
[Federal Register Volume 77, Number 181 (Tuesday, September 18, 2012)]
[Notices]
[Pages 57618-57621]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22915]



[[Page 57618]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67843; File No. SR-NASDAQ-2012-104]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Customer Rebate To Add Liquidity and Non-Customer Fees 
for Removing Liquidity in Penny Pilot Options

September 12, 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 August 31, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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 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

    The NASDAQ Stock Market LLC proposes to modify Chapter XV, entitled 
``Options Pricing,'' at Section 2 governing pricing for NASDAQ members 
using the NASDAQ Options Market (``NOM''), NASDAQ's facility for 
executing and routing standardized equity and index options. 
Specifically, NOM proposes to amend the Customer Rebate to Add 
Liquidity and Non-Customer Fees for Removing Liquidity in Penny Pilot 
\3\ Options.
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through June 30 [sic], 2012. See 
Securities Exchange Act Release Nos. 57579 (March 28, 2008), 73 FR 
18587 (April 4, 2008)(SR-NASDAQ-2008-026)(notice of filing and 
immediate effectiveness establishing Penny Pilot); 60874 (October 
23, 2009), 74 FR 56682 (November 2, 2009)(SR-NASDAQ-2009-091)(notice 
of filing and immediate effectiveness expanding and extending Penny 
Pilot); 60965 (November 9, 2009), 74 FR 59292 (November 17, 
2009)(SR-NASDAQ-2009-097)(notice of filing and immediate 
effectiveness adding seventy-five classes to Penny Pilot); 61455 
(February 1, 2010), 75 FR 6239 (February 8, 2010)(SR-NASDAQ-2010-
013)(notice of filing and immediate effectiveness adding seventy-
five classes to Penny Pilot); 62029 (May 4, 2010), 75 FR 25895 (May 
10, 2010) (SR-NASDAQ-2010-053)(notice of filing and immediate 
effectiveness adding seventy-five classes to Penny Pilot); 65969 
(December 15, 2011), 76 FR 79268 (December 21, 2011) (SR-NASDAQ-
2011-169) (notice of filing and immediate effectiveness extension 
and replacement of Penny Pilot); and 67325 (June 29, 2012), 77 FR 
40127 (July 6, 2012) (SR-NASDAQ-2012-075) (notice of filing and 
immediate effectiveness extension and replacement of Penny Pilot 
through December 31, 2012). See also NOM Rules, Chapter VI, Section 
5.
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    While the changes proposed herein are effective upon filing, the 
Exchange has designated these changes to be operative on September 4, 
2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, 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 Exchange 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 IV below. The Exchange 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 proposes to modify Chapter XV, entitled ``Options Pricing,'' 
at Section 2(1) governing the rebates and fees assessed for option 
orders entered into NOM. The Exchange is proposing to increase the Non-
Customer Penny Pilot Options Fees for Removing Liquidity in order to 
offer additional Penny Pilot Options Customer Rebates to Add Liquidity 
to attract additional order flow to the Exchange to the benefit of all 
market participants.
    Specifically, the Exchange is proposing to modify the five tier 
structure for paying Customer Rebates to Add Liquidity in Penny Pilot 
Options. Today, the Exchange pays Rebates to Add Liquidity in Penny 
Pilot Options as follows:
    * * * The Customer Rebate to Add Liquidity in Penny Pilot Options 
will be paid as noted below. Each Customer order of 5,000 or more, 
displayed or non-displayed contracts, which adds liquidity in Penny 
Pilot Options, will qualify for an additional rebate of $0.01 per 
contract provided the NOM Participant has qualified for a rebate in 
Tier 2, 3, 4 or 5 for that month.

------------------------------------------------------------------------
                                                              Rebate to
                       Monthly volume                            add
                                                              liquidity
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Tier 1 Participant adds Customer liquidity of up to 14,999         $0.26
 contracts per day in a month..............................
Tier 2 Participant adds Customer liquidity of 15,000 to             0.38
 49,999 contracts per day in a month.......................
Tier 3 Participant adds Customer liquidity of 50,000 to             0.43
 74,999 contracts per day in a month.......................
Tier 4 \a\ Participant adds Customer liquidity of 75,000 or         0.44
 more contracts per day in a month or has Total Volume of
 100,000 or more contracts per day in a month..............
Tier 5 \b\ Participant adds (1) Customer liquidity of               0.42
 25,000 or more contracts per day in a month, (2) the
 Participant has certified for the Investor Support Program
 set forth in Rule 7014; and (3) the Participant executed
 at least one order on NASDAQ's equity market..............
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\a\ For purposes of Tier 4, ``Total Volume'' shall be defined as
  Customer, Professional, Firm, NOM Market Maker and Non-NOM Market
  Maker volume in Penny Pilot Options which either adds or removes
  liquidity.
\b\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
  qualify for the rebate if a NASDAQ member under common ownership with
  the NOM Participant has certified for the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common
  ownership is defined as 75 percent common ownership or control.

    The Exchange proposes to add a Tier 6 to the Penny Pilot Options 
Customer Rebates to Add Liquidity and pay Customers a rebate of $0.45 
per contract when a Participant has Total Volume of 130,000 or more 
contracts per day in month. Total Volume is defined as Customer, 
Professional, Firm, NOM Market Maker and Non-NOM Market Maker volume in 
Penny Pilot Options and Non-Penny Pilot Options which either adds or 
removes liquidity. In addition, NOM Participants under common ownership 
will be permitted to aggregate their volume to qualify for the Tier 6 
rebate. The Exchange defines common ownership as 75 percent common 
ownership or control.\4\
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    \4\ NOM Participants may be requested by the Exchange's 
Membership Department to demonstrate that they are under 75% common 
ownership if the information is not readily available in Web CRD.
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    In connection with offering the Tier 6 rebate, the Exchange 
proposes to eliminate the current incentive for Customer orders of 
5,000 or more, displayed or non-displayed contracts, which add 
liquidity in Penny Pilot Options provided the NOM Participant

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has qualified for Tier 2, 3, 4 or 5 for that month. The Exchange 
believes that the Tier 6 incentive will encourage NOM Participants to 
send additional order flow to the Exchange and is therefore eliminating 
the incentive at this time.
    The Exchange also proposes to amend Tier 4 which currently provides 
that a NOM Participant that adds Customer liquidity of 75,000 or more 
contracts per day in a month or has Total Volume of 100,000 or more 
contracts per day in month qualifies for a $0.44 per contract rebate. 
The Exchange proposes to amend Tier 4 to state that only a NOM 
Participant that adds Customer liquidity of 75,000 or more contracts 
per day in a month qualifies for a $0.44 per contract rebate.\5\ The 
Exchange would eliminate the qualifier of 100,000 or more contracts of 
Total Volume because it is instead offering the Tier 6 rebate. The 
Exchange would also eliminate note ``a,'' which is no longer relevant 
because it applied to Total Volume in Tier 4. The remainder of the 
notes would change lettering.
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    \5\ The Exchange is not proposing to amend the amount of the 
$0.44 per contract rebate at this time.
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    The Exchange also proposes to amend the Fees for Removing Liquidity 
in Penny Pilot Options. Professionals, Firms, Non-NOM Market Makers and 
NOM Market Makers who are currently assessed a $0.45 per contract fee 
would be assessed a $0.47 per contact Fee for Removing Liquidity in a 
Penny Pilot Option.\6\ In addition, the Exchange proposes to reduce the 
Professional, Firm, Non-NOM Market Maker and NOM Market Maker Penny 
Pilot Option Fees for Removing Liquidity by $0.01 per contract for 
transactions in which the same participant is the buyer and the seller 
to further incentivize these NOM Participants to add and remove 
liquidity in the market.
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    \6\ The Customer Penny Pilot Fee for Removing Liquidity of $0.45 
per contract is not being amended.
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2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with Section 
6(b)(4) of the Act,\8\ in particular, in that they provide 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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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed addition of Tier 6 is 
reasonable because it is part of an existing program \9\ to encourage 
broker-dealers acting as agent for Customer orders to select the 
Exchange as a venue to post Customer orders. The Exchange believes that 
its success at attracting Customer order flow benefits all market 
participants by improving the quality of order interaction and 
executions at the Exchange. Also, the Exchange believes the existing 
monthly volume thresholds have incentivized firms that route Customer 
orders to send additional Customer order flow to the Exchange. The 
Exchange desires to continue to encourage firms that route Customer 
orders to increase Customer order flow to the Exchange by providing an 
additional opportunity to qualify for a Customer Rebate. The Exchange 
would allow a NOM Participant to total both Penny Pilot Option Volume 
and Non-Penny Pilot Option volume that adds or removes liquidity to 
qualify for the $0.45 per contract Customer Rebate to Add Liquidity in 
Penny Pilot Options proposed in Tier 6. The Exchange believes that 
additional NOM Participants would be able to qualify for this tier, 
including NOM Participants who do not qualify for rebates today, as 
long as the 130,000 volume requirement was met. Proposed Tier 6 is a 
broader category because it includes Non-Penny Pilot Option volume to 
qualify for the rebate. The proposed Tier 6 Total Volume qualifier is 
similar to pricing currently in place on BATS Exchange, Inc. 
(``BATS'').\10\
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    \9\ The Exchange adopted these monthly volume achievement tiers 
in September 2011. See Securities Exchange Act Release Nos. 65317 
(September 12, 2011), 76 FR 57778 (September 16, 2011) (SR-NASDAQ-
2011-124), 65317 (September 12, 2011), 76 FR 61129 (October 3, 2011) 
(SR-NASDAQ-2011-127), 66126 (January 10, 2012), 77 FR 2335 (January 
17, 2012) (SR-NASDAQ-2012-003), 66360 (February 8, 2012), 77 FR 8312 
(February 14, 2012) (SR-NASDAQ-2012-022), 66768 (April 6, 2012), 77 
FR 22015 (April 12, 2012) (SR-NASDAQ-2012-048) 67388 (July 10, 
2012), 77 FR 42073 (July 17, 2012) (SR-NASDAQ-2012-083).
    \10\ BATS pays rebates for certain Customer Penny Pilot orders 
based on, among other factors, total consolidated volume. BATS 
defines total consolidated volume as the volume reported by all 
exchanges to the consolidated transaction reporting plan for the 
month for which the fees apply. See BATS BZX Exchange Fee Schedule. 
The Exchange is proposing to utilize Total Volume which would 
include Penny Pilot Option and Non-Penny Pilot Option volume which 
either adds or removes liquidity to qualify for the Customer Rebate 
to Add Liquidity in Penny Pilot Options.
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    The Exchange believes that proposed Tier 6 is equitable and not 
unfairly discriminatory because the Exchange is proposing to offer an 
even higher Customer rebate in Penny Pilot Options of $0.45 per 
contract to NOM Participants which will be based on Total Volume. NOM 
Participants may total all Penny Pilot Option and Non-Penny Pilot 
Option volume that either adds or removes liquidity to qualify for this 
new tier. The Exchange believes that this added incentive would allow 
additional NOM Participants to qualify and receive the Customer rebate. 
All NOM Participants that transact Customer orders in Penny Pilot 
Options are eligible for the Customer rebates.\11\ The Exchange 
believes that allowing NOM Participants to qualify for proposed Tier 6 
by totaling Penny and Non-Penny Option volume that adds or removes 
liquidity would enable a greater number of NOM Participants to qualify 
for the rebate because NOM Participants can utilize either Penny or 
Non-Penny Pilot volume to reach the 130,000 volume requirement. All NOM 
Participants may transact orders in both Penny and Non-Penny Pilot 
Options and the Exchange would equally apply the criteria for Tier 6 to 
all NOM Participants.
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    \11\ Tier 1 pays a rebate for NOM Participants that add Customer 
liquidity of up to 14,999 contracts per day in a month of Penny 
Pilot Options. There is no required minimum volume of Customer 
orders to qualify for a Customer Rebate to Add Liquidity.
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    The Exchange believes that it is reasonable, equitable and not 
unfairly discriminatory to permit NOM Participants under common 
ownership to aggregate their volume for purposes of qualifying for the 
Tier 6 rebate. Certain NOM Participants chose to segregate their 
businesses into different legal entities for purposes of conducting 
business. The Exchange believes that these NOM Participants should be 
treated as one entity for purposes of qualifying for the Tier 6 rebate 
as long as there is at least 75% common ownership or control present 
among the NOM Participants. The Exchange currently permits a similar 
aggregation for the Tier 5 Total Volume calculation.
    The Exchange believes that its proposal to eliminate the $0.01 per 
contract rebate incentive for Customer orders of 5,000 or more, 
displayed or non-displayed, contracts that add liquidity in Penny Pilot 
Options for NOM Participants that qualified for certain tiers is 
reasonable because the Exchange has proposed an alternative incentive 
for NOM Participants in its proposal to adopt Tier 6 with a higher 
rebate. The Exchange believes the Tier 6 rebate will increase order 
flow to the Exchange because all Penny Pilot Option and Non-Penny Pilot 
Option volume that either adds or removes liquidity would count toward 
the 130,000 volume requirement to qualify for the rebate.
    The Exchange believes that the proposal to eliminate the $0.01 
incentive is equitable and not unfairly

[[Page 57620]]

discriminatory because it is being replaced with the Tier 6 rebate 
which offers a higher rebate to NOM Participants who may currently 
qualify for other tiers or a new rebate for NOM Participants that 
currently do not qualify for a rebate. Today, the $0.01 incentive is 
applicable to NOM Participants that qualified for Tiers 2, 3, 4 and 5. 
Proposed Tier 6 would be applicable to the Total Volume of contracts in 
Penny and Non-Penny Pilot Options which either adds or removes 
liquidity for any market participant. The Exchange believes a greater 
number of NOM Participants may qualify for proposed Tier 6 as compared 
to other tiers which are limited to Customer volume in Penny Pilot 
Options.
    The Exchange believes that the proposal to eliminate the text of 
Tier 4, which provides that NOM Participants may qualify for Tier 4 by 
achieving Total Volume of 100,000 or more contracts per day in a month, 
is reasonable, equitable and not unfairly discriminatory because the 
Exchange is proposing to offer a new Tier 6 rebate which would allow 
NOM Participants to achieve an even higher rebate if the NOM 
Participant is able to meet the increased volume requirement of 130,000 
contracts per day in a month. The Exchange believes the new tier may 
further incentivize NOM Participants to send additional volume to the 
Exchange that either adds or removes liquidity in Penny or Non-Penny 
Pilot Options to qualify for the $0.45 per contract rebate.
    The Exchange believes that the increased Fees for Removing 
Liquidity in Penny Pilot Options are reasonable because they permit the 
Exchange to offer an increased Tier 6 rebate to attract additional 
order flow to NOM. The Exchange believes that the increased Fees for 
Removing Liquidity in Penny Pilot Options are equitable and not 
unfairly discriminatory because all market participants, other than 
Customers, are being assessed the same Fees for Removing Liquidity in 
Penny Pilot Options. The Exchange believes that Customer order flow 
brings unique benefits to the market which benefits all market 
participants and therefore Customers are assessed lower fees as 
compared to other market participants. Additionally, the Exchange is 
offering NOM Participants, other than Customers, the ability to reduce 
the Fees for Removing Liquidity by $0.01 per contract when the same 
participant is the buyer and the seller. The Exchange believes that 
this additional fee reduction should further incentivize non-Customer 
NOM Participants to both add and remove liquidity in Penny Pilot 
Options on NOM. It is important to note that NOM Participants are 
unaware at the time the order is entered of the identity of the contra-
party. Because contra-parties are anonymous, NOM Participants would 
aggressively pursue order flow in order to receive the benefit of the 
reduction. Providing the additional incentive is reasonable for this 
reason and also is equitable and not unfairly discriminatory because 
all NOM Participants are entitled to receive the fee reduction when 
they are both the buyer and seller. By way of example, if a NOM 
Participant that is assigned the firm code ``ABC'' by the Exchange 
posted an order utilizing its Customer order router, which order was 
removed by an ABC firm proprietary order, the NOM Participant would 
receive the $0.01 per contract fee reduction. The Exchange proposes to 
utilize the Exchange assigned firm code \12\ to determine which NOM 
Participant executed an order and to apply the fee reduction to the 
Penny Pilot Option Fee for Removing Liquidity if the same non-Customer 
NOM Participant was the buyer and the seller to a transaction.\13\ The 
Exchange believes that it is reasonable, equitable and not unfairly 
discriminatory to not offer the same fee reduction to Customers because 
the Customer fee is not being increased and will now be $0.02 per 
contract lower than the Penny Pilot Options Fees for Removing Liquidity 
applicable to all other market participants.
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    \12\ Each NOM Participant is assigned a firm code by the 
Exchange.
    \13\ In this example, the same NOM Participant added and removed 
the order and would be entitled to the fee reduction because the NOM 
Participant was the buyer and seller on the transaction.
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    The Exchange operates in a highly competitive market comprised of 
ten U.S. options exchanges in which sophisticated and knowledgeable 
market participants can and do send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive or 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed rebate scheme and fees are competitive and similar to other 
fees, rebates and tier opportunities in place on other exchanges. The 
Exchange believes that this competitive marketplace materially impacts 
rebates and fees present on the Exchange today and substantially 
influences the proposal set forth above.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
NASDAQ has designed its rebates and fees to compete effectively for the 
execution and routing of options contracts and to reduce the overall 
cost to investors of options trading. The Exchange believes that 
incentivizing NOM Participants to transact greater Customer volume on 
the Exchange benefits all market participants because of the increased 
liquidity to the market.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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.\14\ 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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    \14\ 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-104 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-2012-104. This 
file number should be included on the subject line if email is used. To 
help the

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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 publicly available. All submissions 
should refer to File Number SR-NASDAQ-2012-104 and should be submitted 
on or before October 9, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22915 Filed 9-17-12; 8:45 am]
BILLING CODE 8011-01-P


