[Federal Register Volume 77, Number 10 (Tuesday, January 17, 2012)]
[Notices]
[Pages 2335-2340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-685]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66126; File No. SR-NASDAQ-2012-003]


 Self-Regulatory Organizations; NASDAQ Stock Market LLC; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the Customer Rebate To Add Liquidity in Penny Pilot Options

January 10, 2012.
    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 January 3, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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 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

    The NASDAQ Stock Market LLC proposes to modify Rule 7050, governing 
pricing for NASDAQ members using the NASDAQ Options Market (``NOM''), 
NASDAQ's facility for executing and routing standardized equity and 
index options. Specifically, NOM proposes to amend the applicability of 
the Customer Rebate to Add Liquidity for the Penny Pilot \3\ Options 
(``Penny Options'').
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through December 31, 2011. 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); 60874 (October 
23, 2009), 74 FR 56682 (November 2, 2009)(SR-NASDAQ-2009-091)(notice 
of filing and immediate effectiveness expanding and extending Penny 
Pilot); 60965 (November 9, 2009), 74 FR 59292 (November 17, 
2009)(SR-NASDAQ-2009-097)(notice of filing and immediate 
effectiveness adding seventy-five classes to Penny Pilot); 61455 
(February 1, 2010), 75 FR 6239 (February 8, 2010)(SR-NASDAQ-2010-
013)(notice of filing and immediate effectiveness adding seventy-
five classes to Penny Pilot); 62029 (May 4, 2010), 75 FR 25895 (May 
10, 2010) (SR-NASDAQ-2010-053)(notice of filing and immediate 
effectiveness adding seventy-five classes to Penny Pilot); 65969 
(December 15, 2011, 76 FR 79268 (December 21, 2011) (SR-NASDAQ-2011-
169) (notice of filing and immediate effectiveness extension and 
replacement of Penny Pilot). See also Exchange Rule Chapter VI, 
Section 5.

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[[Page 2336]]

    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.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. 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
    NASDAQ proposes to modify Exchange Rule 7050 governing the rebates 
and fees assessed for option orders entered into NOM. Specifically, the 
Exchange is proposing to modify the six tier structure for paying 
Customer Rebates to Add Liquidity in Penny Pilot Options. The Exchange 
proposes to reduce the tiers to four tiers and further incentivize NOM 
Participants to route Customer orders to the Exchange by paying an 
additional rebate for certain orders after the NOM Participant has met 
a volume criteria. The Exchange believes that incentivizing NOM 
Participants to send additional Customer orders to the Exchange will 
benefit all market participants by adding liquidity to the market.
    Specifically, the Exchange currently pays a Customer Rebate to Add 
Liquidity in Penny Pilot Options based on the following tier structure:

 
----------------------------------------------------------------------------------------------------------------
                                                                                                      Rebate to
                                                                    Monthly volume                       add
                                                                                                      liquidity
----------------------------------------------------------------------------------------------------------------
Tier 1..........................................  Participant adds Customer liquidity of up to             $0.26
                                                   24,999 contracts per day in a month.
Tier 2..........................................  Participant adds Customer liquidity of 25,000--           0.36
                                                   59,999 contracts per day in a month.
Tier 3..........................................  Participant adds Customer liquidity of 60,000--           0.38
                                                   124,999 contracts per day in a month.
Tier 4..........................................  Participant adds Customer liquidity of 125,000 or         0.40
                                                   more contracts per day in a month.
Tier 5 \a\......................................  Participant adds (1) Customer liquidity of 60,000         0.40
                                                   or more contracts per day in a month, and (2)
                                                   NOM Market Maker liquidity of 60,000 or more
                                                   contracts per day in a month.
Tier 6 \b\......................................  Participant adds Customer liquidity of 25,000 or          0.37
                                                   more contracts per day in a month, and (2) the
                                                   Participant simultaneously qualifies for credit
                                                   under the Investor Support Program set forth in
                                                   Rule 7014.
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\a\ For purposes of Tier 5, the Exchange will aggregate the trading activity of separate NOM Participants when
  computing average daily volumes where 75 percent common ownership or control exists between NOM Participants.
\b\ For purposes of Tier 6, the Exchange will allow a NOM Participant to qualify for the rebate if a NASDAQ
  member under common ownership with the NOM Participant qualifies for a credit under the Investor Support
  Program. Common ownership is defined as 75 percent common ownership or control.

    The Exchange proposes to amend the Customer Rebate to Add Liquidity 
in Penny Pilot Options to a four tier structure as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                      Rebate to
                                                                    Monthly volume                       add
                                                                                                      liquidity
----------------------------------------------------------------------------------------------------------------
Tier 1..........................................  Participant adds Customer liquidity of up to             $0.26
                                                   49,999 contracts per day in a month.
Tier 2..........................................  Participant adds Customer liquidity of 50,000 or          0.42
                                                   more contracts per day in a month.
Tier 3 \a\......................................  Participant adds (1) Customer liquidity of                0.43
                                                   100,000 or more contracts per day in a month,
                                                   and (2) NOM Market Maker liquidity of 40,000 or
                                                   more contracts per day in a month.
Tier 4 \b\......................................  Participant adds (1) Customer liquidity of 25,000         0.40
                                                   or more contracts per day in a month, (2) the
                                                   Participant has certified for the Investor
                                                   Support Program set forth in Rule 7014; and (3)
                                                   the Participant executed at least one order on
                                                   NASDAQ's equity market.
----------------------------------------------------------------------------------------------------------------
\a\ For purposes of Tier 3, the Exchange will aggregate the trading activity of separate NOM Participants when
  computing average daily volumes where 75 percent common ownership or control exists between NOM Participants.
\b\ For purposes of Tier 4, the Exchange will allow a NOM Participant to qualify for the rebate if a NASDAQ
  member under common ownership with the NOM Participant has certified under the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common ownership is defined as 75 percent common
  ownership or control.

    Currently, Tier 1 firms that add up to 24,999 contracts per day in 
a month of liquidity receive a rebate of $0.26 per contract. The 
Exchange is proposing to amend Tier 1 to cover up to 49,999 contracts 
per day in a month, and to pay the same $0.26 per contract rebate. 
Based on past experience, the Exchange anticipates that all firms 
currently receiving the $0.26 rebate will maintain their current level 
of rebate.
    Currently, Tier 2 firms that add between 25,000 and 59,999 
contracts per day in a month receive a rebate of $0.36 per contract. 
The Exchange is proposing to amend Tier 2 to cover 50,000 or more 
contracts per day in a month, and to pay a rebate of $0.42 per 
contract. As a result, firms that currently contribute between 25,000 
and 49,999 per day of liquidity in Customer contracts will receive a 
lower rebate (down from $0.36 to $0.26 per contract). However, firms 
that contribute between

[[Page 2337]]

50,000 and 59,999 contracts per day of Customer order liquidity will 
receive a higher rebate (up from $0.36 to $0.42 per contract). Based 
upon current volume levels and past trading patterns, the Exchange 
anticipates that firms will contribute sufficient liquidity to avoid 
receiving reduced rebates.
    Currently, Tier 3 firms that add between 60,000 and 124,999 
contracts per day in a month receive a rebate of $0.38 per contract. 
This tier is being eliminated. NOM Participants who previously 
qualified for Tier 3 would now qualify for Tier 2, which is now 50,000 
or more contracts, and would receive a higher rebate in Tier 2 (up from 
$0.38 to $0.42 per contract).
    Currently, Tier 4 firms that add 125,000 contracts or more per day 
in a month receive a rebate of $0.40 per contract. This tier is being 
eliminated. NOM Participants who previously qualified for Tier 4 would 
now qualify for Tier 2, which is now 50,000 or more contracts, and 
would receive a higher rebate in Tier 2 rebate (up from $0.40 to $0.42 
per contract).
    Currently, Tier 5 firms that (1) provide 60,000 or more contracts 
per day in a month of Customer order liquidity in Penny Pilot Options, 
and (2) provide 60,000 or more contracts per day of NOM Market Maker 
liquidity receive a rebate of $0.40 per contract if both criteria are 
met. For purposes of determining qualification for this tier, the 
Exchange aggregates \4\ the trading activity of separate NOM 
Participants in calculating the average daily volume if there is at 
least 75% common ownership between the NOM Participants. The Exchange 
proposes to rename this Tier 5 as ``Tier 3'' and modify the Customer 
volume to require that firms: (1) Provide 100,000 or more contracts per 
day in a month of Customer order liquidity in Penny Pilot Options (an 
increase from 60,000), and (2) provide 40,000 or more contracts per day 
of NOM Market Maker liquidity (a decrease from 60,000). If a firm meets 
both criteria, the Exchange would pay an increased rebate of $0.43 per 
contract. Based upon current volume levels and past trading patterns, 
the Exchange anticipates that firms will contribute sufficient 
liquidity to receive an increased rebate.
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    \4\ Aggregation is necessary and appropriate because certain NOM 
participants conduct Customer and NOM Market Maker trading activity 
through separate but related broker-dealers.
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    Currently, Tier 6 firms that (1) provide 25,000 or more contracts 
per day in a month of Customer order liquidity in Penny Pilot Options, 
and (2) simultaneously qualify for credit under the Investor Support 
Program (``ISP'') as set forth in NASDAQ Rule 7014 \5\ receive a rebate 
of $0.37 per contract. Specifically, firms that qualify for a credit 
under the ISP by providing retail investor liquidity to NASDAQ's equity 
market can qualify for a higher rebate on NASDAQ's options market if 
they contribute 25,000 or more contracts per day of Customer order 
liquidity in Penny Pilot Options on NOM. The Exchange proposes to 
rename this Tier 6 as ``Tier 4'' and pay an increased rebate of $0.40 
per contract for firms that meet the criteria for this tier. In 
addition, the Exchange proposes to revise the requirement of newly 
named Tier 4 to state that firms (1) that provide 25,000 or more 
contracts per day in a month of Customer order liquidity in Penny Pilot 
Options, (2) where the Participant has certified for the ISP as set 
forth in Rule 7014; and (3) where the Participant executed at least one 
order on NASDAQ's equity market will receive the $0.40 per contract 
rebate. A member desiring to participate in the ISP must submit an 
application to the Exchange and designate one or more of its NASDAQ 
ports for ISP use.\6\ The Exchange's proposal to qualify for newly 
named Tier 4 would not require the Participant to transact any ISP 
volume, however, the Participant would be required to execute at least 
one order on NASDAQ's equity market.\7\ The Exchange provides a 
methodology by which members can demonstrate their compliance with the 
requirements of Rule 7014. A member shall certify to the reasonable 
satisfaction of the Exchange: (i) Its Baseline Participation Ratio; \8\ 
and (ii) if requested by the Exchange, its compliance with any other 
sections or requirements of Rule 7014, but not more often than once a 
month during participation in ISP. The Exchange would permit a NOM 
Participant to qualify for newly named Tier 4 if that NOM Participant 
meets the Customer liquidity volume of 25,000 or more contracts per day 
in a month, has certified under Rule 7014 and has executed at least one 
order on NASDAQ's equity market. Based upon current volume levels and 
past trading patterns, the Exchange anticipates that firms will 
contribute sufficient liquidity to receive an increased rebate in this 
tier. The Exchange believes the increased rebate would encourage 
participants in the Exchange's equity markets to also participate in 
the Exchange's options market.
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    \5\ For a detailed description of the ISP, see Securities 
Exchange Act Release No. 63270 (November 8, 2010), 75 FR 69489 
(November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness) (the ``ISP Filing''). See also Securities 
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate 
effectiveness); and 63628 (January 3, 2011), 76 FR 1201 (January 7, 
2011) (NASDAQ-2010-154) (notice of filing and immediate 
effectiveness).
    \6\ See Exchange Rule 7014.
    \7\ Currently, in order to comply with Tier 6, a participant 
must qualify for credit under the ISP. In order to qualify for an 
ISP credit, a Participant would need to transact a certain amount of 
displayed liquidity through an ISP-designated port which results in 
an increase in the overall liquidity that the member provides to 
NASDAQ measured as a proportion of the consolidated share volume 
traded by all market participants across all trading venues. To this 
end, a member's ``Baseline Participation Ratio'' is determined by 
measuring the number of shares in liquidity-providing orders entered 
by the member (through any NASDAQ port) and executed on NASDAQ and 
dividing this number by the consolidated (across all trading venues) 
share volume of System Securities traded in a given month. To 
determine whether a member added liquidity to NASDAQ in a given 
month, NASDAQ would perform the same calculation on a monthly basis 
for the then-current month and compare the resulting ratio to the 
Baseline Participation Ratio. For a detailed description of the ISP, 
see Securities Exchange Act Release No. 63270 (November 8, 2010), 75 
FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness) (the ``ISP Filing''). See also Securities 
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate 
effectiveness); and 63628 (January 3, 2011), 76 FR 1201 (January 7, 
2011) (NASDAQ-2010-154) (notice of filing and immediate 
effectiveness). [sic] by transacting a certain volume.
    \8\ The term ``Baseline Participation Ratio'' shall mean, with 
respect to a member, the lower of such member's Participation Ratio 
for the month of August 2010 or the month of August 2011, provided 
that in calculating such Participation Ratios, the numerator shall 
be increased by the amount (if any) of the member's Indirect Order 
Flow for such month, and provided further that if the result is zero 
for either month, the Baseline Participation Ratio shall be deemed 
to be 0.485% (when rounded to three decimal places). See NASDAQ Rule 
7014(g)(1).
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    The Exchange also proposes to further incentivize those NOM 
Participants that qualify for proposed Tiers 2, 3 and 4 by offering to 
pay an additional $0.01 per contract rebate on each Customer order of 
5,000 or more, displayed or non-displayed contracts, which adds 
liquidity in a Penny Pilot Option, as long as that NOM Participant has 
qualified for a rebate in Tier 2, 3 or 4 for that month. This would be 
in addition to the rebate for the qualifying tier.\9\
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    \9\ The rebate would be paid for a partial execution.
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    The Exchange is not otherwise amending the Customer Rebates to Add 
Liquidity.
2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\10\ in general, and with 
Section 6(b)(4) of the

[[Page 2338]]

Act,\11\ 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 NASDAQ 
operates or controls.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed new pricing tiers are 
reasonable, equitable and not unfairly discriminatory because they 
continue an existing program \12\ to encourage broker-dealers acting as 
agent for Customer orders to select the Exchange as a venue to post 
Customer orders. The Exchange believes that its success at attracting 
Customer order flow benefits all market participants by improving the 
quality of order interaction and executions at the Exchange. The 
Exchange believes the existing monthly volume thresholds have 
incentivized firms that route Customer orders to the Exchange to 
increase Customer order flow to the Exchange. The Exchange desires to 
continue to encourage firms that route Customer orders to increase 
Customer order flow to the Exchange by offering greater Customer 
rebates for greater liquidity added to the Exchange.
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    \12\ The Exchange adopted these monthly volume achievement tiers 
in September 2011. See Securities Exchange Act Release Nos. 65317 
(September 12, 2011), 76 FR 57778 (September 16, 2011) (SR-NASDAQ-
2011-124) and 65317 (September 12, 2011), 76 FR 61129 (October 3, 
2011) (SR-NASDAQ-2011-127).
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    Specifically, the Exchange believes that the increased rebates 
would further incentivize firms to continue to send more Customer 
volume to the Exchange. Today, the Exchange pays any Customer order up 
to 24,999 contracts per day in a given month a rebate of $0.26 per 
contract for adding liquidity in Penny Pilot Options. The Exchange 
would continue to pay this same rebate, but would pay such a rebate for 
any Customer order up to 49,999 contracts per day in a given month that 
adds liquidity in Penny Pilot Options. This would result in a decreased 
rebate to certain Participants that currently qualify for Tier 2. The 
Exchange believes that this increase in the number of Customer orders 
that qualify for Tier 1 is reasonable, equitable and not unfairly 
discriminatory because all Customer orders that add liquidity in Penny 
Pilot Options have the ability to earn the rebate; there is no minimum 
order requirement. Also, all NOM Participants transacting Customer 
orders in Penny Pilot Options are eligible to receive this rebate. The 
Exchange currently pays a higher rebate for Tier 2 Customer orders in 
Penny Pilot Options between 25,000 and 59,999 contracts per day in a 
given month of $0.36 per contract. The Exchange believes that offering 
the Tier 1 rebate up to 49,999 contracts per day and starting the Tier 
2 rebate at 50,000 Customer contracts per day would encourage NOM 
Participants to send a greater number of Customer orders to the 
Exchange to obtain the increased rebate of $0.42 per contract.
    The Exchange believes that amending Tier 2 from between 25,000 and 
59,999 Customer orders per day in a given month to 50,000 or more 
Customer contracts per day in a given month (capturing those Customer 
contracts between 50,000 and 59,999) is reasonable because the Exchange 
is also offering a higher rebate of $0.42 per contract, an increase 
from the current $0.36 per contract. The Exchange believes that 
simplifying the current Tiers 1, 2, 3 and 4, which have no other 
qualifier than Customer volume, down to two tiers and offering a higher 
rebate of $0.42 per contract for any Customer order volume over 50,000 
contracts per day in a given month, in Penny Pilot Options, would allow 
a greater number of NOM Participants to obtain a higher rebate. Those 
NOM Participants that currently qualify for Tiers 3 and 4 would be 
eligible for a higher rebate and a portion of those NOM Participants 
that currently qualify for Tier 2 would be eligible for the higher 
rebate. The Exchange believes that for these reasons, the proposal is 
equitable and not unfairly discriminatory.
    The Exchange also proposes to amend current Tier 5, which would be 
renamed Tier 3, to increase the number of Customer contracts from 
60,000 to 100,000 contracts per day in a given month and also decrease 
the second qualifier, concerning NOM Market Maker liquidity, from 
60,000 to 40,000 per day in a given month. The Exchange believes that 
this amendment is reasonable because the Exchange is seeking to 
incentivize NOM Participants to transact a greater number of Customer 
orders. By increasing the number of Customer orders to 100,000 per day 
and lowering the second qualifier on Market Maker liquidity to 40,000 
per day the Exchange desires to further incentivize NOM Participants to 
send additional Customer order flow, in Penny Pilot Options, to the 
Exchange and provide incentives for Market Makers to increase liquidity 
on the Exchange for the benefit of all NOM participants. The Exchange 
believes that Broker Dealers that make markets and also route Customer 
order flow to the Exchange today, would be incentivized to meet the new 
criteria and qualify for Tier 3 because of the lower Market Maker 
liquidity volume and the increased rebate. The Exchange proposes to 
increase the rebate from $0.40 per contract to $0.43 per contract in 
order to incentivize NOM Participants that also route Customer order 
flow to register to make markets on the Exchange. The Exchange believes 
that this newly named Tier 3 is equitable and not unfairly 
discriminatory because Market Makers have obligations to the market and 
regulatory requirements, which normally do not apply to other market 
participants. The Exchange has set a reasonable goal of 40,000 or more 
contracts per day of Market Maker liquidity on NOM, an achievable goal 
that should encourage increased Market Maker registration and liquidity 
on the Exchange. The Exchange believes that paying an increased rebate 
of $0.43 per contract ($0.01 per contract higher than Tier 2) is 
equitable and not unfairly discriminatory because increased Market 
Maker liquidity would, in turn, improve the amount of liquidity 
available on the Exchange and improve the quality of order interaction 
and executions on the Exchange.
    The Exchange also proposes to amend current Tier 6, which would be 
renamed Tier 4, to increase the rebate from $0.37 per contract to $0.40 
per contract to incentivize NOM Participants to transact additional 
Customer orders in Penny Pilot Options and encourage participants in 
the Exchange's equity markets to also participate in the Exchange's 
options market. The Exchange believes that this proposed amendment is 
reasonable because the Exchange seeks to incentivize NOM Participants 
to transact a greater number of Customer orders in Penny Pilot Options. 
Furthermore, the Exchange believes that it is reasonable to allow NOM 
Participants with a certain amount of Customer orders, to qualify for a 
Customer rebate by allowing a related NASDAQ member, under common 
ownership, to qualify for the rebate as specified herein. The Exchange 
also believes that the amendments to the newly named Tier 4 criteria, 
namely 25,000 or more Customer contracts, has certified for ISP and 
executed at least one order on NASDAQ's equity market, are reasonable 
because, as stated above, the Exchange believes that this proposal 
would incentivize NOM Participants to transact additional Customer 
orders and encourage participants in the Exchange's equity markets to 
also participate in the Exchange's options market. The Exchange 
believes this would encourage participants in the Exchange's equity 
markets to also participate in the Exchange's options market 
particularly because the

[[Page 2339]]

Exchange's proposal to qualify for newly named Tier 4 would not require 
the Participant to transact any volume, but only to certify for ISP.
    The Exchange believes that the requirement to certify in 
combination with requiring the Participant to execute at least one 
order on NASDAQ's equity market would promote the submission of 
liquidity-providing orders to NASDAQ. The ISP encourages members to add 
targeted liquidity that is executed in the NASDAQ Market Center. The 
Exchange believes that the ISP promotes submission of liquidity-
providing orders to NASDAQ, which would benefit all NASDAQ members and 
all investors. By allowing members to certify under Rule 7014, while 
also meeting the volume criteria of 25,000 or more Customer contracts 
in Penny Pilot Options, the Exchange believes that the proposal would 
encourage greater participation in the options market. The Exchange 
believes that increased rebate and the amended criteria for newly named 
Tier 4 are equitable and not unfairly discriminatory because together 
these amendments are intended to encourage increased activity in both 
the NASDAQ Options Market and in the ISP of the NASDAQ equity market. 
The goal of the ISP is to incentivize members \13\ to provide liquidity 
from individual equity investors to the NASDAQ Market Center. The 
increased rebate in newly named Tier 4 would encourage firms that 
certify pursuant to Rule 7014 to increase the amount of Customer order 
liquidity provided to the NASDAQ Options Market. The addition of such 
liquidity, either through the ISP or through increased Customer order 
flow, would benefit all Exchange members that participate in those 
markets.\14\ The Exchange believes that amending newly named Tier 4 to 
require firms to be certified for ISP instead of qualifying for a 
credit would provide further incentive for firms to add volume to NOM 
and also participate in the equities market because the firm has to 
execute at least one order in the equity market.
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    \13\ The Commission has expressed its concern that a significant 
percentage of the orders of individual investors are executed at 
over the counter (``OTC'') markets, that is, at off-exchange 
markets; and that a significant percentage of the orders of 
institutional investors are executed in dark pools. See Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (Concept Release on Equity Market Structure, 
``Concept Release''). In the Concept Release, the Commission has 
recognized the strong policy preference under the Act in favor of 
price transparency and displayed markets. The Commission published 
the Concept Release to invite public comment on a wide range of 
market structure issues, including high frequency trading and un-
displayed, or ``dark,'' liquidity. See also Mary L. Schapiro, 
Strengthening Our Equity Market Structure (Speech at the Economic 
Club of New York, Sept. 7, 2010) (``Schapiro Speech,'' available on 
the Commission Web site) (comments of Commission Chairman on what 
she viewed as a troubling trend of reduced participation in the 
equity markets by individual investors, and that nearly 30 percent 
of volume in U.S.-listed equities is executed in venues that do not 
display their liquidity or make it generally available to the 
public).
    \14\ NASDAQ Rule 7018(a) already provides incentives for firms 
to participate in both NASDAQ's equity market and its options 
market.
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    The Exchange believes that it is reasonable to offer a rebate of 
$0.01 per contract on each Customer order of 5,000 or more displayed or 
non-displayed contracts, which adds liquidity in a Penny Pilot Option, 
as long as that NOM Participant has qualified for a rebate in Tier 2, 3 
or 4 for that month. This $0.01 per contract rebate would be in 
addition to the rebate for the qualifying tier. The Exchange believes 
that this enhanced incentive will encourage NOM Participants to send 
larger orders to the Exchange, which in turn would also assist those 
Participants that send Customer orders in Penny Pilot Options to earn 
higher rebates by qualifying for a higher tier as well as bringing 
additional liquidity to the Exchange. The Exchange further believes 
that limiting the enhanced $0.01 per contract rebate to firms already 
qualifying for Tiers 3, 4 or 5 (and not those that qualify for Tier 1) 
is equitable and not unfairly discriminatory because generally NOM 
Participants in Tier 1 today are not sending Customer orders of 5,000 
or more contracts. If those Participants in Tier 1 sent ten Customer 
orders of 5,000 or more per day in a given month to the Exchange, they 
would qualify for Tier 2 and would be paid the additional enhanced 
rebate. The Exchange believes that it is equitable and not unfairly 
discriminatory to incentivize those NOM Participants that qualify for 
higher volume tiers as they are the most likely to obtain the enhanced 
rebate and continue to send larger orders, which provides more 
liquidity to the Exchange. Finally, the Exchange would pay the enhanced 
rebate uniformly to those NOM Participants that qualify for Tiers 2, 3 
or 4 and meet the Customer order volume discussed herein for Penny 
Pilot Options.
    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants can and do send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive or 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed rebate scheme is competitive and similar to other rebates and 
tiers opportunities in place on other exchanges. The Exchange believes 
that this competitive marketplace materially impacts the rebates 
present on the Exchange today and substantially influenced the proposal 
set forth above.

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.

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.\15\ 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 takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \15\ 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 email to [email protected]. Please include 
File Number SR-NASDAQ-2012-003 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.


[[Page 2340]]


All submissions should refer to File Number SR-NASDAQ-2012-003. 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 a.m. and 3 
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-2012-003 and should be submitted 
on or before February 7, 2012.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-685 Filed 1-13-12; 8:45 am]
BILLING CODE 8011-01-P