81 FR 40736 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rules 7018(a) and 7014(h)

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 120 (June 22, 2016)

[Federal Register Volume 81, Number 120 (Wednesday, June 22, 2016)]
[Notices]
[Pages 40736-40739]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-14713]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78089; File No. SR-NASDAQ-2016-083]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rules 7018(a) and 7014(h)

June 16, 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 June 8, 2016, The NASDAQ Stock Market LLC (``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.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Rules 7018(a) and 7014(h) to: (i) 
Provide a new credit for providing liquidity in securities of all three 
Tapes; (ii) amend the requirements of an existing credit tier provided 
in securities of all three Tapes; (iii) delete text from the preamble 
of Rule 7018(a) and from Rule 7014(h)(5) concerning Consolidated 
Volume; and (iv) make technical corrections to the rule text.
    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
    The purpose of the proposed rule change is to amend certain credits 
for the use of the order execution and routing services of the Nasdaq 
Market Center by members for all securities priced at $1 or more that 
it trades, and to make clarifying and technical changes to Rule 
7018(a). Specifically, the Exchange proposes to amend Rules 7018(a) and 
7014(h) to: (i) Provide a new credit for providing liquidity in 
securities of all three Tapes;\3\ (ii) amend the requirements of an 
existing credit tier provided in securities of all three Tapes; (iii) 
delete text from the preamble of Rule 7018(a) and from Rule 7014(h)(5) 
concerning Consolidated Volume;\4\ and (iv) make technical corrections 
to the rule text.
---------------------------------------------------------------------------

    \3\ There are three Tapes, which are based on the listing venue 
of the security: Tape C securities are Nasdaq-listed; Tape A 
securities are New York Stock Exchange-listed; and Tape B securities 
are listed on exchanges other than Nasdaq and NYSE.
    \4\ Consolidated Volume is defined as the total consolidated 
volume reported to all consolidated transaction reporting plans by 
all exchanges and trade reporting facilities during a month in 
equity securities, excluding executed orders with a size of less 
than one round lot. For purposes of calculating Consolidated Volume 
and the extent of a member's trading activity, expressed as a 
percentage of, or ratio to, Consolidated Volume, the date of the 
annual reconstitution of the Russell Investments Indexes shall be 
excluded from both total Consolidated Volume and the member's 
trading activity. See Rule 7018(a).
---------------------------------------------------------------------------

First Change
    The purpose of the first change is to provide an additional credit 
to members for displayed quotes/orders (other than Supplemental Orders 
or Designated Retail Orders) that provide liquidity. Currently, the 
Exchange provides several credits under Rules 7018(a)(1), (2), and (3), 
each of which apply to securities of a different Tape, in return for 
market-improving behavior. The Exchange is proposing to add a new 
credit tier of $0.00305 per share executed to a member that has 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, adds NOM \5\ Market Maker 
liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 
0.10% or more of total industry ADV in the Customer clearing range \6\ 
for Equity and ETF option contracts per day in a month on the Nasdaq 
Options Market, and adds Customer, Professional, Firm, Non-NOM Market 
Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-
Penny Pilot Options of 1.50% or more of total industry ADV in the 
Customer clearing range for Equity and ETF option contracts per day in 
a month on the Nasdaq Options Market. Thus, to qualify under the new 
proposed credit tiers under Rule 7018(a)(1), (2) and (3), an Exchange 
member must be a NOM Participant and meet the NOM rebate criteria 
described above, in addition to providing at least 0.60% of 
Consolidated Volume on the Exchange.
---------------------------------------------------------------------------

    \5\ NOM is an abbreviation of the ``Nasdaq Options Market.''
    \6\ NOM Chapter XV provides the following defined terms:
    The term ``Customer'' or (``C'') applies to any transaction that 
is identified by a Participant for clearing in the Customer range at 
The Options Clearing Corporation (``OCC'') which is not for the 
account of broker or dealer or for the account of a ``Professional'' 
(as that term is defined in Chapter I, Section 1(a)(48)).
    The term ``NOM Market Maker'' or (``M'') 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.
    The term ``Non-NOM Market Maker'' or (``O'') is a registered 
market maker on another options exchange that is not a NOM Market 
Maker. A Non-NOM Market Maker must append the proper Non-NOM Market 
Maker designation to orders routed to NOM.
    The term ``Firm'' or (``F'') applies to any transaction that is 
identified by a Participant for clearing in the Firm range at OCC.
    The term ``Professional'' or (``P'') means any person or entity 
that (i) is not a broker or dealer in securities, and (ii) places 
more than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s) pursuant to Chapter 
I, Section 1(a)(48). All Professional orders shall be appropriately 
marked by Participants.
    The term ``Broker-Dealer'' or (``B'') applies to any transaction 
which is not subject to any of the other transaction fees applicable 
within a particular category.
---------------------------------------------------------------------------

Second Change
    The purpose of the second change is to amend the criteria required 
to qualify for an existing credit, which is available

[[Page 40737]]

to members for displayed quotes/orders (other than Supplemental Orders 
or Designated Retail Orders) that provide liquidity. Currently, the 
Exchange provides a credit of $0.0029 per share executed in the 
security of any of the Tapes to a member with (i) shares of liquidity 
provided in all securities during the month representing more than 
0.15% 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 Nasdaq Options Market rules, of 125,000 
or more contracts per day in a month executed on the Nasdaq Options 
Market. The Exchange is proposing to change the Total Volume 
requirement of paragraph (ii) of the rule to no longer require 125,000 
or more contracts per day in a month executed on the Nasdaq Options 
Market, but to now require Total Volume of 0.90% or more of total 
industry ADV in the Customer clearing range for Equity and ETF option 
contracts per day in a month on the Nasdaq Options Market.
Third Change
    The purpose of the third change is to delete rule text from the 
preamble of Rule 7018(a) concerning Consolidated Volume. The rule 
currently defines Consolidated Volume as the total consolidated volume 
reported to all consolidated transaction reporting plans by all 
exchanges and trade reporting facilities during a month in equity 
securities, excluding executed orders with a size of less than one 
round lot. The Exchange excludes from the calculations of fees and 
credits that have a Consolidated Volume component all trading that 
occurs on the date of the annual reconstitution of the Russell 
Investments. The annual reconstitution represents a day of abnormal 
trading volume, as the Russell Investment indexes adjust holdings to 
accurately reflect the current state of equity markets and their market 
segments.\7\ Consequently, the Exchange excludes trading occurring on 
the date of the Russell Investment reconstitution in all calculations 
of fees and credits because it is not reflective of a member's normal 
trading. The Exchange expresses this under the rule by stating that, 
``[f]or purposes of calculating Consolidated Volume and the extent of a 
member's trading activity, expressed as a percentage of, or ratio to, 
Consolidated Volume, the date of the annual reconstitution of the 
Russell Investments Indexes shall be excluded from both total 
Consolidated Volume and the member's trading activity.'' The Exchange 
believes that the text stating ``expressed as a percentage of, or ratio 
to, Consolidated Volume'' may be confusing to market participants in 
understanding how the Exchange excludes trading activity on the day of 
the Russell Investment reconstitution because some charges and credits 
under Rule 7018(a) are based on a measure of Consolidated Volume that 
is not a percentage or ratio thereof. Thus, the Exchange seeks to 
clarify that all volume based activity on the date of the Russell 
Investment reconstitution (including trading activity not based on a 
percentage or ratio of Consolidated Volume) is excluded from a member's 
trading activity for determining credit and fee tiers. This proposed 
change will ensure that members understand that all volumes on the day 
of the Russell Investment reconstitution would be excluded for purposes 
of measuring fees and credits.
---------------------------------------------------------------------------

    \7\ See https://www.ftserussell.com/research-insights/russell-reconstitution.
---------------------------------------------------------------------------

    The Exchange is also deleting an identical definition of 
Consolidated Volume from Rule 7014, which provides rules applicable to 
the Exchange's Market Quality Incentive Programs. The definition of 
Consolidated Volume under Rule 7014(h)(5) is identical to Rule 7018(a). 
In light of the changes to the definition under Rule 7018(a) and to 
avoid duplication in the rules, the Exchange is eliminating the 
identical definition from Rule 7014(h)(5) and is replacing it with text 
that cross references the definition under Rule 7018(a).
Fourth Change
    The Exchange is proposing to make minor technical and corrective 
changes to the rule text. Specifically, the Exchange is adding 
punctuation to certain credit tiers, which was inadvertently omitted 
when the text was adopted. The Exchange is also reorganizing a credit 
tier so that it reads more consistently with other credit tiers under 
the rule. The reorganization of the credit tier does not change how the 
credit tier is applied. Last, the Exchange is deleting from Rules 
7018(a)(2) and (3) text under a credit tier that concerns its 
application during a period that has since expired.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\9\ 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 the Exchange operates or controls, and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

First Change
    The Exchange believes that the proposed $0.00305 per share executed 
credit is reasonable because it is consistent with other credits that 
the Exchange provides to members for displayed quotes/orders (other 
than Supplemental Orders or Designated Retail Orders) that provide 
liquidity. As a general principle, the Exchange chooses to offer 
credits to members in return for market improving behavior. Under Rule 
7018(a), the various credits the Exchange provides for displayed 
quotes/orders require members to significantly contribute to market 
quality by providing certain levels of Consolidated Volume through one 
or more of its Nasdaq Market Center MPIDs, and volume on NOM. The 
proposed credit will be provided to members that not only contribute to 
the Exchange by providing more than 0.60% of Consolidated Volume 
through one or more of its Nasdaq Market Center MPIDs during the month, 
but also add NOM Market Maker liquidity in Penny Pilot Options and/or 
Non-Penny Pilot Options of 0.10% or more of total industry ADV in the 
Customer clearing range for Equity and ETF option contracts per day in 
a month on the Nasdaq Options Market, and add Customer, Professional, 
Firm, Non-NOM Market Maker, and/or Broker-Dealer liquidity in Penny 
Pilot Options and/or Non-Penny Pilot Options of 1.50% or more of total 
industry ADV in the Customer clearing range for Equity and ETF option 
contracts per day in a month on the Nasdaq Options Market.
    The Exchange notes that the proposed credit is consistent with 
other credits that it provides for displayed quotes/orders under the 
rule, which range from $0.0015 per share executed to $0.00305 per share 
executed and which apply progressively more stringent requirements in 
return for higher per share executed credits. In this case, the 
proposed requirements to receive the $0.00305 per share executed credit 
are set very high, consistent with the criteria of other $0.00305 per 
share executed credit tiers available under Rule 7018(a). For instance, 
the Exchange provides a $0.00305 per share executed credit in 
securities of any Tape to a member with shares of liquidity provided in 
all securities during the

[[Page 40738]]

month representing at least 0.15% of Consolidated Volume during the 
month, through one or more of its Nasdaq Market Center MPIDs, and that 
adds NOM Market Maker liquidity in Penny Pilot Options and/or Non-Penny 
Pilot Options of 0.90% or more of total industry ADV in the Customer 
clearing range for Equity and ETF option contracts per day in a month 
on the Nasdaq Options Market. The Exchange notes that, while the level 
of Consolidated Volume is lower for the existing $0.00305 per share 
executed credit tier, it requires a significantly larger contribution 
to NOM Market Maker liquidity. The proposed new credit tier, however, 
requires a member to also provide a significant level of Customer, 
Professional, Firm, Non-NOM Market Maker, and/or Broker-Dealer 
liquidity that the current credit does not. Thus, the proposed new 
$0.00305 per share executed credit tier criteria is similar, in terms 
of the level of contribution that a member must make to the markets, to 
the criteria required to qualify for an existing $0.00305 per share 
executed credit that the Exchange offers. In sum, both of these credit 
tiers have high standards to earn the credit and, in return for meeting 
these high standards, both provide a high credit. For these reasons, 
the Exchange believes that the proposed $0.00305 per share executed 
credit is reasonable.
    The proposed $0.00305 per share executed credit is an equitable 
allocation and is not unfairly discriminatory because the Exchange will 
apply the same credit to all similarly situated members. Thus, if a 
member meets the requirements, it will receive the credit unless it 
qualifies for a higher credit. Moreover, as discussed above, some 
credit tiers require participation on NOM while others do not. As such, 
members will continue to have opportunities to qualify for similar 
credits based on market participation not tied to NOM.
Second Change
    The Exchange believes that the proposed amendment to the 
requirements of an existing credit tier provided in securities of all 
three Tapes is reasonable because it merely replaces a measure of 
activity on NOM with another, both of which represent a significant 
contribution to that market. Specifically, the Exchange is replacing 
the requirement that a member have 125,000 or more contracts per day in 
a month executed on the Nasdaq Option Market with a new requirement 
that a member have 0.90% or more of total industry ADV in the Customer 
clearing range for Equity and ETF option contracts per day in a month 
on the Nasdaq Options Market. The Exchange notes that it is more 
precisely targeting market-improving behavior on NOM by replacing the 
fixed requirement of providing a certain number of contracts executed 
per day on NOM with a requirement that fluctuates based on total 
industry ADV in the Customer clearing range for both Equity and ETF 
options contracts per day. Thus, the Exchange is proposing to require 
NOM activity that is more closely correlated to the member's activity 
on NOM as compared to overall industry activity.
    The Exchange believes that the proposed amendment to the 
requirements of an existing credit tier provided in securities of all 
three Tapes is an equitable allocation and is not unfairly 
discriminatory because the Exchange will apply the same credit to all 
similarly situated members. Thus, if a member meets the requirements, 
it will receive the credit unless it qualifies for a higher credit. 
Moreover, as discussed above, some credit tiers require participation 
on NOM while others do not. As such, members will continue to have 
opportunities to qualify for similar credits based on market 
participation not tied to NOM. Also the proposed criteria will allow 
the threshold to fluctuate with industry volume, making it easier to 
achieve in low volume environments and more onerous to meet in high 
volume environments.
Third Change
    The Exchange believes that deleting rule text from the preamble of 
Rule 7018(a) concerning Consolidated Volume and the related change to 
Rule 7014(h)(5) are reasonable because they will help clarify how 
volume related to credit and fee tiers will be handled by the Exchange 
during the annual Russell Indexes reconstitution. Currently, the rule 
text could be interpreted to apply to only a member organization's 
trading activity under a fee or credit tier that is expressed as a 
ratio or percentage of Consolidated Volume. The Exchange believes that 
such an interpretation would undermine the Exchange's intent to exclude 
the abnormal trading activity that occurs on that day. Accordingly, the 
Exchange believes that it is reasonable to remove the potentially 
confusing rule text.
    The Exchange believes that deleting rule text from the preamble of 
Rule 7018(a) concerning Consolidated Volume and the related change to 
Rule 7014(h)(5) are an equitable allocation and are not unfairly 
discriminatory because the proposed changes only serve to clarify the 
application of the rule and does not alter how Consolidated Volume or 
activity for tiers is calculated. Thus, the Exchange will apply the 
same process to all similarly situated member organizations that seek 
to qualify under a fee or credit tier, or rebate under the rules.

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.
    In this instance, the changes to the credits provided for the use 
of the order execution and routing services of the Nasdaq Market Center 
by members for all securities priced at $1 or more that it trades are 
reflective of the intense competition among trading venues in capturing 
order flow. Moreover, the proposed changes do not impose a burden on 
competition because Exchange membership is optional and is also the 
subject of competition from other trading venues. For these reasons, 
the Exchange does not believe that any of the proposed changes will 
impair the ability of members or competing order execution venues to 
maintain their competitive standing in the financial markets. Moreover, 
because there are numerous competitive alternatives to the use of the 
Exchange, it is likely that the Exchange will lose market share as a 
result of the changes if they are unattractive to market participants.

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.

[[Page 40739]]

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.\10\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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-2016-083 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-2016-083. 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 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-2016-083, and should 
be submitted on or before July 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14713 Filed 6-21-16; 8:45 am]
 BILLING CODE 8011-01-P