
[Federal Register Volume 77, Number 250 (Monday, December 31, 2012)]
[Notices]
[Pages 77141-77151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31410]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68515; File No. SR-NASDAQ-2012-137]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
to Establish the Market Quality Program

December 21, 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 December 7, 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. On December 20, 2012, the Exchange submitted Amendment No. 1 
to the proposed rule change, which replaces and supersedes the proposed 
rule change in its entirety. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment No. 1 thereto, 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 is filing with the Commission a proposal to add new Rule 
5950 (Market Quality Program) to enable market makers that voluntarily 
commit to and do in fact enhance the market quality (quoted spread and 
liquidity) of certain securities listed on the Exchange to qualify for 
a fee credit pursuant to the Exchange's Market Quality Program and to 
exempt the Market Quality Program from Rule 2460 (Payment for Market 
Making). NASDAQ believes this voluntary program will benefit investors, 
issuers or companies, and market participants by significantly 
enhancing the quality of the market and trading in such listed 
securities.
    The Market Quality Program set forth in Rule 5950 will be effective 
for a one year pilot period beginning from the date of implementation 
of the program. During the pilot, NASDAQ will periodically provide 
information to the Commission about market quality in respect of the 
Market Quality Program.
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDAQ included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This Amendment No.1 to SR-NASDAQ-2012-137 replaces and supercedes 
[sic] SR-NASDAQ-2012-137 in its entirety.\3\
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    \3\ SR-NASDAQ-2012-137 replaced SR-NASDAQ-2012-043, which was 
withdrawn by the Exchange. See Securities Exchange Act Release Nos. 
66765 (April 6, 2012), 77 FR 22042 (April 12, 2012)(SR-NASDAQ-2012-
043)(notice of filing); and 68378 (December 6, 2012), 77 FR 74042 
(December 12, 2012)(notice of withdrawal). Attached hereto is 
Exhibit 4 that reflects the changes made to Exhibit 5. The 
Commission notes that Exhibit 4 is attached to the filing, not to 
this Notice.
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    The purpose of the filing is to propose new Rule 5950 to enable 
Market Makers \4\ that enhance the market quality of certain securities 
listed on the Exchange (known as ``targeted securities'') and thereby 
qualify for a fee credit pursuant to the Market Quality Program 
(``MQP'' or ``Program'') and to exempt the Program from Rule 2460.
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    \4\ The term ``Market Maker'' is defined in Rule 5005(a)(24) as 
a dealer that, with respect to a security, holds itself out (by 
entering quotations in the NASDAQ Market Center) as being willing to 
buy and sell such security for its own account on a regular and 
continuous basis and that is registered as such.
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    Proposed Rule 5950 will be effective for a one year pilot period. 
The pilot period will commence when the Market Quality Program is 
implemented by the Exchange and an MQP Company,\5\ on behalf of an MQP 
security, and one or more related Market Makers are accepted into the 
MQP in respect of a security listed pursuant to the Program (``MQP 
Security'').\6\ The pilot program will, unless extended, end one year 
after implementation.\7\ During the pilot, the

[[Page 77142]]

Exchange will periodically provide information to the Commission about 
market quality in respect of the MQP.\8\
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    \5\ The term ``MQP Company'' is defined in proposed Rule 
5950(e)(5) as the trust or company housing the Exchange Traded Fund 
or, if the Exchange Traded Fund is not a series of a trust or 
company, then the Exchange Traded Fund itself. MQP Fees for MQP 
Securities will be paid by the Sponsors associated with the MQP 
Companies. The term Sponsor means the registered investment adviser 
that provides investment management services to an MQP Company or 
any of such adviser's parents or subsidiaries.
    \6\ The term ``MQP Security'' is defined in proposed Rule 
5950(e)(1) as an Exchange Traded Fund (``ETF'') security issued by 
an MQP Company that meets all of the requirements to be listed on 
NASDAQ pursuant to Rule 5705. For the definition of ETF, see 
proposed Rule 5950(e)(2).
    \7\ The Exchange believes that, based on discussions with the 
Financial Industry Regulatory Authority (``FINRA''), FINRA intends 
to file an immediately effective rule change that would exempt from 
FINRA Rule 5250 exchange programs that are approved by the 
Commission. The Exchange notes that FINRA Rule 5250 does not 
preclude the Exchange from any action, but precludes FINRA members 
(not all Exchange members are FINRA members) from directly or 
indirectly accepting payment or consideration from an issuer of a 
security for acting as a market maker. See Securities Exchange Act 
Release Nos. 60534 (August 19, 2009), 74 FR 44410 (August 28, 
2009)(SR-FINRA-2009-036)(order approving proposal to adopt NASD Rule 
2460 without substantive change into the Consolidated FINRA Rulebook 
as Rule 5250); and 38812 (July 3, 1997), 62 FR 37105 (July 10, 
1997)(SR-NASD-97-29)(order approving adoption of NASD Rule 2460; 
FINRA Rule 5250 and NASDAQ Rule 2460 are based on NASD Rule 
2460)(the ``1997 order''). Being mindful of the concern in the 1997 
order about investor confidence and market integrity, the Exchange 
designed the MQP Program to be highly transparent, with: clear 
public notification requirements; clear entry, continuation, and 
termination requirements; clear market maker accountability 
standards; and, perhaps most importantly, clear market quality 
(liquidity) enhancement standards that benefit investors and market 
participants.
     The Exchange has a provision in its Rule 2460 that is, in 
respect of Exchange members, largely similar to FINRA Rule 5250. See 
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 
3550 (January 23, 2006)(File No. 10-131) (order approving 
registration of The NASDAQ Stock Market LLC as a national securities 
exchange and adopting Rule 2460). As discussed in the body of the 
proposal, the Exchange proposes to modify Rule 2460 so that it is 
not applicable to the MQP.
    \8\ As the Exchange notes in the filing, the goal is to expand 
the MQP, if successful, to small cap stocks that may benefit from 
liquidity enhancement and in turn help to promote economic 
expansion. To expand the MQP in this fashion, the Exchange will need 
to file a new proposed rule change with the Commission.
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Background
    The proposed Market Quality Program is a voluntary program designed 
to promote market quality in MQP Securities.\9\ An MQP Company may list 
an eligible MQP Security on NASDAQ and in addition to the standard 
(non-MQP) NASDAQ listing fee as set forth in the Rule 5000 Series 
(consisting of Rules 5000-5999),\10\ a Sponsor may pay a fee (``MQP 
Fee'') in order for the MQP Company, on behalf of an MQP Security, to 
participate in the Program. The MQP Fee will be credited to NASDAQ's 
General Fund. NASDAQ will incentivize one or more Market Makers in the 
MQP Security (``MQP Market Maker'') to enhance the market quality of 
the MQP Security. Subject to the conditions set forth in this rule, out 
of its General Fund NASDAQ will credit (``MQP Credit'') one or more MQP 
Market Makers that make a quality market in the MQP Security pursuant 
to the Program.\11\ The recipients and the size of their credits will 
be determined solely by NASDAQ pursuant to objective criteria; issuers 
will have no role in selecting the recipients or in determining the 
specific amount, if any, of their credits.
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    \9\ The Exchange notes that MQP Securities do not encompass 
derivatives on such securities.
    \10\ The Rule 5000 Series contains rules related to the 
qualification, listing and delisting of Companies on NASDAQ. The 
Rule 5100 Series discusses NASDAQ's general regulatory authority. 
The Rule 5200 Series sets forth the procedures and prerequisites for 
gaining a listing on NASDAQ, as well as the disclosure obligations 
of listed Companies. The Rule 5300, 5400, and 5500 Series contain 
the specific quantitative listing requirements for listing on the 
Global Select, Global Market, and Capital Market, respectively. The 
corporate governance requirements applicable to all Companies are 
contained in the Rule 5600 Series. Special listing requirements for 
securities other than common or preferred stock and warrants are 
contained in the Rule 5700 Series. The consequences of a failure to 
meet NASDAQ's listing standards are contained in the Rule 5800 
Series. Finally, listing fees are described in the Rule 5900 Series.
    \11\ The enhanced market quality (e.g. liquidity) would, as 
discussed below, emanate from market quality standards for MQP 
Market Makers that include, for example, posting a market in an MQP 
Security that is no wider on the offer side and no wider on the bid 
side than 2% away from NBBO. Proposed Rule 5950(c)(1)(B).
     Other markets have considered various ways to increase 
liquidity in low volume securities. NYSE Euronext, for example, has 
advocated that a market-wide pilot program with wider spread 
increments for less liquid securities could be a worthwhile 
experiment. NYSE Euronext has also recognized that the creation of a 
program in which small companies could enter into agreements 
directly with broker-dealers or through exchanges to provide direct 
payments to a broker-dealer who agrees to make a market in the 
issuer's security is an idea that may warrant further review by 
FINRA and the Commission. See Testimony of Joseph Mecane, Executive 
Vice President, NYSE Euronext, Before the House Committee on 
Government Reform and Oversight, November 15, 2011. See also 
Securities Exchange Act Release No. 66966 (May 11, 2012), 77 FR 
29419 (May 17, 2012)(SR-NYSEArca-2012-37)(notice of filing regarding 
Lead Market Maker incentive program).
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The Need for the MQP
    The Exchange believes that the MQP will be beneficial to the 
financial markets, to market participants including traders and 
investors, and to the economy in general. First, the MQP will encourage 
narrow spreads and liquid markets in situations that generally have not 
been, or may not be, conducive to naturally having such markets. The 
securities that comprise these markets may include less actively traded 
or less well known ETF products that are made up of securities of less 
well known or start-up companies as components.\12\ Second, in 
rewarding Market Makers that are willing to ``go the extra mile'' to 
develop liquid markets for MQP Securities,\13\ the MQP would clearly 
benefit traders and investors by encouraging more quote competition, 
narrower spreads and greater liquidity. Third, the MQP will lower 
transaction costs and enhance liquidity in both ETFs and their 
components, making those securities more attractive to a broader range 
of investors. In so doing, the MQP will help companies access capital 
to invest and grow. And fourth, the MQP may attract smaller, less 
developed companies and investment opportunities to a regulated and 
transparent market and thereby serve the dual function of providing 
access to on-Exchange listing while expanding investment and trading 
opportunities to market participants and investors.
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    \12\ These small companies and their securities (whether 
components of listed products like ETFs or direct listings) have 
been widely recognized as essential to job growth and creation and, 
by extension, to the health of the economy. Being included in a 
successful ETF can provide the stocks of these companies with 
enhanced liquidity and exposure, enabling them to attract investors 
and access capital markets to fund investment and growth.
    \13\ By imposing quality quoting requirements to enhance the 
quality of the market for MQP Securities, the MQP will directly 
impact one of the ways that Market Makers manage risk in lower tier 
or less liquid securities (e.g. the width of bid and offer pricing).
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    There is support for paid for market making (also known as 
``PFMM'') at the highest governmental levels. Congressman Patrick 
McHenry, the Chairman of the House Committee on Governmental Reform and 
Oversight, for example, recently noted that agreements between issuers 
and market makers to pay for market making activity ``* * *would allow 
small companies to produce an orderly, liquid market for their stocks. 
Research has shown that these agreements, already permitted overseas, 
have led to a positive influence on liquidity for small public 
companies.'' \14\
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    \14\ See Payments to Market Makers May Improve Trading in 
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
     The Exchange believes that by establishing specific market 
quality requirements in the MQP to expand quote competition and 
liquidity in targeted securities such as ETFs, the Program will be 
conducive to capital formation--not only in the targeted securities 
or ETFs (e.g. higher trading volume and/or creation of additional 
share units) but also in the individual components that make up the 
targeted securities (e.g. higher share trading volume). Securities 
that trade in active, liquid markets are less likely to suffer from 
mispricing (that is, a discount in pricing because of a lack of 
liquidity) that can diminish a company's ability to raise capital 
for further investment and growth.
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    In a similar vein, Robert Greifeld, Chief Executive Officer of The 
NASDAQ OMX Group, Inc. (``NASDAQ OMX''), has noted that unlike the 
United States, ``[t]he U.K., Canada and Sweden all have exchange 
markets that serve as ``incubators'' for smaller companies.\15\

[[Page 77143]]

The Exchange believes that the MQP proposal will, by encouraging liquid 
markets, enable the Exchange to similarly serve as an ``incubator,'' 
and to continue being an innovator in expanding markets to benefit 
market participants, traders, and investors.\16\ The MQP would reward 
market makers for committing capital to securities and meeting rigorous 
market quality benchmarks established by the Program.\17\ This approach 
has worked very successfully in overseas markets, including the NASDAQ 
OMX Nordic First North market (known as ``First North'').
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    \15\ See Robert Greifeld, CEO, NASDAQ OMX, Sarbox and 
Immigration Reform for Jobs, Wall Street Journal, October 4, 2011. 
For a discussion of capital formation issues in the U.S., see 
letters between Mary Shapiro, Chairman of the Commission and 
Congressman Darrel E. Issa, Chairman of the House Committee on 
Oversight and Governmental Reform, dated March 22, 2011, April 6, 
2011, and April 29, 2011.
    \16\ 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 establishing the Investor Support 
Program to attract retail order flow to the Exchange). See also 
Securities Exchange Act Release No. 64437 (May 6, 2011), 76 FR 27710 
(May 12, 2011)(NASDAQ-2010-059)(approval order creating a listing 
market, The BX Venture Market, that will have strict qualitative 
listing requirements and quantitative standards that would attract 
smaller, growth companies).
    \17\ See Testimony of Edward S. Knight, General Counsel and 
Executive Vice President, NASDAQ OMX Group, Before the Senate 
Committee on Banking, Housing, and Urban Affairs, December 1, 2011.
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    The practice of paid for market making to increase the liquidity of 
less liquid securities was examined by Johannes A. Skjeltorp and Bernt 
Arne Odegaard in a working paper from June 2011.\18\ Skjeltorp and 
Odegaard examined paid for market making on the Oslo Stock Exchange, 
which uses a market making model that is similar to that of NASDAQ's 
First North market,\19\ and noted that they ``* * * find a significant 
reduction in liquidity risk and cost of capital for firms that hire a 
market maker. Firms that prior to hiring a market maker * * * [have] a 
high loading on a liquidity risk factor, experience a significant 
reduction in liquidity risk to a level similar to that of the larger 
and more liquid stocks on the exchange.''
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    \18\ See Why do Firms Pay for Market Making in Their Own Stock? 
by Johannes A. Skjeltorp, Norges Bank, and Bernt Arne Odegaard, 
University of Stavanger and Norges Bank, June 2011. See also Why 
Designate Market Makers? Affirmative Obligations and Market Quality 
by Hendrik Bessembinder, Jia Hao, and Michael Lemmon, June 2011. 
This study suggests that future flash crashes can be avoided and 
social welfare enhanced by designating market makers and engaging 
paid for market making; and observing the positive attributes of 
direct payments from listed firms to designated market makers on the 
Stockholm Stock Exchange and Euronext Paris.
    \19\ The Exchange believes that the Skjeltorp and Odegaard 
article is therefore directly applicable to the First North paid for 
market making experience.
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    About six years prior to the Skjeltorp and Odegaard article, Amber 
Anand, Carsten Tanggaard, and Daniel G. Weaver studied liquidity 
provision through paid for market making on the Stockholm Stock 
Exchange (``SSE''), currently named NASDAQ OMX Stockholm AB.\20\ The 
researchers examined the success of fifty previously illiquid firms 
that were listed on the SSE and enjoyed, along with investors, the 
benefits of paid for market making. The researchers examined the impact 
of the paid market maker program and found that firms experienced ``* * 
*a decreased cost of capital and significant improvements in market 
quality and price discovery.'' \21\ The market makers were known as 
liquidity providers and the firms could set maximum spread widths for 
their stocks, as is currently done. Anand, Tanggaard, and Weaver found 
that following the beginning of paid for market making services, 
spreads narrowed by a statistically significant amount and depth 
increased at the inside and in the aggregate for four price levels away 
from the inside. The researchers found that accompanying the increase 
in depth was a significant increase in average trade size, suggesting 
that traders did not find it necessary to break up their orders to 
accommodate low market depth. They also found an increase in trading 
activity, suggesting that liquidity providers were actively trading 
with public customers.
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    \20\ See Paying for Market Quality, Working Paper F-2006-06 by 
Amber Anand, Carsten Tanggaard, and Daniel G. Weaver, November 2005, 
Aarhus School of Business.
    \21\ At the time of the study, SSE was owned by OMX AB. SSE 
merged into NASDAQ OMX in 2008 and retained its identity within the 
new corporate structure. The SSE paid for market making system 
matured into the current First North market.
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    More recently, Eric Noll, Executive Vice President, NASDAQ OMX, 
described the positive impact of paid for market making in the First 
North market, a European venue for smaller companies that has a program 
enabling companies to compensate market makers.\22\ Mr. Noll stated 
that NASDAQ OMX has had ``great success'' in increasing liquidity in 
stocks on First North, and that in just five years, the First North 
market has grown to 141 listings with a total capitalization of 2.8 
billion Euros. Twenty-two 22 First North companies have graduated to 
the main market since 2006.\23\
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    \22\ See Payments to Market Makers May Improve Trading in 
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
    \23\ See Testimony of Eric Noll, Executive Vice President, 
NASDAQ OMX Group, Before the House Committee on Government Reform 
and Oversight, November 15, 2011. Mr. Noll noted also that one of 
the unintended consequences of market fragmentation in the current 
U.S. securities markets has been a lack of liquidity and price 
discovery in listed securities outside of the top 100 traded names, 
and a disturbing absence of market attention paid to small growth 
companies by market participants. The Exchange believes that the MQP 
proposal offers a practical and positive solution.
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Paid for Market Making on the First North Market
    The Exchange believes that commensurate with the previously-
discussed studies regarding paid for market making,\24\ it is 
instructive to examine the paid for market making experience on the 
First North market.
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    \24\ See supra notes 18, 19, and 20.
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    By way of background, the First North market is an alternative 
listing market to the NASDAQ OMX Nordic Main Market (``Main 
Market'').\25\ Both First North and Main Market are subject to and 
regulated by European Union (``EU'') directives\26\ and exchange rules, 
and are supervised and regulated by one or more Financial Services 
Authorities (``FSAs'').\27\ While the Main Market is intended for 
listing companies that are well established, First North is intended 
for listing small, young or growth companies (not unlike the 
beneficiaries of the MQP) while providing an infrastructure and trading 
and settlement system that is similar to that of the Main Market. First 
North offers new or small public companies the benefits of listing on a 
public market and the potential for good markets through a paid for 
market making system, and is often the first step towards listing on 
the Main Market.\28\
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    \25\ NASDAQ OMX Nordic, which has securities exchanges and 
clearing operations in the Nordic countries of Sweden, Denmark, 
Iceland, and Finland and Baltic countries of Latvia and Estonia, 
operates First North and the Main Market. For additional 
information, see http://www.nasdaqomxnordic.com/about_us?languageId=1.
    \26\ For example, the Markets in Financial Instruments Directive 
(``MiFID''). It should be noted that certain parts of the EU 
legislation, for example the Transparency Directive, only apply to 
companies admitted to trading on the Main Market.
    \27\ A Financial Services Authority or ``FSA'' is the regulator 
of financial services and securities exchanges in an EU country 
(including the Nordics) and as such is similar to the Commission in 
respect of involvement in market regulation and oversight.
    \28\ The First North and Main Market have increasingly higher 
listing standards, similarly to the tiered NASDAQ listings markets. 
See Rule 5300, 5400, and 5500 Series regarding the Global Select, 
Global Market, and Capital Market, respectively. In a similarly 
tiered fashion, between First North and Main Market is an 
intermediary market known as First North Premiere (a segment of 
First North) that is designed to help companies seeking higher 
investor visibility and/or preparation for Main Market listing.
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    The First North paid for market making system is based on a 
standard exchange-supplied contract between a listing firm and a 
designated market maker (``DMM'') that sets forth market obligations 
for the market maker. The Exchange sets forth obligations for the

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MQP Market Makers (as well as MQP Companies) in proposed Rule 5950 in 
the belief that this provides the greatest amount of transparency, and 
accountability, for all that wish to participate in the MQP.
    The paid for market making model on NASDAQ's First North has 
operated since 2002 and has been demonstrably successful to the benefit 
of issuers and investors, without material regulatory issues. One of 
the definitive market quality attributes associated with expansion of 
liquidity through paid for market making is the significant narrowing 
of bid/ask spreads. This phenomenon is directly and immediately 
beneficial for all market participants including investors and listing 
companies (which may also benefit from accompanying volume increase). 
As depicted in the chart below, in 2010 and 2011 the Relative Time 
Weighted Average Spread (``RTWAS'') \29\ at First North was 
significantly better for securities with PFMM than for those without 
the benefit of PFMM.
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    \29\ RTWAS is the bid/ask spread relative to the stock price 
calculated at every NBBO change, then averaged with weights for how 
long each NBBO condition lasted.
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    The substantial positive advantage that market participants receive 
from PFMM is clearly demonstrated in the chart below, showing that non-
PFMM security spreads were: (a) Often more than four times wider than 
PFMM security spreads; and (b) a majority of the time more than three 
times wider than PFMM spreads. Moreover, the spreads for stocks with 
PFMM were more stable through time.
[GRAPHIC] [TIFF OMITTED] TN31DE12.002

    A comparison of Relative Time Weighted Average Spread on First 
North shows the significant, consistent impact of PFMM in narrowing 
spreads.\30\ This directly benefits investors in PFMM securities by 
lowering their transaction costs.\31\
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    \30\ The Exchange believes that the volatility reflected on the 
RTWAS chart after August 2011 is due in large part to economic 
events in the EU.
    \31\ The Exchange believes that just as First North's positive 
PFMM experience is successful in its own right, so it is equally 
positive within the wider European liquidity enhancement (paid for 
market making) experience. See, for example, How Do Designated 
Market Makers Create Value for Small-Caps? by Albert J. Menkveld and 
Ting Wang, August 1, 2011. This analysis of the 2001 Euronext system 
roll-out to the Amsterdam market, where small-caps had the 
opportunity to hire a DMM who guaranteed a minimum liquidity supply 
in their stock, found an improvement in liquidity level and a 
reduction in liquidity risk. See also Designated Sponsors and Bid-
Ask Spreads on Xetra by J[ouml]rdis Hengelbrock, October 31, 2008. 
This analysis of Deutsche B[ouml]rse Group's Xetra program that 
began in the 1990s, where issuers of less liquid stocks could 
contract with a Designated Sponsor to provide liquidity in a stock 
for a fee, found that investor costs including spreads were lower 
for those stocks that had at least one such dedicated Designated 
Sponsor.
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    In terms of regulation, the First North PFMM experience has not 
raised concerns. Based on Exchange discussions with the Office of 
General Counsel at NASDAQ OMX Nordic in respect of the First North 
market, the Exchange is not aware of regulatory oversight issues (e.g. 
Swedish FSA or Danish FSA) in respect of paid for market making on 
First North.\32\
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    \32\ Moreover, the Exchange notes that while spreads widened for 
stocks on all markets around the world during the height of the 
financial crisis in September and October 2008, First North stocks 
with PFMM experienced less spread widening than comparable stocks 
without PFMM.
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    The Exchange believes that the MQP will, like paid for market 
making on First North, achieve positive results.\33\
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    \33\ The Exchange believes that even though First North market 
lists equities while the proposed MQP market would emphasize listing 
ETF products, this does not detract from, and indeed enhances, the 
comparability of the First North PFMM experience to MQP. See infra 
note 36 (discussing the potential benefit of the unique trust 
structure of ETFs).
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The Proposal--Background
    The Exchange believes that this proposal would help raise investor 
and issuer confidence in the fairness of their transactions and the 
markets in general by enhancing market maker quote competition in 
securities on the Exchange, narrowing spreads, increasing shares 
available at the inside, reducing transaction costs, supporting

[[Page 77145]]

the quality of price discovery, and promoting market transparency.\34\
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    \34\ The Commission has recognized the strong policy preference 
under the Act in favor of price transparency and displayed markets. 
See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 
FR 3594 (January 21, 2010) (Concept Release on Equity Market 
Structure).
    To that end, the Exchange has recently put into place 
initiatives designed to expand the liquidity of certain targeted 
securities on transparent and displayed markets on the Exchange. 
See, for example, Securities Exchange Act Release No. 63270 
(November 8, 2010), 75 FR 69489 (November 12, 2010)(SR-NASDAQ-2010-
141)(notice of filing and immediate effectiveness of proposal to 
establish Investor Support Program in respect of retail or natural 
order flow).
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    As noted, the proposal would enhance the market quality of targeted 
securities, particularly ETFs. The Exchange believes that ETFs offer 
great value to retail and institutional investment communities, as 
reflected in their popularity as investment vehicles both in the U.S. 
and abroad.\35\ ETFs offer transparency, liquidity, diversification, 
cost efficiency and investment flexibility to gain broad market 
exposure or to express a directional view as a core or satellite 
component to one's investment portfolio; and do so while offering 
investment exposure to all asset classes--many of which would otherwise 
be inaccessible.\36\ Moreover, ETFs, particularly those that are equity 
based, also benefit listed companies. By being included in a single, 
diversified security, companies gain access to a greater audience of 
investors who may not have bought the individual stock.\37\ This means 
that the markets are deeper and more liquid, benefiting not only 
investors but the economy as a whole.\38\ This proposal will allow ETFs 
that may not otherwise see much trading or volume\39\ to be listed and 
traded on the Exchange in more liquid markets.\40\ In that this 
proposal is designed to provide market quality support to smaller, less 
frequently traded segments of securities (ETFs), subsection (d) of 
proposed Rule 5950, which catalogues the reasons for termination of the 
MQP and is discussed at length below, indicates that an MQP Security 
will no longer be eligible to remain in the MQP if the security 
sustains an average daily trading volume (consolidated trades in all 
U.S. markets) (``ATV'') of one million shares or more for three 
consecutive months. While the Exchange originally proposed a two 
million shares threshold in the withdrawn MQP proposal at SR-NASDAQ-
2012-043, it is scaling back the threshold to one million shares to 
better provide NASDAQ and the Commission with an opportunity to observe 
the impact, if any, on MQP Securities that exceed the threshold and 
``graduate'' from the Program. The Exchange has compiled statistics 
indicating that ``graduation'' from the Program may occur more 
frequently at a one million threshold than a two million threshold:
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    \35\ The Exchange notes that foreign (non-U.S.) ETFs, 
particularly those that are derivative-based, may have certain 
negative characteristics that are not present in U.S. ETFs. In some 
cases, under the Undertakings for Collective Investment in 
Transferable Securities (UCITS, Europe's equivalent of the 
Investment Company Act of 1940 (``1940 Act'')) structure, individual 
firms are permitted to fulfill multiple roles within the construct 
of the product's trading and or creation/redemption process (e.g. 
the Sponsor/Issuer of a European ETF could be the same entity as the 
market maker, distributor, intraday Net Asset Value (``NAV'') 
calculation agent, custodian bank and/or counterparty to any 
underlying asset). Under the 1940 Act, this is not permitted.
    \36\ It has been noted that since the prices of ETFs are 
generally linked back to the underlying securities, there is less 
opportunity for manipulation. See Payments to Market Makers May 
Improve Trading in Smaller Stocks, by Nina Mehta, Bloomberg, 
November 15, 2011. To that end, the Exchange notes that by 
definition an ETF will have an insulating wall between Market Maker 
and product, namely a trust structure--which is not present with 
other products such as equity securities--that establishes the daily 
NAV for an ETF. NAV reflects the per-share value of an ETF, which is 
based upon the performance of a fund's underlying components and 
methodology.
    \37\ See Testimony of Eric Noll, Executive Vice President, 
NASDAQ OMX, Before the Securities Subcommittee of the Senate Banking 
Committee October 19, 2011 (``I can tell you from personal 
experience that the companies that make up QQQ [(the NASDAQ-100 
technology ETF)] consider it a real achievement, and certainly 
NASDAQ is proud of the excellence QQQ represents.'').
    In addition, the Exchange believes that purchasers of ETFs that 
find success because of increased market quality (especially where 
such ETFs are smaller or niche funds with fewer components) may 
choose to invest directly in the fund components after a positive 
ETF market quality and execution experience.
    \38\ See Testimony of Eric Noll, Executive Vice President, 
NASDAQ OMX, Before the House Committee on Government Reform and 
Oversight, November 15, 2011.
    \39\ There are a record 377 funds (273 ETFs and 104 ETNs) on the 
August 2012 ``ETF Deathwatch'' list maintained by Ron Rowland, 
president of Capital Cities Asset Management. All the funds on this 
list have limped along for at least three months with less than $5 
million in assets or fewer than $100,000 worth of shares changing 
hands daily. The list now includes about 17% of the industry's 
approximately 1,400 ETFs and exchange-traded notes, as measured by 
number of funds. Mr. Rowland states: ``The largest risk is not, 
however, that [the funds] may close in the future. No, the more 
notable risk is that they suffer from extremely poor liquidity 
today. Wide bid/ask spreads, little to no volume behind the quotes, 
and sleeping market makers can potentially inflict much more damage 
on unknowing investors than a fund closure.''
    Perhaps the most astonishing statistic, which clearly shows the 
critical need for a rules-based liquidity-enhancement program such 
as the MQP, is that ETF Deathwatch list surged 131% in the past 
year.
    \40\ Subsection (a)(1)(C)(iv) of Proposed Rule 5950 indicates 
that the Exchange will post on its Web site a general description of 
the Program as implemented on a pilot basis and a fair and balanced 
summation of the potentially positive aspects of the Program (e.g. 
enhancement of liquidity and market quality in MQP Securities) as 
well as the potentially negative aspects and risks of the Program 
(e.g. possible lack of liquidity and negative price impact on MQP 
Securities that withdraw or are terminated from the Program), and 
indicates how interested parties can get additional information 
about products in the Program.
[GRAPHIC] [TIFF OMITTED] TN31DE12.003

    Moreover, while the MQP pilot is structured to initially apply only 
to ETFs, the goal is to expand the MQP, if successful, to small cap 
stocks and other similar products that may need liquidity enhancement. 
The Exchange believes that while this would benefit small cap MQP 
products and investors as well as overall market liquidity, perhaps 
even more importantly it would serve to help economic expansion and the 
economy as a whole.\41\
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    \41\ This is clearly consistent with recent legislative action 
designed to create job opportunities and promote economic expansion, 
such as the Jumpstart Our Business Startups Act (JOBS Act).

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[[Page 77146]]

The Proposal--Specifics
Proposed Rule 2460
    Preliminarily, the Exchange is proposing to modify its Rule 2460, 
which prohibits direct or indirect payment by an issuer to a Market 
Maker, to indicate that Rule 2460 is not applicable to the MQP.\42\ 
Specifically, the Exchange is proposing new IM-2460-1 (Market Quality 
Program) \43\ to state that Rule 2460 is not applicable to a member 
that is accepted into the Market Quality Program pursuant to Rule 5950 
or to a person that is associated with such member for their conduct in 
connection with that program. The Exchange believes that this proposed 
limited clarification is proper in that it allows the MQP to go forward 
on a pilot basis without denigrating the basic premise of Rule 2460, 
which was designed to forestall problematic relationships between 
exchange members (e.g. market makers) and issuers. The Exchange's 
proposal sets forth an extensive rule-based process with clear Program 
requirements for issuers (MQP Companies) and clear market quality 
requirements for members (MQP Market Makers) that can only be effected 
in a lit and highly regulated exchange environment.
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    \42\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006)(File No. 10-131)(order 
approving registration of The NASDAQ Stock Market LLC as a national 
securities exchange and adopting Rule 2460). FINRA, with whom the 
Exchange has an agreement regarding provision of certain regulatory 
services, has a similar provision in FINRA Rule 5250. As discussed, 
the Exchange believes that FINRA intends to file an immediately 
effective rule change that would exempt from FINRA Rule 5250 
Exchange programs that are approved by the Commission.
    \43\ IM reflects interpretive material to an Exchange rule.
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    In the order approving NASD Rule 2460 (the 1997 order), upon which 
NASDAQ Rule 2460 is based (as is FINRA Rule 5250), the Commission 
discussed that NASD Rule 2460 preserved investor confidence, preserved 
the integrity of the marketplace, and established a clear standard of 
practice for member firms.\44\
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    \44\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997)(SR-NASD-97-29)(order approving 
adoption of NASD Rule 2460). In discussing the 1997 order, the 
Commission cited to NASD Notice to Members 75-16 (February 20, 
1975); see also the letter from Kenneth S. Spirer, Attorney, 
Division of Market Regulation, SEC, to Mr. Jack Rubens, Monroe 
Securities, Inc. (May 4, 1973)(regarding acceptance of a fee or 
service charge from issuers in connection with making a market). See 
also Securities Exchange Act Release No. 39670 (February 25, 1998), 
File No. S7-3-98, 63 FR 9661)(notice for public comment of proposed 
amendments to Rule 15c2-11 under the Act in response to increasing 
incidents of fraud and manipulation in the OTC securities market 
involving thinly traded securities of thinly-capitalized issuers, 
known as microcap securities)(the ``15c2-11 proposal''). In the 
15c2-11 proposal, the Commission cited NASD Rule 2460 when 
discussing that microcap fraud often involves ``pump and dump'' 
operations, in which unscrupulous brokers sell the securities of 
less-seasoned issuers to retail customers by using high pressure 
sales tactics and a supply of securities under the firm's control.
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    The Exchange designed the MQP to meet the goals of market 
integrity, investor confidence, and clear member standards as discussed 
in the 1997 order. In particular, the Exchange designed the MQP to have 
precise standards for all MQP Market Makers in the Program and to be 
highly transparent with clear public notification requirements; with 
clear entry, continuation, and termination requirements; with clear 
Market Maker accountability standards; and, perhaps most importantly, 
with clear market quality (liquidity) enhancement standards that 
benefit investors and market participants. Additionally, NASDAQ has 
ensured that issuers are unable to influence the selection or retention 
of MQP Market Makers, or the amount of incentive credits that any 
particular Market Maker receives from NASDAQ. The positive aspects of 
the MQP are objective, clear and unambiguous.\45\
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    \45\ In addition to the clear and unambiguous MQP market quality 
standards promoting tighter markets and increased liquidity to the 
benefit of market participants, it has been demonstrated that 
already-established paid for market making programs in Europe have 
resulted in a significant and sustained reduction in spreads. As an 
example, securities that enjoyed PFMM in NASDAQ's First North's 
market have spreads that are as much as four times narrower, and are 
more stable, than securities without PFMM. See supra notes 31, 32, 
and 33 and related text. Narrower spreads benefit investors by 
lowering their transaction costs.
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    First, the entire MQP is clearly and accurately set forth in 
proposed Rule 5950. This includes the application and withdrawal 
process, the listing fee and credit structure, the market quality 
standards that an MQP Market Maker must meet and maintain to secure an 
MQP Credit, and the Program termination process. Second, the Exchange 
will provide notification on its public Web site regarding the variable 
aspects of the Program. Specifically, this notification will include: 
the names of the MQP Companies and the MQP Market Makers that are 
accepted into the Program; how many MQP Securities an MQP Company may 
have in the Program; the specific names of the MQP Securities that are 
listed pursuant to the Program; the identity of the MQP Market Makers 
in each MQP Security; and the amount of the supplemental MQP Fee, if 
one is established by an MQP Company in addition to the basic MQP Fee, 
as discussed below. Third, MQP Securities will be traded on a highly 
regulated and transparent exchange, namely NASDAQ, pursuant to the 
current trading and reporting rules of the Exchange, and pursuant to 
the established market surveillance and oversight procedures of the 
Exchange. And fourth, the MQP would encourage narrower spreads and 
better market quality (more liquid markets) for securities that 
generally have not been, or may not be, conducive to naturally having 
such markets. The Exchange believes that these factors, which directly 
benefit all market participants and investors, are instrumental to 
developing strong investor confidence in the MQP and the integrity of 
the market.
    Moreover, the Exchange believes that the MQP does not implicate 
conflicts of interest. That is, unlike the situation that the NASD was 
trying to address in its Rule 2460 or NASD Notice to Members 75-16, 
where issuers had the ability to directly pay a market maker to 
illegally pump up the price of an issuer's stock, the proposed MQP does 
not encourage MQP Market Makers to improperly pump up prices nor, for 
that matter, establish any direct financial connection between MQP 
Market Makers and MQP Companies. First, an MQP Company must go through 
an MQP application process, and the Exchange must accept the MQP 
Company into the Program, before an MQP Company can list a product 
pursuant to the Program.\46\ Second, an MQP Market Maker must go 
through a separate MQP application process, and the Exchange must 
accept an MQP Market Maker into the Program, before an MQP Market Maker 
can make a market in a product listed pursuant to the Program.\47\ 
NASDAQ will operate both of these application processes as an 
independent regulator, preventing either issuers or market makers from 
improperly influencing the ultimate outcome. Third, in terms of flow of 
funds, the Program is constructed so that the only way that an MQP 
Market Maker can earn an MQP Credit--the payment of which is 
administered solely by the Exchange--is to maintain

[[Page 77147]]

a quality market in terms of the spread and liquidity of an MQP 
Security.\48\ The Program does not afford any other way for an MQP 
Market Maker to earn an MQP Credit. If an MQP Market Maker does not 
earn an MQP credit, the MQP Fee remains in NASDAQ's General Fund. 
Fourth, in contrast to the extensive benefits of the MQP, the 
participation of an MQP Company in the Program is substantially limited 
by design. In this regard, an MQP Company is limited to making only the 
following determinations regarding the Program: whether to participate 
in the Program; what MQP Security should be in the Program; when the 
MQP Security should exit the Program; and the level of Supplemental 
Fees, if any, that should be applied. The MQP Company can never choose 
an MQP Market Maker, nor influence how, when, or the specific amount 
that an MQP Market Maker receives as credit for making a market in an 
MQP Security; these functions are performed solely by the Exchange 
according to standards set forth in the Program.\49\ The Exchange 
firmly believes that the clear, unambiguous, and transparent nature of 
the Program and its established market quality standards are counter- 
indicative of any inherent conflict of interest.\50\
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    \46\ Moreover, an MQP Company approved to be in the Program must 
meet both the non-MQP initial and continued listing standards (e.g. 
Rules 5300, 5400, 5500) and the MQP initial and continued listing 
standards to list a security pursuant to the MQP.
    \47\ Moreover, an MQP Market Maker must be approved to be a 
member on NASDAQ to be eligible for the MQP, and thereafter must 
attain the general market making requirements (e.g. Rule 4613) and 
the specific MQP market quality standards to be able to attain an 
MQP Credit.
    \48\ One of the eligibility criteria for an MQP Market Maker to 
receive an MQP Credit, for example, is that the MQP Market Maker 
must maintain at least 2,500 shares of attributable, displayed 
posted liquidity on the NASDAQ Market Center that are priced no 
wider on the offer side and no wider on the bid side than 2% away 
from NBBO. Proposed Rule 5950(c)(1)(B).
    Moreover, NASDAQ notes, regarding the flow of funds, that the 
Exchange stands between an MQP Company and an MQP Market Maker; an 
MQP Company cannot and does not, under any circumstances, directly 
pay any funds to an MQP Market Maker.
    \49\ Indeed, the Exchange will not pay an MQP Market Maker 
pursuant to the Program for making a market in an MQP Security; 
rather, the Exchange will pay an incentive out of its General Fund 
if--and only if--an MQP Market Maker achieves very specific, rules-
based market quality objectives when otherwise making a market.
    \50\ The Exchange notes that the MQP as proposed (e.g. fully 
transparent and with clear market quality standards) would not be 
susceptible to the ``pump and dump'' fraud and manipulation schemes 
noted in the 15c2-11 proposal. See also supra note 36 discussing 
that ETFs afford less opportunity for manipulation and that the ETF 
trust structure acts as an insulating wall between market maker and 
product.
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    Additionally, the Exchange notes that the MQP is proposed initially 
as a pilot program. This is significant for several reasons. First, 
NASDAQ is proposing the pilot as an attempt to repair a gap in market 
structure, namely the challenge of certain small or start-up securities 
lacking access to quality markets with adequate liquidity.\51\ Second, 
the Exchange has agreed, as part of the MQP pilot, to submit periodic 
reports to the Commission about market quality in respect of the MQP. 
These reports will endeavor to compare, to the extent practicable, 
securities before and after they are in the MQP. The reports will 
provide information regarding, for example, volume metrics, number of 
MQP Market Makers in target securities, and spread size; and will help 
the Commission and NASDAQ to evaluate the efficacy of the Program. The 
Exchange will endeavor to provide similar data to the Commission about 
comparable ETFs that are listed on the Exchange that are not in the 
MQP. And third, if the Exchange desires to expand the pilot program or 
make the MQP permanent, the Exchange will need to file a new proposed 
rule change with the Commission.
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    \51\ These securities may include less actively traded or less 
well known ETF products that have less well known or start-up 
companies as components.
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    The Exchange believes that the MQP proposal would help raise 
investor and issuer confidence in the fairness of their transactions 
and the markets in general by enhancing market maker quote competition 
in securities on the Exchange, narrowing spreads, increasing shares 
available at the inside, reducing transaction costs, supporting the 
quality of price discovery, and promoting market transparency.
Proposed Rule 5950--Securities Eligible for the MQP
    The MQP is available to Companies \52\ that choose to list certain 
MQP Securities on the Exchange. To be eligible for listing, MQP 
Securities must meet the requirements to be listed on NASDAQ as an ETF 
pursuant to Rule 5705.\53\ In addition, the MQP Security must meet all 
NASDAQ requirements for continued listing during the period of time 
that the MQP Security is in the MQP.\54\
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    \52\ The term Company is defined in Rule 5005(a)(6).
    \53\ See proposed Rule 5950(e)(1) and 5950(b)(1)(B).
    \54\ Proposed Rule 5950(b)(1)(C).
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Proposed Rule 5950--Application and Withdrawal
    The first step for an entity wishing to participate in the MQP by 
listing a security on the Exchange, and for a Market Maker wishing to 
participate in the MQP as an MQP Market Maker, is to submit an MQP 
application to the Exchange.\55\ Once the Exchange determines that the 
MQP Company and the MQP Market Maker are eligible to be in the MQP 
according to the parameters of the proposed rule, the Exchange will 
indicate acceptance to the MQP Company and the MQP Market Maker. NASDAQ 
will provide notification on its Web site regarding acceptance of an 
MQP Company, on behalf of an MQP Security, and an MQP Market Maker into 
the Program.\56\ NASDAQ may, on a Program-wide basis, limit the number 
of MQP Securities that any one MQP Company may have in the MQP; any 
limitation would be uniformly applied to all MQP Companies.\57\ In 
determining to limit the number of MQP Securities per MQP Company in 
the MQP, NASDAQ may consider information that it believes will be of 
assistance to it, such as whether a restriction, if any, is in the best 
interest of NASDAQ, the MQP Company and the goals of the MQP, and 
investors.\58\
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    \55\ See Proposed Rule 5950(a). Thus for an MQP Company, on 
behalf of an MQP Security, to participate in the Program, and for an 
MQP Market Maker to be eligible to receive an MQP Credit for his 
market making activities, the Exchange must have accepted the 
application of each of these parties in respect of an MQP Security, 
and the parties must each have fulfilled their obligations pursuant 
to the MQP. Proposed Rule 5950 (b)(1) and (c)(1).
    \56\ Proposed Rule 5950(a)(1)(C).
    \57\ NASDAQ may also, on a Program-wide basis, limit the number 
of MQP Market Makers permitted to register in an MQP Security. 
NASDAQ will provide notification on its Web site of any such limit. 
If a limit is established, NASDAQ will allocate available MQP Market 
Maker registrations in a first-come-first-served fashion based on 
successful completion of an MQP Market Maker application. Proposed 
Rule 5950(c)(3).
    \58\ Proposed Rule 5950 (a)(1)(A) and (B). Factors that may be 
considered by the Exchange are set forth in subsection (a)(1)(B)(i) 
and include, but are not limited to, the following: the current and 
expected liquidity characteristics of MQP Securities; the projected 
initial and continuing market quality needs of MQP Securities; and 
the trading characteristics of MQP Securities (e.g. quoting, 
trading, and volume).
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    Moreover, to further enhance the transparency of the Program, 
proposed Rule 5950(a)(1)(C) indicates that NASDAQ will also provide 
notification on its Web site regarding the following: the total number 
of MQP Securities that any one MQP Company may have in the Program; and 
the names of MQP Securities that are listed on NASDAQ and the MQP 
Market Maker(s) in each listed MQP Security, and the dates that an MQP 
Company, on behalf of an MQP Security, commences participation in and 
withdraws or is terminated from the Program.\59\
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    \59\ See also proposed Rule 5950(a)(1)(C)(iv), whereby the 
Exchange will include on its Web site a general statement about the 
MQP that sets forth the potentially positive and negative aspects of 
the Program.
    And per proposed Rule 5950(b)(1)(D), during such time that an 
MQP Company lists an MQP Security, the MQP Company must, on a 
product-specific Web site for each product, indicate that the 
product is in the MQP and provide the link to the Exchange's MQP Web 
site.

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[[Page 77148]]

    An MQP Company, on behalf of an MQP Security, and an MQP Market 
Maker may choose to withdraw from the Program. After an MQP Company, on 
behalf of an MQP Security, is in the MQP for six consecutive months but 
less than one year, it may voluntarily withdraw from the MQP on a 
quarterly basis. The MQP Company must notify NASDAQ in writing not less 
than one month prior to withdrawing from the MQP. NASDAQ may determine, 
however, to allow an MQP Company to withdraw from the MQP earlier.\60\ 
After an MQP Company, on behalf of an MQP Security, is in the MQP for 
one year or more, it may voluntarily withdraw from the MQP on a monthly 
basis. The MQP Company must notify NASDAQ in writing one month prior to 
withdrawing.\61\ After an MQP Market Maker is in the MQP for not less 
than one quarter, he may withdraw from the MQP on a quarterly basis. 
The MQP Market Maker must, similarly to an MQP Company, notify NASDAQ 
in writing one month prior to withdrawing.\62\
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    \60\ In making this determination, NASDAQ may take into account 
the volume and price movements in the MQP Security; the liquidity, 
size quoted, and quality of the market in the MQP Security; and any 
other relevant factors. Proposed Rule 5950(a)(2)(A).
    \61\ Proposed Rule 5950(a)(2)(B).
    \62\ Proposed Rule 5950(a)(2)(C). In addition, per proposed Rule 
5950(a)(2)(D), NASDAQ will provide notification on its Web site when 
it receives notification that an MQP Company, on behalf of an MQP 
Security, or MQP Market Maker intends to withdraw from the Program, 
and the date of actual withdrawal or termination from the Program.
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    After an MQP Company, on behalf of an MQP Security, is in the MQP 
for one year, the MQP and all obligations and requirements of the 
Program will automatically continue on an annual basis unless NAQSAQ 
terminates the Program by providing not less than one month prior 
notice of intent to terminate or the pilot Program is not extended or 
made permanent pursuant to a proposed rule change subject to filing 
with or approval by the Commission under Section 19(b) of the Exchange 
Act; the MQP Company withdraws from the Program pursuant to subsection 
(a)(2) of this rule; or the MQP Company is terminated from the Program 
pursuant to subsection (d) of Proposed Rule 5950.\63\
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    \63\ Proposed Rule 5950(a)(2) and (a)(3). Proposed Rule 5950 (d) 
states that the MQP will terminate in respect of an MQP Security 
under the following circumstances:
    (A) An MQP Security sustains an average daily trading volume 
(consolidated trades in all U.S. markets) (``ATV'') of one million 
shares or more for three consecutive months;
    (B) An MQP Company, on behalf of an MQP Security, withdraws from 
the MQP, is no longer eligible to be in the MQP pursuant to this 
rule, or its Sponsor ceases to make MQP Fee payments to Nasdaq;
    (C) An MQP Security is delisted or is no longer eligible for the 
MQP;
    (D) An MQP Security does not have at least one MQP Market Maker 
for more than one quarter; or
    (E) An MQP Security does not, for two consecutive quarters, have 
at least one MQP Market Maker that is eligible for MQP Credit.
    Moreover, subsection (d) states that MQP Credits remaining upon 
termination of the MQP in respect of an MQP Security will be 
distributed on a pro rata basis to the MQP Market Makers that made a 
market in such MQP Security and were eligible to receive MQP Credit 
pursuant to this rule; and that termination of an MQP Company, MQP 
Security, or MQP Market Maker does not preclude the Exchange from 
allowing re-entry into the Program where the Exchange deems proper.
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Proposed Rule 5950--MQP Fees
    An MQP Company seeking to participate in the MQP shall incur an 
annual basic MQP Fee of $50,000 per MQP Security. The basic MQP Fee 
must be paid to NASDAQ prospectively on a quarterly basis.\64\
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    \64\ Proposed Rule 5950(b)(2)(A).
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    An MQP Company may also incur an annual supplemental MQP Fee per 
MQP Security. The basic MQP Fee and supplemental MQP Fee when combined 
may not exceed $100,000 per year. The supplemental MQP Fee is a fee 
selected by an MQP Company on an annual basis, if at all. The 
supplemental MQP Fee must be paid to NASDAQ prospectively on a 
quarterly basis. The amount of the supplemental MQP Fee, if any, will 
be determined by the MQP Company initially per MQP Security and will 
remain the same for the period of a year. NASDAQ will provide 
notification on its Web site regarding the amount, if any, of any 
supplemental MQP Fee determined by an MQP Company per MQP Security.\65\
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    \65\ Proposed Rule 5950(b)(2)(B).
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    The MQP Fee is in addition to the standard (non-MQP) NASDAQ listing 
fee applicable to the MQP Security and does not offset such standard 
listing fee.\66\ NASDAQ will bill prospectively each MQP Company for 
the quarterly MQP Fee for each MQP Security. MQP Fees (basic and 
supplemental) will be credited to the NASDAQ General Fund.\67\
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    \66\ Proposed Rule 5950(b)(2)(C). The MQP Fee in respect of an 
ETF shall be paid by the Sponsor(s) of such ETF.
    \67\ Proposed Rule 5950(b)(2)(D) and (E).
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Proposed Rule 5950--MQP Credit to Market Makers
    When making a market in an MQP Security, an MQP Market Maker must, 
in addition to fulfilling the market making obligations per Rule 
4613,\68\ meet or exceed several market quality requirements on a 
monthly basis to be eligible for an MQP Credit. First, for at least 25% 
of the time when quotes can be entered in the Regular Market Session 
\69\ as averaged over the course of a month, an MQP Market Maker must 
maintain: a) at least 500 shares of attributable, displayed quotes \70\ 
or orders at the NBBO or better on the bid side of an MQP Security; and 
b) at least 500 shares of attributable, displayed quotes or orders at 
the NBBO or better on the offer side of an MQP Security. And second, 
for at least 90% of the time when quotes can be entered in the Regular 
Market Session as averaged over the course of a month, a MQP Market 
Maker must maintain: (a) At least 2,500 shares of attributable, 
displayed posted liquidity on the NASDAQ Market Center that are priced 
no wider than 2% away from the NBBO on the bid side of an MQP Security; 
and (b) at least 2,500 shares of attributable, displayed posted 
liquidity on the NASDAQ Market Center that are priced no wider than 2% 
away from the NBBO on the offer side of an MQP Security.\71\
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    \68\ Rule 4613 states that market making obligations applicable 
to NASDAQ members that are registered as Market Makers include, 
among other things, quotation requirements and obligations as 
follows: For each security in which a member is registered as a 
Market Maker, the member shall be willing to buy and sell such 
security for its own account on a continuous basis during regular 
market hours and shall enter and maintain a two-sided trading 
interest (``Two-Sided Obligation'') that is identified to the 
Exchange as the interest meeting the obligation and is displayed in 
the Exchange's quotation montage at all times. Interest eligible to 
be considered as part of a Market Maker's Two-Sided Obligation shall 
have a displayed quotation size of at least one normal unit of 
trading (or a larger multiple thereof); provided, however, that a 
Market Maker may augment its Two-Sided Obligation size to display 
limit orders priced at the same price as the Two- Sided Obligation. 
Unless otherwise designated, a ``normal unit of trading'' shall be 
100 shares. After an execution against its Two-Sided Obligation, a 
Market Maker must ensure that additional trading interest exists in 
the Exchange to satisfy its Two-Sided Obligation either by 
immediately entering new interest to comply with this obligation to 
maintain continuous two-sided quotations or by identifying existing 
interest on the Exchange book that will satisfy this obligation.
    \69\ The term ``Regular Market Session'' shall have the meaning 
given in Rule 4120(b)(4)(D). Proposed Rule 5950(e)(6).
    \70\ These are quotes that are attributable to members and not 
hidden quotes.
    \71\ Proposed Rule 5950(c)(1)(B).
    For example, regarding the first market quality standard (25%)--
in an MQP Security where the NBBO is $25.00 x $25.10, for a minimum 
of 25% of the time when quotes can be entered in the Regular Market 
Session as averaged over the course of a month, an MQP Market Maker 
must maintain bids at or better than $25.00 for at least 500 shares 
and must maintain offers at or better than $25.10 for at least 500 
shares. Thus, if there were 20 trading days in a given month and the 
MQP Market Maker met this requirement 20% of the time when quotes 
can be entered in the Regular Market Session for 10 trading sessions 
and 40% of the time when quotes can be entered in the Regular Market 
Session for 10 trading sessions then the MQP Market Maker would have 
met the requirement 30% of the time in that month.
    For example, regarding the second market quality standard 
(90%)--in an MQP Security where the NBBO is $25.00 x $25.10, for a 
minimum of 90% of the time when quotes can be entered in the Regular 
Market Session as averaged over the course of a month, an MQP Market 
Maker must post bids for an aggregate of 2,500 shares between $24.50 
and $25.00, and post offers for an aggregate of 2,500 shares between 
$25.10 and $25.60. Thus, if there were 20 trading days in a given 
month and the MQP Market Maker met this requirement 88% of the time 
when quotes can be entered in the Regular Market Session for 10 
trading sessions and 98% of the time when quotes can be entered in 
the Regular Market Session for 10 trading sessions then the MQP 
Market Maker would have met the requirement 93% of the time in that 
month.

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[[Page 77149]]

    MQP Credits for each MQP Security will be calculated monthly and 
credited quarterly on a pro rata basis to one or more eligible MQP 
Market Makers \72\ out of the Exchange's General Fund. Each MQP Credit 
will be allocated 50% to a Quote Share Payment that is based on 
Qualified Quotes, and 50% to a Trade Share Payment that is based on 
Qualified Trades.\73\ Trade Share Payments will, as discussed, be based 
upon the total aggregate share amount of Qualified Trades in an MQP 
Security executed on the NASDAQ Market Center; \74\ and Quote Share 
Payments will be based in equal proportions on: (a) Average quoted size 
at or better than NBBO, and (b) average time spent quoting at or better 
than NBBO.\75\
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    \72\ NASDAQ may accept multiple MQP Market Makers into the 
Program. Proposed Rule 5950(c)(1)(A).
    \73\ Proposed Rule 5950(c)(2)(A). This subsection indicates that 
a Qualified Quote represents attributable and displayed liquidity 
(either quotes or orders) in an MQP Security; that a quote or order 
entered by an MQP Market Maker in an MQP Security is only a 
Qualified Quote if it is posted within 2% of the NBBO; and that a 
Qualified Trade in an MQP Security represents a liquidity-providing 
execution of a Qualified Quote on the NASDAQ Market Center.
    \74\ Proposed Rule 5950(e)(4).
    \75\ Proposed Rule 5950(c)(2)(B).
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    An MQP Credit will be credited quarterly to an MQP Market Maker on 
a pro rata basis for each month during such quarter that an MQP Market 
Maker is eligible to receive a credit pursuant to the proposed rule. 
However, the calculation to establish the eligibility of an MQP Market 
Maker will be done on a monthly basis. Thus, for example, if during a 
quarter an MQP Market Maker was eligible to receive a credit for two 
out of three months, he would receive a quarterly pro rata MQP Credit 
for those two months.\76\
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    \76\ Proposed Rule 5950(c)(2)(C).
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    NASDAQ may limit, on a Program-wide basis, how many MQP Market 
Makers are permitted to register in an MQP Security, and will provide 
notification on its Web site of any such limitation. As discussed 
above, if a limit is established, NASDAQ will allocate available MQP 
Market Maker registrations in a first-come-first-served fashion based 
on successful completion of an MPQ Market Maker application.\77\
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    \77\ Proposed Rule 5950(c)(3). See also supra note 57.
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    Finally, to give the Exchange and the Commission an opportunity to 
evaluate the impact of the MQP on the quality of markets in MQP 
Securities, the Exchange is proposing that the MQP will be effective 
for a one year pilot period. During the pilot period, the Exchange will 
submit monthly reports to the Commission about market quality in 
respect of the MQP. The monthly reports will endeavor to compare, to 
the extent practicable, securities before and after they are in the MQP 
and will include information regarding the MQP such as: (1) Rule 605 
metrics; \78\ (2) volume metrics; (3) number of MQP Market Makers in 
target securities; (4) spread size; and (5) availability of shares at 
the NBBO. The Exchange will endeavor to provide similar data to the 
Commission about comparable ETFs that are listed on the Exchange that 
are not in the MQP; and any other MQP-related data requested by the 
Commission for the purpose of evaluating the efficacy of the MQP. The 
Exchange will post the monthly reports on its Web site.
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    \78\ 17 CFR 242.605.
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    The first report will be submitted within sixty days after the MQP 
becomes operative.
    The Exchange will issue to its members an information bulletin 
about the MQP prior to operation of the Program.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of targeted securities (including ETFs) 
on the Exchange during all trading sessions, and to detect and deter 
violations of Exchange rules and applicable federal securities laws. 
Trading of the targeted MQP Securities through the Exchange will be 
subject to FINRA's surveillance procedures for derivative products 
including ETFs.\79\ The Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges that are 
members or affiliates of the ISG; \80\ and from listed MQP Companies 
and public and non-public data sources such as, for example, Bloomberg.
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    \79\ FINRA surveils trading on the Exchange pursuant to a 
Regulatory Services Agreement (``RSA''). The Exchange is responsible 
for FINRA's performance under this RSA.
    \80\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
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2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\81\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\82\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers or Companies and other persons 
using any facility or system which NASDAQ operates or controls, and it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market, and, in general, to protect investors and the public interest.
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    \81\ 15 U.S.C. 78f.
    \82\ 15 U.S.C. 78f(b)(4) and (5).
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    The goal of the MQP--to incentivize members to make high-quality, 
liquid markets--supports the primary goal of the Act to promote the 
development of a resilient and efficient national market system. 
Congress instructed the Commission to pursue this goal by emphasizing 
multiple policies, including the promotion of price discovery, order 
interaction and competition among orders and markets. The MQP promotes 
all of these policies; it will enhance quote competition, improve 
NASDAQ liquidity, support the quality of price discovery, promote 
market transparency and increase competition for listings and trade 
executions while reducing spreads and transaction costs. Maintaining 
and increasing liquidity in exchange-listed securities executed on a 
registered exchange will help raise investors' confidence in the 
fairness of the market and their transactions. Improving liquidity in 
this manner is particularly important with respect to ETFs and low-
volume securities, as noted by the Joint CFTC/SEC Advisory Commission 
on Emerging Regulatory Issues.\83\
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    \83\ See Recommendations Regarding Regulatory Responses To The 
Market Events Of May 6, 2010, February 18, 2011 (Recommendation that 
the SEC evaluate whether incentives or regulations can be developed 
to encourage persons who engage in market making strategies to 
regularly provide buy and sell quotations that are ``reasonably 
related to the market.''). Available at http://www.sec.gov/spotlight/sec-cftcjointcommittee/021811-report.pdf.
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    Each aspect of the MQP adheres to and supports the Act. First, the 
Program promotes the equitable allocation of fees and dues among 
issuers. The MQP is completely voluntary in that it will provide an 
additional means by which issuers may relate to the Exchange without 
modifying the existing listing options. Issuers can supplement the 
standard listing fees (which have already been determined to be 
consistent with the Act) with those of

[[Page 77150]]

the MQP (which are consistent with the Act as well). While the MQP will 
result in higher fees for issuers that choose to participate, the 
issuers receive significant benefits for participating, including 
greater liquidity, and lower transaction costs for their investors. 
Additionally, issuers will have the ability to withdraw from the 
Program after an initial commitment in the event they determine that 
participation is not beneficial. In that case, the withdrawing issuers 
will automatically revert to the already-approved fee schedule 
applicable to the market tier in which their shares are listed.
    The MQP also represents an equitable allocation of fees and dues 
among Market Makers. Again, the MQP is completely voluntary with 
respect to Market Maker participation in that it will provide an 
additional means by which members may qualify for a credit, without 
eliminating any of the existing means of qualifying for incentives on 
the Exchange. Currently, NASDAQ and other exchanges use multiple fee 
arrangements to incentivize Market Makers to maintain high quality 
markets or to improve the quality of executions, including various 
payment for order flow arrangements, liquidity provider credits, and 
NASDAQ's Investor Support Program (set forth in NASDAQ Rule 7014). 
Market Makers that choose to undertake increased burdens pursuant to 
the MQP will be rewarded with increased credits; those that do not 
undertake such burdens will receive no added benefit. As with issuers, 
Market Makers that choose to participate in the MQP will be permitted 
to withdraw from it after an initial commitment if they determine that 
the burdens imposed by the MQP outweigh the benefits provided.
    Additionally, the MQP establishes an equitable allocation of MQP 
Credits among Market Makers that choose to participate and fulfill the 
obligations imposed by the rule. If one Market Maker fulfills those 
obligations, the MQP Credit will be distributed by NASDAQ to that 
Market Maker out of the General Fund; and if multiple Market Makers 
satisfy the standard, the MQP Credit will be distributed pro rata among 
them. In other words, all of the benefit of the MQP Credits will flow 
to high-performing Market Makers, provided that at least one Market 
Maker fulfills the obligations under the proposed rule.
    The MQP is designed to avoid unfair discrimination among Market 
Makers and issuers. The proposed rule contains objective, measurable 
(universal) standards that NASDAQ will apply with care. These standards 
will be applied equally to ensure that similarly situated parties are 
treated similarly. This is equally true for inclusion of issuers and 
Market Makers, withdrawal of issuers and Market Makers, and termination 
of eligibility for the MQP. The standards are carefully constructed to 
protect the rights of all parties wishing to participate in the Program 
by providing notice of requirements and a description of the selection 
process. NASDAQ will apply these standards with the same care and 
experience with which it applies the many similar rules and standards 
in NASDAQ's rule manuals.
    In contrast to the extensive benefits of the MQP, the participation 
of an MQP Company in the Program is substantially limited by design. In 
this regard, an MQP Company is limited to making only the following 
determinations regarding the Program: whether to participate in the 
Program; what MQP Security should be in the Program; when the MQP 
Security should exit the Program; and the level of Supplemental Fees, 
if any, that should be applied. The MQP Company can never choose an MQP 
Market Maker, nor influence how, when, or the specific amount that an 
MQP Market Maker receives as credit for making a market in an MQP 
Security; these functions are performed solely by the Exchange 
according to standards set forth in the Program.\84\
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    \84\ Indeed, the Exchange will not pay an MQP Market Maker 
pursuant to the Program for making a market in an MQP Security; 
rather, the Exchange will pay an incentive out of its General Fund 
if--and only if--an MQP Market Maker achieves very specific, rules-
based market quality objectives when otherwise making a market.
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    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 and program 
offerings 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 all aspects of the proposed rule change reflect this competitive 
environment because the MQP is designed to increase the credits 
provided to members that enhance NASDAQ's market quality.
    Finally, NASDAQ notes that the proposed paid for market making 
system has been used successfully for years on NASDAQ OMX Nordic's 
First North market. The First North paid for market making system has 
been quite beneficial to market participants including investors and 
listing companies (issuers) that have experienced market quality and 
liquidity with narrowed spreads. The Exchange believes that the 
proposed MQP will similarly enjoy positive results to the benefit of 
investors in MQP Securities and Companies related to them and the 
financial markets as a whole.

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. To the contrary, 
NASDAQ believes the MQP program is pro-competitive in that it will 
increase competition in both the listings market and in the transaction 
services market. The MQP will promote competition in the listings 
market by advancing NASDAQ's reputation as an exchange that works 
tirelessly to develop a better market for all issuers, and for 
partnering with issuers to improve the quality of trading on NASDAQ. In 
fact, the MQP is itself a response to the competition provided by other 
markets that are developing similar programs, including NYSE Arca and 
BATS. NASDAQ fully expects that other listing venues will respond to 
the MQP by further enhancing their listings market offerings.
    The MQP promotes competition in the transaction services market by 
creating incentives for market makers to make better quality markets. 
As market makers strive to attain the quality standards established by 
the MQP, the quality of NASDAQ's quotes will improve. This, in turn, 
will attract more liquidity to NASDAQ and further improve the quality 
of trading of MQP stocks. Again, if the MQP is successful in its goals, 
NASDAQ fully expects that competing markets will respond by creating 
incentives of their own to improve the quality of their markets and to 
attract liquidity to their markets.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such

[[Page 77151]]

longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the Exchange consents, the Commission 
shall: (a) By order approve or disapprove such proposed rule change, or 
(b) institute proceedings to determine whether the proposed rule change 
should be disapproved.

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. The Commission previously received 
comments on SR-NASDAQ-2012-043, which proposed rule change was 
withdrawn by the Exchange,\85\ and all such comments are available on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.)
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    \85\ See supra note 3.
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    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-2012-137 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-2012-137. 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 Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between 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-2012-137 and should 
be submitted on or before January 22, 2013.
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    \86\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\86\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31410 Filed 12-28-12; 8:45 am]
BILLING CODE 8011-01-P


