[Federal Register Volume 81, Number 29 (Friday, February 12, 2016)]
[Notices]
[Pages 7620-7623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02840]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77080; File No. SR-NASDAQ-2016-019]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Include NextShares in the Lead Market Maker Program

February 8, 2016.
    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 2, 2016, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II 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 add NextShares to the list of securities 
eligible to be Qualified Securities under the Lead Market Maker Program 
of Rule 7014(f) and to make a technical change to the rule. Nasdaq will 
implement the proposed rule change on February 26, 2016.
    The text of the proposed rule change is available on the Nasdaq's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
Nasdaq, 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 these statements may be examined at the places specified in 
Item IV below. Nasdaq 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
Background
    Nasdaq is proposing to include NextShares, listed under Rule 5745, 
to the list of securities eligible to be treated as a Qualified 
Security under the Lead Market Maker (``LMM'') Program of Rule 7014(f).
    The LMM Program is designed to provide incentive to market makers 
to make markets in certain relatively illiquid exchange-traded products 
(``ETPs''). To achieve this goal, Nasdaq provides credits to a 
designated LMM for execution of a Qualified Security. Under Rule 
7014(f)(1), a security may be designated as a ``Qualified Security'' 
if: (A) It is an exchange-traded fund or index-linked security listed 
on Nasdaq pursuant to Nasdaq Rules 5705, 5710, 5720, or 5735; and (B) 
it has at least one LMM.
    An LMM is a registered Nasdaq market maker for a Qualified Security 
that has committed to maintain minimum performance standards, which are 
based on certain percentages

[[Page 7621]]

of time that the LMM is quoting at the national best bid and offer 
(``NBBO''). An LMM is selected by Nasdaq based on several factors 
including, but not limited to, experience with making markets in 
exchange-traded funds and index-linked securities, adequacy of capital, 
willingness to promote Nasdaq as a marketplace, issuer preference, 
operational capacity, support personnel, and history of adherence to 
Nasdaq rules and securities laws. Nasdaq may limit the number of LMMs 
in a security, or modify a previously established limit, upon prior 
written notice to members.
Proposed Change to Rule 7014(f)
    As previously noted, Nasdaq currently includes in the program 
Portfolio Depository Receipts, Index Fund Shares, Securities Linked to 
the Performance of Indexes and Commodities (Including Currencies), 
Trust Issued Receipts, and Managed Fund Shares. Nasdaq is proposing to 
add another ETP, NextShares, as eligible to be a Qualified Security 
under the LMM Program.
    The term NextShares means a security that (a) represents an 
interest in a registered investment company (``NextShares Fund'') 
organized as an open-end management investment company that invests in 
a portfolio of securities and other assets selected and managed by the 
NextShares Fund's investment adviser consistent with the NextShares 
Fund's investment objectives and policies; (b) is issued in a specified 
aggregate unit quantity in return for a deposit of a specified 
portfolio of securities and/or a cash amount with a value per NextShare 
equal to the NextShares Fund's net asset value; (c) when aggregated in 
the same specified unit quantity, may be redeemed for a specified 
portfolio of securities and/or cash with a value per NextShare equal to 
the NextShares Fund's net asset value; and (d) is traded on Nasdaq or 
another national securities exchange using net asset value (``NAV'')-
Based Trading.\3\ NextShares will trade on Nasdaq using a new trading 
protocol called ``NAV-Based Trading.'' In NAV-Based Trading, all bids, 
offers and execution prices will be expressed as a premium/discount 
(which may be zero) to the NextShares' next-determined NAV (e.g., NAV-$ 
0.01; NAV+$ 0.01). A NextShares' next-determined NAV will be 
represented at the beginning of each trading day by a proxy price of 
100.00. A NextShares' NAV will be determined each business day, 
normally no later than 6:45 p.m. Eastern Time. At this time, the day's 
premiums/discounts associated with the day's transactions will be 
applied to the day's NAV to create the final transaction price. Trade 
executions using NAV-Based Trading will be binding at the time orders 
are matched on Nasdaq's facilities, with the transaction prices 
contingent upon the determination of the NextShares' NAV at the end of 
the business day. Nasdaq represents that an [sic] NextShares' next-
determined NAV will be represented by a proxy price (e.g., 100.00) and 
a premium/discount of a stated amount to the next-determined NAV to 
[sic] be represented by the same increment/decrement from the proxy 
price used to denote NAV (e.g., NAV-$0.01 would be represented as 
99.99; NAV+$0.01 as 100.01). To convert proxy prices used to represent 
intraday bids, offers, and execution prices into prices expressed in 
relation to the next-determined NAV, member firms would subtract from 
the reported proxy price (e.g., 99.99) the proxy for NAV (e.g., 100.00) 
and insert ``NAV'' in front of the calculated number expressed in 
dollars (e.g., 99.99-100.00 = -0.01, expressed as ``NAV-$0.01''). 
Nasdaq will report intraday bids, offers, and trades for NextShares in 
real-time to the Consolidated Tape using the proxy price format. In 
addition, Nasdaq will disseminate intraday NextShares bids, offers, and 
trades through a proprietary exchange data feed using the NAV + $.01/
NAV-$.01 format. Nasdaq will also provide the member firms 
participating in each NextShares trade with a contemporaneous notice of 
trade execution, indicating the number NextShares bought or sold and 
the executed premium/discount to NAV. All orders to buy or sell 
NextShares that are not executed on the day the order is submitted 
would be automatically cancelled as of the close of trading on such 
day.\4\
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    \3\ See Rule 5745(c)(1).
    \4\ For a description of NAV-Based Trading and proxy price, see 
Rule 5745(b)(3); see also Securities Exchange Act Release No. 73562 
(November 7, 2014), 79 FR 68309 (November 14, 2014) (SR-NASDAQ-2014-
020) and Securities Exchange Act Release No. 75815 (September 2, 
2015), 80 FR 54349 (September 9, 2015) (SR-NASDAQ-2015-103).
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    As a new and novel ETP, Nasdaq is proposing to include NextShares 
in its LMM Program to provide incentive to market makers to make 
markets in NextShares, which will help to ensure that adequate 
liquidity is provided in the novel product. This will benefit market 
participants interested in buying or selling these ETPs. As noted 
above, the LMM Program's performance criteria are based on an LMM's 
quoting at the NBBO. For purposes of the LMM Program, Nasdaq will use a 
NextShares' best proxy price bid and offer in comparison to an LMM's 
quoting at the time to determine whether it meets the performance 
criteria. Nasdaq will list and trade the first NextShares product on 
February 26, 2016 and plans to include NextShares in the LMM Program as 
Qualified Securities effective that day.
    Nasdaq is also proposing to make a technical change to rule text in 
Rule 7014(f). Currently, Nasdaq describes Qualified Securities as being 
``exchange-traded fund or index-linked security listed on Nasdaq 
pursuant to Nasdaq Rules 5705, 5710, 5720, or 5735.'' \5\ Nasdaq is 
proposing to replace references to exchange-traded funds and index-
linked securities under subparagraphs (f)(1)(A) and (f)(2) of Rule 7014 
with the term ``exchange-traded product,'' which is a broader term that 
incorporates exchange-traded funds, index-linked securities, and 
NextShares within its meaning. The new term does not change what is 
eligible to be a Qualified Security under the rule.
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    \5\ Rule 7014(f)(1)(A).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\6\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\7\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among its members and issuers and other persons using its 
facilities, and is designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4) and (5).
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    Nasdaq believes that inclusion of NextShares in the LMM Program is 
reasonable because the new ETP is novel, and offering incentives to 
market makers to provide liquidity in the product will help ensure its 
successful launch. The LMM Program is designed to improve liquidity in 
ETPs by allocating rebates to LMMs that quote at the national best bid 
and best offer for certain percentages of time. As additional 
incentive, the LMM Program

[[Page 7622]]

also provides different levels of fee caps on the fees assessed for 
participation in the Opening and Closing Crosses on Nasdaq. The LMM 
Program has been successful at improving market quality in the 
securities covered by the program. Thus Nasdaq believes the program 
will be effective at providing incentive to market makers on Nasdaq to 
become LMMs in NextShares thereby improving market quality in those 
securities. Nasdaq believes that the proposed change to Rule 7014(f) is 
an equitable allocation and is not unfairly discriminatory because all 
market makers that are elected to be designated as LMMs and meet the 
minimum performance criteria have the opportunity to qualify for a 
rebate and fee cap under the program in NextShares. Nasdaq believes 
that the proposed rule change will protect investors and the public 
interest because it may increase market maker participation in 
NextShares, which would in turn make the market in NextShares deeper 
and more liquid than it would be if NextShares were not included in the 
program. Deep and liquid markets protect investors and promote the 
public interest by allowing market participants to buy and sell 
securities quickly at competitive prices.
    Lastly, Nasdaq believes that the proposed use of the term exchange-
traded product in lieu of the terms exchange-traded fund and index-
linked security is consistent with the protection of investors and the 
public interest because it clarifies the rule text with a more 
commonly-used term to describe the securities eligible to be Qualified 
Securities under the LMM Program and does not change the type of 
securities eligible to be included in the program.

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. Specifically, the 
change is designed to improve market quality through the application of 
an ETP incentive program to a type of ETP that is currently not part of 
the program. A new ETP product, NextShares, may have comparatively low 
liquidity upon listing. Including NextShares in the LMM Program is 
designed to improve market quality in NextShares. Lastly, to the extent 
market quality in NextShares improves from inclusion in the LMM 
Program, the proposed change may promote competition among exchanges 
for new NextShares listings and similar incentive programs, to the 
benefit of all market participants trading NextShares.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \10\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \11\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
NextShares may be included as Qualified Securities in the LMM Program 
on February 26, 2016, the first day of trading for NextShares on 
Nasdaq. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because it could allow NextShares investors to benefit from potential 
increased liquidity that an LMM could provide in a Qualified Security 
as early as the first day of trading for NextShares on Nasdaq. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposed rule change operative upon filing.\12\
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    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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.

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-2016-019 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-2016-019. 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 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-

[[Page 7623]]

NASDAQ-2016-019 and should be submitted on or before March 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02840 Filed 2-11-16; 8:45 am]
 BILLING CODE 8011-01-P