Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval to Proposed Rule Change, as Modified by Amendment No. 1, To Establish the Retail Price Improvement Program on a Pilot Basis until 12 Months From the Date of Implementation, 12397-12402 [2013-04096]
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Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Notices
available publicly. All submissions
should refer to File Number SR–NYSE–
2013–07 and should be submitted on or
before March 15, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–04092 Filed 2–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68937; File No. SR–
NASDAQ–2012–129]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Granting Approval to Proposed Rule
Change, as Modified by Amendment
No. 1, To Establish the Retail Price
Improvement Program on a Pilot Basis
until 12 Months From the Date of
Implementation
February 15, 2013.
I. Introduction
On November 19, 2012, The NASDAQ
Stock Market LLC (the ‘‘Exchange’’ or
‘‘NASDAQ’’) 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 to
establish a Retail Price Improvement
Program (‘‘Program’’) on a pilot basis for
a period of 12 months from the date of
implementation, if approved. The
proposed rule change was published for
comment in the Federal Register on
December 7, 2012.3 The Commission
did not receive any comments on the
proposed rule change. On February 13,
2013, the Exchange filed Amendment
No. 1 to its proposal.4
In connection with the proposal, the
Exchange requested exemptive relief
from Rule 612 of Regulation NMS,5
which, among other things, prohibits a
national securities exchange from
57 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 68336
(December 3, 2012), 77 FR 73097 (SR–NASDAQ–
2012–129) (‘‘Notice’’).
4 In Amendment No. 1, the Exchange proposes to
clarify that, to qualify as a ‘‘Retail Order,’’ a
‘‘riskless principal’’ order must satisfy the criteria
for riskless principal orders set forth in FINRA Rule
5320.03. Because the changes made in Amendment
No. 1 do not materially alter the substance of the
proposed rule change or raise any novel regulatory
issues, Amendment No. 1 is not subject to notice
and comment.
5 17 CFR 242.612 (‘‘Sub-Penny Rule’’).
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accepting or ranking orders priced
greater than $1.00 per share in an
increment smaller than $0.01.6 On
January 14, 2013, the Exchange
submitted a letter requesting that the
staff of the Division of Trading and
Markets not recommend any
enforcement action under Rule 602 of
Regulation NMS (‘‘Quote Rule’’) based
on the Exchange’s and its Members’
participation in the Program.7
This order approves the proposed rule
change and grants the exemption from
the Sub-Penny Rule sought by the
Exchange in relation to the proposed
rule change.
II. Description of the Proposal
The Exchange is proposing a 12month pilot program to attract
additional retail order flow to the
Exchange, while also providing the
potential for price improvement to such
retail order flow. The Program would be
limited to trades occurring at prices
equal to or greater than $1.00 per share.8
All Regulation NMS securities traded on
the Exchange would be eligible for
inclusion in the Program.
Under the Program, a new class of
market participants called Retail
Member Organizations (‘‘RMOs’’) 9
would be eligible to submit certain retail
order flow (‘‘Retail Orders’’) to the
Exchange. All Exchange Members
would be permitted to provide potential
price improvement for Retail Orders in
the form of designated non-displayed
interest, called a Retail Price
Improvement Order (‘‘RPI Order’’ or
‘‘RPI interest’’), that is priced more
aggressively than the Protected National
Best Bid or Offer (‘‘Protected NBBO’’) 10
6 See Letter from Jeffrey Davis, Deputy General
Counsel, The NASDAQ Stock Market LLC, to
Elizabeth M. Murphy, Secretary, Commission, dated
November 19, 2012 (‘‘Request for Sub-Penny Rule
Exemption’’).
7 See Letter from Jeffrey Davis, Deputy General
Counsel, The NASDAQ Stock Market LLC, to John
Ramsay, Division of Trading and Markets,
Commission, dated January 14, 2013.
8 The Exchange notes that certain orders
submitted to the Program designated as eligible to
interact with liquidity outside of the Program—
Type 2 Retail Orders, discussed below—could
execute at prices below $1.00 if they do in fact
execute against liquidity outside of the Program.
9 A RMO would be a Member (or a division
thereof) that has been approved by the Exchange to
submit Retail Orders. See Nasdaq Rule 4780. A
‘‘Member’’ is any registered broker or dealer that
has been admitted to membership in the Exchange.
See Nasdaq Rule 0120(i).
10 The terms Protected Bid and Protected Offer are
defined in Rule 600(b)(57) of Regulation NMS. 17
CFR 242.600(b)(57). The Exchange represents that,
generally, the Protected Bid and Protected Offer,
and the national best bid (‘‘NBB’’) and national best
offer (‘‘NBO,’’ together with the NBB, the ‘‘NBBO’’),
will be the same. However, it further represents that
a market center is not required to route to the NBB
or NBO if that market center is subject to an
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12397
by at least $0.001 per share. When RPI
interest priced at least $0.001 per share
better than the Protected Bid or
Protected Offer for a particular security
is available in the system, the Exchange
would disseminate an identifier, known
as the Retail Liquidity Identifier,
indicating that such interest exists. A
Retail Order would interact, to the
extent possible, with available contraside RPI Orders.11
The Exchange represents that its
proposed rule change is based on rules
recently adopted by other exchanges.
The NASDAQ proposal is virtually
identical to BATS Y-Exchange Rule
11.24, which sets forth the BATS YExchange’s Retail Price Improvement
Program.12 It is also highly similar to
New York Stock Exchange LLC’s
(‘‘NYSE’’) Rule 107C, which governs
NYSE’s Retail Liquidity Program,13 with
three distinctions. First, the NYSE’s
Retail Liquidity Program creates a
category of members, Retail Liquidity
Providers, who are required to maintain
a retail price-improving order that
betters the protected best bid or offer at
least 5% of the trading day in each
assigned security and who receive lower
execution fees as a result. Under the
NASDAQ proposal, the Exchange would
not create such a category of Members.
Second, NASDAQ’s proposal would
permit executions in all cases against
resting RPI Orders and, additionally,
other non-displayed liquidity resting on
the Exchange’s System.14 In contrast,
exception under Regulation NMS Rule 611(b)(1) or
if such NBB or NBO is otherwise not available for
an automatic execution. In such case, the Exchange
states that the Protected NBBO would be the bestpriced protected bid or offer to which a market
center must route interest pursuant to Rule 611 of
Regulation NMS.
11 As explained further below, the Exchange has
proposed two types of Retail Orders, one of which
could execute against other interest if it was not
completely filled by contra-side RPI Interest or
other price-improving liquidity. All Retail Orders
would first execute against available contra-side RPI
Orders or other price-improving liquidity. Any
remaining portion of the Retail Order would then
either cancel, be executed as an immediate-orcancel order, or be routed to another market for
execution, depending on the type of Retail Order.
12 See Securities Exchange Act Release No. 68303
(November 27, 2012), 77 FR 71652 (December 3,
2012) (SR–BYX–2012–019) (‘‘BATS RPI Approval
Order’’).
13 See Securities Exchange Act Release No. 67347
(July 3, 2012), 77 FR 40673 (July 10, 2012) (SR–
NYSE–2011–55; SR–NYSEAmex–2011–84) (‘‘NYSE
RLP Approval Order’’). In the RLP Approval Order,
the Commission also approved a Retail Liquidity
Program for NYSE Amex LLC (now known as NYSE
MKT LLC) (‘‘NYSE MKT’’).
14 The Exchange notes that other price improving
liquidity may include, but is not limited to: booked
non-displayed orders with a limit price that is more
aggressive than the then-current NBBO; midpointpegged orders (which are by definition nondisplayed and priced more aggressively than the
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pursuant to NYSE Rule 107C(k)(1), a
Type 1-designated Retail Order, ‘‘will
interact only with available contra-side
Retail Price Improvement Orders and
will not interact with other available
contra-side interest in Exchange
systems.’’ 15 Finally, under the NYSE’S
Retail Liquidity Program, Retail Orders
execute at the single price at which the
order will be fully executed. Pursuant to
NASDAQ’s proposal, Retail Orders
execute at multiple price levels rather
than a single price level.16
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Types of Orders and Identifier
A Retail Order would be an agency or
riskless principal 17 order that originates
from a natural person and is submitted
to the Exchange by a RMO, provided
that no change is made to the terms of
the order with respect to price (except
in the case of a market order being
changed to a marketable limit order) or
side of market and the order does not
originate from a trading algorithm or
any other computerized methodology.
As discussed in greater detail below,
Retail Orders may be designated as Type
1 or Type 2. Retail Orders, regardless of
Type, may be entered in sizes that are
odd lots, rounds lots, or mixed lots.
An RPI Order would be non-displayed
liquidity on the Exchange that is priced
more aggressively than the Protected
NBBO by at least $0.001 per share and
that is identified as an RPI Order in a
manner prescribed by the Exchange. RPI
interest can be priced either as an
explicitly priced limit order or
implicitly priced as relative to the
NBBO with an offset of at least $0.001.
The price of an RPI Order with an offset
would be determined by a Member’s
entry of the following into the
Exchange: (1) RPI buy or sell interest; (2)
an offset from the Protected NBBO, if
any; and (3) a ceiling or floor price. RPI
Orders submitted with an offset would
NBBO); non-displayed orders pegged to the NBBO
with an aggressive offset. Orders that do not
constitute other price improving liquidity include,
but are not limited to: orders with a time-in-force
instruction of IOC; displayed orders; limit orders
priced less aggressively than the NBBO.
15 Additionally, pursuant to NYSE Rules
107C(k)(2) and 107C(k)(3), a Type 2-designated
Retail Order and a Type 3-designated Retail Order
can interact with other non-RPI interest in the
NYSE systems; however, such interaction only
occurs after a Retail Order first executes against RPI
Orders.
16 See Notice, supra note 3, 77 FR at 73100–01
(explaining the three distinctions in detail).
17 In order to qualify as a ‘‘Retail Order,’’ a
‘‘riskless principal’’ order must satisfy the criteria
set forth in FINRA Rule 5320.03. RMOs that submit
riskless principal orders as Retail Orders must
maintain supervisory systems to reconstruct such
orders in a time-sequenced manner, and the RMOs
must submit reports contemporaneous with the
execution of the facilitated orders that identify such
trades as riskless principal.
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be similar to other peg orders available
to Members in that the order is tied or
‘‘pegged’’ to a certain price, and would
have its price automatically set and
adjusted upon changes in the Protected
NBBO, both upon entry and any time
thereafter.
RPI Orders in their entirety (the buy
or sell interest, the offset, and the
ceiling or floor) will remain nondisplayed. The Exchange will also allow
Members to enter RPI Orders which
establish the exact limit price, which is
similar to a non-displayed limit order
currently accepted by the Exchange
today, except the Exchange will accept
sub-penny limit prices on RPI Orders in
increments of $0.001.18 The Exchange
will monitor whether RPI buy or sell
interest, adjusted by any offset and
subject to the ceiling or floor price, is
eligible to interact with incoming Retail
Orders.
When RPI interest priced at least
$0.001 better than the Exchange’s
Protected Bid or Protected Offer for a
particular security is available in the
System, the Exchange would
disseminate an identifier, known as the
Retail Liquidity Identifier, indicating
that such interest exists. The Exchange
would implement the Program in a
manner that allowed the dissemination
of the identifier through consolidated
data streams (i.e., pursuant to the
Consolidated Tape Association Plan/
Consolidated Quotation Plan (‘‘CTA/CQ
Plan’’) for Tape A and Tape B securities,
and the Nasdaq UTP Plan for Tape C
securities as well as through proprietary
Exchange data feeds). The Retail
Liquidity Identifier would reflect the
symbol and the side (buy or sell) of the
RPI Order, but it would not include the
price or size. In particular, the
consolidated quoting outputs would
include a field for codes related to the
Retail Liquidity Identifier. The codes
will indicate RPI interest that is priced
better than the Protected Bid or
Protected Offer by at least the minimum
level of price improvement as required
by the Program.
Retail Member Organizations
In order to become a RMO, a Member
must conduct a retail business or handle
retail orders on behalf of another brokerdealer. Any Member that wishes to
obtain RMO status would be required to
submit: (1) An application form; (2) an
18 As noted above, supra note 6 and
accompanying text, in connection with the
Program, the Exchange requested exemptive relief
from the Sub-Penny Rule of Regulation NMS,
which, among other things, prohibits a national
securities exchange from accepting or ranking
orders priced greater than $1.00 per share in an
increment smaller than $0.01.
PO 00000
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attestation, in a form prescribed by the
Exchange, that any order submitted by
the Member as a Retail Order would
meet the qualifications for such orders
under proposed Nasdaq Rule 4780(b);
and (3) supporting documentation
sufficient to demonstrate the retail
nature and characteristics of the
applicant’s order flow.19 If the Exchange
disapproves the application, it would
provide a written notice to the Member.
The disapproved applicant could appeal
the disapproval as provided below and/
or re-apply 90 days after the disapproval
notice is issued by the Exchange. An
RMO also could voluntarily withdraw
from such status at any time by giving
written notice to the Exchange.
The Exchange would require an RMO
to have written policies and procedures
reasonably designed to assure that it
will only designate orders as Retail
Orders if all the requirements of a Retail
Order are met. Such written policies
and procedures would have to require
the Member to exercise due diligence
before entering a Retail Order to assure
that entry as a Retail Order is in
compliance with the proposed rule, and
monitor whether orders entered as
Retail Orders meet the applicable
requirements. If the RMO represents
Retail Orders from another broker-dealer
customer, the RMO’s supervisory
procedures must be reasonably designed
to assure that the orders it receives from
such broker-dealer customer that it
designates as Retail Orders meet the
definition of a Retail Order. The RMO
must obtain an annual written
representation, in a form acceptable to
the Exchange, from each broker-dealer
customer that sends it orders to be
designated as Retail Orders that entry of
such orders as Retail Orders will be in
compliance with the requirements of
this rule, and monitor whether its
broker-dealer customer’s Retail Order
flow continues to meet the applicable
requirements.20
Retail Order Designations
Under proposed Nasdaq Rule 4780(f),
a RMO submitting a Retail Order could
choose one of two designations dictating
how it would interact with available
19 For example, a prospective RMO could be
required to provide sample marketing literature,
Web site screenshots, other publicly disclosed
materials describing the retail nature of their order
flow, and such other documentation and
information as the Exchange may require to obtain
reasonable assurance that the applicant’s order flow
would meet the requirements of the Retail Order
definition.
20 The Exchange represents that it or another selfregulatory organization on behalf of the Exchange
will review a RMO’s compliance with these
requirements through an exam-based review of the
RMO’s internal controls. See Notice, supra note 3,
77 FR at 73099 n.7.
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Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Notices
contra-side interest. First, a Retail Order
could interact only with available
contra-side RPI interest and other priceimproving liquidity. The Exchange
would label this a Type 1 Retail Order
and such orders would not interact with
available non-price-improving, contraside interest in Exchange systems or
route to other markets. Portions of a
Type 1 Retail Order that are not
executed would be cancelled
immediately and automatically.
Second, a Retail Order could interact
first with available contra-side RPI
Orders and other price-improving
liquidity, and any remaining portion
would be eligible to interact with other
interest in the System and, if designated
as eligible for routing, would route to
other markets in compliance with
Regulation NMS and pursuant to
Nasdaq Rule 4758. The shares
remaining from a Type 2-designated
Retail Order that do not fully execute
against contra-side RPI Orders or other
price improving liquidity, if any, would
execute against other liquidity available
on the Exchange or be routed to other
market centers for execution. The
remaining unexecuted portion would
then be cancelled.
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Priority and Allocation
Under proposed Nasdaq Rule 4780(g),
the Exchange would follow price-time
priority, ranking RPI interest in the
same security according to price and
then time of entry into the System.21
Any remaining unexecuted RPI Orders
would remain available to interact with
other incoming Retail Orders if such
interest is at an eligible price. Any
remaining unexecuted portion of a
Retail Order would cancel or execute in
accordance with proposed Nasdaq Rule
4780(f).22
Failure of RMO To Abide by Retail
Order Requirements
Proposed Nasdaq Rule 4780(c)
addresses an RMO’s failure to abide by
Retail Order requirements. If an RMO
were to designate orders submitted to
the Exchange as Retail Orders and the
Exchange determined, in its sole
discretion, that those orders failed to
meet any of the requirements of Retail
Orders, the Exchange could disqualify a
Member from its status as a RMO. When
disqualification determinations are
made, the Exchange would provide a
written disqualification notice to the
Member. A disqualified RMO could
appeal the disqualification as provided
21 See also Nasdaq Rule 4757 (setting forth the
Exchange’s price-time priority methodology).
22 The Exchange provides three examples of how
the priority and ranking of RPI Orders would
operate. See Notice, supra note 3, 77 FR at 73100.
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below and/or re-apply 90 days after the
disqualification notice is issued by the
Exchange.
Appeal of Disapproval or
Disqualification
Under Proposed Rule 4780(d), the
Exchange would establish a Retail Price
Improvement Program Panel (‘‘RPI
Panel’’) to review disapproval or
disqualification decisions. If a Member
disputes the Exchange’s decision to
disapprove or disqualify it as a RMO,
such Member could request, within five
business days after notice of the
decision is issued by the Exchange, that
the RPI Panel review the decision to
determine if it was correct. The RPI
Panel would consist of the Exchange’s
Chief Regulatory Officer or his or her
designee, and two officers of the
Exchange designated by the Exchange’s
Chief Operating Officer, and it would
review the facts and render a decision
within the timeframe prescribed by the
Exchange. The RPI Panel could overturn
or modify an action taken by the
Exchange and all determinations by the
RPI Panel would constitute final action
by the Exchange on the matter at issue.
III. Discussion and Commission
Findings
After careful review of the proposal,
the Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange. In particular, the Commission
finds that the proposed rule change,
subject to its term as a pilot, is
consistent with Section 6(b)(5) of the
Act,23 which requires, among other
things, that the rules of a national
securities exchange be 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 regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to 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.
The Commission finds that the
Program, as it is proposed on a pilot
basis, is consistent with the
requirements of the Act because the
Program is reasonably designed to
benefit retail investors by providing
23 15
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U.S.C. 78f(b)(5).
Frm 00110
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12399
price improvement to retail order
flow.24 The Commission also believes
that the Program could promote
competition for retail order flow among
execution venues, and that this could
benefit retail investors by creating
additional price improvement
opportunities for their order flow.
Currently, most marketable retail order
flow is executed in the over-the-counter
(‘‘OTC’’) markets, pursuant to bilateral
agreements, without ever reaching a
public exchange. The Commission has
noted that ‘‘a very large percentage of
marketable (immediately executable)
order flow of individual investors’’ is
executed, or ‘‘internalized,’’ by brokerdealers in the OTC markets.25 A review
of the order flow of eight retail brokers
revealed that nearly 100% of their
customer market orders were routed to
OTC market makers.26 The same review
found that such routing is often done
pursuant to arrangements under which
retail brokers route their order flow to
certain OTC market makers in exchange
for payment for such order flow.27 To
the extent that the Program may provide
price improvement to retail orders that
equals what would be provided under
such OTC internalization arrangements,
the Program could benefit retail
investors. To better understand the
Program’s potential impact, the
Exchange represents that it ‘‘will
produce data throughout the pilot,
which will include statistics about
participation, the frequency and level of
price improvement provided by the
Program, and any effects on the broader
market structure, and would be
reviewed by the Commission prior to
any extension of the Program beyond
the proposed one-year pilot term, or
permanent approval of the Program.’’ 28
The Program proposes to create
additional price improvement
opportunities for retail investors by
segmenting retail order flow on the
Exchange and requiring liquidity
providers that want to interact with
such retail order flow to do so at a price
at least $0.001 per share better than the
Protected Best Bid or Offer. The
Commission finds that, while the
Program would treat retail order flow
differently from order flow submitted by
other market participants, such
segmentation would not be inconsistent
24 The Commission recently approved similar
Programs for BATS–Y Exchange, NYSE and NYSE
MKT. See BATS RPI Approval Order, supra note
12, and NYSE RLP Approval Order, supra note 13.
25 See Securities Exchange Act Release No. 61358
(Jan. 14, 2010), 75 FR 3594, 3600 (Jan. 21, 2010)
(‘‘Concept Release on Equity Market Structure’’).
26 See id.
27 See id.
28 See Notice, supra note 3, 77 FR at 73100.
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with Section 6(b)(5) of the Act, which
requires that the rules of an exchange
are not designed to permit unfair
discrimination. The Commission
previously has recognized that the
markets generally distinguish between
individual retail investors, whose orders
are considered desirable by liquidity
providers because such retail investors
are presumed on average to be less
informed about short-term price
movements, and professional traders,
whose orders are presumed on average
to be more informed.29 The Commission
has further recognized that, because of
this distinction, liquidity providers are
generally more inclined to offer price
improvement to less informed retail
orders than to more informed
professional orders.30 Absent
opportunities for price improvement,
retail investors may encounter wider
spreads that are a consequence of
liquidity providers interacting with
informed order flow. By creating
additional competition for retail order
flow, the Program is reasonably
designed to attract retail order flow to
the exchange environment, while
helping to ensure that retail investors
benefit from the better price that
liquidity providers are willing to give
their orders.
The Commission notes that the
Program might also create a desirable
opportunity for institutional investors to
interact with retail order flow that they
are not able to reach currently. Today,
institutional investors often do not have
the chance to interact with marketable
retail orders that are executed pursuant
to internalization arrangements. Thus,
by submitting RPI Orders, institutional
investors may be able to reduce their
29 See BATS RPI Approval Order, supra note 12
and NYSE RLP Approval Order, supra note 13. See
also Concept Release on Equity Market Structure,
supra note 25; Securities Exchange Act Release No.
64781 (June 30, 2011), 76 FR 39953 (July 7, 2011)
(approving a program proposed by an options
exchange that would provide price improvement
opportunities to retail orders based, in part, on
questions about execution quality of retail orders
under payment for order flow arrangements in the
options markets).
30 See BATS RPI Approval Order, supra note 12,
and NYSE RLP Approval Order, supra note 1313.
See also Securities Exchange Act Release No. 64781
(June 30, 2011), 76 FR 39953 (July 7, 2011) (noting
that ‘‘it is well known in academic literature and
industry practice that prices tend to move against
market makers after trades with informed traders,
often resulting in losses for market makers,’’ and
that such losses are often borne by uninformed
retail investors through wider spreads (citing H.R.
Stoll, ‘‘The supply of dealer services in securities
markets,’’ Journal of Finance 33 (1978), at 1133–51;
L. Glosten & P. Milgrom, ‘‘Bid ask and transaction
prices in a specialist market with heterogeneously
informed agents,’’ Journal of Financial Economics
14 (1985), at 71–100; and T. Copeland & D. Galai,
‘‘Information effects on the bid-ask spread,’’ Journal
of Finance 38 (1983), at 1457–69)).
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possible adverse selection costs by
interacting with retail order flow.
When the Commission is engaged in
rulemaking or the review of a rule filed
by a self-regulatory organization, and is
required to consider or determine
whether an action is necessary or
appropriate in the public interest, the
Commission shall also consider, in
addition to the protection of investors,
whether the action will promote
efficiency, competition, and capital
formation.31 As discussed above, the
Commission believes this Program will
promote competition for retail order
flow by allowing Exchange Members to
submit RPI Orders to interact with
Retail Orders. Such competition may
promote efficiency by facilitating the
price discovery process. Moreover, the
Commission does not believe that the
Program will have a significant effect on
market structure, or will create any new
inefficiencies in current market
structure. Finally, to the extent the
Program is successful in attracting retail
order flow, it may generate additional
investor interest in trading securities,
thereby promoting capital formation.
The Commission also believes that the
Program is sufficiently tailored to
provide the benefits of potential price
improvement only to bona fide retail
order flow originating from natural
persons.32 The Commission finds that
the Program provides an objective
process by which a Member
organization could become a RMO, and
for appropriate oversight by the
Exchange to monitor for continued
compliance with the terms of these
provisions. The Exchange has limited
the definition of Retail Order to an
agency or riskless principal order that
originates from a natural person and not
a trading algorithm or any other
computerized methodology.
Furthermore, a Retail Order must be
submitted by a RMO that is approved by
the Exchange. In addition, RMOs would
be required to maintain written policies
and procedures to help ensure that they
designate as Retail Orders only those
orders which qualify under the Program.
If a Member’s application to become a
RMO is denied by the Exchange, that
Member may appeal the determination
or re-apply. The Commission believes
that these standards should help ensure
that only retail order flow is submitted
into the Program and thereby promote
just and equitable principles of trade
31 See
15 U.S.C. 78c(f).
addition, the Commission believes that the
Program’s provisions concerning the approval and
potential disqualification of RMOs are not
inconsistent with the Act. See, e.g., NYSE RLP
Approval Order, supra note 13, 77 FR at 40680 &
n.77.
32 In
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Fmt 4703
Sfmt 4703
and protect investors and the public
interest, while also providing an
objective process through which
Members may become RMOs.
In addition, the Commission finds
that the Program’s proposed
dissemination of a Retail Liquidity
Identifier would increase the amount of
pricing information available to the
marketplace and is consistent with the
Act. The identifier would be
disseminated through the consolidated
public market data stream to advertise
the presence of a RPI Order with which
Retail Orders could interact. The
identifier would reflect the symbol for a
particular security and the side of the
RPI Order interest, but it would not
include the price or size of such
interest. The identifier would alert
market participants to the existence of a
RPI Order and should provide market
participants with more information
about the availability of price
improvement opportunities for retail
orders than is currently available.33
The Exchange believes that the
proposed Program, which will operate
virtually the same as the BATS RPI
Program, and similar to, but with
distinctions from, the NYSE RLP
Program, should both enhance
competition among market participants
and encourage competition among
exchange venues.34 Specifically, the
Exchange believes that: allowing all
Members to enter RPI Orders, as
opposed to adopting a special category
of retail liquidity provider, as NYSE did
with its RLP Program, could result in a
higher level of competition and could
maximize price improvement to
incoming Retail Orders; the Program
will provide the maximum price
improvement available to incoming
Retail Orders because they will always
interact with available contra-side RPI
Orders and any other price-improving
contra-side interest; and the Program
will provide all of the price
improvement available to incoming
Retail Orders by allowing executions at
multiple price levels, as opposed to a
33 As the Commission noted when approving the
comparable BATS and NYSE programs, the
Commission believes that the Program will not
create any best execution challenges for brokers that
are not already present in today’s markets. A
broker’s best execution obligations are determined
by a number of facts and circumstances, including:
(1) The character of the market for the security (e.g.,
price, volatility, relative liquidity, and pressure on
available communications); (2) the size and type of
transaction; (3) the number of markets checked; (4)
accessibility of the quotation; and (5) the terms and
conditions of the order which result in the
transaction. See BATS RPI Approval Order, supra
note 12, 77 FR at 71657, and NYSE RLP Approval
Order, supra note 13, 77 FR at 40680 n.75 (both
citing FINRA Rule 5310).
34 See Notice, supra note 3, 77 FR at 73102.
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single clearing price level.35 The
Commission finds that the Program is
reasonably designed to enhance
competition among market participants
and encourage competition among
exchange venues. The Commission also
finds that the distinctions between the
Exchange’s Program and the approved
NYSE and NYSE MKT programs are
reasonably designed to enhance the
Program’s price-improvement benefits
to retail investors and, therefore, are
consistent with the Act.
The Commission notes that it is
approving the Program on a pilot basis.
Approving the Program on a pilot basis
will allow the Exchange and market
participants to gain valuable practical
experience with the Program during the
pilot period. This experience should
allow the Exchange and the Commission
to determine whether modifications to
the Program are necessary or
appropriate prior to any Commission
decision to approve the Program on a
permanent basis. The Exchange also has
agreed to provide the Commission with
a significant amount of data that should
assist the Commission in its evaluation
of the Program. Specifically, the
Exchange has represented that it ‘‘will
produce data throughout the pilot,
which will include statistics about
participation, the frequency and level of
price improvement provided by the
Program, and any effects on the broader
market structure.’’ 36 The Commission
expects that the Exchange will monitor
the scope and operation of the Program
and study the data produced during that
time with respect to such issues, and
will propose any modifications to the
Program that may be necessary or
appropriate.
The Commission also welcomes
comments, and empirical evidence, on
the Program during the pilot period to
further assist the Commission in its
evaluation of the Program. The
Commission notes that any permanent
approval of the Program would require
a proposed rule change by the
Exchange, and such rule change will
provide an opportunity for public
comment prior to further Commission
action.
IV. Exemption From the Sub-Penny
Rule
Pursuant to its authority under Rule
612(c) of Regulation NMS,37 the
Commission hereby grants the Exchange
a limited exemption from the SubPenny Rule to operate the Program. For
35 See
supra notes 14 to 16 and accompanying
text.
36 See
37 17
supra note 28 and accompanying text.
CFR 242.612(c).
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16:18 Feb 21, 2013
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the reasons discussed below, the
Commission determines that such
action is necessary or appropriate in the
public interest, and is consistent with
the protection of investors. The
exemption shall operate for a period of
12 months, coterminous with the
effectiveness of the proposed rule
change approved today.
When the Commission adopted the
Sub-Penny Rule in 2005, it identified a
variety of problems caused by subpennies that the Sub-Penny Rule was
designed to address:
• If investors’ limit orders lose
execution priority for a nominal
amount, investors may over time
decline to use them, thus depriving the
markets of liquidity.
• When market participants can gain
execution priority for a nominal
amount, important customer protection
rules such as exchange priority rules
and the Manning Rule could be
undermined.
• Flickering quotations that can result
from widespread sub-penny pricing
could make it more difficult for brokerdealers to satisfy their best execution
obligations and other regulatory
responsibilities.
• Widespread sub-penny quoting
could decrease market depth and lead to
higher transaction costs.
• Decreasing depth at the inside
could cause institutions to rely more on
execution alternatives away from the
exchanges, potentially increasing
fragmentation in the securities
markets.38
At the same time, the Commission
‘‘acknowledge[d] the possibility that the
balance of costs and benefits could shift
in a limited number of cases or as the
markets continue to evolve.’’ 39
Therefore, the Commission also adopted
Rule 612(c), which provides that the
Commission may grant exemptions from
the Sub-Penny Rule, either
unconditionally or on specified terms
and conditions, if it determined that
such an exemption is necessary or
appropriate in the public interest, and is
consistent with the protection of
investors.
The Commission believes that the
Exchange’s proposal raises such a case.
As described above, under the current
market structure, few marketable retail
orders in equity securities are routed to
exchanges. The vast majority of
marketable retail orders are internalized
by OTC market makers, who typically
pay retail brokers for their order flow.
38 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37551–52 (June 29,
2005).
39 Id. at 37553.
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Frm 00112
Fmt 4703
Sfmt 4703
12401
Retail investors can benefit from such
arrangements to the extent that OTC
market makers offer them price
improvement over the NBBO. Price
improvement is typically offered in subpenny amounts.40 An internalizing
broker-dealer can offer sub-penny
executions, provided that such
executions do not result from
impermissible sub-penny orders or
quotations. Accordingly, OTC market
makers typically select a sub-penny
price for a trade without quoting at that
exact amount or accepting orders from
retail customers seeking that exact price.
Exchanges—and exchange member
firms that submit orders and quotations
to exchanges—cannot compete for
marketable retail order flow on the same
basis, because it would be impractical
for exchange electronic systems to
generate sub-penny executions without
exchange liquidity providers or retail
brokerage firms having first submitted
sub-penny orders or quotations, which
the Sub-Penny Rule expressly prohibits.
The limited exemption granted today
should promote competition between
exchanges and OTC market makers in a
manner that is reasonably designed to
minimize the problems that the
Commission identified when adopting
the Sub-Penny Rule. Under the Program,
sub-penny prices will not be
disseminated through the consolidated
quotation data stream, which should
avoid quote flickering and its reduced
depth at the inside quotation.
Furthermore, while the Commission
remains concerned about providing
enough incentives for market
participants to display limit orders, the
Commission does not believe that
granting this exemption (and approving
the accompanying proposed rule
change) will reduce such incentives.
Market participants that display limit
orders currently are not able to interact
with marketable retail order flow
because it is almost entirely routed to
internalizing OTC market makers that
offer sub-penny executions.
Consequently, enabling the Exchanges
to compete for this retail order flow
through the Program should not
materially detract from the current
incentives to display limit orders, while
potentially resulting in greater order
interaction and price improvement for
40 When adopting the Sub-Penny Rule, the
Commission considered certain comments that
asked the Commission to prohibit broker-dealers
from offering sub-penny price improvement to their
customers, but declined to do so. The Commission
stated that ‘‘trading in sub-penny increments does
not raise the same concerns as sub-penny quoting’’
and that ‘‘sub-penny executions due to price
improvement are generally beneficial to retail
investors.’’ Id. at 37556.
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Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Notices
marketable retail orders. To the extent
that the Program may raise Manning and
best execution issues for broker-dealers,
these issues are already presented by the
existing practices of OTC market
makers.
The exemption being granted today is
limited to a one-year pilot. The
Exchange has stated that ‘‘sub-penny
trading and pricing could potentially
result in undesirable market behavior,’’
and, therefore, it will ‘‘monitor the
Program in an effort to identify and
address any such behavior.’’ 41
Furthermore, the Exchange has
represented that it ‘‘will produce data
throughout the pilot, which will include
statistics about participation, the
frequency and level of price
improvement provided by the Program,
and any effects on the broader market
structure.’’ 42 The Commission expects
to review the data and observations of
the Exchange before determining
whether and, if so, how to extend the
exemption from the Sub-Penny Rule.43
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,44 that the
proposed rule change (SR–NASDAQ–
2012–129) be, and hereby is, approved
on a one-year pilot basis.
It is also hereby ordered that,
pursuant to Rule 612(c) of Regulation
NMS, the Exchange is given a limited
exemption from Rule 612 of Regulation
NMS allowing it to accept and rank
orders priced equal to or greater than
$1.00 per share in increments of $0.001,
in the manner described in the proposed
rule change above, on a one-year pilot
basis coterminous with the effectiveness
of the proposed rule change.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Kevin O’Neill,
Deputy Secretary.
[FR Doc. 2013–04096 Filed 2–21–13; 8:45 am]
sroberts on DSK5SPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
41 See Request for Sub-Penny Rule Exemption,
supra note 6, at 3, n.6.
42 See supra note 28 and accompanying text.
43 In particular, the Commission expects the
Exchange to observe how maker/taker transaction
charges, whether imposed by the Exchange or by
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68941; File No. SR–CBOE–
2013–022]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the CBOE
Stock Exchange Fees Schedule
February 15, 2013.
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 February
12, 2013, Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) 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.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
Fees Schedule of its CBOE Stock
Exchange (‘‘CBSX’’). The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission.
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.
other markets, might impact the use of the Program.
Market distortions could arise where the size of a
transaction rebate, whether for providing or taking
liquidity, is greater than the size of the minimum
increment permitted by the Program ($0.001 per
share).
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make a
number of changes to the CBSX Fees
Schedule. First, the Exchange proposes
to amend the reference in Section 10 of
the CBSX Fees Schedule to CBOEdirect
to refer to CBOE Command, as the
manner through which CBSX Traders
connect to the CBSX System is now
called CBOE Command.
Second, CBSX proposes eliminate the
distinction between Sponsored Users
and non-Sponsored Users as they relate
to CBOE Command Connectivity
Charges. Currently, Sponsored Users are
charged twice the regular monthly fees
for such charges, with the types and
amounts of such fees described in the
chart below:
Description
Network Access
Port (1 Gbps)
Network Access
Port (10
Gbps) ............
Network Access
Port (Disaster
Recovery) ......
CMI Login ID ....
FIX Login ID .....
Regular
monthly fee
Sponsored
user monthly fee
$250
$500
1,000
2,000
250
100
100
500
200
200
Going forward, the Exchange proposes
to assess to Sponsored Users and all
other non-Trading Permit Holders the
same CBOE Command Connectivity
Charges as are assessed to Trading
Permit Holders (‘‘TPHs’’), and to state
that all such fees apply to non-TPHs as
well as TPHs. The purpose of the
proposed change is to simplify the
Exchange’s fees structure for
connectivity to the Exchange and have
a standard set of connectivity fees that
apply to both TPHs and non-TPHs.
CBSX also proposes to amend the
manner in which it determines which
fee tiers apply for Maker transactions in
securities priced $1 or greater.
Currently, fees for such transactions are
assessed depending on the amount of
shares of liquidity that a Maker adds in
one day, with the fee amount lowering
based on a Maker adding higher levels
of liquidity in one day. The current tiers
44 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(83).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
45 17
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]]>Agencies
[Federal Register Volume 78, Number 36 (Friday, February 22, 2013)]
[Notices]
[Pages 12397-12402]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04096]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68937; File No. SR-NASDAQ-2012-129]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval to Proposed Rule Change, as Modified by Amendment No.
1, To Establish the Retail Price Improvement Program on a Pilot Basis
until 12 Months From the Date of Implementation
February 15, 2013.
I. Introduction
On November 19, 2012, The NASDAQ Stock Market LLC (the ``Exchange''
or ``NASDAQ'') 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 to establish a Retail Price Improvement Program
(``Program'') on a pilot basis for a period of 12 months from the date
of implementation, if approved. The proposed rule change was published
for comment in the Federal Register on December 7, 2012.\3\ The
Commission did not receive any comments on the proposed rule change. On
February 13, 2013, the Exchange filed Amendment No. 1 to its
proposal.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68336 (December 3,
2012), 77 FR 73097 (SR-NASDAQ-2012-129) (``Notice'').
\4\ In Amendment No. 1, the Exchange proposes to clarify that,
to qualify as a ``Retail Order,'' a ``riskless principal'' order
must satisfy the criteria for riskless principal orders set forth in
FINRA Rule 5320.03. Because the changes made in Amendment No. 1 do
not materially alter the substance of the proposed rule change or
raise any novel regulatory issues, Amendment No. 1 is not subject to
notice and comment.
---------------------------------------------------------------------------
In connection with the proposal, the Exchange requested exemptive
relief from Rule 612 of Regulation NMS,\5\ which, among other things,
prohibits a national securities exchange from accepting or ranking
orders priced greater than $1.00 per share in an increment smaller than
$0.01.\6\ On January 14, 2013, the Exchange submitted a letter
requesting that the staff of the Division of Trading and Markets not
recommend any enforcement action under Rule 602 of Regulation NMS
(``Quote Rule'') based on the Exchange's and its Members' participation
in the Program.\7\
---------------------------------------------------------------------------
\5\ 17 CFR 242.612 (``Sub-Penny Rule'').
\6\ See Letter from Jeffrey Davis, Deputy General Counsel, The
NASDAQ Stock Market LLC, to Elizabeth M. Murphy, Secretary,
Commission, dated November 19, 2012 (``Request for Sub-Penny Rule
Exemption'').
\7\ See Letter from Jeffrey Davis, Deputy General Counsel, The
NASDAQ Stock Market LLC, to John Ramsay, Division of Trading and
Markets, Commission, dated January 14, 2013.
---------------------------------------------------------------------------
This order approves the proposed rule change and grants the
exemption from the Sub-Penny Rule sought by the Exchange in relation to
the proposed rule change.
II. Description of the Proposal
The Exchange is proposing a 12-month pilot program to attract
additional retail order flow to the Exchange, while also providing the
potential for price improvement to such retail order flow. The Program
would be limited to trades occurring at prices equal to or greater than
$1.00 per share.\8\ All Regulation NMS securities traded on the
Exchange would be eligible for inclusion in the Program.
---------------------------------------------------------------------------
\8\ The Exchange notes that certain orders submitted to the
Program designated as eligible to interact with liquidity outside of
the Program--Type 2 Retail Orders, discussed below--could execute at
prices below $1.00 if they do in fact execute against liquidity
outside of the Program.
---------------------------------------------------------------------------
Under the Program, a new class of market participants called Retail
Member Organizations (``RMOs'') \9\ would be eligible to submit certain
retail order flow (``Retail Orders'') to the Exchange. All Exchange
Members would be permitted to provide potential price improvement for
Retail Orders in the form of designated non-displayed interest, called
a Retail Price Improvement Order (``RPI Order'' or ``RPI interest''),
that is priced more aggressively than the Protected National Best Bid
or Offer (``Protected NBBO'') \10\ by at least $0.001 per share. When
RPI interest priced at least $0.001 per share better than the Protected
Bid or Protected Offer for a particular security is available in the
system, the Exchange would disseminate an identifier, known as the
Retail Liquidity Identifier, indicating that such interest exists. A
Retail Order would interact, to the extent possible, with available
contra-side RPI Orders.\11\
---------------------------------------------------------------------------
\9\ A RMO would be a Member (or a division thereof) that has
been approved by the Exchange to submit Retail Orders. See Nasdaq
Rule 4780. A ``Member'' is any registered broker or dealer that has
been admitted to membership in the Exchange. See Nasdaq Rule
0120(i).
\10\ The terms Protected Bid and Protected Offer are defined in
Rule 600(b)(57) of Regulation NMS. 17 CFR 242.600(b)(57). The
Exchange represents that, generally, the Protected Bid and Protected
Offer, and the national best bid (``NBB'') and national best offer
(``NBO,'' together with the NBB, the ``NBBO''), will be the same.
However, it further represents that a market center is not required
to route to the NBB or NBO if that market center is subject to an
exception under Regulation NMS Rule 611(b)(1) or if such NBB or NBO
is otherwise not available for an automatic execution. In such case,
the Exchange states that the Protected NBBO would be the best-priced
protected bid or offer to which a market center must route interest
pursuant to Rule 611 of Regulation NMS.
\11\ As explained further below, the Exchange has proposed two
types of Retail Orders, one of which could execute against other
interest if it was not completely filled by contra-side RPI Interest
or other price-improving liquidity. All Retail Orders would first
execute against available contra-side RPI Orders or other price-
improving liquidity. Any remaining portion of the Retail Order would
then either cancel, be executed as an immediate-or-cancel order, or
be routed to another market for execution, depending on the type of
Retail Order.
---------------------------------------------------------------------------
The Exchange represents that its proposed rule change is based on
rules recently adopted by other exchanges. The NASDAQ proposal is
virtually identical to BATS Y-Exchange Rule 11.24, which sets forth the
BATS Y-Exchange's Retail Price Improvement Program.\12\ It is also
highly similar to New York Stock Exchange LLC's (``NYSE'') Rule 107C,
which governs NYSE's Retail Liquidity Program,\13\ with three
distinctions. First, the NYSE's Retail Liquidity Program creates a
category of members, Retail Liquidity Providers, who are required to
maintain a retail price-improving order that betters the protected best
bid or offer at least 5% of the trading day in each assigned security
and who receive lower execution fees as a result. Under the NASDAQ
proposal, the Exchange would not create such a category of Members.
Second, NASDAQ's proposal would permit executions in all cases against
resting RPI Orders and, additionally, other non-displayed liquidity
resting on the Exchange's System.\14\ In contrast,
[[Page 12398]]
pursuant to NYSE Rule 107C(k)(1), a Type 1-designated Retail Order,
``will interact only with available contra-side Retail Price
Improvement Orders and will not interact with other available contra-
side interest in Exchange systems.'' \15\ Finally, under the NYSE'S
Retail Liquidity Program, Retail Orders execute at the single price at
which the order will be fully executed. Pursuant to NASDAQ's proposal,
Retail Orders execute at multiple price levels rather than a single
price level.\16\
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019) (``BATS RPI
Approval Order'').
\13\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-
2011-84) (``NYSE RLP Approval Order''). In the RLP Approval Order,
the Commission also approved a Retail Liquidity Program for NYSE
Amex LLC (now known as NYSE MKT LLC) (``NYSE MKT'').
\14\ The Exchange notes that other price improving liquidity may
include, but is not limited to: booked non-displayed orders with a
limit price that is more aggressive than the then-current NBBO;
midpoint-pegged orders (which are by definition non-displayed and
priced more aggressively than the NBBO); non-displayed orders pegged
to the NBBO with an aggressive offset. Orders that do not constitute
other price improving liquidity include, but are not limited to:
orders with a time-in-force instruction of IOC; displayed orders;
limit orders priced less aggressively than the NBBO.
\15\ Additionally, pursuant to NYSE Rules 107C(k)(2) and
107C(k)(3), a Type 2-designated Retail Order and a Type 3-designated
Retail Order can interact with other non-RPI interest in the NYSE
systems; however, such interaction only occurs after a Retail Order
first executes against RPI Orders.
\16\ See Notice, supra note 3, 77 FR at 73100-01 (explaining the
three distinctions in detail).
---------------------------------------------------------------------------
Types of Orders and Identifier
A Retail Order would be an agency or riskless principal \17\ order
that originates from a natural person and is submitted to the Exchange
by a RMO, provided that no change is made to the terms of the order
with respect to price (except in the case of a market order being
changed to a marketable limit order) or side of market and the order
does not originate from a trading algorithm or any other computerized
methodology. As discussed in greater detail below, Retail Orders may be
designated as Type 1 or Type 2. Retail Orders, regardless of Type, may
be entered in sizes that are odd lots, rounds lots, or mixed lots.
---------------------------------------------------------------------------
\17\ In order to qualify as a ``Retail Order,'' a ``riskless
principal'' order must satisfy the criteria set forth in FINRA Rule
5320.03. RMOs that submit riskless principal orders as Retail Orders
must maintain supervisory systems to reconstruct such orders in a
time-sequenced manner, and the RMOs must submit reports
contemporaneous with the execution of the facilitated orders that
identify such trades as riskless principal.
---------------------------------------------------------------------------
An RPI Order would be non-displayed liquidity on the Exchange that
is priced more aggressively than the Protected NBBO by at least $0.001
per share and that is identified as an RPI Order in a manner prescribed
by the Exchange. RPI interest can be priced either as an explicitly
priced limit order or implicitly priced as relative to the NBBO with an
offset of at least $0.001. The price of an RPI Order with an offset
would be determined by a Member's entry of the following into the
Exchange: (1) RPI buy or sell interest; (2) an offset from the
Protected NBBO, if any; and (3) a ceiling or floor price. RPI Orders
submitted with an offset would be similar to other peg orders available
to Members in that the order is tied or ``pegged'' to a certain price,
and would have its price automatically set and adjusted upon changes in
the Protected NBBO, both upon entry and any time thereafter.
RPI Orders in their entirety (the buy or sell interest, the offset,
and the ceiling or floor) will remain non-displayed. The Exchange will
also allow Members to enter RPI Orders which establish the exact limit
price, which is similar to a non-displayed limit order currently
accepted by the Exchange today, except the Exchange will accept sub-
penny limit prices on RPI Orders in increments of $0.001.\18\ The
Exchange will monitor whether RPI buy or sell interest, adjusted by any
offset and subject to the ceiling or floor price, is eligible to
interact with incoming Retail Orders.
---------------------------------------------------------------------------
\18\ As noted above, supra note 6 and accompanying text, in
connection with the Program, the Exchange requested exemptive relief
from the Sub-Penny Rule of Regulation NMS, which, among other
things, prohibits a national securities exchange from accepting or
ranking orders priced greater than $1.00 per share in an increment
smaller than $0.01.
---------------------------------------------------------------------------
When RPI interest priced at least $0.001 better than the Exchange's
Protected Bid or Protected Offer for a particular security is available
in the System, the Exchange would disseminate an identifier, known as
the Retail Liquidity Identifier, indicating that such interest exists.
The Exchange would implement the Program in a manner that allowed the
dissemination of the identifier through consolidated data streams
(i.e., pursuant to the Consolidated Tape Association Plan/Consolidated
Quotation Plan (``CTA/CQ Plan'') for Tape A and Tape B securities, and
the Nasdaq UTP Plan for Tape C securities as well as through
proprietary Exchange data feeds). The Retail Liquidity Identifier would
reflect the symbol and the side (buy or sell) of the RPI Order, but it
would not include the price or size. In particular, the consolidated
quoting outputs would include a field for codes related to the Retail
Liquidity Identifier. The codes will indicate RPI interest that is
priced better than the Protected Bid or Protected Offer by at least the
minimum level of price improvement as required by the Program.
Retail Member Organizations
In order to become a RMO, a Member must conduct a retail business
or handle retail orders on behalf of another broker-dealer. Any Member
that wishes to obtain RMO status would be required to submit: (1) An
application form; (2) an attestation, in a form prescribed by the
Exchange, that any order submitted by the Member as a Retail Order
would meet the qualifications for such orders under proposed Nasdaq
Rule 4780(b); and (3) supporting documentation sufficient to
demonstrate the retail nature and characteristics of the applicant's
order flow.\19\ If the Exchange disapproves the application, it would
provide a written notice to the Member. The disapproved applicant could
appeal the disapproval as provided below and/or re-apply 90 days after
the disapproval notice is issued by the Exchange. An RMO also could
voluntarily withdraw from such status at any time by giving written
notice to the Exchange.
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\19\ For example, a prospective RMO could be required to provide
sample marketing literature, Web site screenshots, other publicly
disclosed materials describing the retail nature of their order
flow, and such other documentation and information as the Exchange
may require to obtain reasonable assurance that the applicant's
order flow would meet the requirements of the Retail Order
definition.
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The Exchange would require an RMO to have written policies and
procedures reasonably designed to assure that it will only designate
orders as Retail Orders if all the requirements of a Retail Order are
met. Such written policies and procedures would have to require the
Member to exercise due diligence before entering a Retail Order to
assure that entry as a Retail Order is in compliance with the proposed
rule, and monitor whether orders entered as Retail Orders meet the
applicable requirements. If the RMO represents Retail Orders from
another broker-dealer customer, the RMO's supervisory procedures must
be reasonably designed to assure that the orders it receives from such
broker-dealer customer that it designates as Retail Orders meet the
definition of a Retail Order. The RMO must obtain an annual written
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders
that entry of such orders as Retail Orders will be in compliance with
the requirements of this rule, and monitor whether its broker-dealer
customer's Retail Order flow continues to meet the applicable
requirements.\20\
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\20\ The Exchange represents that it or another self-regulatory
organization on behalf of the Exchange will review a RMO's
compliance with these requirements through an exam-based review of
the RMO's internal controls. See Notice, supra note 3, 77 FR at
73099 n.7.
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Retail Order Designations
Under proposed Nasdaq Rule 4780(f), a RMO submitting a Retail Order
could choose one of two designations dictating how it would interact
with available
[[Page 12399]]
contra-side interest. First, a Retail Order could interact only with
available contra-side RPI interest and other price-improving liquidity.
The Exchange would label this a Type 1 Retail Order and such orders
would not interact with available non-price-improving, contra-side
interest in Exchange systems or route to other markets. Portions of a
Type 1 Retail Order that are not executed would be cancelled
immediately and automatically.
Second, a Retail Order could interact first with available contra-
side RPI Orders and other price-improving liquidity, and any remaining
portion would be eligible to interact with other interest in the System
and, if designated as eligible for routing, would route to other
markets in compliance with Regulation NMS and pursuant to Nasdaq Rule
4758. The shares remaining from a Type 2-designated Retail Order that
do not fully execute against contra-side RPI Orders or other price
improving liquidity, if any, would execute against other liquidity
available on the Exchange or be routed to other market centers for
execution. The remaining unexecuted portion would then be cancelled.
Priority and Allocation
Under proposed Nasdaq Rule 4780(g), the Exchange would follow
price-time priority, ranking RPI interest in the same security
according to price and then time of entry into the System.\21\ Any
remaining unexecuted RPI Orders would remain available to interact with
other incoming Retail Orders if such interest is at an eligible price.
Any remaining unexecuted portion of a Retail Order would cancel or
execute in accordance with proposed Nasdaq Rule 4780(f).\22\
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\21\ See also Nasdaq Rule 4757 (setting forth the Exchange's
price-time priority methodology).
\22\ The Exchange provides three examples of how the priority
and ranking of RPI Orders would operate. See Notice, supra note 3,
77 FR at 73100.
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Failure of RMO To Abide by Retail Order Requirements
Proposed Nasdaq Rule 4780(c) addresses an RMO's failure to abide by
Retail Order requirements. If an RMO were to designate orders submitted
to the Exchange as Retail Orders and the Exchange determined, in its
sole discretion, that those orders failed to meet any of the
requirements of Retail Orders, the Exchange could disqualify a Member
from its status as a RMO. When disqualification determinations are
made, the Exchange would provide a written disqualification notice to
the Member. A disqualified RMO could appeal the disqualification as
provided below and/or re-apply 90 days after the disqualification
notice is issued by the Exchange.
Appeal of Disapproval or Disqualification
Under Proposed Rule 4780(d), the Exchange would establish a Retail
Price Improvement Program Panel (``RPI Panel'') to review disapproval
or disqualification decisions. If a Member disputes the Exchange's
decision to disapprove or disqualify it as a RMO, such Member could
request, within five business days after notice of the decision is
issued by the Exchange, that the RPI Panel review the decision to
determine if it was correct. The RPI Panel would consist of the
Exchange's Chief Regulatory Officer or his or her designee, and two
officers of the Exchange designated by the Exchange's Chief Operating
Officer, and it would review the facts and render a decision within the
timeframe prescribed by the Exchange. The RPI Panel could overturn or
modify an action taken by the Exchange and all determinations by the
RPI Panel would constitute final action by the Exchange on the matter
at issue.
III. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder that are applicable to a national
securities exchange. In particular, the Commission finds that the
proposed rule change, subject to its term as a pilot, is consistent
with Section 6(b)(5) of the Act,\23\ which requires, among other
things, that the rules of a national securities exchange be 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 regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to 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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\23\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the Program, as it is proposed on a pilot
basis, is consistent with the requirements of the Act because the
Program is reasonably designed to benefit retail investors by providing
price improvement to retail order flow.\24\ The Commission also
believes that the Program could promote competition for retail order
flow among execution venues, and that this could benefit retail
investors by creating additional price improvement opportunities for
their order flow. Currently, most marketable retail order flow is
executed in the over-the-counter (``OTC'') markets, pursuant to
bilateral agreements, without ever reaching a public exchange. The
Commission has noted that ``a very large percentage of marketable
(immediately executable) order flow of individual investors'' is
executed, or ``internalized,'' by broker-dealers in the OTC
markets.\25\ A review of the order flow of eight retail brokers
revealed that nearly 100% of their customer market orders were routed
to OTC market makers.\26\ The same review found that such routing is
often done pursuant to arrangements under which retail brokers route
their order flow to certain OTC market makers in exchange for payment
for such order flow.\27\ To the extent that the Program may provide
price improvement to retail orders that equals what would be provided
under such OTC internalization arrangements, the Program could benefit
retail investors. To better understand the Program's potential impact,
the Exchange represents that it ``will produce data throughout the
pilot, which will include statistics about participation, the frequency
and level of price improvement provided by the Program, and any effects
on the broader market structure, and would be reviewed by the
Commission prior to any extension of the Program beyond the proposed
one-year pilot term, or permanent approval of the Program.'' \28\
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\24\ The Commission recently approved similar Programs for BATS-
Y Exchange, NYSE and NYSE MKT. See BATS RPI Approval Order, supra
note 12, and NYSE RLP Approval Order, supra note 13.
\25\ See Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594, 3600 (Jan. 21, 2010) (``Concept Release on Equity
Market Structure'').
\26\ See id.
\27\ See id.
\28\ See Notice, supra note 3, 77 FR at 73100.
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The Program proposes to create additional price improvement
opportunities for retail investors by segmenting retail order flow on
the Exchange and requiring liquidity providers that want to interact
with such retail order flow to do so at a price at least $0.001 per
share better than the Protected Best Bid or Offer. The Commission finds
that, while the Program would treat retail order flow differently from
order flow submitted by other market participants, such segmentation
would not be inconsistent
[[Page 12400]]
with Section 6(b)(5) of the Act, which requires that the rules of an
exchange are not designed to permit unfair discrimination. The
Commission previously has recognized that the markets generally
distinguish between individual retail investors, whose orders are
considered desirable by liquidity providers because such retail
investors are presumed on average to be less informed about short-term
price movements, and professional traders, whose orders are presumed on
average to be more informed.\29\ The Commission has further recognized
that, because of this distinction, liquidity providers are generally
more inclined to offer price improvement to less informed retail orders
than to more informed professional orders.\30\ Absent opportunities for
price improvement, retail investors may encounter wider spreads that
are a consequence of liquidity providers interacting with informed
order flow. By creating additional competition for retail order flow,
the Program is reasonably designed to attract retail order flow to the
exchange environment, while helping to ensure that retail investors
benefit from the better price that liquidity providers are willing to
give their orders.
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\29\ See BATS RPI Approval Order, supra note 12 and NYSE RLP
Approval Order, supra note 13. See also Concept Release on Equity
Market Structure, supra note 25; Securities Exchange Act Release No.
64781 (June 30, 2011), 76 FR 39953 (July 7, 2011) (approving a
program proposed by an options exchange that would provide price
improvement opportunities to retail orders based, in part, on
questions about execution quality of retail orders under payment for
order flow arrangements in the options markets).
\30\ See BATS RPI Approval Order, supra note 12, and NYSE RLP
Approval Order, supra note 1313. See also Securities Exchange Act
Release No. 64781 (June 30, 2011), 76 FR 39953 (July 7, 2011)
(noting that ``it is well known in academic literature and industry
practice that prices tend to move against market makers after trades
with informed traders, often resulting in losses for market
makers,'' and that such losses are often borne by uninformed retail
investors through wider spreads (citing H.R. Stoll, ``The supply of
dealer services in securities markets,'' Journal of Finance 33
(1978), at 1133-51; L. Glosten & P. Milgrom, ``Bid ask and
transaction prices in a specialist market with heterogeneously
informed agents,'' Journal of Financial Economics 14 (1985), at 71-
100; and T. Copeland & D. Galai, ``Information effects on the bid-
ask spread,'' Journal of Finance 38 (1983), at 1457-69)).
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The Commission notes that the Program might also create a desirable
opportunity for institutional investors to interact with retail order
flow that they are not able to reach currently. Today, institutional
investors often do not have the chance to interact with marketable
retail orders that are executed pursuant to internalization
arrangements. Thus, by submitting RPI Orders, institutional investors
may be able to reduce their possible adverse selection costs by
interacting with retail order flow.
When the Commission is engaged in rulemaking or the review of a
rule filed by a self-regulatory organization, and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\31\ As discussed above,
the Commission believes this Program will promote competition for
retail order flow by allowing Exchange Members to submit RPI Orders to
interact with Retail Orders. Such competition may promote efficiency by
facilitating the price discovery process. Moreover, the Commission does
not believe that the Program will have a significant effect on market
structure, or will create any new inefficiencies in current market
structure. Finally, to the extent the Program is successful in
attracting retail order flow, it may generate additional investor
interest in trading securities, thereby promoting capital formation.
---------------------------------------------------------------------------
\31\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission also believes that the Program is sufficiently
tailored to provide the benefits of potential price improvement only to
bona fide retail order flow originating from natural persons.\32\ The
Commission finds that the Program provides an objective process by
which a Member organization could become a RMO, and for appropriate
oversight by the Exchange to monitor for continued compliance with the
terms of these provisions. The Exchange has limited the definition of
Retail Order to an agency or riskless principal order that originates
from a natural person and not a trading algorithm or any other
computerized methodology. Furthermore, a Retail Order must be submitted
by a RMO that is approved by the Exchange. In addition, RMOs would be
required to maintain written policies and procedures to help ensure
that they designate as Retail Orders only those orders which qualify
under the Program. If a Member's application to become a RMO is denied
by the Exchange, that Member may appeal the determination or re-apply.
The Commission believes that these standards should help ensure that
only retail order flow is submitted into the Program and thereby
promote just and equitable principles of trade and protect investors
and the public interest, while also providing an objective process
through which Members may become RMOs.
---------------------------------------------------------------------------
\32\ In addition, the Commission believes that the Program's
provisions concerning the approval and potential disqualification of
RMOs are not inconsistent with the Act. See, e.g., NYSE RLP Approval
Order, supra note 13, 77 FR at 40680 & n.77.
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In addition, the Commission finds that the Program's proposed
dissemination of a Retail Liquidity Identifier would increase the
amount of pricing information available to the marketplace and is
consistent with the Act. The identifier would be disseminated through
the consolidated public market data stream to advertise the presence of
a RPI Order with which Retail Orders could interact. The identifier
would reflect the symbol for a particular security and the side of the
RPI Order interest, but it would not include the price or size of such
interest. The identifier would alert market participants to the
existence of a RPI Order and should provide market participants with
more information about the availability of price improvement
opportunities for retail orders than is currently available.\33\
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\33\ As the Commission noted when approving the comparable BATS
and NYSE programs, the Commission believes that the Program will not
create any best execution challenges for brokers that are not
already present in today's markets. A broker's best execution
obligations are determined by a number of facts and circumstances,
including: (1) The character of the market for the security (e.g.,
price, volatility, relative liquidity, and pressure on available
communications); (2) the size and type of transaction; (3) the
number of markets checked; (4) accessibility of the quotation; and
(5) the terms and conditions of the order which result in the
transaction. See BATS RPI Approval Order, supra note 12, 77 FR at
71657, and NYSE RLP Approval Order, supra note 13, 77 FR at 40680
n.75 (both citing FINRA Rule 5310).
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The Exchange believes that the proposed Program, which will operate
virtually the same as the BATS RPI Program, and similar to, but with
distinctions from, the NYSE RLP Program, should both enhance
competition among market participants and encourage competition among
exchange venues.\34\ Specifically, the Exchange believes that: allowing
all Members to enter RPI Orders, as opposed to adopting a special
category of retail liquidity provider, as NYSE did with its RLP
Program, could result in a higher level of competition and could
maximize price improvement to incoming Retail Orders; the Program will
provide the maximum price improvement available to incoming Retail
Orders because they will always interact with available contra-side RPI
Orders and any other price-improving contra-side interest; and the
Program will provide all of the price improvement available to incoming
Retail Orders by allowing executions at multiple price levels, as
opposed to a
[[Page 12401]]
single clearing price level.\35\ The Commission finds that the Program
is reasonably designed to enhance competition among market participants
and encourage competition among exchange venues. The Commission also
finds that the distinctions between the Exchange's Program and the
approved NYSE and NYSE MKT programs are reasonably designed to enhance
the Program's price-improvement benefits to retail investors and,
therefore, are consistent with the Act.
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\34\ See Notice, supra note 3, 77 FR at 73102.
\35\ See supra notes 14 to 16 and accompanying text.
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The Commission notes that it is approving the Program on a pilot
basis. Approving the Program on a pilot basis will allow the Exchange
and market participants to gain valuable practical experience with the
Program during the pilot period. This experience should allow the
Exchange and the Commission to determine whether modifications to the
Program are necessary or appropriate prior to any Commission decision
to approve the Program on a permanent basis. The Exchange also has
agreed to provide the Commission with a significant amount of data that
should assist the Commission in its evaluation of the Program.
Specifically, the Exchange has represented that it ``will produce data
throughout the pilot, which will include statistics about
participation, the frequency and level of price improvement provided by
the Program, and any effects on the broader market structure.'' \36\
The Commission expects that the Exchange will monitor the scope and
operation of the Program and study the data produced during that time
with respect to such issues, and will propose any modifications to the
Program that may be necessary or appropriate.
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\36\ See supra note 28 and accompanying text.
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The Commission also welcomes comments, and empirical evidence, on
the Program during the pilot period to further assist the Commission in
its evaluation of the Program. The Commission notes that any permanent
approval of the Program would require a proposed rule change by the
Exchange, and such rule change will provide an opportunity for public
comment prior to further Commission action.
IV. Exemption From the Sub-Penny Rule
Pursuant to its authority under Rule 612(c) of Regulation NMS,\37\
the Commission hereby grants the Exchange a limited exemption from the
Sub-Penny Rule to operate the Program. For the reasons discussed below,
the Commission determines that such action is necessary or appropriate
in the public interest, and is consistent with the protection of
investors. The exemption shall operate for a period of 12 months,
coterminous with the effectiveness of the proposed rule change approved
today.
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\37\ 17 CFR 242.612(c).
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When the Commission adopted the Sub-Penny Rule in 2005, it
identified a variety of problems caused by sub-pennies that the Sub-
Penny Rule was designed to address:
If investors' limit orders lose execution priority for a
nominal amount, investors may over time decline to use them, thus
depriving the markets of liquidity.
When market participants can gain execution priority for a
nominal amount, important customer protection rules such as exchange
priority rules and the Manning Rule could be undermined.
Flickering quotations that can result from widespread sub-
penny pricing could make it more difficult for broker-dealers to
satisfy their best execution obligations and other regulatory
responsibilities.
Widespread sub-penny quoting could decrease market depth
and lead to higher transaction costs.
Decreasing depth at the inside could cause institutions to
rely more on execution alternatives away from the exchanges,
potentially increasing fragmentation in the securities markets.\38\
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\38\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37551-52 (June 29, 2005).
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At the same time, the Commission ``acknowledge[d] the possibility
that the balance of costs and benefits could shift in a limited number
of cases or as the markets continue to evolve.'' \39\ Therefore, the
Commission also adopted Rule 612(c), which provides that the Commission
may grant exemptions from the Sub-Penny Rule, either unconditionally or
on specified terms and conditions, if it determined that such an
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.
---------------------------------------------------------------------------
\39\ Id. at 37553.
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The Commission believes that the Exchange's proposal raises such a
case. As described above, under the current market structure, few
marketable retail orders in equity securities are routed to exchanges.
The vast majority of marketable retail orders are internalized by OTC
market makers, who typically pay retail brokers for their order flow.
Retail investors can benefit from such arrangements to the extent that
OTC market makers offer them price improvement over the NBBO. Price
improvement is typically offered in sub-penny amounts.\40\ An
internalizing broker-dealer can offer sub-penny executions, provided
that such executions do not result from impermissible sub-penny orders
or quotations. Accordingly, OTC market makers typically select a sub-
penny price for a trade without quoting at that exact amount or
accepting orders from retail customers seeking that exact price.
Exchanges--and exchange member firms that submit orders and quotations
to exchanges--cannot compete for marketable retail order flow on the
same basis, because it would be impractical for exchange electronic
systems to generate sub-penny executions without exchange liquidity
providers or retail brokerage firms having first submitted sub-penny
orders or quotations, which the Sub-Penny Rule expressly prohibits.
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\40\ When adopting the Sub-Penny Rule, the Commission considered
certain comments that asked the Commission to prohibit broker-
dealers from offering sub-penny price improvement to their
customers, but declined to do so. The Commission stated that
``trading in sub-penny increments does not raise the same concerns
as sub-penny quoting'' and that ``sub-penny executions due to price
improvement are generally beneficial to retail investors.'' Id. at
37556.
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The limited exemption granted today should promote competition
between exchanges and OTC market makers in a manner that is reasonably
designed to minimize the problems that the Commission identified when
adopting the Sub-Penny Rule. Under the Program, sub-penny prices will
not be disseminated through the consolidated quotation data stream,
which should avoid quote flickering and its reduced depth at the inside
quotation. Furthermore, while the Commission remains concerned about
providing enough incentives for market participants to display limit
orders, the Commission does not believe that granting this exemption
(and approving the accompanying proposed rule change) will reduce such
incentives. Market participants that display limit orders currently are
not able to interact with marketable retail order flow because it is
almost entirely routed to internalizing OTC market makers that offer
sub-penny executions. Consequently, enabling the Exchanges to compete
for this retail order flow through the Program should not materially
detract from the current incentives to display limit orders, while
potentially resulting in greater order interaction and price
improvement for
[[Page 12402]]
marketable retail orders. To the extent that the Program may raise
Manning and best execution issues for broker-dealers, these issues are
already presented by the existing practices of OTC market makers.
The exemption being granted today is limited to a one-year pilot.
The Exchange has stated that ``sub-penny trading and pricing could
potentially result in undesirable market behavior,'' and, therefore, it
will ``monitor the Program in an effort to identify and address any
such behavior.'' \41\ Furthermore, the Exchange has represented that it
``will produce data throughout the pilot, which will include statistics
about participation, the frequency and level of price improvement
provided by the Program, and any effects on the broader market
structure.'' \42\ The Commission expects to review the data and
observations of the Exchange before determining whether and, if so, how
to extend the exemption from the Sub-Penny Rule.\43\
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\41\ See Request for Sub-Penny Rule Exemption, supra note 6, at
3, n.6.
\42\ See supra note 28 and accompanying text.
\43\ In particular, the Commission expects the Exchange to
observe how maker/taker transaction charges, whether imposed by the
Exchange or by other markets, might impact the use of the Program.
Market distortions could arise where the size of a transaction
rebate, whether for providing or taking liquidity, is greater than
the size of the minimum increment permitted by the Program ($0.001
per share).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-NASDAQ-2012-129) be, and
hereby is, approved on a one-year pilot basis.
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\44\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
It is also hereby ordered that, pursuant to Rule 612(c) of
Regulation NMS, the Exchange is given a limited exemption from Rule 612
of Regulation NMS allowing it to accept and rank orders priced equal to
or greater than $1.00 per share in increments of $0.001, in the manner
described in the proposed rule change above, on a one-year pilot basis
coterminous with the effectiveness of the proposed rule change.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(83).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2013-04096 Filed 2-21-13; 8:45 am]
BILLING CODE 8011-01-P
