[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13928-13930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04747]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68976; File No. SR-NASDAQ-2013-029]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Routing Fees to C2

February 25, 2013.
    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 February 12, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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

    NASDAQ proposes to amend Chapter XV, entitled ``Options Pricing,'' 
at Section 2 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 its Routing Fees to the C2 Options Exchange, Inc. (``C2'').
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to amend its Routing Fees at Chapter XV, Section 
2(3) of the Exchange Rules in order to recoup costs applicable to the 
C2 Options Exchange, Inc. (``C2'') that the Exchange incurs for routing 
and executing orders in equity options. Today, the Exchange calculates 
Routing Fees by assessing certain Exchange costs related to routing 
orders to away markets plus the away market's transaction fee. The 
Exchange assesses a $0.05 per contract fixed Routing Fee when routing 
orders to the NASDAQ OMX PHLX LLC (``PHLX'') and NASDAQ OMX BX, Inc. 
(``BX Options'') and a $0.11 per contract fixed Routing Fee to all 
other options exchanges in addition to the actual transaction fee or 
rebate paid by the away market.\3\
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    \3\ Today, the transaction fee assessed by the Exchange is based 
on the away market's actual transaction fee or rebate for a 
particular market participant at the time that the order was entered 
into the Exchange's trading system. This transaction fee is 
calculated on an order-by-order basis, since different away markets 
charge different amounts. In the event that there is no transaction 
fee or rebate assessed by the away market, the only fee assessed is 
the fixed Routing Fee. With respect to the rebate, the Exchange pays 
a market participant the rebate offered by an away market where 
there is such a rebate. Any rebate available is netted against a fee 
assessed by the Exchange. The Exchange is not proposing to amend its 
calculation of the away market's transaction fee as described 
herein.
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    The fixed Routing Fee is based on costs that are incurred by the 
Exchange when routing to an away market in addition to the away 
market's transaction fee. For example, the Exchange incurs a fee when 
it utilizes Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange and the Exchange's exclusive order router.\4\ Each time NOS 
routes to away markets NOS incurs a clearing-related cost \5\ and, in 
the case of certain exchanges, a transaction fee is also charged in 
certain symbols, which fees are passed through to the Exchange. The 
Exchange also incurs administrative and technical costs associated with 
operating NOS, membership fees at away markets, Options Regulatory Fees 
(``ORFs'') and technical costs associated with routing options.
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    \4\ See NASDAQ Rules at Chapter VI, Section 11(e) (Order 
Routing).
    \5\ The Options Clearing Corporation (``OCC'') assesses a 
clearing fee of $0.01 per contract side. See Securities Exchange Act 
Release No. 68025 (October 10, 2012), 77 FR 63398 (October 16, 2012) 
(SR-OCC-2012-18).
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    C2 recently filed a rule change to amend its transaction fees and 
rebates

[[Page 13929]]

for simple,\6\ non-complex orders, in equity options classes which 
became operative on February 1, 2013.\7\ C2 assesses its transaction 
fees based on a formula wherein fees are calculated on a per-contract 
basis.\8\ C2 pays rebates based on a formula wherein rebates are 
calculated on a per-contract basis.\9\ Because of this recent rule 
change, the Exchange proposes to amend C2 Routing Fees to provide 
transparency to its market participants.
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    \6\ C2 defines simple orders to exclude ETFs and indexes.
    \7\ See Securities Exchange Act Release No. 68792 (January 31, 
2013), 78 FR 8621 (February 6, 2013) (SR-C2-2013-004).
    \8\ C2 utilizes the following formula to calculate its 
transaction fees: C2 BBO Market Width at time of execution) x 
(Market Participant Rate) x 50. The C2 BBO Market Width is the 
difference between the quoted best offer and best bid in each class 
on C2 (the displayed C2 ask price minus the displayed C2 bid price). 
The Market Participant Rates are different rates for different types 
of market participants, as follows: Market Participant Rate; C2 
Market-Maker 30%; Public Customer (Maker) 40%; all other origins 
50%. See C2's Fees Schedule.
    \9\ C2 utilizes the following formula to compute rebates for 
simple, non-complex Public Customer orders in all equity options 
classes that remove liquidity (i.e. takers): Rebate = (C2 BBO Market 
Width at time of execution) x (Order Size Multiplier) x 50. The 
order size multiplier is as follows: 1-10 contracts will be 36%; 11-
99 contracts will be 30%; 100-250 contracts will be 20% and 251 plus 
contracts is 0%. The maximum rebate is capped at $0.75 per contract. 
See C2's Fees Schedule.
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    The Exchange proposes to amend its non-Customer C2 Routing Fees to 
assess the fixed cost of $0.11 per contract plus a flat rate of $0.85 
per contract, except with respect to Customers.\10\ With respect to 
Customers, the Exchange proposes not to pass the rebate offered by C2, 
as is the case today for Routing to C2 and other away markets. The 
Exchange proposes to not assess Customers a Routing Fee when routing 
orders to C2. This is similar to the manner in which the BATS Exchange, 
Inc. (``BATS'') prices Customer orders routed to C2.\11\ The Exchange 
proposes to specifically note the amended rates in its rule text in 
order to simplify C2 Routing Fees.
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    \10\ Recent pricing changes by C2 will result in a maximum fee 
of $0.85 per contract for non-Customer orders executed at C2 and 
rebates or free executions for Customer orders executed at C2.
    \11\ See SR-BATS-2013-012 (not yet published).
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    As with all fees, the Exchange may adjust these Routing Fees in 
response to competitive conditions by filing a new proposed rule 
change.
2. Statutory Basis
    NASDAQ believes that its proposal to amend its pricing is 
consistent with Section 6(b) of the Act \12\ in general, and furthers 
the objectives of Section 6(b)(4) of the Act,\13\ in particular, in 
that it is an equitable allocation of reasonable fees and other charges 
among its Participants.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposal to amend non-Customer C2 
Routing Fees from actual transaction charges to a flat rate, in 
addition to its fixed cost, is reasonable because the current C2 
Routing Fees are not transparent. The Exchange believes that assessing 
a flat rate in addition to the fixed cost assessed by the Exchange will 
provide market participants certainty with respect to C2 Routing Fees. 
Further, each destination market's transaction charge varies and there 
is a cost incurred by the Exchange when routing orders to away markets. 
The costs to the Exchange include clearing costs, administrative and 
technical costs associated with operating NOS, membership fees at away 
markets, ORFs and technical costs associated with routing options. The 
Exchange believes that the proposed non-Customer C2 Routing Fees will 
enable the Exchange to recover the costs it incurs to route orders to 
C2 in addition to the flat fee to recoup transaction costs.
    The Exchange believes that its proposal to amend the non-Customer 
C2 Routing Fees from actual transaction charges to a flat rate, in 
addition to its fixed cost, is equitable and not unfairly 
discriminatory because the Exchange would uniformly assess the same C2 
Routing Fees to all non-Customer market participants. Under its flat 
fee structure, taking all costs to the Exchange into account, the 
Exchange may operate at a slight gain or a slight loss for orders 
routed to and executed at C2. The Exchange believes that its proposed 
Routing Fees for routing non-Customer orders to C2 are reasonable 
because they are an approximation of the maximum fees the Exchange will 
be charged for such executions, including costs. As a general matter, 
the Exchange believes that the proposed fees will allow it to recoup 
and cover its costs of providing routing services to C2.
    The Exchange believes that its proposal to not pay a rebate to 
Customers and assess no Customer Routing Fee is reasonable, equitable 
and not unfairly discriminatory. The Exchange believes that the pricing 
structure is reasonable because, although not an approximation of the 
cost of routing to C2, Customer orders will still receive executions 
free of charge, whereas all other non-Customer routed orders routed to 
C2 would be assessed a Routing Fee. The Exchange believes that the 
proposed pricing for Customer orders is equitable and not unfairly 
discriminatory because it would apply uniformly to all Customer 
transactions. Participants desiring the rebate offered by C2 can route 
orders directly in order to take advantage of the rebate. Market 
participants may submit orders to the Exchange as ineligible for 
routing or ``DNR'' to avoid Routing Fees.
    Further, the Exchange believes that it is equitable and not 
unfairly discriminatory to assess a fixed cost of $0.05 per contract to 
route orders to NASDAQ OMX away markets (BX Options and PHLX) because 
the cost, in terms of actual cash outlays, to the Exchange to route to 
those markets is lower. For example, costs related to routing to BX 
Options and PHLX are lower as compared to other away markets because 
NOS is utilized by all three exchanges to route orders.\14\ NOS and the 
three NASDAQ OMX options markets have a common data center and staff 
that are responsible for the day-to-day operations of NOS. Because the 
three exchanges are in a common data center, Routing Fees are reduced 
because costly expenses related to, for example, telecommunication 
lines to obtain connectivity are avoided when routing orders in this 
instance. The costs related to connectivity to route orders to other 
NASDAQ OMX exchanges are de minimis. When routing orders to non-NASDAQ 
OMX exchanges, the Exchange incurs costly connectivity charges related 
to telecommunication lines and other related costs when routing orders. 
The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to pass along savings realized by leveraging NASDAQ 
OMX's infrastructure and scale to market participants when those orders 
are routed to BX Options and NOM. It is important to note with respect 
to routing to an away market that orders are routed based on price 
first.\15\ The Exchange will route orders to away markets where the 
Exchange's disseminated bid or offer is inferior to the national best 
bid (best offer) (``NBBO'') price.\16\
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    \14\ See Chapter VI, Section 11 of the NASDAQ and BX Options 
Rules and Phlx Rule 1080(m)(iii)(A).
    \15\ See NASDAQ Rules at Chapter XII (Options Order Protection 
and Locked and Crossed Market Rules).
    \16\ See NASDAQ Rules at Chapter VI, Section 11(e) (Order 
Routing).
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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

[[Page 13930]]

of the purposes of the Act. The Exchange believes that the rule change 
would allow the Exchange to recoup its costs when routing orders 
designated as available for routing by the market participant to C2. 
Participants may choose to mark the order as ineligible for routing to 
avoid incurring these fees.\17\ Today, other options exchanges also 
assess similar fees to recoup costs incurred by the Exchange to route 
orders to away markets. The Exchange routes orders to away markets 
where the Exchange's disseminated bid or offer is inferior to the 
national best bid (best offer) (``NBBO'') price and based on price 
first.\18\
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    \17\ Id.
    \18\ See supra note 15.
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    The Exchange operates in a highly competitive market, comprised of 
eleven exchanges, in which market participants can easily and readily 
direct order flow to competing venues if they deem fee levels at a 
particular venue to be excessive. Accordingly, the fees that are 
assessed by the Exchange must remain competitive with fees charged by 
other venues and therefore must continue to be reasonable and equitably 
allocated to those Participants that opt to direct orders to the 
Exchange rather than competing venues.

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.\19\ 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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    \19\ 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-2013-029 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-2013-029. 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 such filing also will be available 
for inspection and copying at the principal office of NASDAQ. 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-2013-029, and should 
be submitted on or before March 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04747 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P