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January 17, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[]
and Rule 19b-4 thereunder,[]
notice is hereby given that on January 3, 2017, 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 the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend the Exchange's transaction fees at Chapter XV, Section 2, entitled “NASDAQ Options Market—Fees and Rebates,” which governs pricing for Nasdaq members using the NASDAQ Options Market (“NOM”), Nasdaq's facility for executing and routing standardized equity and index options. Nasdaq proposes to implement a new incentive for NOM Participants that add liquidity for Customer and Professional orders in Penny and Non-Penny Pilot Options as described further below.
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 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. The Start Printed Page 8231Exchange 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
The Exchange proposes to create an alternative method for earning a rebate for adding liquidity for both Customers []
and Professionals []
in Penny Pilot []
and Non-Penny Pilot Options. For Customers and Professionals transacting in Penny Pilot Options, the Exchange currently pays a volume-based tiered rebate to add liquidity. That rebate consists of 8 tiers, ranging from $0.20 per contract to $0.48 per contract, with the volume requirements increasing with each tier. Thus, a NOM Participant would qualify for a rebate of $0.20 per contract in Tier 1 for Customers and Professionals if it added Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of up to 0.10% of total industry customer equity and ETF option average daily volume (“ADV”) contracts per day in a month. In comparison, a Participant would qualify for a rebate of $0.48 in Tier 8 for Customers and Professionals if it adds Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.75% or more of total industry customer equity and ETF option ADV contracts per day in a month, or if the Participant adds: (1) Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 0.25% or more of total industry customer equity and ETF option ADV contracts per day in a month, and (2) has added liquidity in all securities through one or more of its Nasdaq Market Center MPIDs that represent 1.00% or more of Consolidated Volume in a month or qualifies for MARS.[]
Currently, Customers and Professionals transacting in Non-Penny Pilot Options on NOM receive a $0.80 per contract Rebate to Add Liquidity. In addition, a Participant that qualifies for a Customer or Professional Penny Pilot Options Rebate to Add Liquidity in Tiers 2, 3, 4, 5 or 6 in a month will receive an additional $0.10 per contract Non-Penny Pilot Options Rebate to Add Liquidity for each transaction which adds liquidity in Non-Penny Pilot Options in that month. A Participant that qualifies for a Customer or Professional Penny Pilot Options Rebate to Add Liquidity in Tiers 7 or 8 in a month will receive an additional $0.20 per contract Non-Penny Pilot Options Rebate to Add Liquidity for each transaction which adds liquidity in Non-Penny Pilot Options in that month.
Furthermore, a Participant that may receive a $0.53 per contract Rebate to Add Liquidity in Penny Pilot Options as a Customer or Professional, and $1.00 per contract Rebate to Add Liquidity in Non-Penny Pilot Options as a Customer or Professional, if that NOM Participant transacts on the NASDAQ Stock Market through one or more of its Nasdaq Market Center MPIDs in the same month, and such transactions in all securities on the NASDAQ Stock Market that month through all of its Nasdaq Market Center MPIDs represent 3.00% or more of Consolidated Volume.[]
Participants that qualify for this rebate would not be eligible for any other rebates in Tiers 1 through 8 or other rebate incentives on NOM for Customer and Professional order flow in Chapter XV, Section 2(1) of NOM Rules.[]
The Exchange proposes an additional incentive to a Participant that adds Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, (b) executes greater than 0.04% of Consolidated Volume (“CV”) []
via Market-on-Close/Limit-on-Close (“MOC/LOC”) []
volume within the NASDAQ Stock Market Closing Cross within a month, and (c) adds greater than 1.5 million shares per day of non-displayed volume within the NASDAQ Stock Market within a month. The Participant would receive a $0.55 per contract rebate to add liquidity in Penny Pilot Options as Customer or Professional and $1.05 per contract rebate to add liquidity in Non-Penny Pilot Options as Customer or Professional. Participants that qualify for this rebate would not be eligible for any other rebates in Tiers 1-8 or other rebate incentives on NOM for Customer and Professional order flow in Chapter XV, Section 2(1). The Exchange believes that the new incentives will attract a greater amount of order flow on NOM by offering a discounted rate.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,[]
in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,[]
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, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
The Commission and the courts have repeatedly expressed their preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. In Regulation NMS, while adopting a series of steps to improve the current market model, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system “has been remarkably successful in promoting market competition in its Start Printed Page 8232broader forms that are most important to investors and listed companies.” []
Likewise, in NetCoalition v. Securities and Exchange Commission []
(“NetCoalition”) the D.C. Circuit upheld the Commission's use of a market-based approach in evaluating the fairness of market data fees against a challenge claiming that Congress mandated a cost-based approach.[]
As the court emphasized, the Commission “intended in Regulation NMS that `market forces, rather than regulatory requirements' play a role in determining the market data . . . to be made available to investors and at what cost.” []
Further, “[n]o one disputes that competition for order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market system, buyers and sellers of securities, and the broker-dealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution'; [and] `no exchange can afford to take its market share percentages for granted' because `no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers' . . . . ” []
Although the court and the SEC were discussing the cash equities markets, the Exchange believes that these views apply with equal force to the options markets.
The Exchange notes that the purpose of the proposed rebates is to incentivize NOM Participants to transact greater volume on NOM and the NASDAQ Stock Market in order to qualify for a higher rebate on NOM. The Exchange believes that the amount of the rebate ($0.55 per contract for Penny Pilot Options and $1.05 per contract for Non-Penny Pilot Options) along with the various criteria for qualifying for the rebate ((a) add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, (b) execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month, and (c) add greater than 1.5 million shares per day of non-displayed within the NASDAQ Stock Market within a month) are reasonable. With respect to the rebate for Penny Pilot Options, the Exchange notes that the proposed $0.55 per contract rebate is higher than the currently highest rebate available ($0.53 per contract) to Customers and Professionals for adding liquidity in Penny Pilot Options.[]
The Exchange believes the proposed rebate of $0.55 per contract is reasonable because the proposed rebate requires three components ((a) add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, (b) execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month, and (c) add greater than 1.5 million shares per day of non-displayed volume within the NASDAQ Stock Market within a month) to be met by NOM Participants in order to qualify for that rebate. These requirements require more volume to be submitted on NOM than the current highest rebate requires today. Similarly, the Exchange believes the proposed $1.05 rebate per contract for Non-Penny Pilot Options is reasonable for similar reasons. The requirements to obtain this rebate require more volume to be submitted on NOM.
The Exchange believes that the requirement that a NOM Participant add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month, and add greater than 1.5 million shares per day of non-displayed volume within the NASDAQ Stock Market within a month is reasonable because the Exchange is offering to pay a rebate of $0.55 per contract, the highest rebate. These more stringent volume-based requirements bring a greater amount of volume to both NOM and the NASDAQ Stock Market. The first volume requirement, which requires volume to be added to NOM, is reasonable because it is similar to that required to qualify for certain NOM Market Maker discounted remove fees.[]
The second volume requirement Start Printed Page 8233to execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month is reasonable because it is one of the same requirements to qualify for note “c” in Chapter XV, Section 2 of NOM Rules.[]
The third volume requirement to add greater than 1.5 million shares per day of non-displayed volume within the NASDAQ Stock Market within a month is a new requirement, which must be met in addition to the first and second volume requirements. The Exchange believes that this requirement is reasonable because linking rebates on NOM to activity on the NASDAQ Stock Market is not novel. The Exchange believes that requiring Participants to add non-displayed volume within the NASDAQ Stock Market is reasonable because this type of liquidity benefits all market participants by way of interacting with that liquidity on the equity market.[]
By encouraging market participants to increase their participation on the equities market by delivering non-displayed volume, the Exchange is rewarding Participants with an opportunity to earn an additional options incentive, provided all requirements are met. The Exchange notes that previous and current rebates offered by NOM relate to activity on the NASDAQ Stock Market.[]
Similarly, the NASDAQ Stock Market offers enhanced rebates that are based on activity on NOM.[]
Moreover, the Exchange notes that any NOM Options Participant may trade equities on the NASDAQ Stock Market because they are approved members.[]
Further, the Exchange believes it is reasonable to make this rebate exclusive of any other rebates in Tiers 1 through 8 or other rebate incentives on NOM for Customer and Professional order flow in Chapter XV, Section 2(1) of NOM Rules. As noted above, the proposed rebates are higher, and in some cases significantly higher, than the rebates that a NOM Participant may currently receive for adding liquidity in Penny Pilot and Non-Penny Pilot Options as a Customer or Professional. Given the size of the proposed rebates, the Exchange believes it is reasonable to make these rebates exclusive of other rebates on NOM for Customer and Professional order flow. Finally, the Exchange also believes the proposal is reasonable because the proposed rebates apply to both transactions in Penny Pilot and Non-Penny Pilot Options.
The Exchange believes that the amount of the rebate ($0.55 per contract for Penny Pilot Options and $1.05 per contract for Non-Penny Pilot Options) along with the various criteria for qualifying for the rebate ((a) add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, (b) execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month, and (c) add greater than 1.5 million shares per day of non-displayed within the NASDAQ Stock Market within a month) is equitable and not unfairly discriminatory because any Participant that qualifies for this rebate will be uniformly paid $0.55 per contract for Penny Pilot Options and $1.05 per contract for Non-Penny Pilot Options. The requirements for earning this rebate will be applied uniformly to all market participants. The Exchange believes that requiring Participants to add non-displayed volume is equitable and not unfairly discriminatory because the Exchange will pay the incentive, in a uniform manner, to Participants that have met all criteria required for the rebate.
The Exchange believes that the requirement that a NOM Participant add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 1.45% of total industry customer equity and ETF option ADV contracts per day in a month, execute greater than 0.04% of Consolidated Volume (“CV”) via Market-on-Close/Limit-on-Close (“MOC/LOC”) volume within the NASDAQ Stock Market Closing Cross within a month, and add greater than 1.5 million shares per day of non-displayed volume within the NASDAQ Stock Market within a month is equitable and not unfairly discriminatory because while the requirements for qualifying for the proposed rebates may be more stringent than other requirements for qualifying for other rebates currently offered by NOM, the Exchange believes that these requirements are proportionate to the amount of the proposed rebates and equitably reflect the purpose of the proposed rebates, which is to incentivize NOM Participants to transact greater volume on NOM and the NASDAQ Stock Market. Moreover, all similarly-situated NOM Participants, e.g., those that add liquidity in either Penny Pilot or Non-Penny Pilot Options as either Customers or Professionals and also transact on the NASDAQ Stock Start Printed Page 8234Market, are equally capable of qualifying for the proposed rebates, and the same rebates will be paid to all NOM Participants that qualify for them. Further, the Exchange believes that it is equitable and not unfairly discriminatory to offer this rebate to NOM Participants that add liquidity as Customers or Professionals, and not to offer this rebate to NOM Participants that add liquidity as Firms,[]
NOM Market Makers,[]
Non-NOM Market Makers, or Broker-Dealers.[]
Nasdaq notes that Customer liquidity offers unique benefits to the market which benefits all market participants by providing more trading opportunities, which attracts Specialists and Market Makers. An increase in the activity of these market participants in turn facilitates tighter spreads, which may cause an additional corresponding increase in order flow from other market participants. The Exchange believes that encouraging Participants to add Professional liquidity is similarly beneficial, as the rebates may cause market participants to select NOM as a venue to send Professional order flow, increasing competition among the exchanges. As with Customer liquidity, the Exchange believes that increased Professional additional order flow should benefit other market participants.
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 of the purposes of the Act. In terms of inter-market competition, the Exchange 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, the Exchange 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, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited.
The Exchange does not believe that the proposed rebates will impose any burden on competition that is not necessary or appropriate. The Exchange notes that the purpose of the proposed rebate is to incentivize NOM Participants to transact on NOM and the NASDAQ Stock Market. All similarly-situated NOM Participants, e.g., those that add liquidity in either Penny Pilot or Non-Penny Pilot Options as either Customers or Professionals and also transact the requisite volumes on the NASDAQ Stock Market, are equally capable of qualifying for the proposed rebates. Additionally, the Exchange will pay the same rebates, in a uniform manner, to all NOM Participants that qualify for them. The Exchange believes that Customer and Professional order flow provides unique benefits to all participants on the Exchange and may even facilitate inter-market competition, and is therefore offering the proposed rebates to NOM Participants that add liquidity as either a Customer or a Professional accordingly. With respect to linking the proposed rebates to a participant's activity on the NASDAQ Stock Market, NOM currently offers rebates that are based on activity on the NASDAQ Stock Market.[]
Similarly, the NASDAQ Stock Market currently offers reduced transaction fees that are based on activity on NOM.[]
Finally, because they are approved members, any NOM Options Participant may trade equities on the NASDAQ Stock Market and therefore attempt to qualify for the proposed rebates.[]
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.[]
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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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
Paper Comments
- Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2017-001. 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 Start Printed Page 8235business 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-2017-001 and should be submitted on or before February 14, 2017.
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For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.32
Eduardo A. Aleman,
Assistant Secretary.
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[FR Doc. 2017-01464 Filed 1-23-17; 8:45 am]
BILLING CODE 8011-01-P