
[Federal Register Volume 77, Number 224 (Tuesday, November 20, 2012)]
[Notices]
[Pages 69685-69688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28176]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68232; File No. SR-NASDAQ-2012-127]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Non-Penny Pilot and Penny Pilot Options

November 14, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on November 1, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 Non-Penny Pilot Options Fees 
for Removing Liquidity and the Customer Rebate to Add Liquidity as well 
as the Penny Pilot Options Customer Rebate to Add Liquidity.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments related to fee increases 
will be operative on November 2, 2012.\3\
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    \3\ The amendments related to the Fees for Removing Liquidity in 
Non-Penny Pilot Options would be operative on November 2, 2012.
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    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 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. 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 certain 
Non-Penny Pilot Options Fees for Removing Liquidity in order to offer 
increased Penny Pilot and Non-Penny Pilot Options Customer Rebates to 
Add Liquidity to attract additional order flow to the Exchange to the 
benefit of all market participants.
    The Exchange proposes to amend the Fees for Removing Liquidity in 
Non-Penny Pilot Options. Today Customers and NOM Market Makers are 
assessed a $0.79 per contract Fee for Removing Liquidity in Non-Penny 
Pilot Options and Professionals, Firms and Non-NOM Market Makers are 
assessed an $0.85 per contract Fee for Removing Liquidity in Non-Penny 
Pilot Options. The Exchange proposes to increase the Customer and NOM 
Market Maker Fees for Removing Liquidity in Non-Penny Pilot Options 
from $0.79 to $0.82 per contract and also increase the Professional, 
Firm and Non-NOM Market Maker Fees for Removing Liquidity in Non-Penny 
Pilot Options from $0.85 per to $0.89 per contract. The Exchange 
proposes that these amendments will become operative on November 2, 
2012.
    The Exchange also proposes to amend the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options. Today, the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options, including NDX, is $0.75 per 
contract, unless a market participant adds Customer Liquidity in either 
or both Penny Pilot or Non-Penny Pilot Options (including NDX) of 
115,000 contracts per day in a month, then the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options is $0.77 per contract.\4\ The 
Exchange proposes to increase the Customer Rebate to Add Liquidity in 
Non-Penny Pilot Options, including NDX, from $0.75 to $0.80 per 
contract and also to increase the Customer Rebate to Add Liquidity in 
Non-Penny Pilot Options when a market participant adds Customer 
Liquidity in either or both Penny Pilot or Non-Penny Pilot Options 
(including NDX) of 115,000 contracts per day in a month from $0.77 to 
$0.81 per contract. The Exchange proposes that these amendments become 
immediately effective.
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    \4\ NOM Participants under common ownership may aggregate their 
Customer volume to qualify for the increased Customer rebate. Common 
ownership is defined as 75 percent common ownership or control.
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    The Exchange also proposes to amend the Customer Rebate to Add 
Liquidity in Penny Pilot Options. Today, the Exchange pays Customer 
Rebates to Add Liquidity on Penny Pilot Options as follows:

[[Page 69686]]



------------------------------------------------------------------------
                                                           Rebate to add
                                   Monthly volume            liquidity
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Tier 1...................  Participant adds Customer               $0.26
                            liquidity of up to 34,999
                            contracts per day in a month.
Tier 2...................  Participant adds Customer                0.43
                            liquidity of 35,000 to
                            74,999 contracts per day in
                            a month.
Tier 3...................  Participant adds Customer                0.44
                            liquidity of 75,000 or more
                            contracts per day in a month.
Tier 4 \a\...............  Participant adds (1) Customer            0.42
                            liquidity of 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.
Tier 5 \b,c\.............  Participant has Total Volume             0.45
                            of 130,000 or more contracts
                            per day in a month.
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\a\ For purposes of Tier 4, 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.
\b\ For purposes of Tier 5, ``Total Volume'' shall be defined as
  Customer, Professional, Firm, Non-NOM Market Maker and NOM Market
  Maker volume in Penny Pilot Options and Non-Penny Pilot Options which
  either adds or removes liquidity.
\c\ For purposes of Tier 5, the Exchange will allow NOM Participants
  under common ownership to aggregate their volume to qualify for the
  rebate. Common ownership is defined as 75 percent common ownership or
  control.

    The Exchange proposes to amend the Tier 5 rebate which pays a $0.45 
per contract Rebate to Add Liquidity to NOM Options Participants that 
have Total Volume of 130,000 or more contracts per day in a month.\5\ 
Total Volume is defined as Customer, Professional, Firm, Non-NOM Market 
Maker and NOM Market Maker volume in Penny Pilot Options and Non-Penny 
Pilot Options which either adds or removes liquidity. The Exchange 
proposes to amend the Tier 5 rebate from $0.45 to $0.46 per 
contract.\6\ The Exchange proposes that this amendment become 
immediately effective.
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    \5\ For purposes of Tier 5, the Exchange allows NOM Participants 
under common ownership to aggregate their volume to qualify for the 
rebate. Common ownership is defined as 75 percent common ownership 
or control.
    \6\ The Exchange is not proposing to otherwise amend Tier 5 or 
any other Penny Pilot Options Customer rebate tier.
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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 increasing the Fees for Removing Liquidity in 
Non-Penny Pilot Options for all market participants is reasonable 
because the increased fees permit the Exchange to offer increased 
Customer Rebates to Add Liquidity in both Penny Pilot and Non-Penny 
Pilot Options. Also, the proposed Fees for Removing Liquidity are 
similar to the non-Penny Pilot Options fees at BATS Exchange, Inc. 
(``BATS'').\9\
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    \9\ BATS is amending pricing effective November 1, 2012 to 
increase non-customer non-Penny pricing from $0.80 to $0.84 per 
contract. See BATS alert titled ``BATS Options Exchange Pricing 
Effective November 1, 2012.''
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    The Exchange believes that increasing the Professional, Firm and 
Non-NOM Market Maker Fees for Removing Liquidity from $0.85 to $0.89 
per contract is equitable and not unfairly discriminatory because all 
market participants would be assessed the same Fees for Removing 
Liquidity in Non-Penny Pilot Options, except Customers and NOM Market 
Makers. The Exchange believes that it is equitable and not unfairly 
discriminatory to increase Customer and NOM Market Maker Non-Penny 
Pilot Fees for Removing Liquidity from $0.79 to $0.82 per contract 
because Customers and NOM Market Makers each bring benefits to the 
market. The Exchange believes that Customer order flow brings unique 
benefits to the market which benefits all market participants through 
increased liquidity. NOM Market Makers have obligations to the market 
and regulatory requirements,\10\ which normally do not apply to other 
market participants. A NOM Market Maker has the obligation to make 
continuous markets, engage in a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, and not make bids or offers or enter into transactions that are 
inconsistent with a course of dealings. The proposed differentiation as 
between Customers and NOM Market Makers and other market participants 
recognizes the differing contributions made to the liquidity and 
trading environment on the Exchange by Customers and NOM Market Makers, 
as well as the differing mix of orders entered.
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    \10\ Pursuant to Chapter VII (Market Participants), Section 5 
(Obligations of Market Makers), in registering as a market maker, an 
Options Participant commits himself to various obligations. 
Transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and Market Makers 
should not make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. Further, all Market 
Makers are designated as specialists on NOM for all purposes under 
the Act or rules thereunder. See Chapter VII, Section 5.
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    The Exchange believes that increasing the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options, including NDX, from $0.75 to 
$0.80 per contract and also increasing the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options when a market participant adds 
Customer Liquidity in either or both Penny Pilot or Non-Penny Pilot 
Options (including NDX) of 115,000 contracts per day in a month from 
$0.77 to $0.81 per contract is reasonable because these increased 
rebates would continue to attract Customer order flow to the Exchange 
in Non-Penny Pilot Options. Today, NOM Options Participants have the 
ability to earn a $0.75 per contract Customer Rebate to Add Liquidity 
in Non-Penny Pilot Options and an increased rebate of $0.77 when a 
market participant adds Customer Liquidity in either or both Penny 
Pilot or Non-Penny Pilot Options (including NDX) of 115,000 contracts 
per day in a month. By increasing both the Customer Rebate to Add 
Liquidity to $0.80 per contract and the Customer Rebate for market 
participants that add Customer in either or both Penny Pilot or Non-
Penny Pilot Options (including NDX) of 115,000 contracts per day in a 
month to $0.81 per contract should encourage market participants to 
send additional order flow to NOM to obtain an even greater Customer 
Rebate to Add Liquidity in Non-Penny Pilot Options.
    The Exchange believes that increasing the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options, including NDX, from $0.75 to 
$0.80 per contract and also increasing the Customer Rebate to Add 
Liquidity in Non-Penny Pilot Options when a market participant adds 
Customer Liquidity in either or both Penny Pilot or Non-Penny Pilot 
Options (including NDX) of 115,000 contracts

[[Page 69687]]

per day in a month from $0.77 to $0.81 per contract is equitable and 
not unfairly discriminatory because Customer order flow brings unique 
benefits to the market which benefits all market participants. 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. These increased rebates are 
available to all NOM Options Participants acting as agent for Customer 
orders and in the case of the enhanced rebate of $0.81 per contract, 
all NOM Options Participants that send 115,000 contracts per day in a 
month in either or both Penny Pilot or Non-Penny Pilot Options would be 
entitled to receive the enhanced rebate.
    In the current U.S. options market, many of the contracts are 
quoted in pennies. Under this pricing structure, the minimum penny tick 
increment equates to a $1.00 economic value difference per contract, 
given that a single standardized U.S. option contract covers 100 shares 
of the underlying stock. Where contracts are quoted in $0.05 increments 
(non-pennies), the value per tick is $5.00 in proceeds to the investor 
transacting in these contracts. Liquidity rebate and access fee 
structures on the make-take exchanges, including NOM, for securities 
quoted in penny increments are commonly in the $0.30 to $0.45 per 
contract range.\11\ A $0.30 per contract rebate in a penny quoted 
security is a rebate equivalent to 30% of the value of the minimum 
tick. A $0.45 per contract fee in a penny quoted security is a charge 
equivalent to 45% of the value of that minimum tick. In other words, in 
penny quoted securities, where the price is improved by one tick with 
an access fee of $0.45 per contract, an investor paying to access that 
quote is still $0.55 better off than trading at the wider spread, even 
without the access fee ($1.00 of price improvement -$0.45 access fee = 
$0.55 better economics). This computation is equally true for 
securities quoted in wider increments. Rebates and access fees near the 
$0.89 per contract level equate to only 17.8% of the value of the 
minimum tick in Non-Penny Pilot Options, less than the experience today 
in Penny Pilot Options. For example, a retail investor transacting a 
single contract in a non-penny quoted security quoted a single tick 
tighter than the rest of the market, and paying an access fee of $0.82 
per contract, is receiving an economic benefit of $4.18 ($0.05 improved 
tick = $5.00 in proceeds - $0.82 access fee = $4.18). The Exchange 
believes that encouraging NOM Market Makers to quote more aggressively 
by maintaining reducing transaction fees \12\ and incentivizing 
Customer orders to post on NOM will narrow the spread in Non-Penny 
Pilot Options to the benefit of investors and all market participants 
by improving the overall economics of the resulting transactions that 
occur on the Exchange, even if the access fee paid in connection with 
such transactions is higher. Accordingly, the Exchange believes that 
the proposed fees and rebates for Non-Penny Pilot Options are 
reasonable, equitable and not unfairly discriminatory.
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    \11\ NOM is proposing to only pay a Customer a Rebate to Add 
Liquidity in Non-Penny Pilot Options. Other market participants 
would not be entitled to a rebate.
    \12\ The Exchange notes that the proposed $0.25 per contract NOM 
Market Maker Fee for Adding in Non-Penny Pilot Options is 
significantly less than transaction fees plus payment for order flow 
fees assessed by other options exchanges. For example, on NASDAQ OMX 
PHLX LLC (``Phlx''), the combined payment for order flow fee plus 
the transaction fee is $0.92 per contract. See Phlx's Pricing 
Schedule. Unlike Penny Pilot Options, the Exchange believes this 
significant reduction in fees for adding liquidity will have the 
same effect as a rebate in non-Penny Pilot Options in terms of a 
narrower spread.
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    The Exchange believes that the proposed increase to the Tier 5 
Customer Rebate to Add Liquidity in Penny Pilot Options is reasonable 
because the increased rebate would encourage broker-dealers acting as 
agent for Customer orders to select the Exchange as a venue to post 
Customer orders. The Exchange believes the existing monthly volume 
thresholds have incentivized firms to increase Customer order flow to 
the Exchange. The Exchange desires to continue to encourage firms to 
route Customer orders to the Exchange by offering an increased Customer 
rebate.
    The Exchange believes that the proposed increase to the Tier 5 
Customer Rebate to Add Liquidity in Penny Pilot Options is equitable 
and not unfairly discriminatory because the Exchange is proposing to 
offer an even higher Tier 5 Customer rebate in Penny Pilot Options of 
$0.46 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 reach the 
130,000 volume requirement and qualify to obtain this rebate. All NOM 
Participants that transact Customer orders in Penny Pilot Options are 
eligible for the Customer rebates.\13\
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    \13\ 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 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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[[Page 69688]]

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-2012-127 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-2012-127. 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 
10:00 a.m. and 3:00 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-2012-127 and should 
be submitted on or before December 11, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
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    \15\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2012-28176 Filed 11-19-12; 8:45 am]
BILLING CODE 8011-01-P


