
[Federal Register Volume 81, Number 166 (Friday, August 26, 2016)]
[Notices]
[Pages 59023-59025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20451]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78634; File No. SR-NASDAQ-2016-113]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange's Options Pricing

August 22, 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 August 9, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 LLC (``NOM''), the Exchange's facility 
for executing and routing standardized equity and index options. The 
Exchange proposes to amend certain Penny Pilot Options \3\ pricing.
---------------------------------------------------------------------------

    \3\ The Penny Pilot was established in March 2008 and was last 
extended in 2016. 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 78037 (June 10, 2016), 81 FR 39299 (June 16, 2016) (SR-
NASDAQ-2016-052) (notice of filing and immediate effectiveness 
extending the Penny Pilot through December 31, 2016). All Penny 
Pilot Options listed on the Exchange can be found at http://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2016-15.
---------------------------------------------------------------------------

    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 to amend NOM pricing at chapter XV, section 
2(1) to increase the Customer \4\ or Professional \5\ Penny Pilot 
Options Fee for Removing Liquidity in SPY Options.\6\ The proposed 
change is discussed below.
---------------------------------------------------------------------------

    \4\ 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 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)).
    \5\ 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.
    \6\ 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.
---------------------------------------------------------------------------

Change 1--Penny Pilot Options: Change Fee for Removing Customer and 
Professional Liquidity in SPY Options

    The Exchange currently assesses Customers, Professionals, Firms,\7\ 
Non-NOM Market Makers,\8\ NOM Market Makers,\9\ and Broker-Dealers \10\ 
a $0.50 per contract Penny Pilot Options Fee for Removing Liquidity in 
all NOM Penny Pilot Options, except SPY options. Today, the Exchange 
assesses a Customer or Professional that removes liquidity in SPY 
options a Penny Pilot Options Fee for Removing Liquidity of $0.47 per 
contract.\11\ The Exchange proposes to amend note ``3'' of chapter XV, 
section 2(1) to increase the Customer or Professional Penny Pilot 
Options Fee for Removing Liquidity in SPY options from $0.47 to $0.48 
per contract. While the Exchange is proposing to increase this fee, the 
Exchange believes that the lower fee, as compared to $0.50 per contract 
in other Penny Pilot Options, will continue to incentivize Participants 
to send Customer and Professional order flow in SPY.\12\
---------------------------------------------------------------------------

    \7\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at The 
Options Clearing Corporation.
    \8\ 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.
    \9\ 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.
    \10\ 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.
    \11\ Firms, Non-NOM Market Makers, NOM Market Makers and Broker-
Dealers are assessed a $0.50 per contract Penny Pilot Options Fee 
for Removing Liquidity in SPY options, similar to other Penny Pilot 
Options.
    \12\ SPY options are the largest volume Penny Pilot Options 
traded on the Exchange.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\13\ in general, and furthers the objectives of 
sections 6(b)(4) and 6(b)(5) of the Act,\14\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among its members and issuers and other persons using its 
facilities, and is not designed to permit unfair

[[Page 59024]]

discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    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.'' \15\
---------------------------------------------------------------------------

    \15\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission 
\16\ (``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.\17\ 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.'' \18\
---------------------------------------------------------------------------

    \16\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \17\ See NetCoalition, at 534-535.
    \18\ Id. at 537.
---------------------------------------------------------------------------

    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' . . .'' \19\ 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.
---------------------------------------------------------------------------

    \19\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

Change 1--Penny Pilot Options: Change Fee for Removing Customer and 
Professional Liquidity in SPY Options

    The Exchange's proposal to amend note ``3'' of chapter XV, section 
2(1) to increase the Customer or Professional Penny Pilot Options Fee 
for Removing Liquidity in SPY from $0.47 to $0.48 per contract is 
reasonable because the Customer and Professional Penny Pilot Options 
Fee for Removing Liquidity continues to be lower for SPY as compared to 
other Penny Pilot Options. The lower fee of $0.48 in SPY, as compared 
to $0.50 per contract in other Penny Pilot Options, will continue to 
incentivize Participants to send Customer and Professional order flow 
in SPY.
    The Exchange's proposal to amend note ``3'' of chapter XV, section 
2(1) to increase the Customer or Professional Penny Pilot Options Fee 
for Removing Liquidity in SPY options from $0.47 to $0.48 per contract 
is equitable and not unfairly discriminatory because the Customer and 
Professional Penny Pilot Options Fee for Removing Liquidity continues 
to be lower for SPY as compared to other Penny Pilot Options. This 
lower fee for these market participants is equitable and not unfairly 
discriminatory because Customer liquidity benefits all market 
participants by providing more trading opportunities, which attracts 
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 that offering a lower fee to Professionals is 
equitable and not unfairly discriminatory because it serves to attract 
more liquidity to NOM to the benefit of other market participants. By 
offering Professionals, as well as Customers, lower fees, 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 to 
increased Customer order flow. Further, the Exchange initially 
established Professional pricing in order to ``. . . bring additional 
revenue to the Exchange.'' \20\ 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.'' \21\ The 
Exchange does not believe that providing Professionals with the 
opportunity to obtain lower remove fee in SPY, equivalent to that of a 
Customer, creates a competitive environment where Professionals would 
be necessarily advantaged on NOM as compared to NOM Market Makers, 
Firms, Broker-Dealers or Non-NOM Market Makers.
---------------------------------------------------------------------------

    \20\ 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.
    \21\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
---------------------------------------------------------------------------

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. 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.
    The proposed fee changes are competitive and do not impose a burden 
on inter-market competition. In sum, 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.

Change 1--Penny Pilot Options: Change Fee for Removing Customer and 
Professional Liquidity in SPY Options

    The Exchange's proposal to amend note ``3'' of chapter XV, section 
2(1) to increase the Customer or Professional Penny Pilot Options Fee 
for Removing Liquidity in SPY options from $0.47 to $0.48 per contract 
does not create an undue burden on intra-market competition, rather the 
proposal will incentivize market participants to send additional SPY 
order flow to NOM, because Participants sending Customer and 
Professional order flow will

[[Page 59025]]

continued to be charged a lower rate of $0.48 in SPY as compared to 
$0.50 per contract in other Penny Pilot Options. Customer liquidity 
benefits all market participants by providing more trading 
opportunities, which attracts 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 that 
offering a lower fee to Professionals does not create an undue burden 
on intra-market competition because it serves to attract more liquidity 
to NOM to the benefit of other market participants. By offering 
Professionals, as well as Customers, lower fees, 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 to 
increased Customer order flow. Further, the Exchange initially 
established Professional pricing in order to ``. . . bring additional 
revenue to the Exchange.'' \22\ 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.'' \23\ The 
Exchange does not believe that providing Professionals with the 
opportunity to obtain lower remove fee in SPY, equivalent to that of a 
Customer, creates a competitive environment where Professionals would 
be necessarily advantaged on NOM as compared to NOM Market Makers, 
Firms, Broker-Dealers or Non-NOM Market Makers.
---------------------------------------------------------------------------

    \22\ 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.
    \23\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
---------------------------------------------------------------------------

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.\24\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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 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-2016-113 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-2016-113. 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-2016-113 and should 
be submitted on or before September 16, 2016.
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20451 Filed 8-25-16; 8:45 am]
 BILLING CODE 8011-01-P


