
[Federal Register Volume 81, Number 41 (Wednesday, March 2, 2016)]
[Notices]
[Pages 10946-10949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04507]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77239; File No. SR-NASDAQ-2016-027]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 7018

February 25, 2016.
    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 February 22, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing changes to amend Nasdaq Rule 7018(a), governing 
fees and credits assessed for execution and routing of securities.
    The text of the proposed rule change is available at 
nasdaq.cchwallstreet .com, 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 those 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 parts of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Nasdaq Rule 7018(a), governing fees 
and credits assessed for execution and routing of securities listed on 
Nasdaq,\3\ listed on the New York Stock Exchange (``NYSE'') \4\ and 
listed on exchanges other than Nasdaq and NYSE \5\ (collectively, the 
``Tapes'').
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    \3\ Nasdaq Rule 7018(a)(1).
    \4\ Nasdaq Rule 7018(a)(2).
    \5\ Nasdaq Rule 7018(a)(3).
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    Specifically, the purpose of the proposed rule change is to 
indicate that Nasdaq will not charge a fee for the use of its recently 
approved routing option, the Retail Order Process (``RTFY''),\6\ 
regardless of where the execution occurs.\7\ The RTFY order routing 
option

[[Page 10947]]

is designed to enhance execution quality and benefit retail investors 
by providing price improvement opportunities to retail order flow.
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    \6\ See Securities Exchange Act Release No. 76335 (Nov. 3, 
2015), 80 FR 69256 (Nov. 9, 2015) (SR-NASDAQ-2015-112).
    \7\ The Exchange proposed RTFY because retail order firms often 
send non-marketable order flow (i.e., orders that are not executable 
against the best prices available in the market place based on their 
limit price) to post and display on exchanges. Some of the orders 
that have been deemed to be non-marketable by the entering firm 
become marketable by the time the exchange receives them and 
ultimately remove liquidity from the exchange order book.
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    Members entering RTFY orders, regardless of where the orders 
execute will not incur a fee if they use this optional routing 
strategy. Currently, unless the member is eligible for a lower charge 
to enter orders that execute in the Nasdaq Market Center (``remove 
liquidity fee'' or ``remove rate''),\8\ all routing strategies that 
execute on Nasdaq are charged $0.0030 per share executed. Therefore, 
the proposed $0.0000 per share executed for orders electing to use RTFY 
is a reduction from the standard remove rate of $0.0030 per share 
executed that orders with routing instructions currently face.
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    \8\ See Nasdaq Rule 7014(d).
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    The Exchange does not expect an order using RTFY to execute on the 
Exchange, but Nasdaq will cover this atypical scenario by specifically 
stating that no fee will be assessed if the order ultimately executes 
on the Exchange. Currently, if an order removes liquidity from the 
Exchange, unless specifically exempted in a Nasdaq rule, the standard 
remove rate applies. In sum, this proposed rule change reduces the 
remove rate from $0.0030 to $0.0000 per share executed for orders 
electing to use RTFY and establishes routing fees for RFTY as $0.0000 
per share executed.
    Members using TFTY, in contrast to RTFY, which is a comparable 
routing strategy, incurs [sic] fees for routing. Members using TFTY are 
assessed a charge of $0.0030 per share executed for orders that execute 
at NASDAQ OMX PSX and are assessed a charge of $0.0007 per share 
executed for orders that execute on venues other than BX or NASDAQ OMX 
PSX. Orders using TFTY on the Exchange also incur remove liquidity 
fees. In the case of RTFY, the Exchange intends to provide the RFTY 
routing option at no charge as an incentive for members to use this new 
routing strategy. No member that uses this new routing strategy to seek 
price improvement opportunities for the retail orders that it routes 
will incur a routing fee. A member that elects not to use this new 
routing strategy will be assessed the routing fee applicable to the 
strategy it selected and will be charged the remove rate the member 
otherwise qualifies for on Nasdaq.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ 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 its facilities which 
the Exchange operates or controls, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \11\ Likewise, in 
NetCoalition v. Securities and Exchange Commission \12\ 
(``NetCoalition'') the D.C. Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\13\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \14\
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    \11\ Securities Exchange Act Release No. 34-51808 (June 9, 2005) 
(``Regulation NMS Adopting Release'').
    \12\ NetCoalition v. SEC. 615 F.3d 525 (D.C. Cir. 2010).
    \13\ Id. at 534-535.
    \14\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers' . . . .'' \15\
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    \15\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
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    Nasdaq believes that the proposed rule change to Nasdaq Rule 
7018(a)(1), (2) and (3) is reasonable because it is an incentive for 
members to select RTFY and a price reduction versus other order types, 
routing strategies and services offered by the Exchange and other away 
venues. Additionally, the new fees of $0.0000 per share executed will 
apply equally to all members entering RTFY orders that execute in the 
Nasdaq Market Center, as well as in a venue other than the Nasdaq 
Market Center. A member that elects not to use this new routing 
strategy will be assessed charges the member otherwise qualifies for, 
often $0.0030 per share executed when executing on Nasdaq and ranging 
from a rebate to a fee when routing to venues other than Nasdaq.
    The new fees are being proposed in connection with the recently 
approved RTFY order routing option under Nasdaq Rule 4758(a)(1)(A)(v) 
for Designated Retail Orders (``DROs'').\16\ If a DRO electing the RTFY 
routing option is not marketable, it will rest on the Exchange book and 
other Nasdaq members will have the opportunity to interact with the 
order at its limit price.\17\ The RTFY order routing option is designed 
to enhance execution quality and benefit retail investors by providing 
price improvement opportunities to retail order flows. The Exchange 
believes that this new Exchange functionality will enhance coordination 
and cooperation with market participants and produce a more efficient 
market because the Exchange believes more retail investor orders will 
be sent to the Exchange to add liquidity or to obtain price 
improvement. Increasing retail activity on the Exchange, in turn, 
benefits all participants through more robust price discover 
opportunities on Nasdaq.
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    \16\ Supra note 6.
    \17\ Supra note 7.
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    The lower cost ($0.0000 per share executed) of this routing 
strategy as compared with other existing routing strategies is 
reasonable because of the lower costs that Nasdaq is charged by the 
venues to which the RTFY orders are routed. For the majority of orders 
routed, Nasdaq believes it will not be charged a fee for the orders 
that become marketable and route to other market centers using this 
routing strategy.
    Equally important, the $0.0000 per share executed is a fee 
reduction versus an assessed a charge of $0.0030 per share executed for 
a member who elects not to use this new routing strategy, as well as a 
fee reduction versus other choices currently available on Nasdaq. The 
Exchange believes that the lower

[[Page 10948]]

cost of this routing strategy is reasonable since it is designed to act 
as an incentive to encourage members to try this new routing strategy. 
Members have a wide range of options of where to send their orders and 
the proposed pricing is influenced by these factors. While Nasdaq 
believes that this new functionality is novel and desired by market 
participants, Nasdaq equally believes that the proposed rate of $0.0000 
per share executed is the appropriate incentive to encourage market 
participants to use this innovative order routing strategy in lieu of 
other choices in the market place. The practice of exchanges offering 
lower rates for new services or those geared toward investors or 
customers is not novel. For example, there are a variety of programs 
that exist today that offer incentives and execution opportunities for 
retail orders, as long as they use specific programs or functionality.
    One such program is the retail price improvement (``RPI'') programs 
that exist on the New York Stock Exchange LLC, NYSE ARCA, Inc., BATS Y-
Exchange, Inc., and NASDAQ OMX BX, Inc. (``BX''). For example, on BX a 
retail order in the RPI program receives higher rebates than an 
otherwise situated order because of its use of the program's specific 
order types. Similar to how members currently take advantage of other 
price reductions, discounts or rebates via volume discounts and tiers, 
members may elect to use the RTFY routing strategy to receive a reduced 
fee, just as members may use RPI programs and various order types to 
receive enhanced rebates or reduced fees. Further, Chicago Board 
Options Exchange, Incorporated (``CBOE'') and NASDAQ PHLX LLC 
(``Phlx'') all offer inventive programs designed to attract customer 
orders.\18\ While not identical to the CBOE and Phlx programs, the 
proposed rate is an incentive designed to attract member's that act as 
agent for retail orders to choose RTFY over all other alternatives in 
the market place in the same manner as the CBOE and Phlx supplemental 
rebates encourage members that rout customer order flow to choose their 
respective exchanges for execution. The Exchange believes that offering 
lower fees, even if for a new routing strategy, is consistent with the 
Exchange Act.
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    \18\ See CBOE Fee Schedule, Volume Incentive Program; see also 
Section B of the Phlx Pricing Schedule, Customer Rebate Program.
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    The Exchange also believes that the proposed rule change is an 
equitable allocation and is not unfairly discriminatory because the new 
fees will be applied uniformly across all members that are willing to 
use Nasdaq's routing services and opt to use the RTFY routing 
strategy.\19\ All members sending DROs may elect to use the RTFY 
routing strategy when sending orders. Moreover, assessing different 
rates when a member elects to use a routing strategy but executes on 
the venue where the order was originally entered in not novel. BX 
provided a higher rebate to remove liquidity for members if they 
elected to use specific routing strategies (the ``BX filing'').\20\ In 
the BX filing, a member using the BDRK or BCST routing strategy was 
able to receive a $0.0014 rebate for removing liquidity in the BX 
Equities System rather than the standard $0.0004 rebate for removing 
liquidity on the BX Equities System. Thus, the same order (apart from 
the routing strategy used) was eligible for a different rebate when 
removing liquidity on BX solely because of its routing strategy. This 
is similar to the proposed $0.0000 fee for RTFY orders that execute on 
the Nasdaq Market Center in that the member receives a different rate 
for an otherwise similar order, but by using a specific routing 
strategy.
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    \19\ See Securities Exchange Act Release No. 66763 (April 6, 
2012), 77 FR 22008 (April 12, 2012) (SR-EDGA-2012-13) (an example of 
another exchange using a proposed rate of $0.0000 per share executed 
that is an equitable allocation of reasonable dues, fees, and other 
charges).
    \20\ See Securities Exchange Act Release No. 69053 (March 7, 
2013), 78 FR 15999 (March 13, 2013) (SR-BX-2013-019).
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    Additionally, the proposed rule change also is not unfairly 
discriminatory because all members sending DROs to Nasdaq for execution 
are eligible to use RTFY. Each member may elect to use the RTFY routing 
strategy as they see fit.

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

    The proposed rule change will not result in a burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act, as amended.\21\ In terms of inter-market competition, the 
Exchange 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 credit opportunities 
available at other venues to be more favorable. In such an environment, 
the Exchange must continually adjust its fees and credits to remain 
competitive with other exchanges and with alternative trading systems 
that have been exempted from compliance with the statutory standards 
applicable to exchanges.
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    \21\ 15 U.S.C. 78f(b)(8).
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    Because competitors are free to modify their own fees and credits 
in response, and because market participants may readily adjust their 
order routing practices, the Exchange believes that the degree to which 
fee changes in this market may impose any burden on competition is 
extremely limited.
    In this instance, the proposed new fees applicable across the Tapes 
apply to member firms entering RTFY orders that execute in the Nasdaq 
Market Center, as well as in a venue other than the Nasdaq Market 
Center (although the proposed new fees are $0.0000 per share executed) 
do not impose a burden on competition because the Exchange's execution 
services are voluntary and subject to extensive competition both from 
other exchanges and from off-exchange venues. The Exchange believes 
that the competition among exchanges and other venues will help to 
drive price improvement and overall execution quality higher for end 
retail investors.
    In sum, if the change proposed herein is unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange does not believe that the proposed 
change 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\22\ 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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    \22\ 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,

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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-2016-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-027. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2016-027 and should 
be submitted on or before March 23, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04507 Filed 3-1-16; 8:45 am]
BILLING CODE 8011-01-P


