[Federal Register Volume 79, Number 61 (Monday, March 31, 2014)]
[Notices]
[Pages 18091-18094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07038]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71793; File No. SR-NASDAQ-2014-026]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
the Qualified Market Maker Program and NBBO Setter Incentive Program 
Under Rule 7014, and To Modify the Rules Governing Fees Assessed for 
Orders Executed in the NASDAQ Opening Cross Under Rule 7018

March 25, 2014.
    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 March 13, 2014, 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 and II 
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 to make changes Qualified Market Maker 
(``QMM'') Program under NASDAQ Rule 7014 and the removal of the NBBO 
Setter Incentive Program as a separate section thereunder, as well as 
to modify the rules governing fees assessed for orders executed in the 
NASDAQ Opening Cross under NASDAQ Rule 7018.
    The text of the proposed rule change is available 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, NASDAQ 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 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 proposing to modify NASDAQ Rule 7014 to effect the 
restriction of NBBO Setter Incentives exclusively to Qualified Market 
Makers (``QMMs''). In doing so, the Exchange is proposing to 
incorporate the relevant language from NASDAQ Rule 7014 relating to 
NBBO Setter Incentives and QMMs (i.e., NASDAQ Rule 7018(g)(3) into the 
section relating to QMMs generally (i.e., NASDAQ Rule 7014(e)(1)). The 
Exchange is also proposing to modify the rules governing fees assessed 
for orders executed in the NASDAQ Opening Cross and, in particular, to 
modify the criteria in which executions will be deemed fee liable.
QMM and NBBO Setter Incentive Programs
    A QMM is a member that makes 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. The designation reflects 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. In return for its contributions, certain 
financial benefits are provided to a QMM with respect to a particular 
MPID (a ``QMM MPID''), as described under NASDAQ Rule 7014(e).
    Currently, one of these benefits pertains to the credits available 
under NASDAQ's NBBO Setter Incentive Program. The NBBO Setter Incentive 
Program was intended to provide an incentive to members to set the NBBO 
or quote at the NBBO on NASDAQ, with the expectation that the 
additional competition to set the best prices on NASDAQ would improve 
the quality of the market. Since the introduction of the incentives, 
however, NASDAQ has not seen a substantial increase in the amount of 
competition among firms setting the inside market and, as a 
consequence, has not witnessed a material improvement in market quality 
(e.g., as defined by quoted spreads). The outcome of the program has 
been, instead, a simple increase in the average rebate firms 
collectively receive for providing liquidity. A member currently 
receives an NBBO Setter Incentive credit of either $0.0001 or $0.0002 
per share executed in addition to regularly assessed trading rebates, 
depending upon certain trading qualifications. Every member is 
currently eligible to receive at least a $0.0001 credit as long as that 
member executes an order that at the time of execution either sets the 
NBBO or causes the NASDAQ BBO to improve to the NBBO.
    The Exchange has observed that for the vast majority of 
participants these rebates do not provide meaningful incentives to 
modify behavior, (i.e., participants do not quote more aggressively or 
increase the frequency with which they execute orders at the NBBO). As 
a consequence, NASDAQ has concluded that providing these rebates 
without tying them to some additional requirement is ineffective and 
will thus provide NBBO Setter rebates only to members that qualify for 
the QMM Program.
    Therefore, the Exchange proposes to merge the incentives pertaining 
to the QMM Program in NASDAQ Rule 7014(e) and delete the remaining 
portions of NASDAQ Rule 7014(f) and

[[Page 18092]]

(g). The method by which the QMMs will attain the additional rebates 
(the ``Additional Rebate'') in NASDAQ Rule 7014(e)(1) associated with 
NBBO setting/joining activity will be unchanged. They will be available 
to those orders under the QMM Program that (a) displayed a quantity of 
at least one round lot at the time of execution; (b) 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 (c) were entered through a QMM 
MPID. Note that these conditions are simply a carryover from the 
pertinent parts of the NBBO Setter Incentive Program currently set 
forth in NASDAQ Rule 7014(g)(3)(A)-(C), and that remain applicable to 
the Additional Rebate and will be included in NASDAQ Rule 7014(e)(1).
    NASDAQ Rule 7014, as revised, will remain consistent with the 
current rule in that the current requirement that a QMM may not receive 
both an ISP credit and NBBO Setter Incentive credit but only the 
greater credit of the two, will continue just in an updated form. 
Specifically, NASDAQ Rule 7014(e)(1) will similarly state that if a QMM 
participates in the ISP, NASDAQ will only pay the greater of any 
applicable credit under the ISP or the Additional Rebate, but not both. 
Additionally, Designated Retail Orders will continue to be ineligible 
for NBBO Setter Rebates.
NASDAQ Opening Cross
    The Exchange is proposing three modifications to its fee structure 
relating to executions in the NASDAQ Opening Cross (the ``Open''): (1) 
To adjust the fee cap governing executions in the Open from $15,000 to 
$20,000; (2) to make the fee cap applicable to all orders in the Open, 
and not just Market-on-Open and Limit-on-Open (MOO/LOO), Good-till-
Cancelled and Immediate-or-Cancel orders; and (3) to eliminate rule 
language that stipulates that only the buy/sell imbalance of MOO/LOO, 
Good-till-Cancelled and Immediate-or-Cancel orders are fee liable.
    The purpose of the changes above are primarily to rationalize 
pricing for Imbalance Only orders with pricing for all other executions 
in the Opening Cross. Imbalance Only orders are orders that, given an 
imbalance of buy and sell interest in an Opening Cross at the time its 
[sic] execution, will always buy in the event of a sell imbalance and 
always sell in the event of a buy imbalance. As a consequence, firms 
submitting Imbalance Only orders typically act to offset ``natural'' 
interest in the auction by acting as counterparties for orders 
specifically marked with buy or sell requirements. The Exchange has 
traditionally considered such executions conceptually equivalent to 
liquidity providing orders during the continuous market, since in both 
instances the firm submitting such orders are providing a benefit to 
the market as a whole by increasing the ability of firms to trade into 
and out of positions at a given price. As such, the Exchange seeks to 
encourage the use of liquidity providing orders and Imbalance Only 
orders appropriately.
    To that end, NASDAQ is proposing to expand the applicability of the 
fee cap currently available only to orders other than Imbalance Only 
orders (i.e., Market-on-Open, Limit-on-Open (MOO/LOO), Good-till-
Cancelled and Immediate-or-Cancel orders) to Imbalance Only orders. By 
making this modification, the Exchange believes it will encourage 
continued use of Imbalance Only orders and rationalize pricing for 
Imbalance Only orders with all other orders. NASDAQ further proposes to 
increase the value of the fee cap to $20,000 from $15,000 in light of 
the increased pool of orders subject to the cap.
    Finally, NASDAQ proposes to remove language that makes fee liable 
only those orders that represent a net buy and sell imbalance in the 
opening cross. As with the above, NASDAQ seeks to rationalize pricing 
for Opening Cross executions, in particular, with the other crossing 
mechanisms currently available (e.g., the Closing Cross) which do not 
have such a provision. The Exchange believes that in order to 
appropriately offset the costs of maintaining the technology and 
infrastructure of the Opening Cross it must assess fees on all 
executions that it enables. The restriction to buy sell imbalances is 
both inconsistent with pricing for other mechanisms and prevents the 
Exchange from appropriately funding the Opening Cross.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\3\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\4\ 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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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(4) and (5).
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    The proposed changes are reflective of NASDAQ's ongoing efforts to 
use pricing incentive programs to attract orders that NASDAQ believes 
will improve market quality. The 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.
    Generally, NASDAQ seeks to provide customers with rewards that they 
deem helpful, and to eliminate those that they do not. By reframing and 
refocusing the NBBO Incentive Program, NASDAQ believes it will be able 
to further promote these goals by providing better targeted incentives 
for market participants to achieve these goals. The proposed changes 
will immediately improve the incentive to participate in the QMM 
Program (by making NBBO setter/joiner credits exclusively available to 
QMMs) while eliminating unsuccessful aspects of the NBBO Setter 
Incentive Program.
    Specifically, the proposed changes are consistent with statutory 
requirements. The proposal to replace in the QMM Program the NBBO 
Setter Incentive credit of $0.0002 per share executed with the 
Additional Rebate for the same amount is consistent with an equitable 
allocation of fees and is not unfairly discriminatory because the 
amount of the credit is in essence not being changed and it is 
continuing to be offered to market participants that make significant 
contributions to market quality by satisfying the QMM requirements, 
thereby benefitting other NASDAQ market participants. Additionally, 
NASDAQ believes that it is an equitable allocation of reasonable fees 
and is not unfairly discriminatory to convert the restriction on 
receiving multiple credits currently imposed on QMMs from participating 
in the ISP and the NBBO Setter Incentive Program (NASDAQ will pay the 
greater of any applicable credit), to now applying it to QMMs from 
participating in the ISP and receiving the Additional Rebate, but not 
both.
    The elimination of NASDAQ Rule 7014(g)(1) and (2) is consistent 
with a fair allocation of reasonable fees and not unfairly 
discriminatory since the removal of the rule language pertaining to the 
incentives, as discussed above, impacts all firms equally (to the 
extent that their activity would result in receiving a benefit) unless 
the firm has committed to additional quoting

[[Page 18093]]

requirements under NASDAQ Rule 7014(e).
    The restriction of NBBO Setter Incentives to QMMs is also 
consistent with a fair allocation of reasonable fees and not unfairly 
discriminatory since the QMM Program remains open to all members that 
satisfy the voluntary trading requirements set forth in NASDAQ Rule 
7014(e).
    The modifications to the Open are consistent with a fair allocation 
of reasonable fees and not unfairly discriminatory because they are 
applied equally across all members with absolutely no exclusions. 
Moreover, the changes bring the fee structure for the Opening Cross in 
line with the fee structure for other NASDAQ crosses, which are well-
understood and accepted by the marketplace. By expanding the fee cap to 
include Imbalance Only orders, NASDAQ believes its fee structure will 
be more fair and equitable, in particular by providing a similar 
benefit for firms that provide a service to the market by offsetting 
``natural'' interest in the Opening Cross that is currently only 
available to firms trading with non-Imbalance Only orders.
    Raising the fee cap from $15,000 to $20,000 is consistent with a 
fair allocation of reasonable fees and not unfairly discriminatory 
because it impacts only those firms that trade in the auction, and 
impacts these firms equally given their usage of the Opening Cross.
    The same is true for the elimination of the language stipulating 
that only the net buy and sell imbalance will be fee liable. This 
change further improves fairness of the allocation of fees by removing 
an arbitrary restriction on fee liability that brings fee allocation 
more in line with actual usage of the Opening Cross.

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.\5\ 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. 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 elimination of portions of the 
NBBO Setter Incentive Program and changes to the QMM Program, as well 
as the proposed changes to modify the rules governing fees assessed for 
orders executed in the Open reflect this.
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    \5\ 15 U.S.C. 78f(b)(8).
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    The QMM Program is entirely voluntary, and as a consequence members 
may elect to participate in other incentive programs under which they 
may receive benefits for improving the market. The very fact that the 
NBBO Setter Incentive credit continues in the form of the Additional 
Rebate, is itself reflective of the need for exchanges to offer 
significant financial incentives to attract order flow. In sum, if the 
changes proposed herein, including the modifications to the fee 
structure relating to executions in the Open, are unattractive to 
market participants, it is likely that NASDAQ will lose market share as 
a result.
    Accordingly, NASDAQ does not believe that the proposed changes will 
impair the ability of members or competing order execution venues to 
maintain their competitive standing in the financial markets.

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 change has become effective pursuant to Section 
19(b)(3)(A) of the Act,\6\ and paragraph (f)\7\ of Rule 19b-4, 
thereunder. 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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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 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-2014-026 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-026. 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-2014-026, and should 
be submitted on or before April 21, 2014.
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    \8\ 17 CFR 200.30-3(a)(12).


[[Page 18094]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07038 Filed 3-28-14; 8:45 am]
BILLING CODE 8011-01-P