
[Federal Register Volume 78, Number 10 (Tuesday, January 15, 2013)]
[Notices]
[Pages 3060-3064]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00634]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68613; File No. SR-NASDAQ-2012-141]


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

January 9, 2013.
    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 31, 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 NASDAQ. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to modify Chapter XV, Section 2 of the rules 
governing the NASDAQ Options Market (``NOM''), NASDAQ's facility for 
executing and routing standardized equity and index options. 
Specifically, NOM proposes to amend its pricing to modify the 
Professional Rebate to Add Liquidity in Penny Pilot Options.\3\
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    \3\ The Penny Pilot was established in March 2008, expanded in 
October 2009, and, through a series of orders, extended through 
December 31, 2012. See Securities Exchange Act Release Nos. 57579 
(March 28, 2008), 73 FR 18587 (April 4, 2008) (SR-NASDAQ-2008-026) 
(notice of filing and immediate effectiveness establishing Penny 
Pilot); 60874 (October 23, 2009), 74 FR 56682 (November 2, 2009) 
(SR-NASDAQ-2009-091) (notice of filing and immediate effectiveness 
expanding and extending Penny Pilot); 60965 (November 9, 2009), 74 
FR 59292 (November 17, 2009) (SR-NASDAQ-2009-097) (notice of filing 
and immediate effectiveness adding seventy-five classes to Penny 
Pilot); 61455 (February 1, 2010), 75 FR 6239 (February 8, 2010) (SR-
NASDAQ-2010-013) (notice of filing and immediate effectiveness 
adding seventy-five classes to Penny Pilot); 62029 (May 4, 2010), 75 
FR 25895 (May 10, 2010) (SR-NASDAQ-2010-053) (notice of filing and 
immediate effectiveness adding seventy-five classes to Penny Pilot); 
65969 (December 15, 2011), 76 FR 79268 (December 21, 2011) (SR-
NASDAQ-2011-169) (notice of filing and immediate effectiveness 
extension and replacement of Penny Pilot); and 67325 (June 29, 
2012), 77 FR 40127 (July 6, 2012) (SR-NASDAQ-2012-075) (notice of 
filing and immediate effectiveness and extension and replacement of 
Penny Pilot through December 31, 2012). See also NOM Rules, Chapter 
VI, Section 5.
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    While the changes proposed herein are effective upon filing, the 
Exchange

[[Page 3061]]

has designated that the amendments be operative on January 2, 2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
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 amend the 
Professional Rebate to Add Liquidity in Penny Pilot Options to attract 
additional order flow to the Exchange.
    The Exchange currently pays a flat Professional Rebate to Add 
Liquidity in Penny Pilot Options of $0.29 per contract. The Exchange is 
now proposing to pay Professionals, a tiered rebate instead. 
Specifically, the Exchange proposes to eliminate the flat $0.29 per 
contract Professional Rebate to Add Liquidity and instead pay 
Professionals rebates based on total number of Customer and 
Professional contracts that add liquidity in Penny Pilot Options in a 
given month as follows:

------------------------------------------------------------------------
                                                           Rebate to add
                     Monthly volume                          liquidity
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Tier 1--Participant adds Customer and Professional                 $0.26
 liquidity of up to 34,999 contracts per day in a month.
Tier 2--Participant adds Customer and Professional                  0.43
 liquidity of 35,000 to 74,999 contracts per day in a
 month..................................................
Tier 3--Participant adds Customer and Professional                  0.44
 liquidity of 75,000 or more contracts per day in a
 month..................................................
Tier 4--Participant adds (1) Customer and Professional              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--Participant has Total Volume of 130,000 or more             0.46
 contracts per day in a month...........................
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    Professionals would be entitled to the same Rebate to Add Liquidity 
in Penny Pilot Options that Customers receive today. The Exchange would 
pay a Tier 1 rebate of $0.26 per contract to market participants that 
add Customer and Professional liquidity of up to 34,999 contracts per 
day in a month. A Tier 2 rebate would pay $0.43 per contract to market 
participants that add Customer and Professional liquidity between 
35,000 and 74,999 contracts per day in a month. A Tier 3 rebate would 
pay a $0.44 per contract rebate to market participants that add 
Customer and Professional liquidity of 75,000 contracts or more per day 
in a month. The Tier 4 rebate would pay a $0.42 rebate to market 
participants that add Customer and Professional liquidity of 25,000 or 
more contracts per day in a month. In addition, to qualify for Tier 4, 
the Participant must have certified for the Investor Support Program 
(``ISP'') as set forth in Rule 7014; \4\ and executed at least one 
order on NASDAQ's equity market.\5\ The Tier 5 rebate would pay a $0.46 
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.\6\ 
Total Volume is defined to include 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.\7\
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    \4\ For a detailed description of the ISP, 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). See also Securities Exchange Act Release 
Nos. 63414 (December 2, 2010), 75 FR 76505 (December 8, 2010) 
(NASDAQ-2010-153) (notice of filing and immediate effectiveness); 
and 63628 (January 3, 2011), 76 FR 1201 (January 7, 2011) (NASDAQ-
2010-154) (notice of filing and immediate effectiveness).
    \5\ 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.
    \6\ 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.
    \7\ See the Exchange's Rules at Chapter XV, Section 2.
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    The Exchange proposes to apply the Rebate to Add Liquidity tiers to 
Professionals transacting Penny Pilot Options. The Exchange proposes to 
amend Chapter XV, Section 2 by noting that the tiers would apply to 
Professionals.
    Additionally, the Exchange also proposes to add contracts executed 
in the ``Professional'' capacity to the tier requirements. NOM 
Participants would be able to count Customer and Professional contracts 
toward the number of contracts eligible to qualify for a tier as 
specified herein. The addition of Professional orders to the number of 
contracts eligible for each rebate tier will enable NOM Participants to 
achieve higher rebates.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with Section 
6(b)(4) of the Act,\9\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which NASDAQ operates or controls.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed tier structure for 
Professional Rebates to Add Liquidity in Penny Pilot Options is 
reasonable, equitable and not unfairly discriminatory because by 
incentivizing NOM Participants to select the Exchange as a venue to 
post Customer and Professional orders, the Exchange will attract 
additional Professional order flow to the benefit of all market 
participants.
    The Exchange believes that the proposed monthly volume tier Rebates 
to Add Liquidity in Penny Pilot Options are equitable and not unfairly 
discriminatory because members that account for more volume would be 
able to add greater value to the Exchange's trading environment. 
Additionally, with the exception of Tier 1, Professionals will have an 
opportunity to earn higher rebates than they earned in the past.

[[Page 3062]]

With respect to Tier 1, the Exchange is proposing to pay a $0.26 per 
contract Rebate to Add Liquidity in Penny Pilot Options as compared to 
a $0.29 per contract rebate. The Exchange believes that this proposal 
is equitable and not unfairly discriminatory because the Professional 
has an opportunity to earn higher rebates with the tier structure as 
compared the current $0.29 per contract Rebate to Add Liquidity in 
Penny Pilot Options. In addition, the Exchange believes that the 
proposed monthly tier structure for Professional Rebates to Add 
Liquidity in Penny Pilot Options is equitable and not unfairly 
discriminatory because the Exchange would uniformly pay a Rebate to Add 
Liquidity to Professionals executing Penny Pilot Options based on the 
monthly tiers proposed herein.
    The Exchange believes that paying Professionals a tiered Rebate to 
Add Liquidity in Penny Pilot Options as proposed herein is equitable 
and not unfairly discriminatory as compared to other market 
participants. For example, Customers are entitled to the same rebates. 
NOM Market Makers are entitled to a $0.30 per contract Rebate to Add 
Liquidity in Penny Pilot Options, and that rebate is higher than 
Professionals that achieve a Tier 1 rebate because NOM Market Makers 
add value through continuous quoting \10\ and the commitment of 
capital. With respect to Tiers 2, 3 and 4, pursuant to this proposal, a 
Professional earns a higher rebate as compared to a NOM Market Maker. 
In addition, a Professional would earn a higher rebate with any tier as 
compared to a Firm and Non-NOM Market Maker. Today, Professionals are 
paid a higher Rebate to Add Liquidity in Penny Pilot Options as 
compared to Firms and Non-NOM Market Makers however the differential 
would become larger. The Exchange believes that paying Professionals 
higher Tier 2, 3 and 4 rebates as compared to NOM Market Makers and 
paying Professionals higher rebates as compared to Firms and Non-NOM 
Market Makers is equitable and not unfairly discriminatory because the 
Exchange does not believe that the amount of the rebate offered by the 
Exchange has a material impact on a NOM Participant's ability to 
execute orders in Penny Pilot Options. The Exchange has been assessing 
the impact of rebates since it first began to offer them and has also 
observed the impact of fees and rebates on other options exchanges in 
terms of quoting and liquidity. The Exchange believes that the Fees for 
Adding Liquidity in Penny Pilot Options, as compared to rebates, impact 
a market participant's decision-making more prominently with respect to 
posting order flow on different venues and price. In modifying its 
rebates, the Exchange hopes to simply remain competitive with other 
venues so that it remains a choice for market participants when posting 
orders and the result may be additional Professional order flow for the 
Exchange. In addition, a NOM Participant may not be able to gauge the 
exact rebate tier it would qualify for until the end of the month 
because Professional volume would be commingled with Customer volume in 
calculating tier volume. Other participants have a known rebate rate at 
which they would execute the entire month. A Professional could only 
otherwise presume the Tier 1 rebate would be achieved in a month when 
determining price.
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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 initially established Professional pricing in order to 
``* * * bring additional revenue to the Exchange.'' \11\ The Exchange 
noted in the Professional Filing that it believes ``* * * that the 
increased revenue from the proposal would assist the Exchange to recoup 
fixed costs.'' \12\ Further, the Exchange noted in that filing that it 
believes that establishing separate pricing for a Professional, which 
ranges between that of a Customer and market maker, accomplishes this 
objective.\13\ Herein, the Exchange is not proposing to amend fees, 
which fees continue to meet the objectives noted in the Professional 
Filing. Rather, the Exchange desires to amend the rebates it pays 
because it believes that NOM Participants would view NOM as a favorable 
venue to transact Professional volume. The Exchange does not believe 
that providing Professionals with the opportunity to obtain higher 
rebates would create a competitive environment where Professionals 
would be necessarily advantaged on NOM as compared to other NOM Market 
Makers, Firms or Non-NOM Market Makers. First, a Professional would be 
assessed the same fees as these other market participants, as is the 
case today. Second, a Professional only has the opportunity to achieve 
the higher rebate by sending in more than 35,000 contracts, otherwise 
the Professional only achieves a Tier 1 rebate with at least one trade 
and the differential in that scenario as between market participants 
remain the same.\14\ The Exchange recognizes that the rebate tiers 
provide an incentive to Professionals, but it is not a guaranteed 
rebate.
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    \11\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066) 
(``Professional Filing''). In this filing, the Exchange addressed 
the perceived favorable pricing of Professionals who were assessed 
fees and paid rebates like a Customer prior to the filing. The 
Exchange noted in that filing that a Professional, unlike a retail 
Customer, has access to sophisticated trading systems that contain 
functionality not available to retail Customers.
    \12\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
    \13\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066) The Exchange 
also in the Professional Filing that it believes the role of the 
retail Customer in the marketplace is distinct from that of the 
Professional and the Exchange's fee proposal at that time accounted 
for this distinction by pricing each market participant according to 
their roles and obligations.
    \14\ If a Professional earned a Tier 1 rebate, the Professional 
would continue to receive a lower rebate as compared to a NOM Market 
Maker and a higher rebate as compared to a Firm and a Non-NOM Market 
Maker, as is the case today. The rebate differential, however, for a 
Professional as compared to a Firm and a Non-NOM Market Maker would 
be lower than it is today.
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    Additionally, the Exchange believes the proposed tiered Rebates to 
Add Liquidity in Penny Pilot Options are reasonable, equitable and not 
unfairly discriminatory because the rebates are similar to a tiered 
rebate offered by NYSE Arca, Inc. (``NYSE Arca''). NYSE Arca pays a per 
contract rate on all posted liquidity in Customer Penny Pilot Issues by 
aggregating total contracts from customer posted orders in Penny Pilot 
Issues in a given month.\15\ Of note, NYSE Arca does not have a 
professional category similar to NOM and therefore, orders that would 
otherwise be classified as Professionals orders on NOM \16\ are being 
counted towards customer volume at NYSE Arca.
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    \15\ See NYSE Arca's Fee Schedule.
    \16\ See Securities Exchange Act Release No. 63028 (October 1, 
2010), 75 FR 62443 (October 8, 2010) (SR-NASDAQ-2012-099). In this 
rule filing, the Exchange noted that NOM Participants will be 
required appropriately to mark all Professional orders. To comply 
with this requirement, Participants will be required to review their 
Public Customers' activity on at least a quarterly basis to 
determine whether orders that are not for the account of a broker-
dealer should be represented as Professional orders.
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    The Exchange proposes to count both Customer and Professional 
orders in the number of contracts eligible for the Rebate to Add 
Liquidity in Penny Pilot Options. NOM Participants would

[[Page 3063]]

benefit from the addition of Professional orders to the number of 
contracts eligible for the rebate and as a result may qualify for a 
higher tier. The Exchange believes the addition of Professional orders 
to the types of orders eligible for a rebate tier is reasonable because 
it will incentivize NOM Participants to send additional Professional 
orders to the Exchange as well as Customer orders. The Exchange 
believes that adding Professional orders to the types of orders 
eligible for a rebate tier is equitable and not unfairly discriminatory 
because all NOM Participants will benefit from the additional liquidity 
the amendment may attract to the Exchange as a result of the increased 
incentive to send Professional as well as Customer orders. Also, all 
NOM Participants are eligible for the rebate and are able to earn a 
rebate by simply transacting one Customer or Professional order in a 
Penny Pilot Option.\17\
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    \17\ A NOM Participant qualifies for a Tier 1 rebate of $0.26 
per contract by adding Customer and Professional liquidity of up to 
34,999 contracts per day in a month.
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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.
    While the Exchange's proposal would result in a Professional 
receiving a higher rebate as compared to a NOM Market Maker if a 
Professional qualified for a Tier 2, 3 or 4 rebate and the differential 
in the rebate would increase as between a Professional and a Firm and a 
Non-NOM Market Maker, the Exchange does not believe the proposed rebate 
tiers would result in any burden on competition as between market 
participants on NOM. The Exchange does not believe that the amount of 
the rebate offered by the Exchange has a material impact on a NOM 
Participant's ability to execute orders in Penny Pilot Options.
    The Exchange has been assessing the impact of rebates since it 
first began to offer them and has also observed the impact of fees and 
rebates on other options exchanges in terms of quoting and liquidity. 
The Exchange believes that the Fees for Adding Liquidity, as compared 
to rebates, impact a market participant's decision-making more 
prominently with respect to posting order flow on different venues and 
price. The Exchange does not believe that allowing a Professional to 
obtain a higher rebate than other market participants, if a certain 
number of contracts where to be executed on the Exchange, results in a 
burden on competition among market participants on NOM for the reasons 
noted herein.
    The Exchange believes that offering Professionals the proposed 
tiered rebates creates competition among options exchanges because the 
Exchange believes that the rebates may cause market participants to 
select NOM as a venue to send Professional order flow. The fees that 
the Exchange assesses are not being amended with this proposal, rather 
the Exchange is offering to pay increased rebates in exchange for 
additional Professional order flow being executed at the Exchange, 
which additional order flow should benefit other market participants.
    The Exchange operates in a highly competitive market comprised of 
eleven U.S. options exchanges in which sophisticated and knowledgeable 
market participants can readily send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive. The 
Exchange believes that the proposed rebate structure and tiers are 
competitive with rebates and tiers in place on other exchanges. The 
Exchange believes that this competitive marketplace impacts the rebates 
present on the Exchange today and substantially influences the 
proposals set forth above.

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.\18\ 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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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-141 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-2012-141. 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 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2012-141, and should be submitted on or before February 5, 2013.


[[Page 3064]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00634 Filed 1-14-13; 8:45 am]
BILLING CODE 8011-01-P


