[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69489-69491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28545]
[[Page 69489]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63270; File No. SR-NASDAQ-2010-141]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Add New Rule 7014 To Enable NASDAQ Members To Qualify for a Monthly Fee
Credit
November 8, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 26, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ proposes to add new Rule 7014 (Investor Support Program) to
enable NASDAQ members to qualify for a monthly fee credit.
The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com, at NASDAQ's principal office, 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, NASDAQ included statements
concerning the purpose of, and basis for, the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below, and is set forth in Sections A, B, and C below. NASDAQ
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ is adding new Rule 7014 to establish an Investor Support
Program (``ISP''), which would enable NASDAQ members to earn a monthly
fee credit for providing additional liquidity to NASDAQ and increasing
the NASDAQ-traded volume of what are generally considered to be retail
and institutional investor orders in exchange-traded securities.\3\ The
goal of the ISP is to incentivize members to provide such targeted
liquidity to the Nasdaq Market Center.\4\ Maintaining and increasing
the proportion of orders in exchange-listed securities executed on a
registered exchange (rather than relying on any of the available off-
exchange execution methods) \5\ would help raise investors' confidence
in the fairness of their transactions and would benefit all investors
by deepening NASDAQ's liquidity pool, supporting the quality of price
discovery, promoting market transparency and improving investor
protection.\6\
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\3\ The liquidity would, as discussed below, emanate from
members that have a low order to execution ratio.
\4\ The Commission has recently expressed its concern that a
significant percentage of the orders of individual investors are
executed at over the counter (``OTC'') markets, that is, at off-
exchange markets; and that a significant percentage of the orders of
institutional investors are executed in dark pools. Securities
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594
(January 21, 2010) (Concept Release on Equity Market Structure,
``Concept Release''). See also Mary L. Schapiro, Strengthening Our
Equity Market Structure (Speech at the Economic Club of New York,
Sept. 7, 2010) (``Schapiro Speech,'' available on the Commission Web
site) (comments of Commission Chairman on what she viewed as a
troubling trend of reduced participation in the equity markets by
individual investors).
\5\ In the January 2010 Concept Release, the Commission noted
that dark pools and internalizing broker-dealers executed
approximately 25.4% of share volume. See Concept Release, Figure 6.
In her September 2010 speech, Chairman Schapiro referenced that
figure and the fact that it continued to grow: ``today, nearly 30
percent of volume in U.S.-listed equities is executed in venues that
do not display their liquidity or make it generally available to the
public. The percentage executed by these dark, non-public markets is
increasing nearly every month.'' Schapiro Speech.
\6\ The Commission has recognized the strong policy preference
under the Act in favor of price transparency and displayed markets.
The Commission published the Concept Release to invite public
comment on a wide range of market structure issues, including high
frequency trading and un-displayed, or ``dark,'' liquidity. See
Concept Release. Moreover, Chairman Schapiro identified ``two
concerns that go to the core of our equity market structure: First,
whether the quality of price discovery has declined, and second,
whether these changes in our market structure could undermine the
fair and level playing field essential to investor protection,
capital formation and vibrant capital markets generally.'' Schapiro
Speech.
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The first step for a NASDAQ member wishing to participate in the
ISP is to designate one or more of its NASDAQ ports for ISP use.\7\
Orders entered through ISP-designated ports will be used for ISP credit
calculations.
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\7\ Subsequent to initial port designation, a member may add or
remove designated ports for ISP use no later than the first trading
day of the month when the desired change is to become effective.
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Subsection (b) of Rule 7014 describes how the ISP credit will be
calculated. The ISP credit formula provides for a monthly credit of 3
cents per 100 shares of displayed liquidity provided through an ISP-
designated port to the extent that such liquidity results in an
increase (compared with August 2010) in the overall level of liquidity
that the member provides to NASDAQ measured as a proportion of the
consolidated share volume traded by all market participants across all
trading venues. To this end, a member's ``Baseline Participation
Ratio'' is determined by measuring the number of shares in liquidity-
providing orders entered by the member (through any NASDAQ port) and
executed on NASDAQ and dividing this number by the consolidated (across
all trading venues) share volume of System Securities \8\ traded in
August 2010.\9\ To determine whether a member added liquidity to NASDAQ
in a given month, NASDAQ would perform the same calculation on a
monthly basis for the then-current month and compare the resulting
ratio to the Baseline Participation Ratio. If the member's then-current
month's ratio is higher than the Baseline Participation Ratio, then the
member's ``Added Liquidity'' for that month would be calculated by
multiplying the difference between the two ratios by such month's
consolidated average daily share volume of System Securities traded
across all venues (if the result is a negative number, then Added
Liquidity would be deemed zero).\10\ To determine the amount of the ISP
credit, NASDAQ would multiply $0.0003 by the lower of: (1) The number
of shares of displayed liquidity provided in orders entered by the
member thorough its ISP-designated ports and executed in the Nasdaq
Market Center during the given month, or (2) the amount of Added
Liquidity for the given month. Any ISP credit issued pursuant to Rule
7014 will be in addition to (and will not replace) any other credit or
rebate for which a member may qualify.
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\8\ The term ``System Securities'' is defined as all securities
listed on NASDAQ and all securities subject to the Consolidated Tape
Association Plan and the Consolidated Quotation Plan. Rule 4751(b).
\9\ See Proposed Rule 7014(d)(2).
\10\ See Proposed Rule 7014(d)(1).
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Subsection (c) contains requirements designed to limit ISP credit
eligibility to targeted orders. This is accomplished by establishing a
maximum ratio (set at 10) of (i) liquidity-providing orders placed from
all of given member's ISP-designated ports to (ii) liquidity-providing
orders placed from such
[[Page 69490]]
member's ISP-designated ports and actually executed (at least
partially) in the Nasdaq Market Center. If in a given month this ratio
is 10 or higher for a given member (usually because the member
cancelled a large portion of the orders placed), then the member would
not receive ISP credit for that month. In calculating the ratio, NASDAQ
will exclude pegged, odd-lot and System Hours and Market Hours
Immediate-or-Cancel orders,\11\ and will not double-count in the event
of multiple partial executions of a single order.
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\11\ See Nasdaq Rule 4751(f)(4), (g)(3) and (h)(1) and (5).
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The rule sets 10 million shares daily on average as the minimum
qualifying volume of shares in executed liquidity-providing orders
entered from a member's ISP-designated ports. This is done to attract
firms with substantive amounts or retail and institutional order flow
that may provide such targeted liquidity to NASDAQ. If, in a given
month, this daily average is lower than 10 million shares, the member
would not qualify for ISP credit. It is expected that both the
execution ratio and the volume minimum would serve to encourage members
to enter orders that are likely to be executed.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\12\ in general, and with
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and issuers and other persons using any
facility or system which NASDAQ operates or controls, and it is
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market,
and, in general, to protect investors and the public interest. The rule
change establishes a program that enables NASDAQ members to earn a
monthly fee credit for increasing the NASDAQ-traded volume of what are
generally retail and institutional investor orders in exchange-traded
securities. The goal of the program is to encourage members to enter
such orders in the Nasdaq Market Center.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(4) and (5).
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While the program distinguishes among orders, such distinctions
``are not designed to permit unfair discrimination'' \14\ but, rather,
are intended to promote submission of liquidity-providing orders to
NASDAQ, which would benefit all NASDAQ members and all investors.
Maintaining and increasing the proportion of retail and institutional
orders in exchange-listed securities executed on a registered national
securities exchange (rather than relying on any of the available off-
exchange execution methods) would help raise investors' confidence in
the fairness of their transactions and would benefit all investors by
deepening NASDAQ's liquidity pool, supporting the quality of price
discovery, promoting market transparency and improving investor
protection.
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\14\ See Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
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Furthermore, setting a minimum monthly volume of eligible ISP
orders as a condition for any fee credit eligibility (and therefore
establishing a minimum threshold amount for any monthly credit) is not
designed to discriminate unfairly, but rather to attract targeted
retail and institutional investor liquidity. Likewise, the program is
consistent with the Act's requirement ``for the equitable allocation of
reasonable dues, fees, and other charges.'' \15\ As explained in the
immediately preceding paragraphs, members who choose to increase the
volume of ISP-eligible liquidity-providing orders that they submit to
NASDAQ would be benefitting all investors, and therefore an additional
credit, as contemplated in the proposed program, is equitable.
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\15\ See Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4).
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Finally, NASDAQ notes that the intense competition among several
national securities exchanges and numerous OTC venues effectively
guarantees that fees and credits for the execution of trades in NMS
securities remain equitable and are not unfairly discriminatory.\16\
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\16\ See, e.g., Concept Release (discusses the various venues
where trades are executed).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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.\17\ 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 necessary or appropriate in the public interest,
for the protection of investors, or 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.
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\17\ 15 U.S.C. 78s(b)(3)(a)(ii).
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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 e-mail to [email protected]. Please include
File Number SR-NASDAQ-2010-141 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2010-141. This
file number should be included on the subject line if e-mail 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, \18\ 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, on official business days between the hours of 10 a.m.
and
[[Page 69491]]
3 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-2010-141 and should be submitted
on or before December 3, 2010.
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\18\ The text of the proposed rule change is available on the
Commission's Web site at http://www.sec.gov/rules/sro.shtml.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28545 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P