
[Federal Register Volume 81, Number 102 (Thursday, May 26, 2016)]
[Notices]
[Pages 33572-33575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12386]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77878; File No. SR-NASDAQ-2016-070]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Options Pricing at Chapter XV, Section 2

May 20, 2016.
    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 May 10, 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

    The Exchange proposes to amend Chapter XV, entitled ``Options 
Pricing,'' at Section 2, which governs pricing for Exchange members 
using the NASDAQ Options Market (``NOM''), the Exchange's facility for 
executing and routing standardized equity and index options.\3\ The 
Exchange proposes to amend certain Penny Pilot Options \4\ pricing.
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    \3\ References in this proposal to Chapter and Series refer to 
NOM rules, unless otherwise indicated.
    \4\ The Penny Pilot was established in March 2008 and was last 
extended in 2015. 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); and 75283 (June 24, 2015), 80 FR 37347 (June 30, 2015) (SR-
NASDAQ-2015-063) (notice of filing and immediate effectiveness 
extending the Penny Pilot through June 30, 2016). All Penny Pilot 
Options listed on the Exchange can be found at http://www.nasdaqtrader.com/Micro.aspx?id=phlx.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes certain amendments to the NOM transaction 
fees set forth at Chapter XV, Section 2, for executing and routing 
standardized equity and index Penny Pilot Options. Specifically, the 
Exchange proposes to reduce the fee for Customer \5\ or Professional 
\6\ that removes liquidity in SPY Options.\7\ The proposed change is 
discussed below.
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    \5\ The term ``Customer'' or (``C'') applies to any transaction 
that is identified by a Participant for clearing in the Customer 
range at The Options Clearing Corporation (``OCC'') which is not for 
the account of broker or dealer or for the account of a 
``Professional'' (as that term is defined in Chapter I, Section 
1(a)(48)).
    \6\ The term ``Professional'' or (``P'') means any person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s) pursuant 
to Chapter I, Section 1(a)(48). All Professional orders shall be 
appropriately marked by Participants.
    \7\ Options overlying Standard and Poor's Depositary Receipts/
SPDRs (``SPY'') are based on the SPDR exchange-traded fund 
(``ETF''), which is designed to track the performance of the S&P 500 
Index.
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    The Exchange currently assesses Customer, Professional, Firm,\8\ 
Non-NOM Market Maker,\9\ NOM Market

[[Page 33573]]

Maker,\10\ and Broker-Dealer \11\ a $0.50 per contract Fee for Removing 
Liquidity in Penny Pilot Options.\12\ The Exchange proposes a slightly 
reduced Fee for Removing Customer and Professional Liquidity in SPY 
Options, which are the largest volume Penny Pilot Options traded on the 
Exchange. Excluding the proposed change in SPY Options, the Penny Pilot 
Options Fee for Removing Liquidity, as also the Penny Pilot Options 
Rebate to Add Liquidity does not change.
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    \8\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \9\ The term ``Non-NOM Market Maker'' or (``O'') is a registered 
market maker on another options exchange that is not a NOM Market 
Maker. A Non-NOM Market Maker must append the proper Non-NOM Market 
Maker designation to orders routed to NOM.
    \10\ The term ``NOM Market Maker'' or (``M'') is a Participant 
that has registered as a Market Maker on NOM pursuant to Chapter 
VII, Section 2, and must also remain in good standing pursuant to 
Chapter VII, Section 4. In order to receive NOM Market Maker pricing 
in all securities, the Participant must be registered as a NOM 
Market Maker in at least one security.
    \11\ The term ``Broker-Dealer'' or (``B'') applies to any 
transaction which is not subject to any of the other transaction 
fees applicable within a particular category.
    \12\ Customer, Professional, Firm, Non-NOM Market Maker, NOM 
Market Maker, and Broker-Dealer are NOM Participants. The term 
``Participant'' or ``Options Participant'' means a firm, or 
organization that is registered with the Exchange pursuant to 
Chapter II of these Rules for purposes of participating in options 
trading on NOM as a ``Nasdaq Options Order Entry Firm'' or ``Nasdaq 
Options Market Maker''.
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Change 1--Penny Pilot Options: Change Fee for Removing Customer and 
Professional Liquidity in SPY Options
    The Exchange proposes to modify the Penny Pilot Options fees and 
rebates schedule (per executed contract) to slightly reduce the fee 
when a Customer or Professional removes liquidity in SPY Options. 
Specifically, the Exchange proposes to make note 3 applicable to 
Customer and Professional Penny Pilot Options in Chapter XV, Section 
2(1), and to state that ``A Customer or Professional that removes 
liquidity in SPY Options will be assessed a fee of $0.47 per 
contract.'' Currently, the fee for removing Penny Pilot Options 
liquidity, which includes SPY Options, is $0.50 per contract.
    The Exchange is proposing to decrease the noted SPY Option Fee for 
Removing Liquidity at this time because it believes that the proposed 
decrease will incentivize Participants to send Customer and 
Professional Order flow to the Exchange. This enables the Exchange to 
remain competitive with other options exchanges.
    The Exchange is also making two housekeeping changes in NOM Chapter 
XV, Section 2(1). First, the Exchange is correcting a typo in Penny 
Pilot Options Rebate to Add Liquidity and indicating that note ``d'' is 
applicable to Professional just as it is to Customer.\13\ Second, the 
Exchange is adding ``unless otherwise stated'' in note ``. . .'' for 
better readability and clarity. The sentence as modified will read: 
``To determine the applicable percentage of total industry customer 
equity and ETF option average daily volume, unless otherwise stated, 
the Participant's Penny Pilot and Non-Penny Pilot Customer and/or 
Professional volume that adds liquidity will be included.''
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    \13\ See Securities Exchange Act Release No. 77661 (April 20, 
2016), 81 FR 24668 (April 26, 2016) (SR-NASDAQ-2016-055) (notice of 
filing and immediate effectiveness), wherein the Exchange proposed 
to make note ``d'' applicable to Professional just as it is to 
Customer.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act,\14\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the 
Act,\15\ 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 the 
Exchange operates or controls, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4), (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.'' \16\
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    \16\ Securities Exchange Act Release No. 51808 (June 29, 2005), 
70 FR 37496 at 37499 (File No. S7-10-04) (``Regulation NMS Adopting 
Release'') [sic].
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\17\ (``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.\18\ 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.'' \19\
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    \17\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \18\ See id. at 534-535.
    \19\ See 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'. . . .'' \20\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \20\ See id. at 539 (quoting Securities Exchange Act Commission 
at [sic] Release No. 59039 (December 2, 2008), 73 FR 74770 at 74782-
74783 (December 9, 2008) (SR-NYSEArca-2006-21)).
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    The Exchange believes that the proposed change is reasonable, 
equitable and not unfairly discriminatory for the following reasons.
Change 1--Penny Pilot Options: Change Fee for Removing Customer and 
Professional Liquidity in SPY Options
    The Exchange proposes to modify the Penny Pilot Options fees and 
rebates schedule (per executed contract) to slightly reduce the fee 
when a Customer or Professional removes liquidity in SPY Options. 
Specifically, the Exchange proposes to make note 3 applicable to 
Customer and Professional Penny Pilot Options in Chapter XV, Section 
2(1), and to state that ``A Customer or Professional that removes 
liquidity in SPY Options will be assessed a fee of $0.47 per 
contract.'' Currently, the fee is $0.50 per contract.
    The Exchange is proposing to decrease the noted SPY Option-related 
fee at this time because it believes that the proposed decrease will 
incentivize Participants to send Customer and Professional Order flow 
to the Exchange. This enables the Exchange to remain competitive with 
other options exchanges.
    The Exchange's proposal to reduce the noted SPY Option Fee for 
Removing Liquidity is reasonable because NOM Participants will continue 
to be incentivized, even more so with the proposed fee reduction, to 
send order flow to NOM.
    The proposed rule change is reasonable because it continues to 
encourage market participant behavior through the fees and rebates 
system, which is an accepted methodology

[[Page 33574]]

among options exchanges.\21\ It is reasonable to incentivize bringing 
flow to the Exchange by offering reduced fees.
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    \21\ See, e.g., fee and rebate schedules of other options 
exchanges, including, but not limited to, NASDAQ BX, Inc. (``BX 
Options''), NASDAQ PHLX LLC (``Phlx''), and Chicago Board Options 
Exchange (``CBOE'').
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    The Exchange believes it is equitable and not unfairly 
discriminatory to continue to charge the Fee for Removing Liquidity, as 
also the Rebate to Add Liquidity, in order to incentivize Professionals 
and Customers to bring liquidity to the Exchange. Such liquidity, and 
in particular Customer liquidity, attracts other market participants. 
Customer liquidity benefits all market participants by providing more 
trading opportunities, which attract Market Makers. An increase in the 
activity of these market participants in turn facilitates tighter 
spreads, which may cause an additional corresponding increase in order 
flow from other market participants. The Exchange believes it is 
equitable and not unfairly discriminatory to make the proposed 
reduction in the Fee for Removing Liquidity because it will be applied 
uniformly across all similarly situated Participants, while promoting 
bringing liquidity to the Exchange. The Exchange also believes that it 
is equitable and not unfairly discriminatory to make sure that Customer 
and Professional are harmonized and treated the same, as proposed.
    As noted, liquidity attracts other market participants. Customer 
and Professional liquidity benefits all market participants by 
providing more trading opportunities, which attract Market Makers. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
The proposed changes enhance the competitiveness of the Exchange by 
continuing to incentivize bringing flow to the Exchange.
    The Exchange does not believe that the two housekeeping changes 
have any impact on the reasonable and equitable and not unfairly 
discriminatory nature of the proposal.
    The Exchange desires to continue to incentivize members and member 
organizations, through the Exchange's rebate and proposed reduced fee 
structure, to select the Exchange as a venue for bringing liquidity and 
trading by offering competitive pricing. Such competitive, 
differentiated pricing exists today on other options exchanges. The 
Exchange's goal is creating and increasing incentives to attract orders 
to the Exchange that will, in turn, benefit all market participants 
through increased liquidity at the Exchange.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the Exchange does 
not believe that its proposal to make changes to its Fee for Removing 
Liquidity where a Customer or Professional removes liquidity in SPY 
Options, as per proposed note 3, will impose any undue burden on 
competition, as discussed below.
    The Exchange operates in a highly competitive market in which many 
sophisticated and knowledgeable market participants can readily and do 
send order flow to competing exchanges if they deem fee levels or 
rebate incentives at a particular exchange to be excessive or 
inadequate. Additionally, new competitors have entered the market and 
still others are reportedly entering the market shortly. These market 
forces ensure that the Exchange's fees and rebates remain competitive 
with the fee structures at other trading platforms. In that sense, the 
Exchange's proposal is actually pro-competitive because the Exchange is 
simply continuing its fees and rebates for Penny Pilot Options, and 
enhancing its fee structure in order to remain competitive in the 
current environment.
    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. 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 rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange 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, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    In terms of intra-market competition, the Exchange notes that price 
differentiation among different market participants operating on the 
Exchange (e.g., Customer and Professional as opposed to others) is 
reasonable. Customer and Professional activity, for example, enhances 
liquidity on the Exchange for the benefit of all market participants 
and benefits all market participants by providing more trading 
opportunities, which attracts market makers. An increase in the 
activity of these market participants (particularly in response to 
pricing) in turn facilitates tighter spreads, which may cause an 
additional corresponding increase in order flow from other market 
participants.
    Moreover, in this instance, the proposed changes to reduce the Fee 
for Removing Liquidity where Customer or Professional removes liquidity 
in SPY Options does not impose a burden on competition because the 
Exchange's execution and routing services are completely voluntary and 
subject to extensive competition both from other exchanges and from 
off-exchange venues. If the changes proposed herein are 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 
changes will impair the ability of members or competing order execution 
venues to maintain their competitive standing in the financial markets. 
Additionally, the changes proposed herein are pro-competitive to the 
extent that they continue to allow the Exchange to promote and maintain 
order executions.

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.\22\
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    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings

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to determine whether the proposed rule should be approved or 
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. 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-2016-070 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-2016-070. 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-2016-070 and should 
be submitted on or before June 16, 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. 2016-12386 Filed 5-25-16; 8:45 am]
 BILLING CODE 8011-01-P


