[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Notices]
[Pages 71690-71693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-28571]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70926; File No. SR-NASDAQ-2013-141]


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

November 22, 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 November 13, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to modify Chapter XV, entitled ``Options Pricing,'' 
at

[[Page 71691]]

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 certain NOM Market Maker \3\ Rebates to Add Liquidity in Penny 
Pilot Options.\4\
---------------------------------------------------------------------------

    \3\ The term ``NOM Market Maker'' is a Participant that has 
registered as a Market Maker on NOM pursuant to Chapter VII, Section 
2, and must also remain in good standing pursuant to Chapter VII, 
Section 4. In order to receive NOM Market Maker pricing in all 
securities, the Participant must be registered as a NOM Market Maker 
in at least one security.
    \4\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through December 31, 2013. 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); 67325 (June 29, 2012), 77 
FR 40127 (July 6, 2012) (SR-NASDAQ-2012-075) (notice of filing and 
immediate effectiveness and extension and replacement of Penny Pilot 
through December 31, 2012); 68519 (December 21, 2012), 78 FR 136 
(January 2, 2013) (SR-NASDAQ-2012-143) (notice of filing and 
immediate effectiveness and extension and replacement of Penny Pilot 
through June 30, 2013); and 69787 (June 18, 2013), 78 FR 37858 (June 
24, 2013) (SR-NASDAQ-2013-082). See also NOM Rules, Chapter VI, 
Section 5.
---------------------------------------------------------------------------

    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 Chapter XV, entitled ``Options Pricing,'' 
at Section 2(1) governing the rebates and fees assessed for option 
orders entered into NOM. The Exchange proposes to amend the NOM Market 
Maker Penny Pilot Options Rebates to Add Liquidity. The Exchange 
believes the amendments will attract greater liquidity to the Exchange.
    Today, the Exchange offers a four-tiered Rebate to Add Liquidity in 
Penny Pilot Options to NOM Market Makers as follows:

------------------------------------------------------------------------
                                                         Rebate to add
                                    Monthly volume         liquidity
------------------------------------------------------------------------
Tier 1........................  Participant adds NOM   $0.25
                                 Market Maker
                                 liquidity in Penny
                                 Pilot Options of up
                                 to 39,999 contracts
                                 per day in a month.
Tier 2........................  Participant adds NOM   $0.30
                                 Market Maker
                                 liquidity in Penny
                                 Pilot Options of
                                 40,000 to 69,999
                                 contracts per day in
                                 a month.
Tier 3........................  Participant adds NOM   $0.32
                                 Market Maker
                                 liquidity in Penny
                                 Pilot Options of
                                 70,000 to 99,999
                                 contracts per day in
                                 a month.
Tier 4........................  Participant adds NOM   $0.32 or $0.38 in
                                 Market Maker           the following
                                 liquidity in Penny     symbols BAC,
                                 Pilot Options of       GLD, IWM, QQQ
                                 100,000 or more        and VXX or $0.40
                                 contracts per day in   in SPY
                                 a month.
------------------------------------------------------------------------

    The Exchange proposes to lower the volume requirements on all NOM 
Market Maker Rebate to Add Liquidity Penny Pilot Option tiers. Tier 1 
currently pays a $0.25 per contract rebate to Participants that add NOM 
Market Maker liquidity in Penny Pilot Options of up to 39,999 contracts 
per day in a month. With respect to Tier 1, the Exchange will continue 
to pay a $0.25 per contract rebate to a Participant provided the 
Participant adds NOM Market Maker liquidity in Penny Pilot Options of 
up to 29,999 contracts per day in a month. Tier 2 currently pays a 
$0.30 per contract rebate to Participants that add NOM Market Maker 
liquidity in Penny Pilot Options of 40,000 to 69,999 contracts per day 
in a month. With respect to Tier 2, the Exchange will continue to pay a 
$0.30 per contract rebate to a Participant provided the Participant 
adds NOM Market Maker liquidity in Penny Pilot Options of 30,000 to 
59,999 contracts per day in a month. Tier 3 currently pays a $0.32 per 
contract rebate to Participants that add NOM Market Maker liquidity in 
Penny Pilot Options of 70,000 to 99,999 contracts per day in a month. 
With respect to Tier 3, the Exchange will continue to pay a $0.32 per 
contract rebate to a Participant provided the Participant adds NOM 
Market Maker liquidity in Penny Pilot Options of 60,000 to 79,999 
contracts per day in a month. Tier 4 currently pays a $0.32 or $0.38 
per contract rebate in BAC, GLD, IWN, QQQ and VXX and a $0.40 per 
contract in SPY to Participants that add NOM Market Maker liquidity in 
Penny Pilot Options of 100,000 or more contracts per day in a month. 
With respect to Tier 4, the Exchange will continue to pay a a $0.32 or 
$0.38 per contract rebate in BAC, GLD, IWN, QQQ and VXX and a $0.40 per 
contract in SPY to a Participant provided the Participant adds NOM 
Market Maker liquidity in Penny Pilot Options of 80,000 or more 
contracts per day in a month.
    The Exchange believes that these amendments to the NOM Market Maker 
Rebate to Add Liquidity tiers will continue to incentivize NOM Market 
Makers to post liquidity on the Exchange.

[[Page 71692]]

2. Statutory Basis
    NASDAQ believes that its proposal to amend its Pricing Schedule is 
consistent with Section 6(b) of the Act \5\ in general, and furthers 
the objectives of Section 6(b)(4) and (b)(5) of the Act \6\ 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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

    The Exchange's proposal to lower the volume requirements on the NOM 
Market Maker Penny Pilot Options Rebates to Add Liquidity tiers is 
reasonable because it should incentivize NOM Market Makers to post 
liquidity on NOM. Also, the lower volume tiers should allow a greater 
number of Participants to qualify for NOM Market Maker rebates. The 
Exchange is lowering the volume on each of the rebate tiers so that 
Participants who currently qualify for certain NOM Market Maker rebate 
tiers may be able to qualify for higher rebates. In addition, 
Participants who did not qualify for a NOM Market Maker rebate may now 
be able to qualify for the Tier 1 rebate. The Exchange believes that 
offering NOM Market Makers the opportunity to earn higher rebates, by 
qualifying for higher rebate tiers, is reasonable because by 
incentivizing NOM Market Makers to post liquidity on NOM will also 
benefit participants through increased order interaction.
    The Exchange's proposal to lower the volume requirements on the NOM 
Market Maker Penny Pilot Options Rebates to Add Liquidity tiers is 
equitable and not unfairly discriminatory because this amendment will 
be applied to all Participants in a uniform matter. In addition, 
Participants should continue to qualify for the rebates that they 
currently receive and may earn increased rebates by qualifying for a 
higher volume tier. For example, a Participant that currently qualifies 
for a Tier 2 rebate by transacting 60,000 contracts per day in a month 
may now qualify for a Tier 3 rebate and earn the $0.32 per contract 
rebate provided the Participant continues to transact that volume. NOM 
Market Makers are valuable market participants that provide liquidity 
in the marketplace and incur costs unlike other market participants. 
The Exchange believes that NOM Market Makers should be offered the 
opportunity to earn higher rebates as compared to Non-NOM Market 
Makers, Firms and Broker Dealers because NOM Market Makers add value 
through continuous quoting \7\ and the commitment of capital. The 
Exchange believes that encouraging NOM Market Makers to be more 
aggressive when posting liquidity benefits all market participants 
through increased liquidity. The Exchange also believes that lowering 
the volume on the various NOM Market Maker rebate tiers is equitable 
and not unfairly discriminatory because it does not misalign the 
current rebate structure because NOM Market Makers will continue to 
earn higher rebates as compared to Firms, Non-NOM Market Makers and 
Broker-Dealers and will earn the same or lower rebates as compared to 
Customers and Professionals.\8\
---------------------------------------------------------------------------

    \7\ Pursuant to Chapter VII (Market Participants), Section 5 
(Obligations of Market Makers), in registering as a market maker, an 
Options Participant commits himself to various obligations. 
Transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and Market Makers 
should not make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. Further, all Market 
Makers are designated as specialists on NOM for all purposes under 
the Act or rules thereunder. See Chapter VII, Section 5.
    \8\ The Tier 1 NOM Market Maker Rebate to Add Liquidity in Penny 
Pilot Options is the same rebate as the Tier 1 Customer and 
Professional rebate in Penny Pilot Options. The Exchange pays the 
highest Tier 1 Rebates to Add Liquidity in Penny Pilot Options of 
$0.25 per contract to Customers, Professionals and NOM Market Makers 
for transacting one qualifying contract as compared to other market 
participants. Firms, Non-NOM Market Makers and Broker-Dealers 
receive a $0.10 per contract Penny Pilot Option Rebate to Add 
Liquidity. In addition, Participant that adds Firm, Non-NOM Market 
Maker or Broker-Dealer liquidity in Penny Pilot Options and/or Non-
Penny Pilot Options of 15,000 contracts per day or more in a given 
month will receive a Rebate to Add Liquidity in Penny Pilot Options 
of $0.20 per contract.
---------------------------------------------------------------------------

    The Exchange believes that continuing to offer NOM Market Makers 
the opportunity to receive higher rebates as compared to Firms, Non-NOM 
Market Makers and Broker-Dealers is equitable and not unfairly 
discriminatory because all NOM Market Makers may qualify for the NOM 
Market Maker rebate tiers and every NOM Market Maker is entitled to a 
rebate solely by adding one contract of NOM Market Maker liquidity on 
NOM. Also, as mentioned, the NOM Market Maker would receive the same 
rebate in Tier 1 as compared Customers and Professionals and a higher 
rebate in all other tiers as compared to a Firm, Non-NOM Market Maker 
or Broker-Dealer because of the obligations \9\ borne by NOM Market 
Makers as compared to other market participants. Encouraging NOM Market 
Makers to add greater liquidity benefits all Participants in the 
quality of order interaction. The Exchange believes that Customers are 
entitled to higher rebates because Customer order flow brings unique 
benefits to the market through increased liquidity which benefits all 
market participants. The Exchange believes that offering Professionals 
the opportunity to earn the same rebates as Customers, as is the case 
today, and higher rebates as compared to Firms, Broker-Dealers and Non-
NOM Market Makers, and in some cases NOM Market Makers, is equitable 
and not unfairly discriminatory because the Exchange does not believe 
that the amount of the rebate offered by the Exchange has a material 
impact on a Participant's ability to execute orders in Penny Pilot 
Options. By offering Professionals, as well as Customers, higher 
rebates, the Exchange hopes to simply remain competitive with other 
venues so that it remains a choice for market participants when posting 
orders and the result may be additional Professional order flow for the 
Exchange, in addition to increased Customer order flow. A Participant 
may not be able to gauge the exact rebate tier it would qualify for 
until the end of the month because Professional volume would be 
commingled with Customer volume in calculating tier volume.\10\ A 
Professional could only otherwise presume the Tier 1 rebate would be 
achieved in a month when determining price.\11\ Further, the Exchange 
initially established Professional pricing in order to ``. . . bring 
additional revenue to the Exchange.'' \12\ The Exchange noted in the 
Professional Filing that it believes ``. . . that the increased revenue 
from the proposal would assist the Exchange to recoup fixed costs.'' 
\13\ The Exchange

[[Page 71693]]

also noted in that filing that it believes that establishing separate 
pricing for a Professional, which ranges between that of a customer and 
market maker, accomplishes this objective.\14\ The Exchange does not 
believe that providing Professionals with the opportunity to obtain 
higher rebates equivalent to that of a Customer creates a competitive 
environment where Professionals would be necessarily advantaged on NOM 
as compared to NOM Market Makers, Firms, Broker-Dealers or Non-NOM 
Market Makers. Also, a Professional is assessed the same fees as other 
market participants, except Customers.\15\ For these reasons, the 
Exchange believes that continuing to offer Professionals the same 
rebates as Customers is equitable and not unfairly discriminatory.
---------------------------------------------------------------------------

    \9\ See note 7.
    \10\ Customer and Professional volume is aggregated for purposes 
of determining which rebate tier a Participant qualifies for with 
respect to the Professional Rebate to Add Liquidity in Penny Pilot 
Options.
    \11\ A Professional would be unable to determine the exact 
rebate that would be paid on a transaction by transaction basis with 
certainty until the end of a given month when all Customer and 
Professional volume is aggregated for purposes of determining which 
tier the Participant qualified for in a given month.
    \12\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066) 
(``Professional Filing''). In this filing, the Exchange addressed 
the perceived favorable pricing of Professionals who were assessed 
fees and paid rebates like a Customer prior to the filing. The 
Exchange noted in that filing that a Professional, unlike a retail 
Customer, has access to sophisticated trading systems that contain 
functionality not available to retail Customers.
    \13\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066).
    \14\ See Securities Exchange Act Release No. 64494 (May 13, 
2011), 76 FR 29014 (May 19, 2011) (SR-NASDAQ-2011-066). The Exchange 
noted in this filing that it believes the role of the retail 
customer in the marketplace is distinct from that of the 
professional and the Exchange's fee proposal at that time accounted 
for this distinction by pricing each market participant according to 
their roles and obligations.
    \15\ The Fee for Removing Liquidity in Penny Pilot Options is 
$0.48 per contract for all market participants, except Customers who 
are assessed $0.45 per contract.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. The Exchange 
believes that incentivizing NOM Market Makers to post liquidity on NOM 
benefits market participants through increased order interaction. Also, 
NOM Market Makers have obligations \16\ to the market which are not 
borne by other market participants and therefore the Exchange believes 
that NOM Market Makers are entitled to such higher rebates. Lowering 
the volume requirements on the various NOM Market Maker rebate tiers in 
Penny Pilot Options should further encourage NOM Market Makers to post 
liquidity on NOM.
---------------------------------------------------------------------------

    \16\ See note 7.
---------------------------------------------------------------------------

    The proposed amendments does [sic] not misalign the current rebate 
structure because NOM Market Makers will continue to earn higher 
rebates as compared to Firms, Non-NOM Market Makers and Broker-Dealers 
and will earn the same or lower rebates as compared to Customers and 
Professionals. The Exchange believes the differing outcomes, rebates 
and fees created by the Exchange's proposed pricing incentives 
contributes to the overall health of the market place for the benefit 
of all Participants that willing [sic] choose to transact options on 
NOM. For the reasons specified herein, the Exchange does not believe 
this proposal creates an undue burden on competition.
    The Exchange operates in a highly competitive market comprised of 
twelve U.S. options exchanges in which many sophisticated and 
knowledgeable market participants can readily and do send order flow to 
competing exchanges if they deem fee levels or rebate incentives at a 
particular exchange to be excessive or inadequate. These market forces 
support the Exchange belief that the proposed rebate structure and 
tiers proposed herein are competitive with rebates and tiers in place 
on other exchanges. The Exchange believes that this competitive 
marketplace continues to impact the rebates present on the Exchange 
today and substantially influences the proposals set forth above.

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.\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. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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-2013-141 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-2013-141. 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-2013-141 and 
should be submitted on or before December 20, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28571 Filed 11-27-13; 8:45 am]
BILLING CODE 8011-01-P