81 FR 49288 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Affiliated Entities

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 144 (July 27, 2016)

[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Notices]
[Pages 49288-49293]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-17666]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78380; File No. SR-NASDAQ-2016-090]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to Affiliated Entities

July 21, 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 July 11, 2016, 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.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend the NASDAQ Options Market LLC's 
(``NOM'') pricing at Chapter XV to permit certain affiliated market 
participants to aggregate eligible volume for pricing in Chapter XV, 
Sections 2(1) and 2(6), for which a volume threshold or volume 
percentage is required to obtain the pricing.
    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 permit certain 
affiliated market participants to aggregate volume in Chapter XV, 
Sections 2(1) and 2(6), for which a volume threshold or volume 
percentage is required to qualify for various pricing incentives. The 
Exchange's proposal is intended to incentivize Participants to submit 
for execution a greater amount of order flow on NOM to obtain more 
advantageous pricing.
Affiliated Entity
    The Exchange proposes to add three definitions to Chapter XV of NOM

[[Page 49289]]

Rules. The Exchange proposes to define the terms ``Appointed MM,'' 
``Appointed OFP,'' and ``Affiliated Entity.''
    The Exchange proposes to define the term ``Appointed MM'' as a NOM 
Market Maker \3\ who has been appointed by an Order Flow Provider 
(``OFP'') for purposes of qualifying as an Affiliated Entity. An OFP is 
a Participant, other than a NOM Market Maker, that submits orders, as 
agent or principal, to the Exchange.\4\
---------------------------------------------------------------------------

    \3\ 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.
    \4\ Market Makers submitting quotes through SQF or orders 
through OTTO to the Exchange shall not be considered Appointed OFPs 
for the purpose of becoming an Affiliated Entity.
---------------------------------------------------------------------------

    The Exchange proposes to define the term ``Appointed OFP'' as an 
OFP who has been appointed by a NOM Market Maker for purposes of 
qualifying as an Affiliated Entity.
    The Exchange proposes to define the term ``Affiliated Entity'' as a 
relationship between an Appointed MM and an Appointed OFP for purposes 
of aggregating eligible volume for pricing in Chapter XV, Sections 2(1) 
and 2(6), for which a volume threshold or volume percentage is required 
to qualify for higher rebates or lower fees.
    In order to become an Affiliated Entity, NOM Market Makers and OFPs 
will be required to send an email to the Exchange to appoint their 
counterpart, at least 3 business days prior to the last day of the 
month to qualify for the next month.\5\ For example, with this 
proposal, market participants may submit emails to the Exchange to 
become Affiliated Entities eligible to qualify for discounted pricing 
starting August 1, 2016, provided the emails are sent at least 3 
business days prior to the first business day of August 2016. The 
Exchange will acknowledge receipt of the emails and specify the date 
the Affiliated Entity is eligible for applicable pricing in Chapter XV, 
Section 2(1) and (6).
---------------------------------------------------------------------------

    \5\ The Exchange shall issue an Options Trader Alert specifying 
the email address and details required to apply to become an 
Affiliated Entity. Once the Exchange receives both emails, from the 
Affiliated [sic] MM and the Affiliated [sic] OFP, the Exchange will 
send a confirming email with the date of approval of the one (1) 
year term.
---------------------------------------------------------------------------

    Each Affiliated Entity relationship will commence on the 1st of a 
month and may not be terminated prior to the end of any month. An 
Affiliated Entity relationship will terminate after a one (1) year 
period, unless either party terminates earlier in writing by sending an 
email to the Exchange at least 3 business days prior to the last day of 
the month to terminate for the next month. Affiliated Entity 
relationships must be renewed annually. For example, if the start date 
of the Affiliated Entity relationship is August 1, 2016, the 
counterparties may determine to commence a new relationship as of 
August 1, 2017 by sending two new emails by July 27, 2017 (3 business 
days prior to the end of the month). Participants under Common 
Ownership \6\ may not qualify as a counterparty comprising an 
Affiliated Entity. Each Participant may qualify for only one (1) 
Affiliated Entity relationship at any given time.
---------------------------------------------------------------------------

    \6\ The term ``Common Ownership'' means Participants under 75% 
common ownership or control. See Chapter XV. Participants that are 
under 75% common ownership or control shall be considered under 
Common Ownership for purposes of pricing.
---------------------------------------------------------------------------

    As proposed, an Affiliated Entity shall be eligible to aggregate 
their volume for purposes of qualifying for certain pricing in Chapter 
XV, Sections 2(1) and 2(6) for which a volume threshold or volume 
percentage is required to obtain a higher rebate or lower fee. With 
this proposal, Affiliated Entities will be eligible to aggregate 
pricing in Chapter XV, Section 2(1) in both Penny and Non-Penny Pilot 
Options \7\ and also aggregate MARS Payments in Chapter XV, Section 
2(6).
---------------------------------------------------------------------------

    \7\ See NOM Rules at Section 2(1) of Chapter XV.
---------------------------------------------------------------------------

Chapter XV, Section 2(1)--Penny Pilot and Non-Penny Pilot Options 
Pricing
    Currently, the Exchange offers Customers,\8\ Professionals \9\ and 
NOM Market Makers the ability to obtain higher Penny Pilot Options 
Rebates to Add Liquidity with tiered pricing models.\10\ The Exchange 
offers additional volume incentives to Customers and Professionals in 
note 1 of Chapter XV, Section 2(1) to increase the Non-Penny Pilot 
Options Rebate to Add Liquidity, provided certain qualifications are 
met.\11\ The Exchange also offers NOM Market Makers the ability to 
obtain higher Penny Pilot Options Rebates to Add Liquidity.\12\ 
Additionally, the Exchange also offers additional volume incentives to 
NOM Market Makers in note 2 of Chapter XV, Section 2(1) to lower the 
Penny Pilot Options Fee for Removing Liquidity.\13\ Note ``c'' of 
Chapter XV, Section 2(1) \14\

[[Page 49290]]

offers Participants an opportunity to increase the Tier 8 Customer and 
Professional Penny Pilot Options rebate, provided certain 
qualifications are met. This pricing is reflected at Chapter XV, 
Section 2(1) and would be subject to aggregation by Affiliated 
Entities.
---------------------------------------------------------------------------

    \8\ 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 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)).
    \9\ 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.
    \10\ For Customers and Professionals, there are currently 8 
Penny Pilot Options Rebate to Add Liquidity Tiers for Customers and 
Professionals with rebates that range from $0.20 to $0.48 per 
contract. Additionally, notes c and d in Chapter XV, Section 2(1) 
permit additional incentives based on volume in the Customer and 
Professional Penny Pilot Options Rebate to Add Liquidity tiers. For 
NOM Market Makers, there are currently 6 Penny Pilot Options Rebate 
to Add Liquidity Tiers with rebates ranging from $0.20 to $0.42 per 
contract.
    \11\ Note 1 of Chapter XV, Section 2(1) states that a 
Participant that qualifies for Customer or Professional Penny Pilot 
Options Rebate to Add Liquidity 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 Customer or Professional Penny Pilot Options 
Rebate to Add Liquidity 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.
    \12\ There are currently 6 Penny Pilot Options Rebate to Add 
Liquidity Tiers for NOM Market Makers with rebates that range from 
$0.20 to $0.42 per contract.
    \13\ Note 2 of Chapter XV, Section 2(1) states that Participants 
that add 1.30% of Customer, Professional, Firm, Broker-Dealer or 
Non-NOM Market Maker liquidity in Penny Pilot Options and/or Non-
Penny Pilot Options of total industry customer equity and ETF option 
ADV contracts per day in a month will be subject to the following 
pricing applicable to executions: A $0.48 per contract Penny Pilot 
Options Fee for Removing Liquidity when the Participant is (i) both 
the buyer and the seller or (ii) the Participant removes liquidity 
from another Participant under Common Ownership. Participants that 
add 1.50% of Customer, Professional, Firm, Broker-Dealer or Non-NOM 
Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot 
Options of total industry customer equity and ETF option ADV 
contracts per day in a month and meet or exceed the cap for the 
NASDAQ Stock Market Opening Cross during the month will be subject 
to the following pricing applicable to executions less than 10,000 
contracts: a $0.32 per contract Penny Pilot Options Fee for Removing 
Liquidity when the Participant is (i) both the buyer and seller or 
(ii) the Participant removes liquidity from another Participant 
under Common Ownership. Participants that add 1.75% of Customer, 
Professional, Firm, Broker-Dealer or Non-NOM Market Maker liquidity 
in Penny Pilot Options and/or Non-Penny Pilot Options of total 
industry customer equity and ETF option ADV contracts per day in a 
month will be subject to the following pricing applicable to 
executions less than 10,000 contracts: a $0.32 per contract Penny 
Pilot Options Fee for Removing Liquidity when the Participant is (i) 
both the buyer and seller or (ii) the Participant removes liquidity 
from another Participant under Common Ownership
    \14\ Note ``c'' of Chapter XV, Section 2(1) provides, 
``Participants that: (1) Add Customer, Professional, Firm, Non-NOM 
Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options 
and/or Non- Penny Pilot Options of 1.15% or more of total industry 
customer equity and ETF option ADV contracts per day in a month will 
receive an additional $0.02 per contract Penny Pilot Options 
Customer and/or Professional Rebate to Add Liquidity for each 
transaction which adds liquidity in Penny Pilot Options in that 
month; or (2) add Customer, Professional, Firm, Non-NOM Market Maker 
and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-
Penny Pilot Options of 1.30% or more of total industry customer 
equity and ETF option ADV contracts per day in a month will receive 
an additional $0.05 per contract Penny Pilot Options Customer and/or 
Professional Rebate to Add Liquidity for each transaction which adds 
liquidity in Penny Pilot Options in that month; or (3) (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 0.80% of total industry customer equity and ETF option 
ADV contracts per day in a month, (b) add Customer, Professional, 
Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Non-
Penny Pilot Options above 0.15% of total industry customer equity 
and ETF option ADV contracts per day in a month, and (c) 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 will receive an additional $0.05 
per contract Penny Pilot Options Customer and/or Professional Rebate 
to Add Liquidity for each transaction which adds liquidity in Penny 
Pilot Options in a month. Consolidated Volume shall mean 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 an equity 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's proposal would incentivize certain Participants, who 
are not by definition under Common Ownership, to enter into an 
Affiliated Entity relationship for the purpose of aggregating volume to 
qualify for higher rebates and lower fees. With this proposal the 
Exchange is offering Affiliated [sic] OFPs the ability to obtain higher 
rebates and is also offering Appointed MMs the ability to obtain lower 
fees by aggregating volume at Chapter XV, Section 2(1).
Chapter XV, Section 2(6)--MARS Pricing
    The Exchange currently offers a Market Access and Routing Subsidy 
or ``MARS'' to qualifying NOM Participants in Chapter XV, Section 
2(6).\15\ NOM Participants that have System Eligibility and have 
executed the requisite number of Eligible Contracts in a month are paid 
rebates based on average daily volume in a month. There is a 3 tiered 
rebate schedule today for such MARS rebates.\16\ MARS Payments are made 
to NOM Participants that have System Eligibility and have routed the 
requisite number of Eligible Contracts daily in a month, which were 
executed on NOM, for the purpose of qualifying for the MARS 
Payment.\17\
---------------------------------------------------------------------------

    \15\ The Participant remains solely responsible for implementing 
and operating its System, as that term is defined in note 17 below.
    \16\ NOM Participants that qualify for Customer and Professional 
Penny Pilot Options Rebate to Add Liquidity Tier 8 are eligible to 
receive $0.09 per contract in addition to any MARS Payment tier on 
MARS Eligible Contracts the NOM Participant qualifies for in a given 
month. Also, note 4 of Chapter XV, Section 2(1) permits NOM 
Participants that qualify for MARS Payment Tiers 1, 2 or 3 to 
receive a Customer and Professional Penny Pilot Options Fee for 
Removing Liquidity of $0.48 per contract when removing Customer and 
Professional liquidity in Penny Pilot Options, excluding SPY.
    \17\ To qualify for MARS, the NOM Participant's routing system 
(``System'') would be required to meet the following criteria: (1) 
Enable the electronic routing of orders to all of the U.S. options 
exchanges, including NOM; (2) provide current consolidated market 
data from the U.S. options exchanges; and (3) be capable of 
interfacing with NOM's API to access current NOM match engine 
functionality. Also, the Participant's System would also need to 
cause NOM to be the one of the top three default destination 
exchanges for individually executed marketable orders if NOM is at 
the national best bid or offer (``NBBO''), regardless of size or 
time, but allow any user to manually override NOM as a default 
destination on an order-by-order basis (``System Eligibility''). Any 
NOM Participant would be permitted to avail itself of this 
arrangement, provided that its order routing functionality meets the 
requirements described herein and satisfies NOM that it appears to 
be robust and reliable. Eligible Contracts do not include Mini 
Option orders. A NOM Participant is not be entitled to receive any 
other revenue for the use of its System specifically with respect to 
orders routed to NOM.
---------------------------------------------------------------------------

    In note ``d'' of Chapter XV, Section 2(1), the Exchange also offers 
NOM Participants that qualify for MARS Payment Tiers 1, 2 or 3 an 
additional $0.03 per contract Penny Pilot Options Customer and/or 
Professional Rebate to Add Liquidity for each transaction which adds 
liquidity in Penny Pilot Options in that month, in addition to 
qualifying Penny Pilot Options Customer and/or Professional Rebate to 
Add Liquidity Tiers 1 through 8. NOM Participants that qualify for a 
note ``c'' incentive receive the greater of the note ``c'' or note 
``d'' incentive.\18\
---------------------------------------------------------------------------

    \18\ See note 14 above.
---------------------------------------------------------------------------

    The Exchange's proposal would incentivize certain Participants, who 
are not by definition under Common Ownership, to enter into an 
Affiliated Entity relationship for the purpose of aggregating volume to 
qualify for higher MARS rebates. With this proposal the Exchange is 
offering Affiliated [sic] OFPs the ability to obtain higher MARS 
rebates by aggregating volume with an Affiliated [sic] MM with whom 
they are qualified as an Affiliated Entity and also be able to 
aggregate volume for purposes of qualifying for the Chapter XV, Section 
2(1) note ``d'' rebate.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act,\19\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the 
Act,\20\ 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.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

    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 broader forms that are most 
important to investors and listed companies.'' \21\
---------------------------------------------------------------------------

    \21\ Securities Exchange Act Release No. 51808 (June 29, 2005), 
70 FR 37496 at 37499 (File No. S7-10-04) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission 
\22\ (``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.\23\ 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.'' \24\
---------------------------------------------------------------------------

    \22\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \23\ See id. at 534-535.
    \24\ See id. at 537.
---------------------------------------------------------------------------

    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

[[Page 49291]]

the execution of order flow from broker dealers' . . . .'' \25\ 
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.
---------------------------------------------------------------------------

    \25\ See id. at 539 (quoting Securities Exchange Act Commission 
at Release No. 59039 (December 2, 2008), 73 FR 74770 at 74782-74783 
(December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Exchange's proposal to amend Chapter XV to add the definitions 
of ``Appointed MM,'' ``Appointed OFP'' and ``Affiliated Entity'' is 
reasonable because the Exchange is proposing to identify the applicable 
market participants that may qualify to aggregate volume as an 
Affiliated Entity. Further the Exchange seeks to make clear the manner 
in which Participants may participate on the Exchange as Affiliated 
Entities by setting timeframes for communicating agreements among 
market participants and terms of early termination. The Exchange also 
clearly states that no Participant under Common Ownership may become a 
counterparty to an Affiliated Entity. Any Participant who meets the 
definition of Common Ownership shall not be eligible to become an 
Affiliated Entity. The Exchange believes that these terms are 
reasonable because they would allow Participants to elect to become a 
counterparty to an Affiliated Entity, provided they are not under 
Common Ownership.
    The Exchange's proposal to amend Chapter XV to add the definitions 
of ``Appointed MM,'' ``Appointed OFP'' and ``Affiliated Entity'' is 
equitable and not unreasonably discriminatory because all Participants 
that are not under Common Ownership by definition may choose to enter 
into an Affiliated Entity relationship.
Chapter XV, Section 2(1)--Penny Pilot and Non-Penny Pilot Options 
Pricing
    The Exchange's proposal to permit Affiliated Entities to aggregate 
volume for purposes of qualifying Appointed OFPs for higher Penny Pilot 
and Non-Penny Pilot Options rebates\\\ and qualifying Appointed MMs for 
lower fees in Chapter XV, Section 2(1) and the note ``c'' incentive is 
reasonable because it will attract additional Customer and non-Customer 
order flow to the Exchange. Customer liquidity benefits all market 
participants by providing more trading opportunities, which attracts 
NOM 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. Also, the Exchange is incentivizing Participants to send 
non-Customer order flow to NOM, which order flow will benefit all 
Participants because they may interact with the liquidity. Market 
participants directing order flow as OFPs may be eligible to qualify 
for higher rebates with this proposal as a result of aggregating volume 
with an Appointed MM and thereby qualifying for higher rebates. 
Permitting Participants to affiliate for purposes of qualifying 
Appointed OFPs for higher rebates and qualifying Appointed MMs for 
lower fees may also encourage Affiliated Entities to incentivize each 
other to attract and seek to execute more volume on NOM. In turn, 
market participants would benefit from the increased liquidity with 
which to interact, potentially tighter spreads on orders. Overall, 
incentivizing market participants with increased opportunities to earn 
higher or lower fees may increase the quality of the liquidity 
available on NOM.
    The Exchange's proposal to permit Affiliated Entities to aggregate 
volume for purposes of qualifying Appointed OFPs for higher Penny Pilot 
and Non-Penny Pilot Options rebates and qualifying Appointed MMs for 
lower fees in Chapter XV, Section 2(1) and the note ``c'' incentive is 
equitable and not unfairly discriminatory because all NOM Participants, 
other than those that meet the definition of Common Ownership, may 
elect to become an Affiliated Entity as either an Appointed MM or an 
Appointed OFP.\26\ Also, each NOM Participant may participate in only 
one Affiliated Entity relationship at a given time, which imposes a 
measure of exclusivity among market participants, allowing each party 
to rely on the other's executed volume on NOM to receive a 
corresponding benefit in terms of a higher rebate or lower fee. Any 
market participant that by definition is not under Common Ownership may 
elect to become a counterparty of an Affiliated Entity. Also, NOM 
Market Makers are valuable market participants that provide liquidity 
in the marketplace and incur costs that other market participants do 
not incur. NOM Market Makers are subject to burdensome quoting 
obligations \27\ to the market that do not apply to other market 
participants. Incentivizing these market participants to execute volume 
on NOM may result in tighter spreads.
---------------------------------------------------------------------------

    \26\ Both Participants must elect each other to qualify as an 
Affiliated Entity for one year. Participation is effected by an 
agreement of both parties. One party may elect terminate the 
agreement at any time.
    \27\ Pursuant to NOM Rules at Chapter VII, Section 5, entitled 
``Obligations of Market Makers'', in registering as a market maker, 
an Options Participant commits himself to various obligations. 
Transactions of a NOM Market Maker must constitute a course of 
dealings reasonably calculated to contribute to the maintenance of a 
fair and orderly market, and Market Makers should not make bids or 
offers or enter into transactions that are inconsistent with such 
course of dealings. Further, all Market Makers are designated as 
specialists on NOM for all purposes under the Act or rules 
thereunder. See Chapter VII, Section 2.
---------------------------------------------------------------------------

    The Exchange's proposal to exclude Participants that are under 
Common Ownership from qualifying as an Affiliated Entity is reasonable 
because Participants under Common Ownership may aggregate volume today 
for purposes of Chapter XV, Section 2(1) pricing.\28\ The Exchange's 
proposal to exclude Participants that by definition are under Common 
Ownership from qualifying as an Affiliated Entity is equitable and not 
unfairly discriminatory because the Exchange will apply all 
qualifications in a uniform manner when approving Affiliated Entities. 
Excluding Participants under Common Ownership from also qualifying as 
an Affiliated Entity is equitable and not unfairly discriminatory 
because they are able to aggregate volume today and qualify for higher 
rebates or lower fees.
---------------------------------------------------------------------------

    \28\ See NOM Rules at Chapter XV for Common Ownership.
---------------------------------------------------------------------------

Chapter XV, Section 2(6)--MARS Pricing
    The Exchange's proposal to permit NOM Participants that provide 
certain order routing functionalities to other NOM Participants and/or 
use such functionalities themselves, and meet certain System 
Eligibility, to aggregate volume as an Affiliated Entity for purposes 
of receiving MARS Payments including the note ``d'' incentive is 
reasonable because NOM Participants will be incentivized to send more 
order flow to NOM. MARS Payments are made on Firm, Non-NOM Market 
Maker, Broker-Dealer and JBO equity option orders that add liquidity 
and are electronically delivered and executed. All Participants may 
benefit from the increased order flow because they may interact with 
this liquidity. Permitting NOM Participants to affiliate for purposes 
of qualifying Appointed OFPs for higher MARS rebates may also encourage 
Affiliated Entities to incentivize each other to attract and seek to 
execute more volume on NOM. The Affiliated Entity relationship would 
permit the Appointed OFP to benefit from orders executed on NOM in 
terms of qualifying for higher MARS rebates. In turn, market 
participants would benefit from the increased liquidity with

[[Page 49292]]

which to interact, potentially tighter spreads on orders.
    The Exchange's proposal to permit NOM Participants that provide 
certain order routing functionalities to other NOM Participants and/or 
use such functionalities themselves, and meet certain System 
Eligibility, to aggregate volume as an Affiliated Entity for purposes 
of receiving MARS Payments including the note ``d'' incentive is 
equitable and not unfairly discriminatory because all NOM Participants, 
other than those that meet the definition of Common Ownership, may 
qualify as an Affiliated Entity as either an Appointed MM or an 
Appointed OFP. Also, all NOM Participants may qualify for a MARS 
Payment provided they meet applicable System Eligibility requirements. 
NOM Participants may participate in only one Affiliated Entity 
relationship at a given time, which imposes a measure of exclusivity 
among market participants, allowing each party to rely on the other's 
executed volume on NOM to receive a corresponding benefit in terms of a 
rebate. The Exchange will apply all qualifications in a uniform manner 
to all market participants that elect to become counterparties of an 
Affiliated Entity.

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. Specifically, the Exchange does 
not believe that permitting Affiliated Entities to aggregate volume to 
qualify for certain rebates and reduced fees will impose any undue 
burden on competition, as discussed below.
    The Exchange operates in a highly competitive market in which many 
sophisticated and knowledgeable market participants can readily and do 
send order flow to competing exchanges if they deem fee levels or 
rebate incentives at a particular exchange to be excessive or 
inadequate. Additionally, new competitors have entered the market and 
still others are reportedly entering the market shortly. These market 
forces ensure that the Exchange's fees and rebates remain competitive 
with the fee structures at other trading platforms.
    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 sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange 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. 
In terms of inter-market competition, the Exchange notes that other 
options markets have similar incentives in place to attract volume to 
their markets.\29\
---------------------------------------------------------------------------

    \29\ See NYSE MKT LLC's (``NYSE Amex'') pricing at NYSE Amex 
Options Fee Schedule). NYSE Amex permits aggregation of volume to 
qualify for the Amex Customer Engagement or ACE Program. See Bats 
BZX Exchange, Inc.'s (``BZX'') fee schedule. BZX permits aggregation 
of volume to qualify for tiered pricing. See the Chicago Board 
Options Exchange Incorporated (``CBOE'') Fees Schedule. CBOE permits 
aggregation of volume to qualify for credits available under an 
Affiliated Volume Plan or ``AVP.''
---------------------------------------------------------------------------

    The Exchange's proposal to amend Chapter XV to add the definitions 
of ``Appointed MM,'' ``Appointed OFP,'' and ``Affiliated Entity'' does 
not impose an undue burden on competition because these definitions 
apply to all Participants uniformly.
Chapter XV, Section 2(1)--Penny Pilot and Non-Penny Pilot Options 
Pricing
    In terms of intra-market competition, the Exchange does not believe 
that its proposal to permit counterparties of an Affiliated Entities to 
aggregate volume for purposes of qualifying for Chapter XV, Section 
2(1) higher rebates and lower fees and the note ``c'' incentive imposes 
an undue burden on intra-market competition because all NOM 
Participants, other than those under Common Ownership, may qualify as 
an Affiliated Entity as either an Appointed MM or an Appointed OFP. 
Also, each NOM Participant may participate in only one Affiliated 
Entity relationship at a given time, which imposes a measure of 
exclusivity among market participants, allowing each party to rely on 
the other's executed NOM volume on NOM to receive a corresponding 
benefit in terms of a higher rebate or lower fee. The Exchange will 
apply all qualifications in a uniform manner to all market participants 
that elect to become counterparties of an Affiliated Entity. Any market 
participant that by definition is a Participant under Common Ownership 
may not become a counterparty of an Affiliated Entity.
    Also, NOM Market Makers are valuable market participants that 
provide liquidity in the marketplace and incur costs that other market 
participants do not incur. NOM Market Makers are subject to burdensome 
quoting obligations \30\ to the market that do not apply to other 
market participants. Incentivizing these market participants to execute 
Customer and Professional volume on NOM may result in tighter spreads. 
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. 
Appointed OFPs directing order flow to the Exchange may be eligible to 
qualify for a higher rebate and Appointed MMs may be eligible to 
qualify for lower fees, with this proposal, as a result of aggregating 
volume. Permitting Participants to affiliate for purposes of qualifying 
for Chapter XV, Section 2(1) higher rebates or lower fees may also 
encourage the counterparties that comprise the Affiliated Entities to 
incentivize each other to attract and seek to execute more volume on 
NOM.
---------------------------------------------------------------------------

    \30\ See note 27 above.
---------------------------------------------------------------------------

    The Exchange's proposal to exclude Participants that are under 
Common Ownership from becoming an Affiliated Entity does not impose and 
[sic] undue burden on intra-market competition because Participants 
under Common Ownership may aggregate volume today for purposes of 
qualifying for higher rebates or lower fees.
Chapter XV, Section 2(6) -MARS Pricing
    In terms of intra-market competition, the Exchange does not believe 
that its proposal to permit Affiliated Entities to aggregate volume for 
purposes of qualifying for Chapter XV, Section 2(6) MARS rebates and 
the note ``d'' incentive imposes an undue burden on intra-market 
competition because all NOM Participants, other than those under Common 
Ownership, may qualify as an Affiliated Entity as either an

[[Page 49293]]

Appointed MM or an Appointed OFP. Also, all NOM Participants may 
qualify for a MARS Payment provided they meet applicable System 
Eligibility requirements. NOM Participants may participate in only one 
Affiliated Entity relationship at a given time, which imposes a measure 
of exclusivity among market participants, allowing each party to rely 
on the other's executed volume on NOM to receive a corresponding 
benefit in terms of a rebate. The Exchange will apply all 
qualifications in a uniform manner to all market participants that 
elect to become counterparties of an Affiliated Entity.

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.\31\
---------------------------------------------------------------------------

    \31\ 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-2016-090 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-2016-090. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2016-090 and should 
be submitted on or before August 17, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17666 Filed 7-26-16; 8:45 am]
 BILLING CODE 8011-01-P