[Federal Register Volume 77, Number 223 (Monday, November 19, 2012)]
[Notices]
[Pages 69519-69522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28000]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68209; File No. SR-NASDAQ-2012-126]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ's Rebates for Order Execution and Its Fees for Order 
Entry Ports Through the Introduction of New Market Quality Incentive 
Programs on a Pilot Basis

November 9, 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 November 1, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a 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 is proposing a change to modify rebates for order execution 
and its fees for order entry ports through the introduction of new 
market quality incentive programs on a pilot basis. NASDAQ will 
implement the proposed change on November 1, 2012. The text of the 
proposed rule change is available at http://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, the self-regulatory organization 
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

[[Page 69520]]

of those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is introducing two new pricing programs designed to create 
incentives for members to improve market quality. The programs will be 
in effect on a pilot basis from November 1, 2012 until April 30, 2013, 
subject to being modified, terminated, extended, or made permanent 
through a subsequent proposed rule change. The pilot nature of the 
proposals will allow NASDAQ to assess and report to the Commission on 
the effects of the programs on bid-ask spreads, depth of liquidity at 
the inside, and such other factors as may be deemed relevant.
    First, under the NBBO Setter Incentive program, NASDAQ will provide 
an enhanced liquidity provider rebate with respect to displayed 
liquidity-providing orders that set the national best bid or best offer 
(``NBBO'') or join another trading center with a protected quotation at 
the NBBO. The NBBO Setter Incentive credit will be paid on a monthly 
basis, and the amount will be determined by multiplying $0.0005 or 
$0.0002 by the number of shares of displayed liquidity provided to 
which a particular rate applies. A member will receive an NBBO Setter 
Incentive credit at the $0.0002 rate with respect to all shares of 
displayed liquidity that are executed at a price of $1 or more in the 
Nasdaq Market Center during a given month if posted through an order 
that:
     Displayed a quantity of at least one round lot at the time 
of execution; and
     Either established the NBBO or was the first order posted 
on NASDAQ that had the same price as an order posted at another trading 
center with a protected quotation that established the NBBO. Thus, the 
credit will be paid for orders that incur risk by setting the inside 
market or allowing NASDAQ to join another trading center that has 
already set the inside market, thereby aiding price discovery and 
NASDAQ's market quality. The credit will not be paid with respect to 
orders that join another order on NASDAQ that has already established 
or joined the NBBO.
    A member will receive an NBBO Setter Incentive credit at the 
$0.0005 rate with respect to all shares of displayed liquidity that are 
executed at a price of $1 or more in the NASDAQ Market Center during a 
given month if posted through an order that:
     Displayed a quantity of at least one round lot at the time 
of execution;
     Either established the NBBO or was the first order posted 
on Nasdaq that had the same price as an order posted at another trading 
center with a protected quotation that established the NBBO; and
     Was entered through a market participant identifier 
(``MPID'') that qualified for the Qualified Market Maker (``QMM'') 
program during the month. The QMM program is the other market quality 
incentive being introduced by NASDAQ in this proposed rule change, and 
is discussed below.

Similar to other market quality incentive programs already in place at 
NASDAQ, such as the Investor Support Program, an NBBO Setter Incentive 
credit will be in addition to (and will not replace) any other credit 
or rebate for which a member may qualify. The program is similar to a 
provision of the fee schedule of the BATS Exchange, Inc. (``BATS''), 
under which BATS pays its members an additional rebate of $0.0002 per 
share executed for displayed liquidity that sets the NBBO (provided the 
member has an average daily volume equal to or greater than 0.5% of the 
total consolidated volume during the month).\3\
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    \3\ See http://cdn.batstrading.com/resources/regulation/rule_book/BZX_Fee_ Schedule.pdf (``$0.0002 additional rebate per share 
for adding displayed liquidity to the BZX Exchange order book on an 
order that sets the NBBO for Members who have an ADV equal to or 
greater than 0.5% of TCV'').
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Qualified Market Maker Program
    NASDAQ is proposing a market quality incentive program under which 
a member may be designated as a QMM with respect to one or more of its 
MPIDs if:
     The member is not assessed any ``Excess Order Fee'' under 
Rule 7018 during the month; \4\ and
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    \4\ Rule 7018(m). NASDAQ recently introduced an Excess Order 
Fee, aimed at reducing inefficient order entry practices of certain 
market participants that place excessive burdens on the systems of 
NASDAQ and its members and that may negatively impact the usefulness 
and life cycle cost of market data. In general, the determination of 
whether to impose the fee on a particular MPID is made by 
calculating the ratio between (i) entered orders, weighted by the 
distance of the order from the NBBO, and (ii) orders that execute in 
whole or in part. The fee is imposed on MPIDs that have an ``Order 
Entry Ratio'' of more than 100.
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     Through such MPID the member quotes at the NBBO at least 
25% of the time during regular market hours \5\ in an average of at 
least 1,000 securities during the month.\6\
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    \5\ Defined as 9:30 a.m. through 4:00 p.m., or such shorter 
period as may be designated by NASDAQ on a day when the securities 
markets close early (such as the day after Thanksgiving).
    \6\ A member MPID is considered to be quoting at the NBBO if it 
has a displayed order at either the national best bid or the 
national best offer or both the national best bid and offer. On a 
daily basis, NASDAQ will determine the number of securities in which 
the member satisfied the 25% NBBO requirement. To qualify for QMM 
designation, the MPID must meet the requirement for an average of 
1,000 securities per day over the course of the month. Thus, if a 
member MPID satisfied the 25% NBBO requirement in 900 securities for 
half the days in the month, and satisfied the requirement for 1,100 
securities for the other days in the month, it would meet the 
requirement for an average of 1,000 securities.
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    Thus, to be a QMM, a member must make a significant contribution to 
market quality by providing liquidity at the NBBO in a large number of 
stocks for a significant portion of the day. In addition, the member 
must avoid imposing the burdens on NASDAQ and its market participants 
that may be associated with excessive rates of entry of orders away 
from the inside and/or order cancellation. A QMM may be, but is not 
required to be, a registered market maker in any security; thus, the 
QMM designation does not by itself impose a two-sided quotation 
obligation or convey any of the benefits associated with being a 
registered market maker. The designation will, however, reflect the 
QMM's commitment to provide meaningful and consistent support to market 
quality and price discovery by extensive quoting at the NBBO in a large 
number of securities. Thus, the program is designed to attract 
liquidity both from traditional market makers and from other firms that 
are willing to commit capital to support liquidity at the NBBO. Through 
these incentives, NASDAQ hopes to provide improved trading conditions 
for all market participants through narrower bid-ask spreads and 
increased depth of liquidity available at the inside market. In 
addition, the program reflects an effort to use financial incentives to 
encourage a wider variety of members, including members that may be 
characterized as high-frequency trading firms, to make positive 
commitments to promote market quality.
    A member that is a QMM with respect to a particular MPID will 
receive:
     An NBBO Setter Incentive credit of $0.0005 with respect to 
orders that qualify for the NBBO Setter Incentive program (i.e., 
displayed orders with a size of at least one round lot that set the 
NBBO or join another trading center at the NBBO) and that are entered 
through that MPID; and
     A 25% discount on fees for ports used for entering orders 
for that MPID,

[[Page 69521]]

up to a total discount of $10,000 per MPID per month.\7\ As provided in 
amendments to Rule 7015, the specific fees subject to this discount 
are: (i) All ports using the NASDAQ Information Exchange (``QIX'') 
protocol,\8\ (ii) Financial Information Exchange (``FIX'') trading 
ports,\9\ and (iii) ports using other trading telecommunications 
protocols.\10\
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    \7\ The ports subject to the discount are not used for receipt 
of market data.
    \8\ The applicable undiscounted fees are $1,200 per month for a 
port pair or ECN direct connection port pair, and $1,000 per month 
for an unsolicited message port. See Rule 7015(a).
    \9\ The applicable undiscounted fee is $500 per port per month. 
See Rule 7015(b).
    \10\ The applicable undiscounted fee is $500 per port pair per 
month. See Rule 7015(g).
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    NASDAQ is proposing these discounts as a means of recognizing the 
value of market participants that consistently quote at the NBBO in a 
large number of securities. Even when such market participants are not 
formally registered as market makers, they risk capital by offering 
immediately executable liquidity at the price most favorable to market 
participants on the opposite side of the market. Such activity promotes 
price discovery and dampens volatility and enhances the attractiveness 
of NASDAQ as a trading venue. A discount on order entry port fees is an 
appropriate incentive to encourage broad-based liquidity provision 
because active management of quotes across over 1,000 securities may 
require a member to employ numerous order entry ports. NASDAQ further 
notes that the proposed discount on port fees is similar in structure 
and purpose to a provision of the fee schedule for BATS's options 
market under which the $1,000 per month fee for a port with bulk-
quoting capabilities is waived if a member achieves certain market 
quality standards with respect to options on more than 25 underlying 
securities.\11\
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    \11\ See http://cdn.batstrading.com/resources/regulation/rule_book/BZX_Fee_ Schedule.pdf (``fees for logical ports with bulk-
quoting capabilities will be waived for Members achieving QIP 
[Quoting Incentive Program] thresholds in more than 25 underlying 
securities'').
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    In addition to the foregoing changes, NASDAQ is also modifying the 
name of Rule 7014 to reflect the fact that it includes a range of 
market quality incentive programs, adding definitions of ``NBBO'', 
``trading center'', and ``protected quotation'', and ``regular market 
hours'' to the rule, and making conforming changes to the letter 
designations of paragraphs within the rule.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\12\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ 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, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(4) and (5).
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    The proposed NBBO Setter Incentive program is intended to encourage 
members to add liquidity at prices that benefit all NASDAQ market 
participants and the NASDAQ market itself, and enhance price discovery, 
by establishing a new NBBO or allowing NASDAQ to join the NBBO 
established by another trading center. NASDAQ believes that the level 
of the credits available through the program--$0.0002 or $0.0005 per 
share executed--is reasonable, in that it does not reflect a 
disproportionate increase above the rebates provided to all members 
with respect to the provision of displayed liquidity under Rule 7018, 
which range from $0.0020 to $0.00295 per share executed. NASDAQ further 
notes that by introducing the program, NASDAQ is reducing fees for 
members that set the NBBO or join another market at the NBBO. The 
program is consistent with the Act's requirement for an equitable 
allocation of fees because members that establish the NBBO or cause 
NASDAQ to join another market at the NBBO benefit all investors by 
promoting price discovery and increasing the depth of liquidity 
available at the inside market. Such members also benefit NASDAQ itself 
by enhancing its competitiveness as a market that attracts actionable 
orders. Accordingly, NASDAQ believes that it is consistent with an 
equitable allocation of fees to pay an enhanced rebate in recognition 
of these benefits to NASDAQ and its market participants. NASDAQ further 
notes that the program is consistent with an equitable allocation of 
fees because it is immediately available to all market participants 
that allow NASDAQ to set or join the NBBO, regardless of the size of 
the firm or its trading volumes. Finally, NASDAQ believes that the 
program and the payment of a higher rebate with respect to qualifying 
orders is not unfairly discriminatory because it is intended to promote 
the benefits described above, and because the magnitude of the 
additional rebate is not unreasonably high in comparison to the rebate 
paid with respect to other displayed liquidity-providing orders.
    Similarly, the proposed QMM program is intended to encourage 
members to promote price discovery and market quality by quoting at the 
NBBO for a significant portion of each day in a large number of 
securities, thereby benefitting NASDAQ and other investors by 
committing capital to support the execution of orders. With respect to 
the enhanced NBBO Setter Incentive rebate provided to QMMs, NASDAQ 
believes that the rebate itself is reasonable, equitable, and not 
unfairly discriminatory for the reasons discussed above with regard to 
the NBBO Setter Incentive program. In addition, NASDAQ believes that it 
is reasonable to pay a higher rebate under that program to QMMs because 
of the additional commitment to market quality reflected in the quoting 
requirements associated with being a QMM. Similarly, NASDAQ believes 
that the higher rebate is consistent with an equitable allocation of 
fees because a QMM that sets the NBBO is demonstrating both a specific 
commitment to the market through the NBBO-setting order and a broad 
commitment through its quoting activity throughout the month. 
Accordingly, NASDAQ believes that it is consistent with an equitable 
allocation to pay a higher rebate in comparison with the rebate for 
other NBBO-setting orders. Finally, NASDAQ believes that this higher 
rebate is not unfairly discriminatory because it is consistent with the 
market quality and competitiveness benefits associated with the program 
and because the magnitude of the additional rebate is not unreasonably 
high in comparison to the rebate paid with respect to other displayed 
liquidity-providing orders.
    NASDAQ believes that the proposed port fee discount for QMMs is 
consistent with an equitable allocation of fees because the fees for 
connectivity, such as the ports used for order entry, are a significant 
component of the overall cost of trading on NASDAQ and other trading 
venues. Accordingly, to the extent that a member maintains a 
significant presence in the NASDAQ market through the extent of its 
quoting at the NBBO, NASDAQ believes that it is equitable to provide 
the member a discount on this component of its trading costs. NASDAQ 
further believes that the discount is not unfairly discriminatory, 
because it is subject to a monthly cap, such that the disparity between 
the monthly costs of a QMM and another market participant with a 
similar configuration of order entry ports may not exceed $10,000. 
Finally, NASDAQ believes that the discount is

[[Page 69522]]

reasonable because it will result in a fee reduction for members that 
provide the market quality benefits associated with QMM status.
    Finally, NASDAQ notes that it operates in a highly competitive 
market in which market participants can readily favor competing venues 
if they deem fee levels at a particular venue to be excessive. In such 
an environment, NASDAQ must continually adjust its fees to remain 
competitive with other exchanges and with alternative trading systems 
that have been exempted from compliance with the statutory standards 
applicable to exchanges. NASDAQ believes that the proposed rule change 
reflects this competitive environment because it is designed to reduce 
fees for members that enhance the quality of NASDAQ's market.

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. Because the market 
for order execution is extremely competitive, members may readily opt 
to disfavor NASDAQ's execution services if they believe that 
alternatives offer them better value. By reducing fees for order 
execution and order entry ports, the proposal is a manifestation of the 
continued intense level of competition in the market for order 
execution.

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.\14\ 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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    \14\ 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-2012-126 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-2012-126. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-126 and should 
be submitted on or before December 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28000 Filed 11-16-12; 8:45 am]
BILLING CODE 8011-01-P