[Federal Register Volume 78, Number 154 (Friday, August 9, 2013)]
[Notices]
[Pages 48758-48762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-19264]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70117; File No. SR-NASDAQ-2013-100]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
to Its Fees for Routing of Orders Priced at $1 or More Under Rule 
7018(a), as Well as Changes to Its Excess Order Fee Under Rule 7018(m)

August 5, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on July 25, 2013, 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

    NASDAQ is proposing changes to its fees for routing of orders 
priced at $1 or

[[Page 48759]]

more under Rule 7018(a), as well as changes to its Excess Order Fee 
under Rule 7018(m). The changes pursuant to this proposal are effective 
upon filing, and the Exchange will implement the proposed rule changes 
on August 1, 2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://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
Routing Fees
    NASDAQ is proposing to adjust certain of the fees it charges for 
routing orders in securities priced above $1. Currently, for directed 
orders \3\ in securities listed on exchanges other than the New York 
Stock Exchange (``NYSE'') that are sent to NASDAQ OMX BX (``BX''), 
NASDAQ charges no fee and provides no credit, while charging $0.0035 
per share executed for directed orders sent to other execution venues. 
Similarly, for directed orders in securities listed on NYSE that are 
sent to BX, NASDAQ charges no fee and provides no credit. If directed 
orders in securities listed on NYSE are sent to NYSE, NASDAQ charges 
(i) $0.0028 per share executed for a member with an average daily 
volume through the NASDAQ Market Center in all securities during the 
month of more than 35 million shares of liquidity provided through one 
or more of its market participant identifiers (``MPIDs''), and (ii) 
$0.0029 per share executed for other members.\4\
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    \3\ As provided in Rule 4751, directed orders are directed to an 
exchange other than NASDAQ, as designated by the entering party, 
without checking the NASDAQ book. If unexecuted, the order (or 
unexecuted portion thereof) is returned to the entering party. 
Directed orders may be designated as intermarket sweep orders by the 
entering party.
    \4\ It should be noted that Rule 7018(a)(2) currently has text 
that distinguishes among directed orders that are designated as 
intermarket sweep orders, directed orders sent to BX, directed 
orders sent to NASDAQ OMX PSX, and other directed orders, but the 
applicable fees are as described above: $0.0029 per share executed 
for all directed orders sent to NYSE (unless the member qualifies 
for the volume-based tier described above), no fee or credit if sent 
to BX, and $0.0035 per share executed if sent to any venue other 
than BX or NYSE. The proposed rule change will also simplify the 
applicable rule text by eliminating classifications of directed 
order with identical fees.
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    Effective August 1, 2013, NASDAQ will make its fee for routing 
directed orders to BX and NYSE $0.0035 per share executed, equal to its 
fee for routing directed orders to all other venues. Thus, the change 
will make the applicable fees more uniform by eliminating an aspect of 
the pricing schedule that may have provided undue encouragement to 
those members that use NASDAQ's routing services to route directed 
orders to BX or NYSE rather than using routing strategies that access a 
variety of venues. Moreover, NASDAQ notes that although BX currently 
pays a credit with respect to orders that access liquidity, NASDAQ 
currently charges $0.0035 per share executed for directed orders that 
are sent to the BATS-Y Exchange and the EDGA Exchange, venues that also 
pay a credit for orders that access liquidity. Thus, the change will 
result in a consistent fee for routing directed orders to all such 
venues. The change is also consistent with NASDAQ's long-standing 
practice of charging a high fee for use of directed orders, which 
represent a special service of the NASDAQ routing broker and which, 
when designated as intermarket sweep orders, require additional after-
the-fact surveillance to determine whether the member's designation was 
compliant with the requirements of Regulation NMS.
    For orders using NASDAQ's TFTY, SOLV, CART, or SAVE \5\ routing 
strategies that execute at BX, NASDAQ currently provides a credit of 
$0.0004 (equivalent to the credit provided by BX). Effective August 1, 
2013, NASDAQ will eliminate this credit, such that there will be no fee 
or credit when such orders execute at BX. Thus, as is the case with 
other routed orders, the fee for orders that execute at BX using these 
routing strategies will reflect a markup that NASDAQ believes will be 
consistent with the value of the service provided and that will assist 
NASDAQ in covering its costs of operating a routing service and earning 
a return.
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    \5\ These routing strategies are described in NASDAQ Rule 4758.
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Excess Order Fee
    In 2012, NASDAQ introduced an Excess Order Fee, imposed on MPIDs 
that have characteristics indicative of inefficient order entry 
practices.\6\ As NASDAQ explained at the time, inefficient order entry 
practices may place excessive burdens on the systems of NASDAQ and its 
members and may negatively impact the usefulness and life cycle cost of 
market data.\7\ Market participants that flood the market with orders 
that are rapidly cancelled or that are priced away from the inside 
market do little to support meaningful price discovery.
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    \6\ Securities Exchange Act Release Nos. 66951 (May 9, 2012), 77 
FR 28647 (May 15, 2012) (SR-NASDAQ-2012-055) (establishing fee); 
67292 (June 28, 2012), 77 FR 39773 (July 5, 2012) (SR-NASDAQ-2012-
073) (modifying terms and conditions of fee).
    \7\ See generally Recommendations Regarding Regulatory Reponses 
to the Market Events of May 6, 2010, Joint CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues, at 11 (February 18, 2011) 
(``The SEC and CFTC should also consider addressing the 
disproportionate impact that [high frequency trading] has on 
Exchange message traffic and market surveillance costs. . . . The 
Committee recognizes that there are valid reasons for algorithmic 
strategies to drive high cancellation rates, but we believe that 
this is an area that deserves further study. At a minimum, we 
believe that the participants of those strategies should properly 
absorb the externalized costs of their activity.'').
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    In general, the determination of whether to impose the fee on a 
particular MPID has been made by calculating the ratio between (i) 
entered orders, weighted by the distance of the order from the national 
best bid or offer (``NBBO''), and (ii) orders that execute in whole or 
in part. The fee has been imposed on MPIDs with an ``Order Entry 
Ratio'' of more than 100. The Order Entry Ratio is calculated, and the 
Excess Order Fee imposed, on a monthly basis. NASDAQ is now proposing 
to modify the fee, such that it will be calculated and assessed on the 
basis of all of a member's trading activity on NASDAQ, rather than on 
an MPID basis. The purpose of this change is to ensure that members do 
not act in a manner inconsistent with the intent of the fee by 
spreading inefficient order activity across multiple MPIDs in a manner 
that allows the MPIDs to avoid a charge that would not be avoided if 
all of the member's activity were aggregated. Thus, the change replaces 
the term ``MPID'' with the term ``member'' throughout the text of Rule 
7018(m). The rule, as amended, will operate as follows:
    For each member, the Order Entry Ratio will be the ratio of (i) the 
member's ``Weighted Order Total'' to (ii) the greater of one (1) or the 
number of

[[Page 48760]]

displayed, non-marketable orders \8\ sent to NASDAQ by the member 
during the month that execute in full or in part.\9\ The Weighted Order 
Total is the number of displayed, non-marketable orders sent to NASDAQ 
by the member, as adjusted by a ``Weighting Factor.'' The applicable 
Weighting Factor is applied to each order based on its price in 
comparison to the NBBO at the time of order entry:
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    \8\ The fee focuses on displayed orders since they have the most 
significant impact on investor confusion and the quality of market 
data.
    \9\ Thus, in an extreme case where no orders entered by the 
member executed, this component of the ratio would be assumed to be 
1, so as to avoid the impossibility of dividing by zero.

------------------------------------------------------------------------
     Order's Price versus NBBO at Entry            Weighting Factor
------------------------------------------------------------------------
Less than 0.20% away.......................  0x
0.20% to 0.99% away........................  1x
1.00% to 1.99% away........................  2x
2.00% or more away.........................  3x
------------------------------------------------------------------------

    Thus, in calculating the Weighted Order Total, an order that was 
more than 2.0% away from the NBBO would be equivalent to three orders 
that were 0.50% away. Due to the applicable Weighting Factor of 0x, 
orders entered less than 0.20% away from the NBBO would not be included 
in the Weighted Order Total, but would be included in the ``executed'' 
orders component of the Order Entry Ratio if they execute in full or 
part. Orders sent by market makers in securities in which they are 
registered, through the MPID applicable to the registration, are 
excluded from both components of the ratio.\10\ In addition, members 
with a daily average Weighted Order Total of less than 100,000 during 
the month will not be subject to the Excess Order Fee. Finally, the fee 
is based on orders received by NASDAQ during regular market hours 
(generally, 9:30 a.m. to 4:00 p.m.),\11\ and will exclude orders 
received at other times, even if they execute during regular market 
hours.
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    \10\ This is the case because market makers are already subject 
to rule-based standards designed to promote the efficiency and 
quality of their order entry practices. See Rule 4613. Although Rule 
4613 allows market makers to quote at spreads much wider than 2%, 
NASDAQ's assessment of market maker performance has led it to 
conclude that market makers do not generally engage in the 
inefficient practices at which the new fee is aimed. NASDAQ will 
continually assess this data and revisit the applicability of the 
fee to market makers and/or the requirements of Rule 4613 as needed 
to promote efficient quotation practices by market makers.
    \11\ Regular market hours may be different in some 
circumstances, such as on the day after Thanksgiving, when regular 
market hours on all exchanges traditionally end at 1:00 p.m.
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    The following example illustrates the calculation of the Order 
Entry Ratio:
     A member enters 35,000,000 displayed, liquidity-providing 
orders:
    [cir] The member is registered as a market maker with respect to 
20,000,000 of the orders. These orders are excluded from the 
calculation.
    [cir] 10,000,000 orders are entered at the NBBO. The Weighting 
Factor for these orders is 0x.
    [cir] 5,000,000 orders are entered at a price that is 1.50% away 
from the NBBO. The Weighting Factor for these orders is 2x.
     Of the 15,000,000 orders included in the calculation, 
90,000 are executed.
     The Weighted Order Total is (10,000,000 x 0) + (5,000,000 
x 2) = 10,000,000. The Order Entry Ratio is 10,000,000/90,000 = 111.
    If a member has an Order Entry Ratio of more than 100, the amount 
of the Order Entry Fee will be calculated by determining the member's 
``Excess Weighted Orders.'' Excess Weighted Orders are calculated by 
subtracting (i) the Weighted Order Total that would result in the 
member having an Order Entry Ratio of 100 from (ii) the member's actual 
Weighted Order Total. In the example above, the Weighted Order Total 
that would result in an Order Entry Ratio of 100 is 9,000,000, since 
9,000,000/90,000 = 100. Accordingly, the Excess Weighted Orders would 
be 10,000,000-9,000,000 = 1,000,000.
    The Excess Order Fee charged to the member will then be determined 
by multiplying the ``Applicable Rate'' by the number of Excess Weighted 
Orders. The Applicable Rate is determined based on the member's Order 
Entry Ratio:

------------------------------------------------------------------------
             Order Entry Ratio                     Applicable Rate
------------------------------------------------------------------------
101-1,000..................................  $0.005
More than 1,000............................  0.01
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In the example above, the Applicable Rate would be $0.005, based on the 
member's Order Entry Ratio of 111. Accordingly, the monthly Excess 
Order Fee would be 1,000,000 x $0.005 = $5,000.
    NASDAQ continues to expect that the impact of the fee, as modified, 
will be narrow because the change will encourage potentially affected 
market participants to modify their order entry practices in order to 
avoid the fee, thereby improving the market for all participants. 
Accordingly, NASDAQ does not expect to earn significant revenues from 
the modified fee.
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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    NASDAQ believes that the adoption of a uniform fee of $0.0035 per 
share executed for directed orders is reasonable because NASDAQ already 
charges this fee for directed orders sent to most venues, charging 
lower fees only with respect to BX and NYSE. The fee level is 
consistent with NASDAQ's long-standing practice of charging a high fee 
for use of directed orders, which represent a special service of the 
NASDAQ routing broker and which, when designated as intermarket sweep 
orders, require additional after-the-fact surveillance to determine 
whether the member's designation was compliant with the requirements of 
Regulation NMS. The change is consistent with an equitable allocation 
of fees because it is assessed solely upon members that opt to use 
NASDAQ's directed order functionality. The change is not unfairly 
discriminatory because it will result in NASDAQ charging the same fee 
for all directed orders in securities priced above $1, regardless of 
the activity level of the member, the listing venue of the security, or 
the venue to which the order is directed.
    NASDAQ believes that the change to fees for TFTY, SOLV, CART, and 
SAVE orders that execute at BX is reasonable because even though market 
participants will receive no credit with respect to such orders, they 
will also pay no fee.\14\ NASDAQ believes that the change is consistent 
with an equitable allocation of fees because it is allocated solely to 
members that use NASDAQ's routing services and opt to use the specified 
routing strategies. The change is not unfairly discriminatory because 
it will make the economics applicable to executions on BX of orders 
using the specified routing strategies less disparate from the fee 
applicable to such executions using other routing strategies. Moreover, 
the change is not discriminatory in that it applies equally to all 
members using the specified routing strategies.
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    \14\ By contrast, the fee for routed orders that execute at BX 
using the STGY, SCAN, SKNY, or SKIP routing strategies is $0.0030 
per share executed.

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[[Page 48761]]

    With respect to the Excess Order Fee, NASDAQ stated in its original 
filing to institute the fee that it is reasonable because it is 
designed to achieve improvements in the quality of displayed liquidity 
and market data that will benefit all market participants. In addition, 
although the level of the fee may theoretically be very high, the fee 
is reasonable because market participants may readily avoid the fee by 
making improvements in their order entry practices that reduce the 
number of orders they enter, bring the prices of their orders closer to 
the NBBO, and/or increase the percentage of their orders that execute. 
Similarly, the change proposed herein is reasonable because it will 
provide further incentive to members to improve order entry practices 
by insuring that they cannot evade the fee by spreading activity across 
multiple MPIDs.
    For similar reasons, the fee is consistent with an equitable 
allocation of fees, because although the fee may apply to only a small 
number of market participants, the fee would be applied to them in 
order to encourage better order entry practices that will benefit all 
market participants. The change is also equitable because it will 
further encourage better order entry practices across a wider group of 
market participants. Finally, NASDAQ believes that the fee is not 
unfairly discriminatory. Although the fee may apply to only a small 
number of market participants, it will be imposed because of the 
negative externalities that such market participants impose on others 
through inefficient order entry practices. Accordingly, NASDAQ believes 
that it is fair to impose the fee on these market participants in order 
to incentivize them to modify their behavior and thereby benefit the 
market. The change is likewise not unfairly discriminatory because it 
will negatively affect members only if they have been evading the 
incentives to improve order entry practices provided by the fee.

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.\15\ 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, or rebate opportunities 
available at other venues to be more favorable. 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, while also seeking to earn a reasonable profit from its 
trading and routing services. Because competitors are free to modify 
their own fees in response, and because market participants may readily 
adjust their order routing practices, NASDAQ believes that the degree 
to which fee changes in this market may impose any burden on 
competition is extremely limited. In this instance, the changes to 
routing fees do not impose a burden on competition because NASDAQ's 
routing services are optional and are the subject of competition from 
other exchanges and broker-dealers that offer routing services, as well 
as the ability of members to develop their own routing capabilities. 
Accordingly, if the changes are unattractive to market participants, it 
is likely that NASDAQ will lose market share as a result of them.
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    \15\ 15 U.S.C. 78f(b)(8).
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    With respect to the change to the Excess Order Fee, NASDAQ believes 
that the change, like the original fee, will constrain market 
participants from pursuing certain inefficient and potentially abusive 
trading strategies. To the extent that this change may be construed as 
a burden on competition, NASDAQ believes that it is appropriate in 
order to allow NASDAQ to better achieve this purpose.

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) of the Act \16\ and paragraph (f) of Rule 19b-4 
thereunder.\17\ 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.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
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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-2013-100 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-2013-100. 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-2013-100 and should 
be submitted on or before August 30, 2013.


[[Page 48762]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19264 Filed 8-8-13; 8:45 am]
BILLING CODE 8011-01-P