81 FR 83301 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Related to the Payment of a Credit by Execution Access, LLC Based on Volume Thresholds Met on the NASDAQ Options Market

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 224 (November 21, 2016)

[Federal Register Volume 81, Number 224 (Monday, November 21, 2016)]
[Notices]
[Pages 83301-83303]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-27897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79317; File No. SR-NASDAQ-2016-121]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change Related to the Payment of a Credit by Execution 
Access, LLC Based on Volume Thresholds Met on the NASDAQ Options Market

November 15, 2016.

I. Introduction

    On August 29, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change related to the payment of a credit by Execution 
Access, LLC (``EA'') that would be based on volume thresholds met on 
the NASDAQ Options Market LLC (``NOM''). The proposed rule change was 
published for comment in the Federal Register on September 8, 2016.\3\ 
On October 19, 2016, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ To date, the Commission has received no comment letters on 
the proposal. This order institutes proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78749 (September 1, 
2016), 81 FR 62212 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79118, 81 FR 73186 
(October 24, 2016). The Commission designated December 7, 2016 as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    Under the proposal, EA \7\ would offer a credit to its clients who 
are also NOM Participants (``dual access clients''),\8\ provided they 
qualify for one of the two highest Market Access and Routing Subsidy 
(``MARS'') Payment tiers available on NOM. According to the Exchange, 
NOM Participants that have System Eligibility \9\ and have executed the 
requisite number of Eligible

[[Page 83302]]

Contracts \10\ in a month are paid MARS rebates based on average daily 
volume (``ADV'') in the month.\11\ If a NOM Participant meets these 
requirements, the Exchange pays a MARS Payment on all executed Eligible 
Contracts that add liquidity and that are routed to NOM through the NOM 
Participant's System.\12\
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    \7\ According to the Exchange, EA is a broker-dealer that 
operates a fully electronic central limit order book known as 
eSpeed, and it facilitates the matching of client orders in U.S. 
Treasury securities. See Notice, supra note 3, at 62212 n.3.
    \8\ As proposed, the dual access client may be an affiliate 
entity of the NOM Participant. See id. at 62212. Affiliates would 
include other legal entities under common control. See id. at 62212 
n.4.
    \9\ At the time the Exchange initially submitted this proposal, 
to qualify for MARS, a Participant's routing system (``System'') was 
required to: (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. Further, the Participant's System needed to 
cause NOM to be 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. Any NOM Participant was permitted to 
avail itself of this arrangement, provided that its order routing 
functionality incorporates the features described above and 
satisfies NOM that it appears to be robust and reliable. The 
Participant remained solely responsible for implementing and 
operating its System. See id. at 62213 n.6. The Commission notes 
that the Exchange recently modified MARS, including the System 
Eligibility requirements. See NOM Rules at Chapter XV, Section 2(6). 
See also Securities Exchange Act Release No. 79251 (November 7, 
2016), 81 FR 79536 (November 14, 2016) (SR-NASDAQ-2016-149) (``MARS 
Amendment'') (modifying the MARS System Eligibility requirements to 
provide that ``the Participant's System would also need to cause NOM 
to be the one of the top three default destination exchanges for (a) 
individually executed marketable orders if NOM is at the [NBBO], 
regardless of size or time or (b) orders that establish a new NBBO 
on NOM's Order Book, but allow any user to manually override NOM as 
a default destination on an order-by-order basis'') (emphasis 
added).
    \10\ MARS Eligible Contracts include electronic Firm, Non-NOM 
Market Maker, Broker-Dealer, or Joint Back Office orders that add 
liquidity, excluding Mini Options. See NOM Rules at Chapter XV, 
Section 2(6); see also Notice, supra note 3, at 62213 n.7.
    \11\ At the time the Exchange initially submitted this proposal, 
the Exchange had three tiers of MARS Payments: $0.07 for ADV of 
2,500 Eligible Contracts; $0.09 for ADV of 5,000 Eligible Contracts 
(``Payment Tier 2''); and $0.11 for ADV of 10,000 Eligible Contracts 
(``Payment Tier 3''). See Notice, supra note 3, at 62213. The 
Commission notes that, as a result of recent modifications to MARS, 
the Exchange now has four tiers of MARS Payments, as well as 
different MARS Payments for penny pilot options and non-penny pilot 
options. See NOM Rules at Chapter XV, Section 2(6); see also MARS 
Amendment, supra note 9.
    \12\ See NOM Rules at Chapter XV, Section 2(6); see also Notice, 
supra note 3, at 62213.
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    Under the proposal, if a dual access client qualifies for NOM's 
MARS Payment Tier 2 in a given month, EA would credit the dual access 
client (or the dual access client's affiliate, if applicable) $22,000 
on its EA bill for the corresponding month.\13\ If a dual access client 
qualifies for NOM's MARS Payment Tier 3 in a given month, EA would 
credit the dual access client (or the dual access client's affiliate, 
if applicable) $40,000 on its EA bill for the corresponding month.\14\ 
This credit would be paid by EA, would not be transferable, and would 
offset transaction fees on EA.\15\ According to the Exchange, the 
purpose of this proposal is to lower prices to transact U.S. Treasury 
securities on EA in response to competitive forces in the Treasury 
markets, and to increase trading on NOM.\16\
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    \13\ See Notice, supra note 3, at 62213.
    \14\ See id.
    \15\ See id. at 62213 n.8.
    \16\ See id. at 62212-13.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2016-121 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
discussed above, under the proposal, EA would provide credits to dual 
access clients who meet certain volume thresholds on NOM. The Act 
requires that exchange rules provide for the equitable allocation of 
reasonable fees among members, issuers, and other persons using its 
facilities; that exchange rules not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; and 
that exchange rules do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. The 
Commission intends to assess whether the Exchange's proposal is 
consistent with these and other requirements of the Act.
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    \18\ Id.
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    The Commission believes it is appropriate to institute disapproval 
proceedings at this time in view of the legal and policy issues raised 
by the proposal. The sections of the Act applicable to the proposed 
rule change include:
     Section 6(b)(4) of the Act,\19\ which requires that the 
rules of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities.''
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    \19\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act,\20\ which requires that the 
rules of a national securities exchange be designed to, among other 
things, ``remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest'' and not be ``designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers.''
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    \20\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act,\21\ which requires that the 
rules of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate'' in furtherance of the 
purposes of the Act.
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    \21\ 15 U.S.C. 78f(b)(8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4, any request for an opportunity to 
make an oral presentation.\22\ Interested persons are invited to submit 
written data, views, and arguments regarding whether the proposal 
should be approved or disapproved by December 12, 2016. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal by December 27, 2016.
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    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    The Commission invites the written views of interested persons 
concerning whether the proposal is consistent with Sections 6(b)(4), 
6(b)(5), 6(b)(8), or any other provision of the Act, or the rules and 
regulations thereunder. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposal, in addition to any other comments they may wish to submit 
about the proposed rule change. In particular, the Commission seeks 
comment on the following:
    1. Do commenters agree with the Exchange's belief that the 
proposal: (a) Provides for the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuer and other persons 
using its facilities; (b) is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; and (c) 
will not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of the Act? Why or why not?
    2. What are commenters' views on the impact that the proposal would 
have on the current market structure? Please explain.
    3. What are commenters' views on the likely effect of the proposal 
on competition? Specifically, what are commenters' views on the likely 
effect on the fees, volume, and quality of trading on NOM, EA, and the 
platforms that compete with NOM or EA for volume? In providing an 
answer, please consider any effect on the structure and process of 
competition, including number of competitors and/or any exit

[[Page 83303]]

from the market that might arise from the proposal.
    4. What are commenters' views on how the proposal would affect NOM 
Participants and EA clients? Would the ``dual access'' requirement 
affect the number NOM Participants or EA clients?
    5. What are commenters' views on the impact of the proposal on NOM 
Participants who would meet the required MARS thresholds but are not 
dual access clients and thus would not be able to benefit from the 
credit on EA?
    6. What are commenters' views on the impact of the proposal on EA 
clients who are not NOM Participants and thus would not be eligible for 
the credits?
    7. What are commenters' views on how EA would likely recoup the 
cost of the proposed credit?
    8. What are commenters' views on whether the proposal would affect 
competitors to NOM and EA or clients of such competitors? Specifically, 
what are commenters' views on the impact of the proposal on exchanges 
that do not have affiliated broker-dealers/Alternative Trading Systems 
that transact securities not listed on a national securities exchange--
e.g., U.S. Treasury securities? Would the proposal lead to a decline in 
number of clients, or client volume for competitors?
    9. What are commenters' views on how the proposal would impact the 
incentives for existing exchanges or new entities to create multiple 
trading venues or broker-dealers/Alternative Trading Systems under one 
group?
    10. What are commenters' views on the impact the proposal would 
have, if any, on the trading of options orders across multiple options 
exchanges? Please explain. What are commenters' views on the impact the 
proposal would have, if any, on the best execution of investor orders, 
including the implicit costs of executing their orders (such as spreads 
and price impact)? Please explain.
    Commenters are requested to provide empirical data and other 
factual support for their views.
    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-2016-121 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-2016-121. 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-2016-121 and should 
be submitted on or before December 12, 2016. Rebuttal comments should 
be submitted by December 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27897 Filed 11-18-16; 8:45 am]
 BILLING CODE 8011-01-P