[Federal Register Volume 75, Number 198 (Thursday, October 14, 2010)]
[Notices]
[Pages 63238-63240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25741]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63040; File No. SR-NASDAQ-2010-128]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify the Requirements To Qualify for Credits as a Designated 
Liquidity Provider Under Rule 7018(i)

October 5, 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 October 1, 2010, The NASDAQ Stock Market LLC (``NASDAQ'') 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 NASDAQ. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    NASDAQ proposes to modify the requirements to qualify for credits 
as a designated liquidity provider under Rule 7018(i) and to make a 
minor technical change. NASDAQ will implement the proposed change on 
October 1, 2010. The text of the proposed rule change is below. 
Proposed new language is italicized. Deleted language is [bracketed].
* * * * *

7018. Nasdaq Market Center Order Execution and Routing

    (a)-(h) No change.
    (i) Notwithstanding the foregoing, the following charges shall 
apply to transactions in a Qualified Security by one of its Designated 
Liquidity Providers:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Charge to Designated Liquidity Provider     $0.003 per share executed
 entering Order that executes in the         for securities priced at $1
 Nasdaq Market Center or attempts to         or more per share (For
 execute in the Nasdaq Market Center prior   securities priced at less
 to routing:                                 than $1 per share, the
                                             normal execution fee under
                                             7018(a) will apply).
Credit to Designated Liquidity Provider     $0.004 per share executed
 providing displayed liquidity through the   (or $0, in the case of
 Nasdaq Market Center:                       executions against Quotes/
                                             Orders in the Nasdaq Market
                                             Center at less than $1.00
                                             per share), up to 10
                                             million shares average
                                             daily volume.
                                            Normal credits under 7018(a)
                                             apply to shares greater
                                             than 10 million average
                                             daily volume and non-
                                             displayed liquidity.
------------------------------------------------------------------------

    For purposes of this paragraph:
    (1) A security may be designated as a ``Qualified Security'' if:
    (A) it is an exchange-traded fund or index-linked security listed 
on Nasdaq pursuant to Nasdaq Rules 5705, 5710, or 5720;
    (B) [there has been no time at which its average daily volume on 
Nasdaq has exceeded 10,000,000 shares during two calendar months of any 
three calendar-month period; and
    (C)] it has at least one Designated Liquidity Provider.
    [The security will cease to be a Qualified Security at the end of 
the second calendar month that causes the condition described in 
paragraph (B) not to be satisfied.]
    (2) A ``Designated Liquidity Provider'' or ``DLP'' is a registered 
Nasdaq market maker for a Qualified Security that has committed to 
maintain minimum performance standards. [Designated Liquidity 
Providers]A DLP shall be selected by Nasdaq based on factors including, 
but not limited to, experience with making markets in exchange-traded 
funds and index-linked securities, adequacy of capital, willingness to 
promote Nasdaq as a marketplace, issuer preference, operational 
capacity, support personnel, and history of adherence to Nasdaq rules 
and securities laws. Nasdaq may limit the number of Designated 
Liquidity Providers in a security, or modify a previously established 
limit, upon prior written notice to members.
    The minimum performance standards applicable to a DLP[Designated 
Liquidity Provider] may be determined from time to time by Nasdaq and 
may vary depending on the price, liquidity, and volatility of the 
Qualified Security in which the DLP[Designated Liquidity Provider] is 
registered. The performance measurements will include (A) percent of 
time at the national best bid (best offer) (``NBBO''); (B) percent of 
executions better than the NBBO; (C) average displayed size; and (D) 
average quoted spread.
    (3) If a DLP does not meet the performance measurements for a given 
month, fees and credits will revert to the normal schedule under 
7018(a). If a DLP does not meet the stated performance measurements for 
3 out of the past 4 months, the DLP is subject to forfeit of DLP status 
for that instrument, at NASDAQ's discretion. A DLP must provide 30 days 
written notice if it wishes to withdraw its registration in a Qualified 
Security.
    (j) No change.
* * * * *

[[Page 63239]]

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
    NASDAQ is proposing to modify the criteria required of Designated 
Liquidity Providers to qualify for credits in transactions involving a 
Qualified Security.\3\ Currently, a Designated Liquidity Provider 
(``DLP'') may receive a credit of $0.004 per share executed (or $0, in 
the case of executions against Quotes/Orders in the Nasdaq Market 
Center at less than $1.00 per share) if it provides liquidity in a 
Qualified Security to the Nasdaq Market Center. A Qualified Security is 
defined by three criteria in Rule 7018(i)(1): (A) It must be an 
exchange-traded fund or index-linked security listed on Nasdaq pursuant 
to Nasdaq Rules 5705, 5710, or 5720; (B) there has been no time at 
which its average daily volume on Nasdaq has exceeded 10 million shares 
during two calendar months of any three calendar-month period; and (C) 
it has at least one Designated Liquidity Provider. A security will 
cease to be classified as a Qualified Security at the end of the second 
calendar month that causes the condition described in paragraph (B) not 
to be satisfied. NASDAQ is eliminating requirement ``(B)'' of the 
definition of Qualified Security together with related language under 
the rule, and will now permit DLPs to qualify for the credit in a 
Qualified Security with an average daily volume during the month of up 
to 10 million. Any average daily volume for the month in the Qualified 
Security in excess of 10 million would be assessed the standard rates 
found under Rule 7018(a). As such, a DLP will be able to receive the 
higher $0.004 credit on up to 10 million shares of average daily volume 
per month in a Qualified Security, even if the DLP exceeds 10 million 
in average daily volume in a given month.
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    \3\ The Designated Liquidity Provider pricing incentive program 
was implemented in August 2007. See Securities Exchange Act Release 
No. 56130 (July 25, 2007), 72 FR 42163 (August 1, 2007) (SR-NASDAQ-
2007-061).
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    NASDAQ is also limiting the availability of the credit to only DLPs 
providing displayed liquidity through the Nasdaq Market Center. A 
primary purpose of the credit program in Qualified Securities is to 
promote an active and liquid trading market in ETFs and ILSs. As 
currently written, however, Rule 7018(i) provides a credit for any type 
of liquidity provided by a DLP, even if the liquidity is not-displayed 
and thus not promoting price discovery through active public display. 
NASDAQ believes that the program should only award DLPs that make 
markets in a Qualified Security by providing displayed liquidity.
    NASDAQ is adding new rule text describing the consequences of 
failing to meet the DLP minimum performance criteria described in Rule 
7018(i)(2). The minimum performance standards applicable to a DLP are 
determined by NASDAQ and may vary depending on the price, liquidity, 
and volatility of a particular Qualified Security. These performance 
measurements include: (A) Percent of time at the NBBO; (B) percent of 
executions better than the NBBO; (C) average displayed size; and (D) 
average quoted spread. NASDAQ may remove DLPs that do not meet 
performance standards, or that decide to change their status, at any 
time. NASDAQ is providing clarifying information regarding the 
consequences of failing to meet the minimum performance standards. 
Specifically, if a DLP fails to meet minimum performance standards in a 
given month, fees will revert to the standard schedule of fees and 
credits under Rule 7018(a). If a DLP fails to meet minimum performance 
standards for three out of the past four months, it will lose DLP 
status for that instrument. NASDAQ is imposing a thirty-day prior 
notice obligation on DLPs seeking to withdraw registration in a 
Qualified Security. This thirty-day notice requirement will ensure that 
NASDAQ has adequate time to assign a new DLP, thus avoiding any 
disruption in market quality that may be caused by the absence of an 
assigned DLP.
    Last, NASDAQ is making a non-substantive technical change to the 
rule by providing the acronym ``DLP'' as an alternative to ``Designated 
Liquidity Provider'' for use in the rule text.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\4\ in general, and Section 
6(b)(4) of the Act,\5\ in particular, because 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 that 
NASDAQ operates or controls, and it does not unfairly discriminate 
between customers, issuers, brokers or dealers. NASDAQ believes that by 
allocating pricing benefits to market makers that make tangible 
commitments to enhancing market quality for ETFs and ILSs listed on 
NASDAQ, the proposal will encourage the development of new financial 
products, provide a better trading environment for investors in ETFs 
and ILSs, and encourage greater competition between listing venues for 
ETFs and ILSs. The changes proposed herein are designed to further 
promote liquid markets in ETFs and ILSs, and to ensure that DLPs are 
provided adequate incentives to continue to meet minimum standards to 
participate in the credit program.
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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ believes that the proposed rule change will encourage 
greater competition among venues that list ETFs and ILSs, and will 
further strengthen the quality of the NASDAQ market as a venue for 
transactions in ETFs and ILSs. Accordingly, 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\6\ 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. If the Commission

[[Page 63240]]

takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.
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    \6\ 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, 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-2010-128 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2010-128. 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 website 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be available for inspection and copying at the 
principal offices 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-2010-128, and should be submitted on or before 
November 4, 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).

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25741 Filed 10-13-10; 8:45 am]
BILLING CODE 8011-01-P