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Notice

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Market Access and Routing Subsidy Program

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Start Preamble November 7, 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 October 31, 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.

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

The Exchange proposes to amend the Exchange's transaction fees at Chapter XV, Section 2 entitled “NASDAQ Options Market—Fees and Rebates,” which governs pricing for Nasdaq Participants using the NASDAQ Options Market (“NOM”), Nasdaq's facility for executing and routing standardized equity and index options. The Exchange proposes to amend its subsidy program, the Market Access and Routing Subsidy or “MARS,” for NOM Participants that provide certain order routing functionalities [3] to other NOM Participants and/or use such functionalities themselves.

While changes to the Pricing Schedule pursuant to this proposal are effective upon filing, the Exchange has designated these changes to be operative on November 1, 2016.

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

NOM proposes to amend the MARS subsidy program which pays a subsidy to NOM Participants that provide certain order routing functionalities to other NOM Participants and/or use such functionalities themselves. Generally, under MARS, the Exchange pays participating NOM Participants to subsidize their costs of providing routing services to route orders to NOM. The Exchange believes that MARS will continue to attract higher volumes of electronic equity and ETF options volume to the Exchange from non-NOM Start Printed Page 79537Participants as well as NOM Participants.

The Exchange proposes to amend Chapter XV, Section 2(6) to: (1) Provide another method to qualify for MARS System Eligibility; (2) expand the MARS Payment tiers; and (3) make clarifying changes to the rule text.

Amendment to MARS System Eligibility

Today, to qualify for MARS, a NOM Participant's routing system (hereinafter “System”) is required to meet certain criteria. Specifically the Participant's System is 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. The NOM Participant's System would also need 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 the default destination on an order-by-order basis.

The Exchange requires NOM Participants desiring to participate in MARS [4] to complete a form, in a manner prescribed by the Exchange, and reaffirm their information on a quarterly basis to the Exchange. Any NOM Participant is permitted to apply for MARS, provided the above-referenced requirements are met, including a robust and reliable System. The Participant is solely responsible for implementing and operating its System.

The Exchange proposes to amend the requirements for MARS System Eligibility to continue to require the Participant's System 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. In the alternative, the Exchange proposes to permit a Participant to be eligible if the Participant's System causes NOM to be the one of the top three default destination exchanges for orders that establish a new NBBO on NOM's Order Book. The NOM Participant may become eligible for MARS System Eligibility by complying with one of the two options proposed herein.

With respect to the new language, an example would be if the national best bid was 10 and national best offer was 20 and a NOM Participant bid 15 and that quote established a new NBBO on NOM's Order Book, that activity would also be considered eligible. The Exchange believes that this alternative method to qualify for MARS System Eligibility will further incentivize NOM Participants to provide liquidity at the NBBO on NOM to qualify for MARS.

Amendment to MARS Payment

Today, NOM Participants that have System Eligibility and have routed the requisite number of Eligible Contracts daily in a month (Average Daily Volume), which were executed on NOM, are entitled to a MARS Payment. For the purpose of qualifying for the MARS Payment, Eligible Contracts may include Firm,[5] Non-NOM Market Maker,[6] Broker-Dealer [7] or Joint Back Office or “JBO” [8] equity option orders that add liquidity and are electronically delivered and executed.[9]

Today, the Exchange pays the following MARS Payments according to Average Daily Volume (“ADV”) [10] submitted on NOM:

TiersAverage Daily Volume (“ADV”)MARS payment
12,500$0.07
25,0000.09
310,0000.11

Also, NOM Participants that qualify for Customer and Professional Penny Pilot Options Rebate to Add Liquidity Tier 8 in Chapter XV, Section 2(1) will 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. The specified MARS Payment is paid on all executed Eligible Contracts that add liquidity, which are routed to NOM through a participating NOM Participant's System and meet the requisite Eligible Contracts ADV. No payment will be made with respect to orders that are routed to NOM, but not executed.

The Exchange proposes to add a new Tier 4 with an ADV of 20,000 contracts and pay a MARS Payment of $0.15 per contract. The Exchange also proposes to rename the aforementioned tier 4 payment along with the current tier 1 through 3 payments as MARS Payment (Penny). The three existing payment tiers, along with the aforementioned new tier 4 payment tier of $0.15 per contract would be paid for Penny Pilot Options transactions that qualify for the MARS Payment tier program.

Additionally, the Exchange proposes 4 new tiers for Non-Penny Pilot Options transactions as follows: The 4 new tiers for MARS Payment (Non-Penny) shall be: Tier 1 with an ADV of 2,500 contracts would pay $0.15 per contract, tier 2 with an ADV of 5,000 contracts would pay $0.20 per contract, tier 3 with an ADV of 10,000 would pay $0.30 per contract and tier 4 with an ADV of 20,000 contracts would pay $0.50 per contract. The Exchange would continue to pay an additional $0.09 per contract in addition to any MARS Payment tier on MARS Eligible Contracts in a given month on the Non-Penny Pilot Options transactions, provided the NOM Participant qualified for the Customer and Professional Penny Pilot Options Rebate to Add Liquidity Tier 8 in Chapter XV, Section 2(1). The Exchange believes that MARS will continue to attract higher volumes of electronic equity and ETF options volume to the Exchange from non-NOM Participants as well as NOM Participants. This amendment may attract additional Non-Penny Pilot Options volume.Start Printed Page 79538

Clarifying Amendments

Today, a Participant will not be entitled to receive any other revenue from the Exchange for the use of its System, specifically with respect to orders routed to NOM. The Exchange believes that the MARS Payment will subsidize the costs of NOM Participants in providing the routing services. The Exchange proposes to make clear that Participant will not be entitled to receive any other revenue for the use of its System from the Exchange. The Exchange believes this new rule text provides clarity. The Exchange also proposes to add a missing period into the rule text.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act,[11] in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,[12] in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among Participants 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.

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.” [13]

Likewise, in NetCoalition v. Securities and Exchange Commission[14] (“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.[15] 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.” [16]

Further, “[n]o one disputes that competition for order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market system, buyers and sellers of securities, and the broker-dealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution'; [and] `no exchange can afford to take its market share percentages for granted' because `no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers'. . .. ” [17] 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.

Amendment to MARS System Eligibility

The Exchange's proposal to amend the requirements for MARS System Eligibility to continue to permit in the alternative for a Participant to be eligible if the Participant's System causes NOM to be the one of the top three default destination exchanges for orders that establish a new NBBO on NOM's Order Book is reasonable because the amendment will continue to incentivize NOM Participants to quote at the NBBO on NOM to qualify for MARS. The Exchange believes that requiring NOM Participants to maintain their Systems according to the various requirements set forth by the Exchange in order to qualify for MARS is reasonable because the Exchange seeks to encourage market participants to send higher volumes of orders to NOM, which will contribute to the Exchange's depth of book as well as to the top of book liquidity. MARS is designed to enhance the competitiveness of the Exchange, particularly with respect to those exchanges that offer their own front-end order entry system or one they subsidize in some manner.[18] The Exchange also notes that the Chicago Board of Options Exchange, Inc. (“CBOE”) currently offers a similar Order Routing Subsidy (“ORS”), which, similar to the current proposal, allows CBOE Participants to enter into subsidy arrangements with CBOE Trading Permit Holders (“TPHs”) that provide certain order routing functionalities to other CBOE TPHs and/or use such functionalities themselves.[19]

The Exchange's proposal to amend the requirements for MARS System Eligibility to further permit, in the alternative, for a Participant to be eligible if the Participant's System causes NOM to be the one of the top three default destination exchanges for orders that establish a new NBBO on NOM's Order Book is equitable and not unfairly discriminatory because these requirements will uniformly apply to all Participants desiring to qualify for MARS.

Amendments to MARS Eligible Contracts

The Exchange's proposal to add a new Tier 4 with an ADV of 20,000 contracts and pay a MARS Payment of $0.15 per contract and designate all remaining pricing as Penny Pilot Options transactions pricing and adopt new pricing for Non-Penny Pilot Options volume is reasonable because the amendments will attract higher volumes of electronic equity and ETF options volume to the Exchange, which will benefit all NOM Participants by offering greater price discovery, increased transparency, and an increased opportunity to trade on the Exchange. The expanded MARS Payments should enhance the competitiveness of the Exchange, particularly with respect to those exchanges that offer their own front-end order entry system or one they subsidize in some manner. The amendment to add Tier 4 will incentivize NOM Participants to achieve an even higher Penny Pilot Options rebate, provided the NOM Participant is eligible for MARS. Further, the tier structure will allow NOM Participants to price their services at a level that will enable them to attract order flow from market participants who would otherwise utilize an existing front-end order entry mechanism offered by the Exchange's competitors instead of incurring the cost in time and money to develop their own internal systems to be able to deliver orders directly to the Exchange's System.

The Exchange's proposal to add a new Tier 4 with an ADV of 20,000 contracts and pay a MARS Payment of $0.15 per contract and designate all remaining pricing as Penny Pilot Options transactions pricing and adopt new pricing for Non-Penny Pilot Options volume is equitable and not unfairly Start Printed Page 79539discriminatory because the Exchange will uniformly pay all NOM Participants the rebates specified in the proposed MARS Payment tiers provided the NOM Participant has executed the requisite number of Eligible Contracts. Moreover, the Exchange believes that the proposed MARS Payments offered by the Exchange are equitable and not unfairly discriminatory because any qualifying NOM Participant that offers market access and connectivity to the Exchange and/or utilize such functionality themselves may earn the MARS Payment for all Eligible Contracts.

The Exchange's proposal to adopt new Non-Penny Pilot Options MARS Payments tiers with higher rebates as compared to the Penny Pilot Options MARS Payment tiers is reasonable because the amendments will attract higher volumes of electronic equity and ETF options volume to the Exchange, which will benefit all NOM Participants by offering greater price discovery, increased transparency, and an increased opportunity to trade on the Exchange. The expanded MARS Payments should enhance the competitiveness of the Exchange, particularly with respect to those exchanges that offer their own front-end order entry system or one they subsidize in some manner. Today the Exchange bifurcates Penny and Non-Penny Options pricing. The Exchange pays higher Non-Penny Pilot Options rebates as compared to Penny Pilot Options rebates.[20] Penny Pilot Options are more liquid and traditionally are assessed lower fees and paid lower rebates. The Exchange believes it is reasonable to pay higher rebates for Non-Penny Pilot Options which are assessed higher transaction fees on the Exchange.[21]

The Exchange's proposal to adopt new Non-Penny Pilot Options MARS Payments tiers with higher rebates as compared to the Penny Pilot Options MARS Payment tiers is equitable and not unfairly discriminatory because the Exchange will uniformly pay all NOM Participants the MARS Payments specified in the proposed MARS Payment tiers for Penny and Non-Penny Pilot Options provided the NOM Participant has executed the requisite number of Eligible Contracts.

Clarifying Amendments

The Exchange's proposal to amend the rule text to make clear that a Participant will not be entitled to receive any other revenue for the use of its System from the Exchange and add a missing period into the rule text is reasonable, equitable and not unfairly discriminatory because it will clarify existing rule text for all NOM Participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In terms of inter-market competition, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive, or rebate opportunities available at other venues to be more favorable. In such an environment, the Exchange must continually adjust its fees to remain competitive with other exchanges and with alternative trading systems that have been exempted from compliance with the statutory standards applicable to exchanges. Because competitors are free to modify their own fees in response, and because market participants may readily adjust their order routing practices, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited. 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.

Amendment to MARS System Eligibility

The Exchange's proposal to amend the requirements for MARS System Eligibility to further permit, in the alternative, for a Participant to be eligible if the Participant's System causes NOM to be the one of the top three default destination exchanges for orders that establish a new NBBO on NOM's Order Book does not impose an undue burden on intra-market competition because these requirements will uniformly apply to all Participants desiring to qualify for MARS.

Amendments to MARS Eligible Contracts

The Exchange's proposal to add a new Tier 4 with an ADV of 20,000 contracts and pay a MARS Payment of $0.15 per contract and designate this, along with all remaining pricing as Penny Pilot Options transactions pricing and adopt new pricing for Non-Penny Pilot Options volume does not impose an undue burden on intra-market competition because the Exchange will uniformly pay all NOM Participants the rebates specified in the proposed MARS Payment tiers provided the NOM Participant has executed the requisite number of Eligible Contracts. Moreover, the Exchange believes that the proposed MARS Payments offered by the Exchange are equitable and not unfairly discriminatory because any qualifying NOM Participant that offers market access and connectivity to the Exchange and/or utilizes such functionality themselves may earn the MARS Payment for all Eligible Contracts.

The Exchange's proposal to adopt new Non-Penny Pilot Options MARS Payments tiers with higher rebates as compared to the Penny Pilot Options MARS Payment tiers does not impose an undue burden on intra-market competition because the Exchange will uniformly pay all NOM Participants the MARS Payments specified in the proposed MARS Payment tiers for Penny and Non-Penny Pilot Options provided the NOM Participant has executed the requisite number of Eligible Contracts.

Clarifying Amendments

The Exchange's proposal to amend the rule text to make clear that a Participant will not be entitled to receive any other revenue for the use of its System from the Exchange and add a missing period into the rule text does not impose an undue burden on intra-market competition because it will clarify existing rule text for all NOM 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.

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.[22]

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 Start Printed Page 79540Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-149. 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-2016-149 and should be submitted on or before December 5, 2016.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[23]

Brent J. Fields,

Secretary.

End Signature End Preamble

Footnotes

3.  The order routing functionalities permit a NOM Participant to provide access and connectivity to other Participants as well as utilize such access for themselves. The Exchange notes that one NOM Participant is eligible for payments under MARS, while another NOM Participant might potentially be liable for transaction charges associated with the execution of the order, because those orders were delivered to the Exchange through a NOM Participant's connection to the Exchange and that Participant qualified for the MARS Payment.

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4.  For example, a NOM Participant that desires to qualify for MARS in November must complete the form and submit it to the Exchange no later than the last business day of November. Such form will require the NOM Participant to identify the NOM Participant seeking the MARS Payment and must list, among other things, the connections utilized by the NOM Participant to provide Exchange access to other NOM Participants and/or itself. MARS Payments would be made one month in arrears (i.e ., a MARS Payment earned for activity in November would be paid to the qualifying NOM Participant in December), as is the case with all other transactional payments and assessments made by the Exchange.

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5.  The term “Firm” or (“F”) applies to any transaction that is identified by a Participant for clearing in the Firm range at OCC.

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6.  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.

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7.  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.

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8.  The term “Joint Back Office” or “JBO” applies to any transaction that is identified by a Participant for clearing in the Firm range at OCC and is identified with an origin code as a JBO. A JBO will be priced the same as a Broker-Dealer as of September 1, 2014. A JBO participant is a Participant that maintains a JBO arrangement with a clearing broker-dealer (“JBO Broker”) subject to the requirements of Regulation T Section 220.7 of the Federal Reserve System as further discussed in Chapter XIII, Section 5.

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9.  Eligible Contracts do not include Mini-Option orders. Mini Options are further specified in Chapter XV, Section 2(4).

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10.  Average Daily Volume is all Eligible Contracts daily in a month aggregating Penny and Non-Penny Pilot Options.

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12.  15 U.S.C. 78f(b)(4) and (5).

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13.  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (“Regulation NMS Adopting Release”).

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14.  NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).

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15.  See NetCoalition, at 534-535.

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16.  Id. at 537.

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17.  Id. at 539 (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).

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18.  See, e.g., supra note 10; Securities Exchange Act Release No. 34-54121 (July 10, 2006), 71 FR 40566 (July 17, 2006) (SR-ISE-2006-31) (describing PrecISE, which is a front-end, order entry application for trading options utilized by International Securities Exchange LLC).

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19.  See CBOE's Fees Schedule. CBOE's program permits both CBOE Participants and CBOE non-Participants to be eligible for a rebate. CBOE Participants are eligible to receive exchange transaction fees on transactions that earn a non-CBOE Participant a subsidy payment.

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20.  See NOM Rules at Chapter XV, Section 2(1).

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22.  15 U.S.C. 78s(b)(3)(A)(ii).

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[FR Doc. 2016-27235 Filed 11-10-16; 8:45 am]

BILLING CODE 8011-01-P