[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]
[Notices]
[Pages 1201-1203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-90]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63628; File No. SR-NASDAQ-2010-154]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change by the NASDAQ Stock Market LLC
To Enhance the Investor Support Program
January 3, 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 December 21, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') 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 the self-regulatory
organization. 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 changes to the fee provisions of Rule 7014
(Investor Support Program) to enhance the Investor Support Program in
respect of: Certain assumed Baseline Participation Ratio values for
firms that did not add liquidity in August 2010; the addition of
liquidity through Indirect Order Flow; liquidity executed at or above
$1; and a certification provision.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing changes to the fee provisions of Rule
7014 to enhance the Investor Support Program in respect of: Certain
assumed Baseline Participation Ratio values for firms that did not add
liquidity in August 2010; the addition of liquidity through Indirect
Order Flow; liquidity executed at or above $1; and a certification
provision.
The Exchange established an Investor Support Program (``ISP'') that
enables 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 (``targeted
liquidity'').\3\ The goal of the ISP is to incentivize members to
provide such targeted liquidity to the NASDAQ Market Center.\4\ The
Exchange noted in the ISP Filing that 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) 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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\3\ For a detailed description of the Investor Support Program,
see Securities Exchange Act Release No. 63270 (November 8, 2010), 75
FR 69489 (November 12, 2010) (NASDAQ-2010-141) (notice of filing and
immediate effectiveness)(the ``ISP Filing''). See also Securities
Exchange Act Release No. 76505 (December 2, 2010), 75 FR 76505
(December 8, 2010) (NASDAQ-2010-153)(notice of filing and immediate
effectiveness regarding exclusion of partial trading days from
certain ISP calculations).
\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''). In the Concept Release, 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 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, and that 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).
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The Exchange now proposes several adjustments to the Investor
Support Program. The primary objective in making these adjustments is
to moderate the ability of members (firms), on a prospective basis,
from gaining ISP fee credits without effectively adding targeted
liquidity to NASDAQ. This proposal clearly furthers the ISP goal of
incentivizing members to provide targeted liquidity to the Exchange.
First, the ISP generally compares a member's Participation Ratio
for the current month to the same member's Participation Ratio in
August 2010 (known as the ``Baseline Participation Ratio'').\5\ This
ratio is determined by
[[Page 1202]]
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 \6\ traded in the given month.\7\
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\5\ The term ``Participation Ratio'' is defined as: For a given
member in a given month, the ratio of (i) the number of shares of
liquidity provided in orders entered by the member through any of
its NASDAQ ports and executed in the NASDAQ Market Center during
such month to (ii) the consolidated volume of shares of System
Securities in executed orders reported to all consolidated
transaction reporting plans by all exchanges and trade reporting
facilities during such month. Rule 7014(d)(4). Using the
consolidated volume language of subsection (d)(4)(ii), the term
``Consolidated Volume'' is defined as the consolidated volume of
shares of System Securities in executed orders reported to all
consolidated transaction reporting plans by all exchanges and trade
reporting facilities during such month. Rule 7014(d)(5). The term
Consolidated Volume is substituted for current consolidated volume
language throughout the rule.
\6\ 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).
\7\ See Proposed Rule 7014(d)(2).
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The Exchange recognizes that some current members may not be able
to establish a Baseline Participation Ratio for August 2010 (e.g., they
did not add liquidity in August, or were not members). For such
members, the Exchange proposes to add a provision that assumes a
specified value in the Participation Ratio for August 2010.
Specifically, the Exchange proposes new language in subsection (d)(2)
stating that in calculating the August 2010 Participation Ratio, if the
result is zero (no liquidity was added), the Baseline Participation
Ratio shall be deemed to be 0.485% (when rounded to three decimal
places \8\), which corresponds to an average daily volume (``adv'') of
35 million shares in August 2010 (the ``deemed ratio'').\9\ The
Exchange believes that 35 million adv is reasonable in light of the
daily trading volumes in the competitive equity trading market. The
Exchange believes further that the deemed ratio (which would be
uniformly applicable to all members that did not contribute liquidity
in August) is fair and equitable in that it should minimize such
members gaining an advantage over members that contributed liquidity in
August, and would not tend to unfairly exclude members adding targeted
liquidity to the Exchange from the ISP.
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\8\ The Exchange notes that while the Baseline Participation
Ratio is rounded to three decimal places in the rule for ease of
notation, for ISP billing purposes the Baseline Participation Ratio
will not be rounded in this manner.
\9\ The .485% Baseline Participation Ratio is calculated as
follows:
(22 * 35 million shares)/(August consolidated volume * 22).
There were 22 trading days in the month of August 2010. The
consolidated volume for August 2010 was 165.846 billion (rounded).
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Second, the Baseline Participation Ratio now captures the number of
shares of liquidity provided in orders that are entered by the member
directly through any of its NASDAQ ports and executed in the NASDAQ
Market Center in August 2010. A member might have provided liquidity to
NASDAQ, however, through means other than directly through its own
NASDAQ ports (e.g., indirectly thorough other members). The Exchange
proposes an amendment to capture this indirect liquidity (indirect
order flow) when establishing a member's Participation Ratio for the
month of August 2010. Specifically, the Exchange proposes new language
in subsection (d)(2) stating that in calculating the August 2010
Participation Ratio, the numerator shall be increased by the amount (if
any) of the member's August 2010 Indirect Order Flow.
Indirect Order Flow is defined in new subsection (d)(5), for
purposes of the rule, as the number of shares of liquidity provided in
orders entered into the NASDAQ Market Center at the member's direction
by another member with minimal substantive intermediation by such other
member and executed in the NASDAQ Market Center during such month.
NASDAQ will assess whether a member entering orders provided
substantive intermediation to another member based on how much
discretion the entering member had in selecting such key order
attributes as symbol, price, size and time in force.
The Exchange believes that including Indirect Order Flow when
calculating the August 2010 ratio should discourage (and properly
account for) members simply changing how, or through whom (e.g., via
aggregation) they send liquidity to the Exchange to gain ISP fee
payment without effectively increasing the amount of targeted liquidity
sent to the Exchange. This proposal, which is equally applicable to
all, is directly conducive to the goal of adding new liquidity to the
Exchange. As such, the Indirect Order Flow proposal is fair and
equitable to all members. Moreover, the Exchange believes that it is
decidedly non-discriminatory because it promotes accurate accounting of
flow from all sources, thus minimizing the ability of any particular
group of members from gaining an advantage over others.\10\
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\10\ The Exchange notes that the Indirect Order Flow proposal is
not discriminatory against anyone, but to the contrary affords the
Exchange a clearer picture of how all ISP participants provided flow
in August. The Exchange notes further that while the Baseline
Participation Ratio by definition always refers to August 2010,
Indirect Order Flow was not applied during the ISP's initial months
of operation (November and December) and will be applied
prospectively.
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Third, to determine the amount of the ISP credit pursuant to the
program, NASDAQ would multiply $0.0003 by the lower of: 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 the amount of Added Liquidity \11\
for the given month. The established goal of the ISP is to attract
certain targeted retail and institution liquidity. The Exchange
believes that this type of retail and institutional liquidity would
generally be executed at or above $1. The Exchange therefore proposes
to amend the definition of shares of displayed liquidity in subsection
(b)(1) to clarify that such liquidity must be executed at a price at or
above $1 in the NASDAQ Market Center in order to qualify for the ISP.
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\11\ The term ``Added Liquidity'' is defined as: For a given
member in a given month, the number of shares calculated by (i)
subtracting from such member's Participation Ratio for that month
the member's Baseline Participation Ratio, and then (ii) multiplying
the resulting difference by the average daily consolidated volume of
shares of System Securities in executed orders reported to all
consolidated transaction reporting plans by all exchanges and trade
reporting facilities during such month; provided that if the result
is a negative number, the Added Liquidity amount shall be deemed
zero. Rule 7014(d)(1). 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).
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Fourth, the Exchange adds a methodology by which members can
demonstrate their compliance with the requirements of Rule 7014 and the
ISP. The Exchange proposes to add new subsection (e) to state that a
member will certify to the reasonable satisfaction of the Exchange its
Baseline Participation Ratio and its compliance with any other sections
or requirements of this Rule if requested by NASDAQ. The Exchange
limits such certification, which would be applicable to all program
participants, to not more often that once a month during a member's
participation in the ISP. The Exchange believes that the certification
provision would particularly help to ensure that all ISP participants
may participate in the program on an equal, verifiable basis.
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
[[Page 1203]]
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.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(4) and (5).
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The Investor Support Program encourages members to add targeted
liquidity that is executed in the NASDAQ Market Center. The rule change
enhances the Investor Support Program by proposing minor changes
regarding certain assumed Participation Rate values for firms that did
not add liquidity in August 2010; the addition of liquidity through
Indirect Order Flow; liquidity executed at or above $1; and a
certification provision. The primary objective in making these
enhancements to the Investor Support Program is to minimize the ability
of members (firms), on a prospective basis, from gaining ISP fee
credits while effectively adding little or no targeted liquidity to
NASDAQ. The rule change proposals ``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. 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, the proposals enhance the goal of the ISP.
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 enhanced program, is equitable. 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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\14\ See Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
\15\ See Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4).
\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-2010-154 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-2010-154. 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 such 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-2010-154 and should be submitted on or before January 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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-90 Filed 1-6-11; 8:45 am]
BILLING CODE 8011-01-P