[Federal Register Volume 76, Number 25 (Monday, February 7, 2011)]
[Notices]
[Pages 6646-6648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2616]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63815; File No. SR-NASDAQ-2011-012]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Modify NASDAQ Options
Market Rules Chapter VII, Various Sections, Dealing With Market Maker
Obligations
February 1, 2011.
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 January 19, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by NASDAQ. 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 amend Chapter VII, Section 3, Continuing Market
Maker Registration, Section 5, Obligations of Market Makers, and
Section 6, Market Maker Quotations, of the NASDAQ rulebook for the
NASDAQ Options Market (``NOM'') to: (a) Permit Market Maker assignment
by option rather than by series; (b) adopt a $5 quotation
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spread parameter; and (c) amend the quoting requirement for Market
Makers as explained further below. These changes are scheduled to be
implemented on NOM on or about May 1, 2011; the Exchange will announce
the implementation schedule by Options Trader Alert, once the rollout
schedule, which will be based in part on NOM participants' readiness,
is finalized.
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 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. 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to strengthen Market
Maker obligations. The NASDAQ Options Market (``NOM''), the options
trading facility of The NASDAQ Stock Market LLC, has been fully
operational for over two years. During this time, NASDAQ has carefully
considered the role of Market Makers in the NOM marketplace and their
concomitant obligations.
An Options Market Maker is a Participant \3\ registered with NASDAQ
as a Market Maker.\4\ Market Makers on NOM have certain obligations
such as maintaining two-sided markets and participating in transactions
that are ``reasonably calculated to contribute to the maintenance of a
fair and orderly market.'' \5\ To register as a Market Maker, a
Participant must file a written application with Nasdaq Regulation,
which will consider an applicant's market making ability and other
factors it deems appropriate in determining whether to approve an
applicant's registration.\6\ All Market Makers are designated as
specialists on NOM for all purposes under the Act or rules
thereunder.\7\ The NOM Rules place no limit on the number of qualifying
entities that may become Market Makers.\8\ The good standing of a
Market Maker may be suspended, terminated, or withdrawn if the
conditions for approval cease to be maintained or the Market Maker
violates any of its agreements with NASDAQ or any provisions of the NOM
Rules.\9\
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\3\ The term ``Options Participant'' or ``Participant'' means a
firm or organization that is registered with the Exchange pursuant
to Chapter II of the NOM Rules for purposes of participating in
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or
``Nasdaq Options Market Maker.''
\4\ See NOM Rules, Chapter VII, Section 2.
\5\ See NOM Rules, Chapter VII, Section 5(a).
\6\ See NOM Rules, Chapter VII, Section 2(a).
\7\ See NOM Rules, Chapter VII, Section 2.
\8\ See NOM Rules, Chapter VII, Rule 2(c).
\9\ See NOM Rules, Chapter VII, Section 4(b).
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Currently, a Participant that has qualified as a Market Maker may
register to make markets in individual series of options.\10\ Instead,
NASDAQ proposes to require that Market Makers register by option. Thus,
once so registered, a NOM Market Maker is subject to the market making
obligations in all series of that option, except Quarterly Options
Series, adjusted option series and any options series until the time to
expiration for such series is less than nine months.\11\ In order to
effect this change, NASDAQ proposes to amend various provisions in
Sections 3, 5 and 6 of Chapter VII that currently refer to ``series.''
NASDAQ believes that registration by option rather than series should
spread the benefits of Market Maker quoting across all series of an
option, which should, in turn, result in higher quality markets.
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\10\ See NOM Rules, Chapter VII, Section 3(a).
\11\ See proposed NOM Rules, Chapter VII, Section 6(d)(i)(2).
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NASDAQ also proposes to adopt quotation spread parameters, also
known as bid/ask differentials, which establish the maximum permissible
width between a Market Maker's bid and an offer in a particular series.
Specifically, NASDAQ proposes to adopt a $5 wide quote spread parameter
for all options.\12\ Currently, NOM Market Makers are not subject to
quote spread parameters, such that the requirement for a two-sided
market can be met with a quotation that is very wide. NASDAQ believes
that a $5 quote spread parameter for NOM Market Makers should result in
narrower markets, and thereby, improve the quality of NOM's markets.
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\12\ See proposed NOM Rules, Chapter VII, Section 6(d)(ii).
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Lastly, NASDAQ proposes to amend its quotation requirement for
Market Makers. Today, NOM Market Makers are required to make markets on
a continuous basis in at least 75% of the options series in which the
Market Maker is registered. NASDAQ proposes to change this requirement
to 60% of the series; in those series, to satisfy this requirement with
respect to quoting a series, a Market Maker must quote such series 90%
of the trading day (as a percentage of the total number of minutes in
such trading day) \13\ or such higher percentage as the Exchange may
announce in advance.\14\ Nasdaq Regulation may consider exceptions to
the requirement to quote 90% (or higher) of the trading day based on
demonstrated legal or regulatory requirements or other mitigating
circumstances. Although the proposed 60% requirement is lower than the
current 75%, the Exchange is also proposing herein to adopt, for the
first time, a quote spread requirement and a requirement to register by
option rather than by series, which are considerable changes for Market
Makers. NASDAQ believes that this new 60% quoting requirement is needed
to balance the proposed, new quotation spread parameters.
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\13\ For example, on a normal trading day, which lasts 390
minutes (from 9:30 a.m. to 4 p.m.), quoting in a series would need
to be maintained for the total of at least 351 minutes in order to
meet the 90%-of-the-trading-day threshold. In a shortened trading
session, the total number of minutes the quote must be maintained
would be lowered proportionately (and the same percentage threshold
would apply).
\14\ Any such higher percentage would involve an appropriate
advance announcement, which would then be available on the
Exchange's Web site. In the illustration above, if the Exchange set
the threshold, for example, at 99% (rather than 90%), then on a
normal trading day, quoting would need to be maintained for 386
(rather than 351) minutes out of the total of 390 minutes.
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Under this proposal, NASDAQ recognizes that certain options series
present special challenges for Market Makers, due to nontraditional
terms. Accordingly, NASDAQ proposes that Quarterly Option Series,
adjusted option series, and any option series until the time to
expiration for such series is less than nine months be treated
differently. Specifically, under this proposal, Market Makers shall not
be subject to the continuous quoting obligation in Section 6(d)(1)
[sic] of NOM rules in any Quarterly Option Series, any adjusted option
series,\15\ and any option series until the time to expiration for such
series is less than nine months. Accordingly, the requirement to make
two-sided markets set forth in 5(a)(i) of NOM Rules shall not apply to
Market Makers respecting Quarterly Option Series, adjusted option
series, and series
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with an expiration of nine months or greater.
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\15\ For these purposes, an adjusted option series is an option
series wherein one option contract in the series represents the
delivery of other than 100 shares of underlying stock or Exchange-
Traded Fund Shares.
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In addition, if a technical failure or limitation of a system of
the Exchange prevents a Market Maker from maintaining, or prevents a
Market Maker from communicating to NOM, timely and accurate quotes, the
duration of such failure or limitation shall not be included in any of
the calculations under this subparagraph (i) with respect to the
affected quotes.
As a whole, the proposed amendments are intended to improve the
quality of NOM markets, while carefully considering the important role
of Market Makers in the NOM marketplace. Adopting quotation spread
parameters and requiring registration across the series of an option
are intended to encourage market making in more series; at the same
time, NASDAQ recognizes the need to balance these new, more burdensome
obligations with a lower series quoting percentage requirement. This
balance of obligations should help to make the market better for all
participants. NASDAQ believes that it has crafted a reasonable balance
in this proposal.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \16\ in general, and furthers the objectives of Section
6(b)(5) of the Act \17\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system, and, in general,
to protect investors and the public interest. The Exchange believes
that the proposal is appropriate and reasonable for Market Makers,
similar to the rules of other options exchanges (as specified below)
and should, at the same time, enhance the quality of the Exchange's
options markets.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be 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 Exchange 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-2011-012 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-2011-012. 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, 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 a.m. and 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-2011-012 and should be submitted on or before February 28, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-2616 Filed 2-4-11; 8:45 am]
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