
[Federal Register Volume 78, Number 118 (Wednesday, June 19, 2013)]
[Notices]
[Pages 36801-36805]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69758; File No. SR-NASDAQ-2013-081]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Make Changes to NASDAQ's Pricing Incentive Programs and Schedule of 
Fees and Credits

June 13, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 3, 2013, 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 the 
Substance of the Proposed Rule Change

    NASDAQ is proposing to make minor modifications to pricing 
incentive programs under Rule 7014 and NASDAQ's schedule of fees and 
credits applicable to execution and routing of orders in securities 
priced at $1 or more per share under Rule 7018, and to make a 
conforming change to the fee schedule under Rule 7015. The changes 
pursuant to this proposal are effective upon filing, and the Exchange 
will implement the proposed rule changes on June 3, 2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at

[[Page 36802]]

the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    NASDAQ Rule 7014 contains a number of pricing incentive programs 
that are designed to encourage participation in NASDAQ by members 
representing retail investors and to increase the extent to which 
members offer to provide liquidity at the national best bid and/or 
national best offer (``NBBO''). NASDAQ is proposing to make a minor 
modification to reduce the costs of the programs in a period of 
persistent low trading volumes without materially diminishing the 
incentives offered by these programs.
    Under the NBBO Setter Incentive program, NASDAQ provides an 
enhanced liquidity provider rebate with respect to displayed liquidity-
providing orders that set the NBBO or cause NASDAQ to join another 
trading center with a protected quotation at the NBBO. Under the 
Qualified Market Maker (``QMM'') Program, a member may be designated as 
a QMM with respect to one or more of its market participant identifiers 
(``MPIDs'') if (i) the member is not assessed any ``Excess Order Fee'' 
under Rule 7018 during the month; \3\ and (ii) through such MPID the 
member quotes at the NBBO at least 25% of the time during regular 
market hours \4\ in an average of at least 1,000 securities per day 
during the month.\5\ The financial incentives received by a QMM include 
an NBBO Setter Incentive credit that may be higher than the NBBO Setter 
Incentive paid to members that do not qualify for the QMM program. 
Finally, under the Investor Support Program (the ``ISP''), NASDAQ pays 
an enhanced liquidity provider credit to members for providing 
additional liquidity to NASDAQ and increasing the NASDAQ-traded volume 
of what are generally considered to be retail and institutional 
investor orders in exchange-traded securities. Participants in the ISP 
are required to designate specific NASDAQ order entry ports for use 
under the ISP and to meet specified criteria focused on market 
participation, liquidity provision, and high rates of order execution.
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    \3\ Rule 7018(m). Last year, NASDAQ introduced an Excess Order 
Fee, aimed at reducing inefficient order entry practices of certain 
market participants that place excessive burdens on the systems of 
NASDAQ and its members and that may negatively impact the usefulness 
and life cycle cost of market data. In general, the determination of 
whether to impose the fee on a particular MPID is made by 
calculating the ratio between (i) entered orders, weighted by the 
distance of the order from the NBBO, and (ii) orders that execute in 
whole or in part. The fee is imposed on MPIDs that have an ``Order 
Entry Ratio'' of more than 100.
    \4\ Defined as 9:30 a.m. through 4:00 p.m., or such shorter 
period as may be designated by NASDAQ on a day when the securities 
markets close early (such as the day after Thanksgiving).
    \5\ A member MPID is considered to be quoting at the NBBO if it 
has a displayed order at either the national best bid or the 
national best offer or both the national best bid and offer. On a 
daily basis, NASDAQ will determine the number of securities in which 
the member satisfied the 25% NBBO requirement. To qualify for QMM 
designation, the MPID must meet the requirement for an average of 
1,000 securities per day over the course of the month. Thus, if a 
member MPID satisfied the 25% NBBO requirement in 900 securities for 
half the days in the month, and satisfied the requirement for 1,100 
securities for the other days in the month, it would meet the 
requirement for an average of 1,000 securities.
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    At present, if a member is a participant in both the QMM program 
and the ISP, it may receive a supplemental credit of $0.00005, $0.0001, 
or $0.0002 per share executed for displayed liquidity-providing orders 
that qualify for the ISP, and an NBBO Setter Incentive credit or 
$0.0002 or $0.0005 per share executed for displayed liquidity-providing 
orders that set the NBBO or allow NASDAQ to join another market at the 
NBBO.\6\ Under the proposed change, NASDAQ will pay the greater of the 
applicable credit under the ISP or the NBBO Setter Incentive Program, 
but not a credit under both programs. At present, this means that the 
applicable credit would be paid under the NBBO Setter Incentive 
program, since the credits under that program equal or exceed ISP 
credits, but NASDAQ is adopting language to provide for the greater 
credit under either program, to cover the possibility that ISP credits 
may be increased at some point in the future. Orders receiving the NBBO 
Setter Incentive credit would continue to be included in calculations 
to determine a member's eligibility for the ISP. Thus, under the 
change, the ISP would continue to incentivize members representing 
retail and institutional investors to bring orders to NASDAQ. Moreover, 
to the extent that such orders enhance NASDAQ's market quality by 
allowing it to set or join the NBBO, the NBBO Setter Incentive credit 
would be paid. However, NASDAQ believes that paying both rebates would 
be unwarranted under these circumstances, since members representing 
retail or institutional orders are not in a position to influence the 
pricing of such orders.
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    \6\ The ISP credit and the NBBO Setter Incentive credit are both 
in addition to the rebate otherwise applicable under NASDAQ's main 
schedule of fees and credits under Rule 7018.
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    In addition to the NBBO Setter Incentive credit described above, 
QMMs are also eligible to receive a discount on fees for ports used by 
the QMM for entering orders under the program. Effective April 1, 2013, 
NASDAQ reduced the applicable discount from (i) 25%, up to a total 
discount of $10,000 per MPID per month, to (ii) the lesser of the QMM's 
total fees for such ports or $5,000.\7\ The change is reflected in the 
text of Rule 7014. However, NASDAQ did not make a conforming change to 
the text of Rule 7015, and is proposing to do so now.
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    \7\ Securities Exchange Act Release No. 69376 (April 15, 2013), 
78 FR 23611 (April 19, 2013) (SR-NASDAQ-2013-063).
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    Currently, NASDAQ pays a credit of $0.0020 per share executed for 
midpoint pegged and midpoint post-only orders (``midpoint orders'') if 
a member provides an average daily volume of more than 5 million shares 
through midpoint orders during the month and the member's average daily 
volume of liquidity provided through midpoint orders during the month 
is at least 2 million shares more than in April 2013. NASDAQ pays a 
credit of $0.0017 per share executed for midpoint orders if the member 
provides an average daily volume of 3 million or more shares through 
midpoint orders during the month (but does not qualify for the $0.0020 
tier), and a credit of $0.0015 per share executed for midpoint orders 
if the member provides an average daily volume of less than 3 million 
shares through midpoint orders during the month. NASDAQ is proposing to 
increase the requirement for the $0.0017 per share executed tier to an 
average daily volume of 5 million or more shares through midpoint 
orders (but without the requirement for an increase in volume over 
April 2013 applicable to the $0.0020 per share rebate). In addition, 
NASDAQ proposes to reduce the midpoint order rebate for members not 
reaching these tiers (i.e., with an average daily volume of less than 5 
million shares provided through

[[Page 36803]]

midpoint orders during the month) from $0.0015 to $0.0014 per share 
executed. The changes are intended to reduce costs during a period of 
persistent low trading volumes. In addition, the changes maintain 
NASDAQ's established policy of encouraging use of displayed orders 
through rebates that are higher than those paid for non-displayed 
orders, but paying higher rebates for midpoint orders, which offer 
price improvement, than for other forms of non-displayed orders.
    Finally, under both Rule 7014 and Rule 7018, various pricing tiers 
depend upon the extent of a member's trading activity, expressed as a 
percentage of, or a ratio to, Consolidated Volume.\8\ For example, 
NASDAQ pays a rebate of $0.00295 per share executed with respect to 
displayed orders that provide liquidity if a member has shares of 
liquidity provided in all securities through one of its Nasdaq Market 
Center MPIDs that represent more than 0.90% of Consolidated Volume 
during the month. NASDAQ has determined that it would be beneficial to 
members to exclude the date of the annual reconstitution of the Russell 
Investments Indexes (the ``Russell Reconstitution'') (in 2013, June 28) 
from calculations of Consolidated Volume. Trades occurring on that date 
would be excluded from the calculation of total Consolidated Volume and 
from the calculation of the member's trading activity (i.e., they would 
be excluded from both the numerator and the denominator of the 
calculation of a member's percentage or ratio).\9\
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    \8\ ``Consolidated Volume'' is the consolidated volume of shares 
reported to all consolidated transaction reporting plans by all 
exchanges and trade reporting facilities during a month.
    \9\ NASDAQ is also moving the location of the definition of 
Consolidated Volume in Rule 7018.
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    Trading volumes on the date of the Russell Reconstitution are 
generally far in excess of volumes on other days during the month, and 
members that are not otherwise active on NASDAQ to a great extent often 
participate in the NASDAQ Closing Cross on that date. As a result, the 
trading activity of members that are regular daily participants in 
NASDAQ, expressed as a percentage of Consolidated Volume, is likely to 
be lower than their percentage of Consolidated Volume on other days 
during the month. Including the date of the Russell Reconstitution in 
calculations of Consolidated Volume is therefore likely to make it more 
difficult for members to achieve particular pricing tiers during the 
month. Accordingly, excluding the date of the Russell Reconstitution 
from these calculations will diminish the likelihood of a de facto 
price increase occurring because a member is not able to reach a volume 
percentage on that date that it reaches on other trading days during 
the month. Moreover, excluding the date is very unlikely to result in a 
price increase for any members, since a member that was not, on other 
days during the month, trading in NASDAQ at volume levels that would 
allow it qualify for a particular pricing tier would be unlikely to 
achieve percentage volume levels on the date of the Russell 
Reconstitution that would increase its overall monthly percentage to 
the required levels, even if it was very active on that date.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\10\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\11\ 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, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4) and (5).
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    NASDAQ believes that the proposed change to provide that members 
participating in both the QMM program and the ISP may not receive both 
an ISP credit and an NBBO Setter Incentive credit with respect to the 
same order (but rather would receive the higher of the two credits), is 
reasonable because such members will continue to receive an enhanced 
rebate of $0.0002 or $0.0005 per share executed with respect to such 
orders. NASDAQ does not believe, however, that it is reasonable to pay 
an added credit with respect to ISP-qualified orders that set or join 
the NBBO, since a member entering retail or institutional orders is not 
in a position to influence their pricing. NASDAQ further believes that 
the change is consistent with an equitable allocation of fees because 
NASDAQ will continue to pay the higher of the two credits to reflect 
the fact that such orders improve NASDAQ's market quality by setting or 
allowing NASDAQ to join the NBBO. NASDAQ further believes that the 
change is not unfairly discriminatory because the change will eliminate 
an instance in which members may receive credits that are high in 
relation to those paid to other members while still paying credits that 
reflect the value of applicable orders as both retail or institutional 
orders and orders that set or join the NBBO. Finally, the change does 
not unfairly burden competition because it does not disadvantage 
affected members in a manner that would impair their ability to 
compete, in that they will continue to receive enhanced rebates. The 
change with respect to the text of Rule 7015 is reasonable, consistent 
with an equitable allocation, not unfairly discriminatory, and does not 
burden competition, in that is designed merely to ensure that the fee 
language of Rule 7015 reflects a change that was made to Rule 7014 in 
April 2013. As such, it is not a substantive change.
    The changes to increase the required threshold for a rebate of 
$0.0017 per share executed for midpoint orders and to reduce the rebate 
for midpoint orders for members not reaching this tier from $0.0015 to 
$0.0014 per share executed are reasonable, consistent with an equitable 
allocation, not unfairly discriminatory, and do not burden competition. 
Specifically, the change in the threshold is reasonable because it 
provides an incentive for members that wish to receive a higher rebate 
to increase their levels of liquidity provision, while continuing to 
provide a rebate for midpoint orders, whether or not a member reaches 
the tier threshold, that is higher than the rebate for other non-
displayed orders. The change to the threshold is consistent with an 
equitable allocation of fees and not unfairly discriminatory because 
although it will affect only a small number of market participants, it 
is designed to incentivize all market participants that use midpoint 
orders to increase their volumes of liquidity provision in order to 
achieve a higher rebate for such orders, or, in the alternative, to 
increase use of displayed orders to receive a still higher rebate. 
Thus, the change is consistent with NASDAQ's longstanding policy of 
encouraging the use of displayed orders, which promote price discovery, 
while nevertheless favoring midpoint orders over other non-displayed 
orders due to the price improvement they offer. The change does not 
burden competition since affected members may readily adjust trading 
behavior to maintain or increase their rebates, and will therefore not 
be disadvantaged in their ability to compete.
    The change in the applicable rebate for midpoint orders to which a 
pricing tier does not apply is reasonable because it reflects a 
reduction of only $0.0001 to the applicable rebate. The change is 
consistent with an equitable allocation of fees and not unfairly 
discriminatory because it provides further incentives for members to

[[Page 36804]]

increase their volume of liquidity provision through midpoint orders 
and/or increase their use of displayed orders in order to earn a higher 
rebate. As such, the change is consistent with NASDAQ's policy of 
encouraging the use of displayed orders, while nevertheless favoring 
midpoint orders over other non-displayed orders. Moreover, the impact 
of the change will be spread across a large number of firms that use 
midpoint orders. Finally, the change does not burden competition since 
affected members may readily adjust trading behavior to increase 
rebates, or alternatively, will see only a small reduction in rebates 
with respect to continued use of the midpoint orders. Accordingly, 
affected members will not be disadvantaged in their ability to compete.
    NASDAQ believes that the proposed change to exclude the date of the 
Russell Reconstitution from calculations of Consolidated Volume under 
Rules 7014 and 7018 is reasonable because it will diminish the 
likelihood of a de facto price increase occurring because a member is 
not able to reach a volume percentage on that date that it reaches on 
other trading days during the month. NASDAQ further believes that the 
change is consistent with an equitable allocation of fees and is not 
unfairly discriminatory. Specifically, because trading activity on the 
date of the Russell Reconstitution will be excluded from determinations 
of a member's percentage of Consolidated Volume, NASDAQ believes it 
will be easier for members to determine the volume required to meet a 
certain percentage of participation than would otherwise be the case. 
To the extent that a member has been active in NASDAQ at a significant 
level throughout the month, excluding the date of the Russell 
Reconstitution, on which its percentage of Consolidated Volume is 
likely to be lower than on other days, will increase its overall 
percentage for the month. Conversely, even if a member was more active 
on the date of Russell Reconstitution than on other dates, it is 
unlikely that its activity on one day would be able to increase its 
overall monthly percentage to a meaningful extent. Thus, NASDAQ 
believes that the change will benefit members that are in a position to 
achieve volume levels required by the NASDAQ pricing schedule but 
without harming the ability of any members to reach such levels. 
Finally, NASDAQ believes that the change does not unfairly burden 
competition because it will help to preserve or improve the pricing 
status that would apply to members' trading activity in the absence of 
the Russell Reconstitution, and therefore will not impact the ability 
of such members to compete.

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. 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 to remain competitive with other exchanges 
and with alternative trading systems that have been exempted from 
compliance with the statutory standards applicable to exchanges. 
Because competitors are free to modify their own fees in response, and 
because market participants may readily adjust their order routing 
practices, NASDAQ believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited. In 
this instance, although certain of the proposed changes have the effect 
of reducing certain rebates or limiting their availability, the rebates 
in question remain in place and are themselves reflective of the need 
for exchanges to offer significant financial incentives to attract 
order flow. Moreover, if the changes are unattractive to market 
participants, it is likely that NASDAQ will lose market share as a 
result. In addition, the change with respect to the Russell 
Reconstitution is designed to protect members from the possibility of a 
de facto price increase. As a result of all of these considerations, 
NASDAQ does not believe that the proposed changes will impair the 
ability of members or competing order execution venues to maintain 
their competitive standing in the financial markets.

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) of the Act \12\ and paragraph (f) of Rule 19b-4 
thereunder.\13\ 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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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-2013-081 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-2013-081. 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 
offices of NASDAQ. All comments received will be posted without change;

[[Page 36805]]

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-2013-081, and should be submitted on or before July 10, 2013.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14608 Filed 6-18-13; 8:45 am]
BILLING CODE 8011-01-P


