80 FR 43143 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify NASDAQ Rule 7018 Governing Fees and Credits Assessed for Execution and Routing

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 139 (July 21, 2015)

[Federal Register Volume 80, Number 139 (Tuesday, July 21, 2015)]
[Notices]
[Pages 43143-43146]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-17757]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75458; File No. SR-NASDAQ-2015-081]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ Rule 7018 Governing Fees and Credits Assessed for 
Execution and Routing

July 15, 2015.
    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 July 13, 2015, 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to modify changes to amend NASDAQ Rule 7018, 
governing fees and credits assessed for execution and routing of 
securities.
    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 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 is proposing to amend the fees and credits provided under 
NASDAQ Rule 7018. Specifically, NASDAQ is proposing to delete the 
charge it assesses a member firm for its orders that execute in the 
NASDAQ Market Center, which is assessed if the member firm has Market-
on Close (``MOC'') or Limit-on-Close (``LOC'') orders that execute in 
the NASDAQ Closing Cross entered through a single NASDAQ Market Center 
market participant identifier (``MPID''), that represent more than 
0.15% of Consolidated Volume during the month. Currently, the Exchange 
assesses a charge of $0.0030 per share executed in securities listed on 
NASDAQ (``Tape C''), and a charge of $0.00295 per share executed in 
securities listed on NYSE (``Tape A'') and on exchanges other than 
NASDAQ and the NYSE (``Tape B'') (collectively, the ``Tapes''). The 
Exchange is proposing to eliminate this charge under Rules 7018(a)(1), 
(2) and (3).
    The Exchange is also proposing to add a new credit applied to 
securities of all three Tapes. Specifically, the Exchange proposes a 
$0.0029 per share executed credit provided to member firms that add 
Customer,\3\ Professional,\4\ Firm,\5\ Non-NASDAQ Options Market 
(``NOM'') market maker \6\ and/or broker-dealer \7\ liquidity in Penny 
Pilot Options \8\ and/or Non-Penny Pilot Options \9\ of 1.25% or more 
of total industry average daily volume (``ADV'') in the customer 
clearing range for Equity and ETF option contracts per day, in a month 
on NOM. The Exchange believes that the new credit tier will provide 
incentive to NASDAQ market participants to also provide liquidity in 
NOM and notes that it currently provides a similar credit tier 
available for executions in securities of all three Tapes. That credit 
tier provides a slightly higher credit in return for a

[[Page 43144]]

certain level of Consolidated Volume in addition to total industry 
ADV.\10\
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    \3\ As defined by NASDAQ Options Rules, Chapter XV.
    \4\ Id.
    \5\ Id.
    \6\ Id.
    \7\ Id.
    \8\ The Penny Pilot allows market participants to quote in penny 
increments in certain series of option classes and is designed to 
narrow the average quoted spreads in all classes in the Pilot, which 
may result in customers and other market participants to trade 
options at better prices. See NASDAQ Options Rules, Chapter XV, Sec. 
2(1).
    \9\ Id.
    \10\ A member firm will receive a $0.0030 per share executed 
credit if it has (i) shares of liquidity provided in all securities 
during the month representing at least 0.60% of Consolidated Volume 
during the month, through one or more of its NASDAQ Market Center 
MPIDs, and (ii) Adds Customer, Professional, Firm, Non-NOM Market 
Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or 
Non- Penny Pilot Options of 1.25% or more of total industry ADV in 
the customer clearing range for Equity and ETF option contracts per 
day in a month on NOM. See Rules 7018(a)(1)-(3).
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    The Exchange is also deleting a credit tier applied to securities 
of all three Tapes. The Exchange currently provides a $0.0029 per share 
executed credit to a member firm (i) with shares of liquidity provided 
in all securities during the month representing more than 0.10% of 
Consolidated Volume during the month, through one or more of its NASDAQ 
Market Center MPIDs, and (ii) that adds Total NOM Market Maker Volume, 
as defined in Chapter XV, Section 2 of the Nasdaq Options Market rules, 
of 80,000 or more contracts per day in a month executed through one or 
more of its NOM MPIDs. The Exchange notes no member firms have elected 
to qualify in recent months for this credit.
    The Exchange is also proposing to amend the qualification criteria 
a member firm is required to meet in order to receive a $0.0029 per 
share executed credit, which is available to securities of all three 
Tapes. Currently, the Exchange will provide a credit of $0.0029 per 
share executed to a member firm with (i) shares of liquidity provided 
in all securities during the month representing more than 0.08% of 
Consolidated Volume during the month, through one or more of its NASDAQ 
Market Center MPIDs, and (ii) Total Volume, as defined in Chapter XV, 
Section 2 of the NOM rules, of 100,000 or more contracts per day in a 
month executed through one or more of its NOM MPIDs. The Exchange is 
proposing to increase the Consolidated Volume required to meet the 
standard from 0.08% to 0.15%. The Exchange is also proposing to 
increase the level of Total Volume required under the tier from 100,000 
or more contracts per day in a month to 125,000 or more contracts per 
day in a month. Lastly, the Exchange is making a clarifying change to 
the rule. Specifically, the Exchange is proposing to eliminate language 
from the credit tier that discusses NOM MPIDs. The Exchange notes that 
there are not MPIDs on NOM, but rather activity on NOM is measured by 
Participant.\11\ Accordingly, the Exchange is correcting the rule text, 
but continuing to measure activity on NOM by Participant, unchanged.
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    \11\ The term ``Options Participant'' or ``Participant'' means a 
firm, or organization that is registered with the Exchange pursuant 
to Chapter II of the NASDAQ Options Rules for purposes of 
participating in options trading on NOM as a ``Nasdaq Options Order 
Entry Firm'' or ``Nasdaq Options Market Maker''. See NASDAQ Options 
Rules, Chapter I, Sec. 1(a)(40).
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    The Exchange is proposing to increase the fee it assesses for 
participation in the Closing Cross. Currently, the Exchange assesses a 
charge of $0.0006 per share executed for all orders, other than MOC and 
LOC orders executed in the Closing Cross. The Exchange is proposing to 
increase the fee from $0.0006 to $0.0008 per share executed. Similarly, 
the Exchange is proposing to increase the charge assessed for 
participation in the Opening Cross. Currently, the Exchange assesses a 
charge a charge of $0.0006 per share executed for all orders, other 
than Market-on-Open (``MOO'') and Limit-on-Open (``LOO'') orders 
executed in the Opening Cross. The Exchange is proposing to increase 
the fee from $0.0006 to $0.0008 per share executed.
    The Exchange is also proposing to add a new means by which a member 
firm may be excluded from the Excess Order Fee under Rule 7018(m)(4). 
In 2012, NASDAQ introduced an Excess Order Fee, imposed on MPIDs that 
have characteristics indicative of inefficient order entry 
practices.\12\ The fee is designed to dissuade inefficient order entry 
practices that may place excessive burdens on the systems of NASDAQ and 
its member firms, and may negatively impact the usefulness and life 
cycle cost of market data. For example, 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. Currently, the Exchange excludes from the Excess Order Fee a 
member firm with a daily average Weighted Order Total of less than 
100,000 during the month. NASDAQ believes that this exclusion is 
reasonable because a member firm with an extremely low volume of 
entered orders has only a de minimis impact on the market. The Exchange 
is proposing a new exclusion from the fee available to a member firm 
that is a registered NASDAQ market maker in at least 100 issues.\13\ 
The Exchange believes that market makers in a significant number of 
securities should not be captured by the Excess Order Fee because, in 
their capacity as a market maker, they are adding beneficial liquidity 
in a large number of securities thereby improving market quality for 
all market participants. Consequently, the Exchange believes that such 
market-improving activity offsets any negative impact caused by a 
market maker exceeding the Order Entry Ratio.\14\
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    \12\ Securities Exchange Act Release Nos. 66951 (May 9, 2012), 
77 FR 28647 (May 15, 2012) (SR-NASDAQ-2012-055).
    \13\ The Exchange will calculate a market maker's eligibility 
for the exclusion monthly, by taking the number of securities in 
which the market maker was registered in each trading day during the 
calendar month divided by the number of trading days in the calendar 
month, resulting in the average daily number of registered 
securities for the month.
    \14\ The Order Entry Ratio is the ratio of (i) the member firm's 
Weighted Order Total to (ii) the greater of one or the number of 
displayed, non-marketable orders sent to NASDAQ by the member firm 
that execute in full or in part. See Rule 7018(m)(2). Member firms 
with an Order Entry Ratio of 100 or more are assessed the Excess 
Order Fee.
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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,\15\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ 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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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(4) and (5).
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    NASDAQ believes that elimination of the charges assessed member 
firms that provide certain levels of MOC and/or LOC orders executed in 
the Closing Cross is reasonable because the Exchange does not believe 
that market participants require additional incentives to participate 
in the Closing Cross using MOC and LOC orders. Currently, member firms 
are assessed a charge of $0.00295 per share executed for removal of 
Tape A and B securities as opposed to the default charge of $0.0030 per 
share executed. The Exchange believes that it is reasonable to 
eliminate the lower charge in Tape A and B securities because it does 
not believe that an incentive is needed to provide MOC and LOC orders 
in the Closing Cross. Moreover, the Exchange believes that it is 
reasonable to eliminate the charge as applied to Tape C securities 
because it is currently set at the default removal rate of $0.0030 per 
share executed, and therefore does not act as an incentive whatsoever. 
The Exchange believes that the proposed deletion of the charge tier is 
an equitable allocation and is not unfairly discriminatory because 
NASDAQ will apply the default charge assessed for removal of liquidity 
from NASDAQ. As

[[Page 43145]]

such, all member firms that do not otherwise qualify for a lower 
charge, will be assessed the same charge for removing liquidity from 
NASDAQ in the securities of all three Tapes.
    NASDAQ believes that the proposed new $0.0029 per share executed 
credit tier based on NOM activity, which is applied to executions of 
displayed quotes/and orders (other than Supplemental Orders or 
Designated Retail Orders) in the securities of all three Tapes is 
reasonable because it continues to provide incentives to market 
participants to improve the NASDAQ Options Market and increase their 
participation on NASDAQ. As discussed, NASDAQ currently provides a 
credit with similar NOM-based qualification criteria under Rule 
7018(a). The Exchange believes that the proposed new credit tier is an 
equitable allocation and is not unfairly discriminatory because the 
credit will be available to all member firms that provide the required 
level of average daily volume in option contracts. Tiers such as the 
proposed are not novel and have been previously implemented across all 
U.S. equities and options exchanges, including Nasdaq. Like all credit 
tiers, there is the possibility that some member firms may not be able 
to qualify for this credit tier as easily as others due to their size 
and capacity to transact on the Exchange. Notwithstanding, the Exchange 
does not believe that this credit tier discriminates unfairly because 
in return for the reduced credit, qualifying member firms are providing 
market improving participation to the benefit of all market 
participants and the Exchange is not placing any barriers to prevent 
any member firms to achieve the required levels of market improving 
participation. Further, the proposed volume threshold is less than 
previously established tiers.
    NASDAQ believes that elimination of the $0.0029 per share executed 
credit tier based on providing a certain level of Consolidated Volume 
and NOM Market Maker Volume is reasonable because it is not currently 
effective in providing incentive to market participants to provide the 
volume necessary to meet the requirements of the tier. Deletion of this 
credit tier will allow the Exchange to offer other incentives, which 
may be more effective in providing incentive to market participants to 
provide market-improving order flow in return for a credit. The 
Exchange believes that the proposed elimination of the credit tier is 
an equitable allocation and is not unfairly discriminatory because no 
member firms have qualified for the credit in recent months and removal 
of the credit will not impact any member firms at this juncture.
    The Exchange believes that the proposed amendments to the $0.0029 
per share executed credit tier provided for transactions in securities 
of all three Tapes, which is provided in return for the member firm 
providing a certain level of Consolidated Volume and Total Volume, are 
reasonable because require a modest increase in the levels of 
Consolidated Volume and Total Volume in order to qualify for the 
credit. The Exchange chooses to offer credits to market participants in 
return for certain market-improving activity. The Exchange notes that 
from time to time it will adjust charges and credits, and/or the 
criteria required to receive them, in order to balance the incentives 
provided to market participants with the beneficial market activity the 
Exchange seeks to promote and attract. In the present case, the 
Exchange is requiring member firms to provide increased market 
participation in both NASDAQ and NOM in return for the credit, which 
NASDAQ believes better aligns the credit with the market improving 
behavior. The Exchange believes the clarifying change to the tier is 
reasonable because the language of the tier will more accurately 
reflect how the contracts are measured to meet the criteria. In this 
regard, the current criterion is meant to capture all contracts 
executed on NOM. Accordingly, the proposed amended rule text more 
accurately reflects that all of a Participant's contracts on NOM will 
be counted toward the requirement while also will removing inaccurate 
text, which may be confusing to market participants. The Exchange 
believes that the proposed changes to the credit tier is an equitable 
allocation and is not unfairly discriminatory because all member firms 
that qualify under the revised requirements of the tier will receive 
the credit.
    The Exchange believes that the proposed increases to the charges 
assessed member firms for quotes and orders executed in the NASDAQ 
Closing and Opening Crosses under Rules 7018(d) and (e), respectively, 
are reasonable because NASDAQ must from time to time increase fees to 
cover expenses incurred in operating its systems in response to 
increased costs and/or decreased revenue from fees. The proposed 
increase in the charge to participate in the Closing and Opening 
Crosses using all other quotes and orders from $0.0006 per share 
executed to $0.0008 per share executed reflects a modest increase to 
better align the fee with the functionality provided. The Exchange 
notes that the charges continue to be lower than the charges assessed 
for using MOC and LOC orders to participate in the Closing Cross and 
MOO and LOO orders to participate in the Opening Cross, and are 
significantly lower than the default charge assessed for removal of 
liquidity from NASDAQ. The Exchange believes that the proposed increase 
in the charges for participation in the Closing and Opening Crosses is 
an equitable allocation and is not unfairly discriminatory because the 
charges will apply uniformly to all market participants that 
participate in the Crosses.
    The Exchange believes that the proposed addition of a new exclusion 
from the Excess Order Fee is reasonable because NASDAQ would like to 
avoid providing market makers a disincentive to participate in NASDAQ. 
The Exchange notes that the Excess Order Fee was designed to dissuade 
inefficient order entry practices that may place excessive burdens on 
the systems of NASDAQ and its member firms. NASDAQ has observed market 
makers approaching the fee threshold near the end of the month reduce 
their participation in the market to avoid reaching an Order Entry 
Ratio that would trigger the fee. NASDAQ believes that it is reasonable 
to provide an exemption to registered market makers in order to avoid a 
decrease in quoting behavior, which will benefit all market 
participants. Moreover, the Exchange believes that the proposed 100 
securities threshold is reasonable because it sets a modest level of 
securities in which the market maker must be registered, which balances 
the need to set a meaningful standard against setting the level too 
high to be achievable for most market makers. The Exchange notes that 
the Exchange may revisit the registered securities threshold should it 
determine that the level is too high or low. The Exchange believes that 
the proposed exemption from the fee is an equitable allocation and is 
not unfairly discriminatory because it will apply uniformly to all 
market makers, which, unlike other market participants, have 
obligations to provide liquidity to the market. The Exchange notes that 
liquidity is critical to the trading efficiency and quality of the 
exchange, and changes to enhance liquidity should be viewed favorably 
by all participants. The Exchange believes 100 securities threshold is 
an equitable allocation and is not unfairly discriminatory because it 
is a modest level of securities in which the market maker must be 
registered, which was selected by the Exchange

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based on its observation of market maker activity, its desire to slowly 
unwind this program for market makers generally and is designed to 
provide the greatest improvement in market quality. To the extent the 
Exchange's estimation is incorrect, it may adjust the requirement 
appropriately. Lastly, the Exchange believes that the passive liquidity 
provisioning benefits provided by market making to liquidity seeking 
market participants, especially investors, materially outweighs any 
potential harm that may be caused by allowing a market maker to exceed 
the Order Entry Ratio threshold.

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.\17\ 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.
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    \17\ 15 U.S.C. 78f(b)(8).
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    In this instance, the proposed changes to the charges assessed and 
credits available to member firms for execution of securities in 
securities of all three Tapes do not impose a burden on competition 
because NASDAQ's execution services are completely voluntary and 
subject to extensive competition both from other exchanges and from 
off-exchange venues. Excluding market makers from the Excess Order Fee 
does not place a burden on competition because the Exchange has 
balanced the goal of the fee with the potential negative impact on 
market quality and determined that excluding market makers from the fee 
will promote better market quality, and thereby promote NASDAQ's 
competitiveness among exchanges and other market venues. In sum, if the 
changes proposed herein 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

    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.\18\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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: (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

     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-2015-081 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-2015-081. 
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 such filing also will be 
available for inspection and copying at the principal offices 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-2015-081, and should be submitted on or before August 11, 2015.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-17757 Filed 7-20-15; 8:45 am]
 BILLING CODE 8011-01-P