File No. SR-NASDAQ-2012-055]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Institute an Excess Order Fee

May 9, 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 April 30, 2012, 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, 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to institute an excess order fee. NASDAQ will 
implement the proposed change on June 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, the self-regulatory organization 
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 III 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is concerned that the inefficient order entry practices of 
certain market participants may be placing excessive burdens on the 
systems of NASDAQ and its members and may negatively impact the 
usefulness and life cycle cost of market data.\3\ Market participants 
that flood the market with orders that are rapidly cancelled or that 
are priced away from the inside market do little to support meaningful 
price discovery, and in fact may create investor confusion about the 
extent of trading interest in a stock. In extreme instances, 
inefficient order entry may constitute ``layering,'' the manipulative 
practice of using multiple orders at different price levels to move the 
price of a stock. While NASDAQ has an active program to detect and 
prosecute manipulative schemes, including layering,\4\ it also believes 
that market quality can be improved through the imposition of a fee on 
market participants that engage in extremely inefficient order entry 
practices. Because NASDAQ believes that inefficient order entry is a 
problem associated with a relatively small number of market 
participants, and is therefore not a pervasive characteristic of 
today's markets, the impact of the fee will be narrow. In fact, it is 
NASDAQ's expectation that the fee will encourage potentially affected 
market participants to modify their order entry practices in order to 
avoid the fee, thereby improving the market for all participants. 
Accordingly, NASDAQ does not expect to earn significant revenues from 
the fee.
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    \3\ See generally Recommendations Regarding Regulatory Reponses 
to the Market Events of May 6, 2010, Joint CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues, at 11 (February 18, 2011) 
(``The SEC and CFTC should also consider addressing the 
disproportionate impact that [high frequency trading] has on 
Exchange message traffic and market surveillance costs * * *. The 
Committee recognizes that there are valid reasons for algorithmic 
strategies to drive high cancellation rates, but we believe that 
this is an area that deserves further study. At a minimum, we 
believe that the participants of those strategies should properly 
absorb the externalized costs of their activity.'').
    \4\ See, e.g., FINRA Sanctions Trillium Brokerage Services, LLC, 
Director of Trading, Chief Compliance Officer, and Nine Traders 
$2.26 Million for Illicit Equities Trading Strategy (September 13, 
2010) (available at http://www.finra.org/Newsroom/NewsReleases/2010/P121951). The fee proposed in this filing will not in any way 
substitute for, or result in a diminution of, NASDAQ's surveillance 
program for market manipulation.
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    The fee will be imposed on market participant identifiers 
(``MPID'') that have characteristics indicative of inefficient order 
entry practices. In general, the determination of whether to impose the 
fee on a particular MPID will be made by calculating the ratio between 
(i) entered orders, weighted by the distance of the order from the 
national best bid or offer (``NBBO''), and (ii) orders that execute in 
whole or in part. The fee is imposed on MPIDs with an ``Order Entry 
Ratio'' of more than 100. The Order Entry Ratio is calculated, and the 
Excess Order Fee imposed, on a monthly basis.
    For each MPID, the Order Entry Ratio is the ratio of (i) the MPID's 
``Weighted Order Total'' to (ii) the greater of one (1) or the number 
of displayed, non-marketable orders \5\ sent to NASDAQ through the MPID 
that execute in full or in part.\6\ The Weighted Order Total is the 
number of displayed, non-marketable orders sent to NASDAQ through the 
MPID, as adjusted by a ``Weighting Factor.'' The applicable Weighting 
Factor is applied to each order based on its price in comparison to the 
NBBO at the time of order entry:
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    \5\ The fee focuses on displayed orders since they have the most 
significant impact on investor confusion and the quality of market 
data.
    \6\ Thus, in an extreme case where no orders entered through the 
MPID executed, this component of the ratio would be assumed to be 1, 
so as to avoid the impossibility of dividing by zero.

------------------------------------------------------------------------
                                                               Weighting
             Order's price versus NBBO at entry                 factor
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Less than 0.20% away........................................          0x
0.20% to 0.99% away.........................................          1x
1.00% to 1.99% away.........................................          2x
2.00% or more away..........................................          3x
------------------------------------------------------------------------

    Thus, in calculating the Weighted Order Total, an order that was 
more than 2.0% away from the NBBO would be equivalent to three orders 
that were 0.50% away. Due to the applicable Weighting Factor of 0x, 
orders entered less than 0.20% away from the NBBO would not be included 
in the Weighted Order Total, but would be included in the ``executed'' 
orders component of the Order Entry Ratio if they execute in full or 
part. Orders sent by market makers in securities in which they are 
registered, through the MPID applicable to the registration, are 
excluded from both components of the ratio.\7\ In addition, MPIDs with 
a daily average Weighted Order Total of less than 100,000 during the 
month will not be subject to the Excess Order Fee.\8\
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    \7\ This is the case because market makers are already subject 
to rule-based standards designed to promote the efficiency and 
quality of their order entry practices. See Rule 4613. Although Rule 
4613 allows market makers to quote at spreads much wider than 2%, 
NASDAQ's assessment of market maker performance has led it to 
conclude that market makers do not generally engage in the 
inefficient practices at which the new fee is aimed. NASDAQ will 
continually assess this data and revisit the applicability of the 
fee to market makers and/or the requirements of Rule 4613 as needed 
to promote efficient quotation practices by market makers.
    \8\ NASDAQ believes that this exclusion is reasonable because an 
MPID with an extremely low volume of entered orders has only a de 
minimis impact on the market.

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[[Page 28648]]

    The following example illustrates the calculation of the Order 
Entry Ratio:
     A member enters 35,000,000 displayed, liquidity-providing 
orders:
    o The member is registered as a market maker with respect to 
20,000,000 of the orders. These orders are excluded from the 
calculation.
    o 10,000,000 orders are entered at the NBBO. The Weighting Factor 
for these orders is 0x.
    [cir] 5,000,000 orders are entered at a price that is 1.50% away 
from the NBBO. The Weighting Factor for these orders is 2x.
     Of the 15,000,000 orders included in the calculation, 
90,000 are executed.
     The Weighted Order Total is (10,000,000 x 0) + (5,000,000 
x 2) = 10,000,000. The Order Entry Ratio is 10,000,000/90,000 = 111
    If an MPID has an Order Entry Ratio of more than 100, the amount of 
the Order Entry Fee will be calculated by determining the MPID's 
``Excess Weighted Orders.'' Excess Weighted Orders are calculated by 
subtracting (i) the Weighted Order Total that would result in the MPID 
having an Order Entry Ratio of 100 from (ii) the MPID's actual Weighted 
Order Total. In the example above, the Weighted Order Total that would 
result in an Order Entry Ratio of 100 is 9,000,000, since 9,000,000/
90,000 = 100. Accordingly, the Excess Weighted Orders would be 
10,000,000 - 9,000,000 = 1,000,000.
    The Excess Order Fee charged to the member will then be determined 
by multiplying the ``Applicable Rate'' by the number of Excess Weighted 
Orders. The Applicable Rate is determined based on the MPID's Order 
Entry Ratio:

------------------------------------------------------------------------
                                                             Applicable
                     Order entry ratio                          rate
------------------------------------------------------------------------
101-1,000.................................................        $0.005
More than 1,000...........................................         0.01
------------------------------------------------------------------------

    In the example above, the Applicable Rate would be $0.005, based on 
the MPID's Order Entry Ratio of 111. Accordingly, the monthly Excess 
Order Fee would be 1,000,000 x $0.005 = $5,000.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\10\ 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, is not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    NASDAQ believes that the Order Entry Fee is reasonable because it 
is designed to achieve improvements in the quality of displayed 
liquidity and market data that will benefit all market participants. In 
addition, although the level of the fee may theoretically be very high, 
the fee is reasonable because market participants may readily avoid the 
fee by making improvements in their order entry practices that reduce 
the number of orders they enter, bring the prices of their orders 
closer to the NBBO, and/or increase the percentage of their orders that 
execute. For similar reasons, the fee is consistent with an equitable 
allocation of fees, because although the fee may apply to only a small 
number of market participants, the fee would be applied to them in 
order to encourage better order entry practices that will benefit all 
market participants. Ideally, the fee will be applied to no one, 
because market participants will adjust their behavior in order to 
avoid the fee. Finally, NASDAQ believes that the fee is not unfairly 
discriminatory. Although the fee may apply to only a small number of 
market participants, it will be imposed because of the negative 
externalities that such market participants impose on others through 
inefficient order entry practices. Accordingly, NASDAQ believes that it 
is fair to impose the fee on these market participants in order to 
incentivize them to modify their behavior and thereby benefit the 
market.
    Finally, NASDAQ believes that the fee will help to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, because the fee is designed 
to reduce the extent of non-actionable orders in the market, thereby 
promoting greater order interaction, increasing the quality of market 
data, and inhibiting potentially abusive trading practices.

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. Specifically, 
NASDAQ believes that the fee will constrain market participants from 
pursuing certain inefficient and potentially abusive trading 
strategies. To the extent that this change may be construed as a burden 
on competition, NASDAQ believes that it is appropriate in order to 
further the purposes of Section 6(b)(5) of the Act.\11\
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    \11\ 15 U.S.C. 78f(b)(5).
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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.\12\ 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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    \12\ 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
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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-2012-055 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-2012-055. This 
file number should be included on the subject line if email is used.

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    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 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-2012-055, and should be submitted on or before 
June 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11699 Filed 5-14-12; 8:45 am]
BILLING CODE 8011-01-P


