[Federal Register Volume 76, Number 50 (Tuesday, March 15, 2011)]
[Notices]
[Pages 14111-14113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5862]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64054; File No. SR-NASDAQ-2011-036]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ Options Market Rules Chapter VII, Various Sections, 
Dealing With Market Maker Obligations

March 8, 2011.
    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 March 3, 2011, The NASDAQ Stock Market LLC (``NASDAQ''), filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II 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 Substance 
of the Proposed Rule Change

    NASDAQ proposes to amend Chapter VII, Section 3, Continuing Market 
Maker Registration, Section 5, Obligations of Market Makers, and 
Section 6, Market Maker Quotations, of the NASDAQ rulebook for the 
NASDAQ Options Market (``NOM'') to: (a) Permit market maker assignment 
by option rather than by series; (b) adopt a $5 quotation spread 
parameter; and (c) amend the quoting requirement for Market Makers as 
explained further below. These changes are scheduled to be implemented 
on NOM on or about May 31, 2011; the Exchange will announce the 
implementation schedule by Options Trader Alert, once the rollout 
schedule, which will be based in part on NOM participants' readiness, 
is finalized.
    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 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
    The purpose of the proposed rule change is to strengthen Market 
Maker obligations. The NASDAQ Options Market (``NOM''), the options 
trading facility of The NASDAQ Stock Market LLC, has been fully 
operational for over two years. During this time, NASDAQ has carefully 
considered the role of Market Makers in the NOM marketplace and their 
concomitant obligations.
    An Options Market Maker is a Participant \3\ registered with NASDAQ 
as a Market Maker.\4\ Market Makers on NOM have certain obligations 
such as maintaining two-sided markets and participating in transactions 
that are ``reasonably calculated to contribute to the maintenance of a 
fair and orderly market.'' \5\ To register as a Market Maker, a 
Participant must file a written application with Nasdaq Regulation, 
which will consider an applicant's market making ability and other 
factors it deems appropriate in determining whether to approve an 
applicant's registration.\6\ All Market Makers are designated as 
specialists on NOM for all purposes under the Act or rules 
thereunder.\7\ The NOM Rules place no limit on the number of qualifying 
entities that may become Market Makers.\8\ The good standing of a 
Market Maker may be suspended, terminated, or withdrawn if the 
conditions for approval cease to be maintained or the Market Maker 
violates any of its agreements with NASDAQ or any provisions of the NOM 
Rules.\9\
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    \3\ The term ``Options Participant'' or ``Participant'' means a 
firm or organization that is registered with the Exchange pursuant 
to Chapter II of the NOM Rules for purposes of participating in 
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or 
``Nasdaq Options Market Maker.''
    \4\ See NOM Rules, Chapter VII, Section 2.
    \5\ See NOM Rules, Chapter VII, Section 5(a).
    \6\ See NOM Rules, Chapter VII, Section 2(a).
    \7\ See NOM Rules, Chapter VII, Section 2.
    \8\ See NOM Rules, Chapter VII, Rule 2(c).
    \9\ See NOM Rules, Chapter VII, Section 4(b).
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    Currently, a Participant that has qualified as a Market Maker may 
register to make markets in individual series of

[[Page 14112]]

options.\10\ Instead, NASDAQ proposes to require that Market Makers 
register by option. Thus, once so registered, a NOM Market Maker is 
subject to the market making obligations in all series of that option, 
except Quarterly Options Series, adjusted option series and any options 
series until the time to expiration for such series is less than nine 
months.\11\ In order to effect this change, NASDAQ proposes to amend 
various provisions in Sections 3, 5 and 6 of Chapter VII that currently 
refer to ``series.'' NASDAQ believes that registration by option rather 
than series should spread the benefits of Market Maker quoting across 
all series of an option, which should, in turn, result in higher 
quality markets.
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    \10\ See NOM Rules, Chapter VII, Section 3(a).
    \11\ See proposed NOM Rules, Chapter VII, Section 6(d)(i)(2).
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    NASDAQ also proposes to adopt quotation spread parameters, also 
known as bid/ask differentials, which establish the maximum permissible 
width between a Market Maker's bid and an offer in a particular series. 
Specifically, NASDAQ proposes to adopt a $5 wide quote spread 
parameters for all options.\12\ Currently, NOM Market Makers are not 
subject to quote spread parameters, such that the requirement for a 
two-sided market can be met with a quotation that is very wide. NASDAQ 
believes that a $5 quote spread parameter for NOM Market Makers should 
result in narrower markets, and thereby, improve the quality of NOM's 
markets.
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    \12\ See proposed NOM Rules, Chapter VII, Section 6(d)(ii).
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    Lastly, NASDAQ proposes to amend its quotation requirement for 
Market Makers. Today, NOM Market Makers are required to make markets on 
a continuous basis in at least 75% of the options series in which the 
Market Maker is registered. NASDAQ proposes to change this requirement 
to 60% of the series; in those series, to satisfy this requirement with 
respect to quoting a series, a Market Maker must quote such series 90% 
of the trading day (as a percentage of the total number of minutes in 
such trading day) \13\ or such higher percentage as the Exchange may 
announce in advance.\14\ Nasdaq Regulation may consider exceptions to 
the requirement to quote 90% (or higher) of the trading day based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. Although the proposed 60% requirement is lower than the 
current 75%, the Exchange is also proposing herein to adopt, for the 
first time, a quote spread requirement and a requirement to register by 
option rather than by series, which are considerable changes for Market 
Makers. NASDAQ believes that this new 60% quoting requirement is needed 
to balance the proposed, new quotation spread parameters.
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    \13\ For example, on a normal trading day, which lasts 390 
minutes (from 9:30 a.m. to 4 p.m.), quoting in a series would need 
to be maintained for the total of at least 351 minutes in order to 
meet the 90%-of-the-trading-day threshold. In a shortened trading 
session, the total number of minutes the quote must be maintained 
would be lowered proportionately (and the same percentage threshold 
would apply).
    \14\ Any such higher percentage would involve an appropriate 
advance announcement, which would then be available on the 
Exchange's Web site. In the illustration above, if the Exchange set 
the threshold, for example, at 99% (rather than 90%), then on a 
normal trading day, quoting would need to be maintained for 386 
(rather than 351) minutes out of the total of 390 minutes.
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    Under this proposal, NASDAQ recognizes that certain options series 
present special challenges for Market Makers, due to nontraditional 
terms. Accordingly, NASDAQ proposes that Quarterly Option Series, 
adjusted option series, and any option series until the time to 
expiration for such series is less than nine months be treated 
differently. Specifically, under this proposal, Market Makers shall not 
be subject to the continuous quoting obligation in Section 6(d) of NOM 
rules in any Quarterly Option Series, any adjusted option series,\15\ 
and any option series until the time to expiration for such series is 
less than nine months. Accordingly, the requirement to make two-sided 
markets set forth in 5(a)(i) of NOM Rules shall not apply to Market 
Makers respecting Quarterly Option Series, adjusted option series, and 
series with an expiration of nine months or greater.
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    \15\ For these purposes, an adjusted option series is an option 
series wherein one option contract in the series represents the 
delivery of other than 100 shares of underlying stock or Exchange-
Traded Fund Shares.
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    In addition, if a technical failure or limitation of a system of 
the Exchange prevents a Market Maker from maintaining, or prevents a 
Market Maker from communicating to NOM, timely and accurate quotes, the 
duration of such failure or limitation shall not be included in any of 
the calculations under this subparagraph (i) with respect to the 
affected quotes.
    As a whole, the proposed amendments are intended to improve the 
quality of NOM markets, while carefully considering the important role 
of Market Makers in the NOM marketplace. Adopting quotation spread 
parameters and requiring registration across the series of an option 
are intended to encourage market making in more series; at the same 
time, NASDAQ recognizes the need to balance these new, more burdensome 
obligations with a lower series quoting percentage requirement. This 
balance of obligations should help to make the market better for all 
participants. NASDAQ believes that it has crafted a reasonable balance 
in this proposal.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \17\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, and, in general, 
to protect investors and the public interest. The Exchange believes 
that the proposal is appropriate and reasonable for Market Makers, 
similar to the rules of other options exchanges (as specified below) 
and should, at the same time, enhance the quality of the Exchange's 
options markets.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to Section 19(b)(3)(A) of the

[[Page 14113]]

Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the self-regulatory organization to submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement. The 
Exchange previously filed its proposal under Section 19(b)(2) of the 
Act but subsequently withdrew that proposal and refiled under 
Section 19(b)(3)(A). See Securities Exchange Act Release No. 63815 
(February 1, 2011), 76 FR 6646 (February 7, 2011) (SR-NASDAQ-2011-
012).
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    In particular, NASDAQ notes that the proposed rule change is 
similar to the rules of other options exchanges in a variety of ways. 
With respect to registration by series, most options exchanges require 
registration by option (also called underlying).\20\ With respect to 
quotation spread parameters, most options exchanges currently impose 
such parameters on market makers; some options exchanges have a $5 wide 
requirement for electronic quotes,\21\ while others impose $5 wide 
parameter in certain situations and narrower parameters in other 
situations, usually related to the opening and the particular market 
making category.\22\ With respect to the quotation requirement and 
exception for certain series, the proposal is identical to Phlx Rule 
1014(b)(ii)(D)(1) respecting the 60% of series, 90% of the trading day 
requirement, except certain series.\23\
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    \20\ See NYSEArca Rule 6.35(d) and Phlx Rule 507(b). ISE 
appoints by class and group. See ISE Rules 100(a)(6) and 802.
    \21\ See NYSEAmex Rule 925NY(b)(5), which is similar, but not 
identical, because trading auctions on the NYSE Amex's floor-based 
exchange are excluded from its rule.
    \22\ See Phlx Rule 1014(c)(i)(A)(1)(a) and (c)(i)(A)(2) and ISE 
Rule 803(b)(4).
    \23\ Phlx Rule 1014(b)(ii)(D)(1) and (4). Securities Exchange 
Act Release No. 60084 (June 10, 2009) (SR-Phlx-2009-37); see also 
Securities Exchange Act Release No. 57186 (January 22, 2008), 73 FR 
4931 (January 28, 2008) (approving SR-NYSEArca-2007-121).
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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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2011-036 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-2011-036. 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 Web site 
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 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-2011-036 and should be submitted on or before 
April 5, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5862 Filed 3-14-11; 8:45 am]
BILLING CODE 8011-01-P