[Federal Register Volume 75, Number 186 (Monday, September 27, 2010)]
[Notices]
[Pages 59311-59315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24054]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62950; File No. SR-NASDAQ-2010-115]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change To Enhance Quotation 
Requirements for Market Makers

September 20, 2010.
    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 September 17, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 proposes to enhance quotation requirements for market 
makers.
    The text of the proposed rule change is below. Proposed new 
language is in * * * proposed deletions are in [brackets].\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://nasdaqomx.cchwallstreet.com.
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* * * * *
4751. Definitions
    The following definitions apply to the Rule 4600 and 4750 Series 
for the trading of securities listed on Nasdaq or

[[Page 59312]]

a national securities exchange other than Nasdaq.
    (a)-(b) No Change.
    (c) The term ``Participant'' shall mean an entity that fulfills the 
obligations contained in Rule 4611 regarding participation in the 
System, and shall include:
    (1) No Change.
    (2) ``Nasdaq Market Makers[,]'' or ``Market Makers,'' members that 
are registered as Nasdaq Market Makers for purposes of participation in 
the System on a fully automated basis with respect to one or more 
System securities.
    (3) No Change.
    (d)-(i) No Change
* * * * *
[4613. Character of Quotations
    A member registered as a Nasdaq Market Maker shall engage in a 
course of dealings for its own account to assist in the maintenance, 
insofar as reasonably practicable, of fair and orderly markets in 
accordance with this Rule.
(a) Quotation Requirements and Obligations
    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as a Nasdaq Market Maker, the member shall be willing to 
buy and sell such security for its own account on a continuous basis 
and shall enter and maintain a two-sided quotation (``Principal 
Quote''), which is attributed to the market maker by a special maker 
participant identifier (``MPID'') and is displayed in the Nasdaq Market 
Center at all times, subject to the procedures for excused withdrawal 
set forth in Rule 4619.
    (A) A registered market maker must display a quotation size for at 
least one normal unit of trading (or a larger multiple thereof) when it 
is not displaying a limit order in compliance with SEC Rule 604, 
provided, however, that a registered Nasdaq Market Maker may augment 
its displayed quotation size to display limit orders priced at the 
market maker's quotation. Unless otherwise designated, a ``normal unit 
of trading'' shall be 100 shares.
    (B) The minimum quotation increment for quotations of $1.00 or 
above in all System Securities shall be $0.01. The minimum quotation 
increment in the System for quotations below $1.00 in System Securities 
shall be $0.0001.
    (2) The first MPID issued to a member pursuant to subparagraph (1) 
of this rule, or Rule 4623, shall be referred to as the member's 
``Primary MPID.'' Market makers and ECNs may request the use if 
additional MPIDs that shall be referred to as ``Supplemental MPIDs.'' A 
market maker may request the use of Supplemental MPIDs for displaying 
Attributable Quotes/Orders in the Nasdaq Quotation Montage for any 
security in which it is registered and meets the obligations set forth 
in subparagraph (1) of this rule. An ECN may request the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage for any security in which it meets the 
obligations set forth in Rule 4623. A market maker or ECN that ceases 
to meet the obligations appurtenant to its Primary MPID in any security 
shall not be permitted to use a Supplemental MPID for any purpose in 
that security.
    (3) Market makers and ECNs that are permitted the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders pursuant 
to subparagraph (2) of this rule are subject to the same rules 
applicable to the members' first quotation, with two exceptions: (a) 
The continuous two-sided quote requirement and excused withdrawal 
procedures described in subparagraph (1) above do not apply to market 
makers' Supplemental MPIDs; and (b) Supplemental MPIDs may not be used 
by market makers to engage in passive market making or to enter 
stabilizing bids pursuant to Nasdaq Rules 4614 and 4619.]
4613. Market Maker Obligations
    A member registered as a Market Maker shall engage in a course of 
dealings for its own account to assist in the maintenance, insofar as 
reasonably practicable, of fair and orderly markets in accordance with 
this Rule.

(a) Quotation Requirements and Obligations

    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as a Market Maker, the member shall be willing to buy and 
sell such security for its own account on a continuous basis during 
regular market hours and shall enter and maintain a two-sided trading 
interest (``Two-Sided Obligation'') that is identified to the Exchange 
as the interest meeting the obligation and is displayed in the 
Exchange's quotation montage at all times. Interest eligible to be 
considered as part of a Market Maker's Two-Sided Obligation shall have 
a displayed quotation size of at least one normal unit of trading (or a 
larger multiple thereof); provided, however, that a Market Maker may 
augment its Two-Sided Obligation size to display limit orders priced at 
the same price as the Two-Sided Obligation. Unless otherwise 
designated, a ``normal unit of trading'' shall be 100 shares. After an 
execution against its Two-Sided Obligation, a Market Maker must ensure 
that additional trading interest exists in the Exchange to satisfy its 
Two-Sided Obligation either by immediately entering new interest to 
comply with this obligation to maintain continuous two-sided quotations 
or by identifying existing interest on the Exchange book that will 
satisfy this obligation.
    (2) Pricing Obligations. For NMS stocks (as defined in Rule 600 
under Regulation NMS) a Market Maker shall adhere to the pricing 
obligations established by this Rule during Regular Market Hours.
    (A) Bid Quotations. At the time of entry of bid interest satisfying 
the Two-Sided Obligation, the price of the bid interest shall be not 
more than the Designated Percentage away from the then current National 
Best Bid, or if no National Best Bid, not more than the Designated 
Percentage away from the last reported sale from the responsible single 
plan processor. In the event that the National Best Bid (or if no 
National Best Bid, the last reported sale) increases to a level that 
would cause the bid interest of the Two-Sided Obligation to be more 
than the Defined Limit away from the National Best Bid (or if no 
National Best Bid, the last reported sale), or if the bid is executed 
or cancelled, the Market Maker shall enter new bid interest at a price 
not more than the Designated Percentage away from the then current 
National Best Bid (or if no National Best Bid, the last reported sale), 
or identify to the Exchange current resting interest that satisfies the 
Two-Sided Obligation.
    (B) Offer Quotations. At the time of entry of offer interest 
satisfying the Two-Sided Obligation, the price of the offer interest 
shall be not more than the Designated Percentage away from the then 
current National Best Offer, or if no National Best Offer, not more 
than the Designated Percentage away from the last reported sale 
received from the responsible single plan processor. In the event that 
the National Best Offer (or if no National Best Offer, the last 
reported sale) decreases to a level that would cause the offer interest 
of the Two-Sided Obligation to be more than the Defined Limit away from 
the National Best Offer (or if no National Best Offer, the last 
reported sale), or if the offer is executed or cancelled, the Market 
Maker shall enter new offer interest at a price not more than the 
Designated Percentage away from the then current National Best Offer 
(or if no National Best Offer, the last reported sale), or identify to 
the

[[Page 59313]]

Exchange current resting interest that satisfies the Two-Sided 
Obligation.
    (C) The National Best Bid and Offer shall be determined by the 
Exchange in accordance with its procedures for determining protected 
quotations under Rule 600 under Regulation NMS.
    (D) For purposes of this Rule, the term ``Designated Percentage'' 
shall mean the individual stock pause trigger percentage under NASDAQ 
Rule 4120(a)(11) (or comparable rule of another exchange) less two (2) 
percentage points. For times during regular market hours when stock 
pause triggers are not in effect under Rule 4120(a)(11) (or comparable 
rule of another exchange), the Designated Percentage calculation will 
assume a trigger percentage of 22%. For NMS stocks that are not subject 
to such stock pause triggers the Designated Percentage will assume a 
trigger percentage of 32%.
    (E) For purposes of this Rule, the term ``Defined Limit'' shall 
mean the individual stock pause trigger percentage under NASDAQ Rule 
4120(a)(11) (or comparable rule of another exchange) less one-half (\1/
2\) percentage point. For times during regular market hours when stock 
pause triggers are not in effect under Rule 4120(a)(11) (or comparable 
rule of another exchange), the Defined Limit calculation will assume a 
trigger percentage of 22%. For NMS stocks that are not subject to such 
stock pause triggers the Defined Limit calculation will assume a 
trigger percentage of 32%.
    (F) Quotation Creation and Adjustment. For each Issue in which a 
Market Maker is registered, the System shall automatically create a 
quotation for display to comply with this Rule. System-created 
compliant displayed quotations will thereafter be allowed to rest and 
not be further adjusted by the System unless the relationship between 
the quotation and its related National Best Bid or National Best Offer, 
as appropriate, shrinks to the greater of: (a) 4 percentage points, or, 
(b) one-quarter the applicable percentage necessary to trigger an 
individual stock trading pause as described in NASDAQ Rule 4120(a)(11), 
or expands to within that same percentage less 0.5%, whereupon the 
System will immediately re-adjust and display the Market Maker's quote 
to the appropriate Designated Percentage set forth in section (D) 
above. As the System allows for multiple attributable quotations by a 
Market Maker in an issue, quotations originally entered by Market 
Makers shall be allowed to move freely towards or away from the 
National Best Bid or National Best Offer, as appropriate, for potential 
execution.
    (G) Quotation Refresh After Execution. In the event of an execution 
against a System-created compliant quotation, the Market Maker shall 
have its quote refreshed by the System on the executed side of the 
market at the applicable Designated Percentage away from the then 
National Best Bid (Offer) (or if no National Best Bid (Offer), the last 
reported sale).
    (H) Nothing in this Rule shall preclude a Market Marker from 
quoting at price levels that are closer to the National Best Bid and 
Offer than the levels required by this Rule.
    (I) The minimum quotation increment for quotations of $1.00 or 
above in all System Securities shall be $0.01. The minimum quotation 
increment in the System for quotations below $1.00 in System Securities 
shall be $0.0001.
    (J) The individual Market Participant Identifier (``MPID'') 
assigned to a member to meet its Two-Sided Obligation pursuant to 
subparagraph (a)(1) of this Rule, or Rule 4623, shall be referred to as 
the member's ``Primary MPID.'' Market Makers and ECNs may request the 
use if additional MPIDs that shall be referred to as ``Supplemental 
MPIDs.'' A Market Maker may request the use of Supplemental MPIDs for 
displaying Attributable Quotes/Orders in the Nasdaq Quotation Montage 
for any security in which it is registered and meets the obligations 
set forth in subparagraph (1) of this rule. An ECN may request the use 
of Supplemental MPIDs for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage for any security in which it meets the 
obligations set forth in Rule 4623. A Market Maker or ECN that ceases 
to meet the obligations appurtenant to its Primary MPID in any security 
shall not be permitted to use a Supplemental MPID for any purpose in 
that security.
    (K) Market Makers and ECNs that are permitted the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders pursuant 
to subparagraph (2) of this rule are subject to the same rules 
applicable to the members' first quotation, with two exceptions: (a) 
The continuous two-sided quote requirement and excused withdrawal 
procedures described in subparagraph (1) above do not apply to Market 
Makers' Supplemental MPIDs; and (b) Supplemental MPIDs may not be used 
by Market Makers to engage in passive market making or to enter 
stabilizing bids pursuant to Nasdaq Rules 4614 and 4619.
    (b)-(e) No Change.
* * * * *
    (b) Not applicable.
    (c) Not applicable.

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 these statements may be examined at the places specified in 
Item IV below. NASDAQ 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

Market Maker Quote Obligations

    The Exchange proposes to adopt rules to enhance minimum quotation 
requirements for market makers. Under the proposal, the Exchange will 
require market makers for each stock in which they are registered to 
continuously maintain a two-sided quotation within a designated 
percentage of the National Best Bid and National Best Offer as 
appropriate. These enhanced market maker quotation requirements are 
intended to eliminate trade executions against market maker placeholder 
quotations traditionally priced far away from the inside market, 
commonly known as ``stub quotes.'' They are also intended to augment 
and work in relation to the single stock pause standards already in 
place on a pilot basis for stocks in the S&P 500, Russell 1000, and 
specified ETFs.\4\
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    \4\ See Exchange Act Release No. 62884 (September 10, 2010).
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    Under the proposal, the Exchange will require registered market 
makers to enter and maintain quotes priced at no more than a certain 
percentage away from the national inside bid and offer. Permissible 
quotes are determined by the individual character of the security, the 
time of day in which the quote is entered, and other factors which are 
summarized below:
    For issues subject to an individual stock trading trigger pause, a 
permissible quote is determined by first looking at the applicable 
stock trading pause trigger percentage of the security and then 
reducing that number by 2%. Since currently the stock pause trigger 
percentage across all exchanges is 10%, a market maker's quote in a 
such a

[[Page 59314]]

security may not be more than 8% away from the national best bid or 
best offer as appropriate. Once a compliant quote is entered, it may 
rest without adjustment until such time as it moves to within \1/2\ of 
1% of the applicable trigger pause percentage (i.e, currently 9.5%) 
whereupon the market maker must immediately move its quote back to at 
least the permissible default level of 8% away from the national best 
bid or best offer. During times in which a trigger pause percentage is 
not applicable (e.g. before 9:45 a.m. and after 3:35 p.m.), a market 
maker must maintain a quote no further than 20% away from the inside 
(i.e. it may rest without adjustment until it reaches 21.5%). In the 
absence of national best or best offer, the above calculations will 
remain the same, but will use the national last sale instead of the 
absent bid or offer.
    For securities not subject to any individual stock pause trigger, 
the proposal will a [sic] assume a hypothetical 32% trigger pause, 
apply a 2% reduction, and require market makers in those issues to 
maintain quotes no more than 30% away from the national best and 
national best offer. Like securities subject to stock trading pauses, 
once a compliant quote is entered, it may rest without adjustment until 
such time as it moves to within \1/2\ of 1% of its applicable trigger 
pause percentage (31.5%) whereupon the market maker must immediately 
move its quote back to at least the permissible default level of 30%. 
These requirements shall apply to Regulation NMS securities during 
normal market hours.
    Nothing in the above precludes a market maker from voluntarily 
quoting at price levels that are closer to the national best bid and 
best offer than required under the proposal.

Automated Quote Management

    In order to assist market makers in meeting their enhanced 
quotation obligations, the Exchange will also provide automated quote 
management functionality. For each issue in which a market maker is 
registered, the Exchange will automatically create a quotation for 
display to comply with this standard set forth in this proposal. 
Compliant displayed quotations will thereafter be allowed to rest and 
not be further adjusted by the Exchange unless the relationship between 
the quotation and its related national best bid or national best offer, 
as appropriate, shrinks to the greater of: (a) 4 percentage points, or, 
(b) one-quarter the applicable percentage necessary to trigger an 
individual stock trading pause as described in NASDAQ Rule 4120(a)(11), 
or expands to within that same percentage less 0.5%, whereupon the 
Exchange will immediately re-adjust and display the market maker's 
quote to the appropriate designated percentage. Quotations originally 
entered by market makers shall be allowed to move freely towards the 
national best bid or national best offer, as appropriate, for potential 
execution.
    In the event of an execution against a System-created compliant 
quotation, the market maker shall have its quote refreshed by the 
System on the executed side of the market at the applicable designated 
percentage away from the then national best bid (offer), or if no 
national best bid (offer), the last reported sale.

Previously Approved Rule Text

    Finally, the sections (I), (J) and (K) of the proposed rule are 
portions of previously approved text of Rule 4613 that have moved so as 
group the proposed market making standard sections together within the 
rule.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Securities Exchange Act of 1934 (the ``Act''),\5\ which requires 
the rules of an exchange to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system and, in general, to protect 
investors and the public interest. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \6\ of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Exchange believes that the proposed 
rule meets these requirements in that it promotes transparency and 
uniformity across markets concerning minimum market maker quotation 
requirements.
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 78k-1(a)(1).
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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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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 e-mail to [email protected]. Please include 
File Number SR-NASDAQ-2010-115 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2010-115. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be

[[Page 59315]]

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 
publicly available. All submissions should refer to File Number SR-
NASDAQ-2010-115 and should be submitted on or before October 18, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-24054 Filed 9-24-10; 8:45 am]
BILLING CODE 8010-01-P