Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Remove Pilot Restrictions From NASDAQ's Qualified Market Maker and NBBO Setter Incentive Programs, and To Make Other Changes to NASDAQ's Schedule of Fees and Credits, 29193-29199 [2013-11775]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 96 (Friday, May 17, 2013)]
[Notices]
[Pages 29193-29199]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69566; File No. SR-NASDAQ-2013-075]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Remove Pilot Restrictions From NASDAQ's Qualified Market Maker and 
NBBO Setter Incentive Programs, and To Make Other Changes to NASDAQ's 
Schedule of Fees and Credits

May 13, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 1, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III, below, which Items have been prepared by NASDAQ. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is proposing to remove the pilot period restriction from its 
Qualified Market Maker (``QMM'') and NBBO Setter Incentive pricing 
incentive programs under Rule 7014, to make a minor modification to the 
QMM program, and to make other changes to NASDAQ's schedule of fees and 
credits applicable to execution and routing of orders in securities 
priced at $1 or more per share. The changes pursuant to this proposal 
are effective upon filing, and the Exchange will implement the proposed 
rule changes on May 1, 2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

[[Page 29194]]

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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
QMM and NBBO Setter Incentive Programs
    In November 2012,\3\ NASDAQ introduced two new pricing programs 
designed to create incentives for members to improve market quality. 
The programs have been in effect on a pilot basis from November 1, 2012 
until April 30, 2013. Effective April 1, 2013, NASDAQ filed several 
changes to the programs.\4\ NASDAQ is now filing to remove the pilot 
limitation from the programs, while making a minor modification to the 
QMM Program.
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    \3\ Securities Exchange Act Release No. 68209 (November 9, 
2012), 77 FR 69519 (November 19, 2012) (SR-NASDAQ-2012-126).
    \4\ Securities Exchange Act Release No. 69376 (April 15, 2013), 
78 FR 23611 (April 15, 2013) (SR-NASDAQ-2013-063).
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    Under the QMM Program, a member may be designated as a QMM with 
respect to one or more of its MPIDs if:
     The member is not assessed any ``Excess Order Fee'' under 
Rule 7018 during the month; \5\ and
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    \5\ Rule 7018(m). Last year, NASDAQ introduced an Excess Order 
Fee, aimed at reducing inefficient order entry practices of certain 
market participants that place excessive burdens on the systems of 
NASDAQ and its members and that may negatively impact the usefulness 
and life cycle cost of market data. In general, the determination of 
whether to impose the fee on a particular MPID is made by 
calculating the ratio between (i) entered orders, weighted by the 
distance of the order from the NBBO, and (ii) orders that execute in 
whole or in part. The fee is imposed on MPIDs that have an ``Order 
Entry Ratio'' of more than 100.
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     Through such MPID the member quotes at the national best 
bid or best offer (``NBBO'') at least 25% of the time during regular 
market hours \6\ in an average of at least 1,000 securities per day 
during the month.\7\
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    \6\ Defined as 9:30 a.m. through 4:00 p.m., or such shorter 
period as may be designated by NASDAQ on a day when the securities 
markets close early (such as the day after Thanksgiving).
    \7\ A member MPID is considered to be quoting at the NBBO if it 
has a displayed order at either the national best bid or the 
national best offer or both the national best bid and offer. On a 
daily basis, NASDAQ will determine the number of securities in which 
the member satisfied the 25% NBBO requirement. To qualify for QMM 
designation, the MPID must meet the requirement for an average of 
1,000 securities per day over the course of the month. Thus, if a 
member MPID satisfied the 25% NBBO requirement in 900 securities for 
half the days in the month, and satisfied the requirement for 1,100 
securities for the other days in the month, it would meet the 
requirement for an average of 1,000 securities.
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    A member that is a QMM with respect to a particular MPID (a ``QMM 
MPID'') is eligible to receive certain financial benefits, as described 
below:
     The QMM may receive an NBBO Setter Incentive credit of 
$0.0005 with respect to orders that qualify for the NBBO Setter 
Incentive Program (i.e., displayed orders with a size of at least one 
round lot that set the NBBO or join another trading center at the NBBO) 
\8\ and that are entered through the QMM MPID; provided that the QMM 
also has a volume of liquidity provided through the QMM MPID (as a 
percentage of Consolidated Volume \9\) that exceeds the lesser of the 
volume of liquidity provided through such QMM MPID during the first 
month in which the MPID qualified as a QMM MPID (as a percentage of 
Consolidated Volume) or 1.0% of Consolidated Volume.\10\ If a QMM does 
not satisfy these volume requirements, it will receive an NBBO Setter 
Incentive credit of $0.0002 per share executed with respect to orders 
that qualify for the NBBO Setter Incentive Program.\11\
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    \8\ The NBBO Setter Incentive program is described in more 
detail below.
    \9\ ``Consolidated Volume'' means the consolidated volume 
reported to all consolidated transaction reporting plans by all 
exchanges and trade reporting facilities during a month.
    \10\ The QMM will also receive the $0.0005 per share rate during 
the first month in which an MPID becomes a QMM MPID.
    \11\ Orders designated as Designated Retail Orders under Rule 
7018(a) are not eligible to receive an NBBO Setter Incentive credit 
in addition to the credit provided with respect to such orders under 
Rule 7018(a).
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     The QMM receives a credit of $0.0001 per share executed 
with respect to all other displayed orders in securities priced at $1 
or more per share that provide liquidity and that are entered through a 
QMM MPID (in addition to any credit payable under Rule 7018).\12\
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    \12\ If the QMM also participates in NASDAQ Investor Support 
Program (the ``ISP'') NASDAQ will pay the greater of any applicable 
credit under the ISP or the QMM program, but not a credit under both 
programs. However, Designated Retail Orders are not eligible to 
receive an NBBO Setter Incentive credit in addition to the credit 
provided with respect to such orders under Rule 7018(a).
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     The QMM may receive a discount on fees for ports used for 
entering orders for that MPID, equal to the lesser of the QMM's total 
fees for such ports or $5,000.\13\ As provided in Rule 7015, the 
specific fees subject to this discount are: (i) all ports using the 
NASDAQ Information Exchange (``QIX'') protocol,\14\ (ii) Financial 
Information Exchange (``FIX'') trading ports,\15\ and (iii) ports using 
other trading telecommunications protocols.\16\
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    \13\ The ports subject to the discount are not used for receipt 
of market data.
    \14\ The applicable undiscounted fees are $1,200 per month for a 
port pair or ECN direct connection port pair, and $1,000 per month 
for an unsolicited message port. See Rule 7015(a).
    \15\ The applicable undiscounted fee is $500 per port per month. 
See Rule 7015(b).
    \16\ The applicable undiscounted fee is $500 per port pair per 
month. See Rule 7015(g).
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     For a number of shares not to exceed the lower of the 
number of shares of liquidity provided through a QMM MPID or 20 million 
shares per trading day (the ``Numerical Cap''), NASDAQ charges a fee of 
$0.0028 per share executed for orders in securities priced at $1 or 
more per share that access liquidity on the NASDAQ Market Center and 
that are entered through the same QMM MPID; provided, however, that 
orders that would otherwise be charged $0.0028 per share executed under 
Rule 7018 do not count toward the Numerical Cap. For shares above the 
Numerical Cap, NASDAQ charges the rate otherwise applicable under Rule 
7018. Moreover, in order to be charged the execution rate of $0.0028 
per share executed, the QMM's volume of liquidity added, provided, and/
or routed through the QMM MPID during the month (as a percentage of 
Consolidated Volume) must be not less than 0.05% lower than the volume 
of liquidity added, provided, and/or routed through such QMM MPID 
during the first month in which the MPID qualified as a QMM MPID (as a 
percentage of Consolidated Volume).\17\
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    \17\ This limitation will not apply during the first month in 
which an MPID becomes a QMM MPID.
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    NASDAQ believes that the QMM pilot program has been successful in 
achieving its goals of improving market quality. Since the inception of 
the program, thirteen MPIDs have qualified. During April 2013, twelve 
MPIDs have qualified and have met the 25% quoting requirements of the 
program in over 4,700 securities. In recent months, NASDAQ's time at 
the NBBO has increased, with recent data showing NASDAQ at the inside 
25% of the time in approximately 5,700 securities, 50% of the time in 
approximately 4,100 securities, and 75% of the time in approximately 
2,100 securities. Moreover, the presence of even one QMM in a stock 
appears to decrease dramatically the average effective

[[Page 29195]]

spread in a security, with multiple QMMs increasing the effect. 
Specifically, the average effective spread of securities with no QMMs 
was approximately $0.0825 over the pilot period, decreasing to 
approximately $0.065 for securities with one QMM, approximately $0.0425 
for securities with two QMMs, approximately $0.0325 for securities with 
three QMMs, approximately $0.020 for securities with four QMMs, and 
approximately $0.015 for securities with five or more QMMs.
    In addition to removing the pilot limitation from the QMM Program, 
NASDAQ proposes to modify the requirement that a QMM must quote at the 
NBBO at least 25% of the time during regular marker hours in an average 
of at least 1,000 securities per day during the month. Beginning May 1, 
2013, Designated Retail Orders will not be counted in determining 
whether a member satisfies this requirement. Under the terms of another 
NASDAQ financial incentive program, a Designated Retail Order is 
defined as an ``agency or riskless principal order that originates from 
a natural person and is submitted to Nasdaq by a member that designates 
it . . . , provided that no change is made to the terms of the order 
with respect to price or side of market and the order does not 
originate from a trading algorithm or any other computerized 
methodology.'' \18\ The Designated Retail Order Program is aimed at 
encouraging market participants that make routing decisions with 
respect to retail orders to send them to NASDAQ. Because of the origin 
of such orders, they do not represent market-making activity and the 
submitting member is not in a position to influence their price. The 
QMM Program, however, is aimed at encouraging members that submit 
quotes/orders as market makers or as proprietary traders to adhere to 
market quality standards by quoting at the NBBO. Accordingly, NASDAQ 
does not believe that the program's purposes are served by including 
Designated Retail Orders in the calculations to determine whether a 
member has satisfied these quoting standards.
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    \18\ See Rule 7018.
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    Under the NBBO Setter Incentive program, NASDAQ provides an 
enhanced liquidity provider rebate with respect to displayed liquidity-
providing orders that set the NBBO or cause NASDAQ to join another 
trading center with a protected quotation at the NBBO. The NBBO Setter 
Incentive credit is paid on a monthly basis, and the amount is 
determined by multiplying the applicable rate by the number of shares 
of displayed liquidity provided to which a particular rate applies.\19\ 
A member receives an NBBO Setter Incentive credit at the $0.0001 rate 
with respect to all shares of displayed liquidity that are executed at 
a price of $1 or more in the Nasdaq Market Center during a given month 
if posted through an order that:
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    \19\ A member is not eligible to receive an NBBO Setter 
Incentive credit with respect to a Designated Retail Order.
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     displayed a quantity of at least one round lot at the time 
of execution; and
     either established the NBBO or was the first order posted 
on NASDAQ that had the same price as an order posted at another trading 
center with a protected quotation that established the NBBO.

If the member also provides a daily average volume of at least 5 
million shares of liquidity through orders that satisfy the foregoing 
criteria (i.e., that qualify for an NBBO Setter Incentive credit), it 
will receive a credit at the $0.0002 rate. Alternatively, a member may 
receive a credit at the $0.0002 per share executed rate if it is a QMM 
but does not satisfy certain volume criteria required for a QMM to 
receive a credit at the $0.0005 per share executed rate.
    A member receives an NBBO Setter Incentive credit at the $0.0005 
rate with respect to all shares of displayed liquidity that are 
executed at a price of $1 or more in the NASDAQ Market Center during a 
given month if posted through an order that:
     displayed a quantity of at least one round lot at the time 
of execution;
     either established the NBBO or was the first order posted 
on Nasdaq that had the same price as an order posted at another trading 
center with a protected quotation that established the NBBO;
     was entered through a QMM MPID; and
     the QMM has a volume of liquidity provided through the QMM 
MPID (as a percentage of Consolidated Volume) that exceeds the lesser 
of the volume of liquidity provided through such QMM MPID during the 
first month in which the MPID qualified as a QMM MPID (as a percentage 
of Consolidated Volume) or 1.0% of Consolidated Volume.
    NASDAQ believes that the NBBO Setter incentive program has achieved 
its goal of increasing the extent to which NASDAQ sets the NBBO or 
joins another market that has set the NBBO. Specifically, while the 
results are subject to daily fluctuation, NASDAQ has seen an upward 
trend in the extent of quoting and executions at the NBBO as the 
program has gained traction. Thus, shares of liquidity that set or join 
the NBBO have increased from a range of approximately 325-400 million 
in January 2013, to a range of approximately 500-650 million in April 
2013. Similarly, shares executed at the NBBO have increased from a 
range of approximately 105-130 million in January 2013, to a range of 
approximately 120-180 million in April 2013.
Pricing for Midpoint Orders and Other Non-Displayed Orders
    NASDAQ is proposing to adopt a new pricing tier for midpoint pegged 
and midpoint post only orders (``midpoint orders''). Currently, NASDAQ 
pays a credit of $0.0017 per share executed for midpoint orders if the 
member provides an average daily volume of more than 3 million shares 
through midpoint order during the month and $0.0015 per share executed 
for midpoint orders if the member provides an average daily volume of 3 
million or fewer shares through midpoint orders during the month. While 
modifying the text of the existing tiers slightly but without making 
substantive changes to them,\20\ NASDAQ is proposing a new tier for 
members that provide an average daily volume of 5 million or more 
shares of liquidity through midpoint orders during the month, provided, 
however, that the member's average daily volume of liquidity provided 
through midpoint orders during the month is at least 2 million shares 
more than in April 2013. Thus, the tier includes a requirement for both 
absolute volume and an increase in volume over a past level. In this 
respect, the proposed tier is similar to the ``Step-Up'' pricing tier 
offered by NYSEArca, which requires market participants to exceed 
volumes during a specified benchmark month.\21\
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    \20\ Specifically, NASDAQ is rearranging the location of pricing 
for midpoint orders and other forms of non-displayed orders to 
minimize repetition in the fee rule. In addition, NASDAQ is making 
the $0.0017 per share executed tier apply to members providing a 
daily average of ``3 million or more shares,'' rather than ``more 
than 3 million shares.'' NASDAQ does not view this change as 
substantive since the likelihood of a member providing exactly 3 
million share of liquidity per day and thereby being affected by the 
change is extremely remote. Rather, the change is designed to 
provide for consistent drafting for all pricing tiers applicable to 
midpoint orders, including the newly introduced tier for members 
providing a daily average of 5 million or more shares of liquidity 
through midpoint orders.
    \21\ https://usequities.nyx.com/markets/nyse-arca-equities/trading-fees.
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    With respect to non-displayed orders other than midpoint orders, 
NASDAQ currently provides a credit of $0.0010 per share executed. 
NASDAQ is proposing to require that members

[[Page 29196]]

receiving this credit provide an average daily volume of 1 million or 
more shares per day through non-displayed orders (including midpoint 
orders) in order to receive the $0.0010 per share credit. Members not 
meeting this volume requirement will receive a credit of $0.0005 per 
share executed for non-displayed orders.\22\
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    \22\ NASDAQ is also modifying the rule language pertaining to 
credits for non-displayed orders to remove references to a ``quote/
order,'' since all quotes are displayed.
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Routing Fees
    NASDAQ is proposing selected increases in its fees for routing 
orders to other trading venues. These changes are intended to ensure 
that NASDAQ's trading revenues are not unduly impacted by continued low 
volumes in the cash equities markets, and will primarily have the 
effect of making fees associated with routing to NASDAQ OMX BX (``BX'') 
and NASDAQ OMX PSX (``PSX''), NASDAQ's affiliated exchanges, somewhat 
higher than is currently the case. Specifically:
     NASDAQ currently provides a credit of $0.0005 per share 
executed for directed orders \23\ routed to BX, which NASDAQ proposes 
to eliminate, such that no charge or credit will apply. Depending on 
volumes and the nature of the order accessed, BX provides a rebate of 
$0, $0.0004, $0.0010, or $0.0014 per share executed with respect to 
orders that access liquidity from its book.
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    \23\ Directed Orders are orders that are directed to an exchange 
other than NASDAQ, as directed by the entering party, without 
checking the NASDAQ book. If unexecuted, the order (or unexecuted 
portion thereof) is returned to the entering party.
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     NASDAQ currently pays a credit of $0.0014 per share 
executed for TFTY, SOLV, CART, or SAVE \24\ orders that execute at BX. 
NASDAQ proposes to reduce the applicable credit to $0.0004 per share 
executed.
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    \24\ TFTY is a routing option under which orders check the 
NASDAQ System for available shares only if so instructed by the 
entering firm and are thereafter routed to destinations on the 
applicable routing table. If shares remain un-executed after 
routing, they are posted to the book. Once on the book, if the order 
subsequently is locked or crossed by another market center, the 
System will not route the order to the locking or crossing market 
center. SOLV is a routing option under which orders may either (i) 
route to BX and PSX, check the NASDAQ System, and then route to 
other destinations on the applicable routing table, or (ii) may 
check the NASDAQ System first and then route to destinations on the 
applicable routing table. If shares remain un-executed after 
routing, they are posted to the book. Once on the book, if the order 
subsequently is locked or crossed by another accessible market 
center, the System routes the order to the locking or crossing 
market center. CART is a routing option under which orders route to 
BX and PSX and then check the NASDAQ System. If shares remain un-
executed, they are posted to the book or cancelled. Once on the 
book, if the order subsequently is locked or crossed by another 
market center, the System will not route the order to the locking or 
crossing market center. SAVE is a routing option under which orders 
may either (i) route to BX and PSX, check the NASDAQ System, and 
then route to other destinations on the applicable routing table, or 
(ii) may check the NASDAQ System first and then route to 
destinations on the applicable routing table. If shares remain un-
executed after routing, they are posted to the book. Once on the 
book, if the order subsequently is locked or crossed by another 
market center, the System will not route the order to the locking or 
crossing market center.
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     NASDAQ current charges $0.0029 per share executed with 
respect to directed orders that access liquidity at PSX. NASDAQ 
proposes to increase the charge to $0.0035 per share executed, a fee 
equal to NASDAQ's existing charge for directed orders that access 
liquidity on venues other than BX, PSX, or the New York Stock Exchange 
(``NYSE''). PSX currently charges of a fee of $0.0028 or $0.0030 per 
share executed with respect to orders that access liquidity on its 
book.
     NASDAQ currently charges $0.0029 per share executed for 
SAVE or SOLV orders that execute at venues other than BX, PSX, or NYSE. 
NASDAQ proposes to increase the applicable charge to $0.0030 per share 
executed.
     NASDAQ currently charges $0.0027 per share executed for 
directed orders that are designated as Intermarket Sweep Orders and 
that execute at NYSE. NASDAQ proposes raising the applicable fee to 
$0.0029 per share executed. NYSE currently charges NASDAQ $0.0025 per 
share executed for orders that access liquidity on its book, so the 
change increases the extent of the markup charged by NASDAQ for routing 
such orders to NYSE.
     For other directed orders that execute at NYSE, NASDAQ 
currently charges $0.0026 per share executed for a member that provides 
an average daily volume of more than 35 million shares of liquidity, 
and $0.0027 per share executed for other members. NASDAQ proposes 
raising the applicable fees to $0.0028 and $0.0029 per share executed, 
respectively.
     For TFTY orders that execute at NYSE, NASDAQ currently 
charges $0.0024 per share executed. NASDAQ proposes increasing the fee 
to $0.0025 per share executed.
    For DOTI orders that execute at BX,\25\ NASDAQ currently passes 
through applicable fees and/or credits. (As noted above, applicable 
credits currently range from $0 to $0.0014 per share executed.) NASDAQ 
proposes to pay a fixed credit of $0.0004 per share executed with 
respect to such orders.\26\
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    \25\ DOTI is a routing option for orders that the entering firm 
wishes to direct to the NYSE or NYSE MKT without returning to 
NASDAQ. DOTI orders check the NASDAQ System for available shares and 
then are sent to destinations on the applicable routing table before 
being sent to NYSE or NYSE MKT, as appropriate. DOTI orders do not 
return to the NASDAQ book after routing. The entering firm may 
alternatively elect to have DOTI orders check the NASDAQ System for 
available shares and thereafter be directly sent to NYSE or NYSE MKT 
as appropriate.
    \26\ NASDAQ is also adding some clarifying language to the rule 
text relating to fees for DOTI orders.
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2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\27\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\28\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which NASDAQ operates or controls, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \27\ 15 U.S.C. 78f.
    \28\ 15 U.S.C. 78f(b)(4) and (5).
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    NASDAQ believes that the NBBO Setter Incentive program has been 
successful in encouraging members to add liquidity at prices that 
benefit all NASDAQ market participants and the NASDAQ market itself, 
and enhance price discovery, by establishing a new NBBO or allowing 
NASDAQ to join the NBBO established by another trading center. NASDAQ 
further believes that the proposal to remove the pilot limitation from 
the program is reasonable, consistent with an equitable allocation of 
fees, and not unfairly discriminatory. Specifically, NASDAQ believes 
that the level of the credits available through the program--$0.0001, 
$0.0002, or $0.0005 per share executed--is reasonable, in that it does 
not reflect a disproportionate increase above the rebates provided to 
all members with respect to the provision of displayed liquidity under 
Rule 7018. NASDAQ further notes that through the program, NASDAQ 
reduces fees for members that set the NBBO or join another market at 
the NBBO. The program is consistent with the Act's requirement for an 
equitable allocation of fees because members that establish the NBBO or 
cause NASDAQ to join another market at the NBBO benefit all investors 
by promoting price discovery and increasing the depth of liquidity 
available at the inside market. Such members also benefit NASDAQ itself 
by enhancing its competitiveness as a market that attracts marketable 
orders. Accordingly, NASDAQ believes that it is consistent with an 
equitable allocation of fees to pay an enhanced

[[Page 29197]]

rebate in recognition of these benefits to NASDAQ and its market 
participants. NASDAQ further notes that the program is consistent with 
an equitable allocation of fees because it is immediately available to 
all market participants that allow NASDAQ to set or join the NBBO, 
regardless of the size of the firm or its trading volumes. Finally, 
NASDAQ believes that the program and the payment of a higher rebate 
with respect to qualifying orders is not unfairly discriminatory 
because it is intended to promote the benefits described above, and 
because the magnitude of the additional rebate is not unreasonably high 
in comparison to the rebate paid with respect to other displayed 
liquidity-providing orders.
    NASDAQ further believes that the QMM program has been successful at 
encouraging members to promote price discovery and market quality by 
quoting at the NBBO for a significant portion of each day in a large 
number of securities, thereby benefitting NASDAQ and other investors by 
committing capital to support the execution of orders. With respect to 
the enhanced NBBO Setter Incentive rebate provided to QMMs, NASDAQ 
believes that the rebate itself is reasonable, equitable, and not 
unfairly discriminatory for the reasons discussed above with regard to 
the NBBO Setter Incentive program. In addition, NASDAQ believes that it 
is reasonable to pay a higher rebate under that program to QMMs because 
of the additional commitment to market quality reflected in the quoting 
requirements associated with being a QMM. Similarly, NASDAQ believes 
that the higher rebate is consistent with an equitable allocation of 
fees because a QMM that sets the NBBO is demonstrating both a specific 
commitment to the market through the NBBO-setting order and a broad 
commitment through its quoting activity throughout the month. 
Accordingly, NASDAQ believes that it is consistent with an equitable 
allocation to pay a higher rebate in comparison with the rebate for 
other NBBO-setting orders. Finally, NASDAQ believes that this higher 
rebate is not unfairly discriminatory because it is consistent with the 
market quality and competitiveness benefits associated with the program 
and because the magnitude of the additional rebate is not unreasonably 
high in comparison to the rebate paid with respect to other displayed 
liquidity-providing orders. NASDAQ further believes that reserving the 
highest NBBO Setter Incentive Credit of $0.0005 per share executed for 
QMMs that increase their participation in NASDAQ above a prior 
benchmark level (or 1.0% of Consolidated Volume) is reasonable because 
it provides a greater incentive for QMMs to benefit the Exchange and 
other market participants through high levels of liquidity provision. 
This aspect of the program is consistent with an equitable allocation 
of fees because members that contribute significantly to market quality 
by satisfying the requirements of both the QMM and the NBBO Setter 
Incentive program while participating actively in the NASDAQ Market 
Center justifiably earn the higher credit of $0.0005 per share 
executed. This aspect of the program is not unfairly discriminatory 
because a QMM that does not achieve the higher requirements may still 
receive a credit of $0.0002 for orders that set the NBBO, as well as a 
credit of $0.0001 for other displayed orders (excluding Designated 
Retail Orders).
    NASDAQ believes that the port fee discount for QMMs is consistent 
with an equitable allocation of fees because the fees for connectivity, 
such as the ports used for order entry, are a significant component of 
the overall cost of trading on NASDAQ and other trading venues. 
Accordingly, to the extent that a member maintains a significant 
presence in the NASDAQ market through the extent of its quoting at the 
NBBO, NASDAQ believes that it is equitable to provide the member a 
discount on this component of its trading costs. NASDAQ further 
believes that the discount is not unfairly discriminatory, because it 
is subject to a monthly cap, such that the disparity between the 
monthly costs of a QMM and another market participant with a similar 
configuration of order entry ports may not exceed $5,000. Finally, 
NASDAQ believes that the discount is reasonable because it will result 
in a fee reduction for members that provide the market quality benefits 
associated with QMM status.
    The aspect of the QMM program that features a $0.0028 per share 
executed pricing tier for QMMs is reasonable because it provides an 
incentive for QMMs to maintain their participation in NASDAQ near or 
above a prior benchmark level. The tier is consistent with an equitable 
allocation of fees because members that contribute significantly to 
market quality by satisfying the requirements of the QMM program while 
participating actively in the NASDAQ Market Center justifiably may be 
charged a lower fee with respect to order executions. The tier is not 
unfairly discriminatory because a QMM that does not achieve the higher 
requirements would pay a fee that is only slightly higher ($0.0029 or 
$0.0030 per share executed, depending on other aspects of its 
participation in NASDAQ).
    The proposed change to provide that Designated Retail Orders will 
not be considered when determining whether a QMM has met the NBBO 
requirements of the program is reasonable because the program is 
designed to increase the extent to which market makers and other market 
participants with proprietary trading interest choose to commit capital 
to support executions at the NBBO; accordingly, the program's goals are 
not supported by Designated Retail Orders, which do not reflect such 
trading interest. Moreover, the change is consistent with an equitable 
allocation of fees and is not unfairly discriminatory because 
Designated Retail Orders already benefit from a targeted financial 
incentive program designed to encourage them to be posted in NASDAQ.
    The proposed changes with respect to the introduction of a new 
pricing tier for midpoint orders is reasonable because it will result 
in a fee reduction for members using these orders to the required 
extent. As such, it is consistent with pricing tiers established at a 
range of national securities exchanges under which discounts are 
dependent on achieving stipulated volume requirements. NASDAQ believes 
that the proposed tier is consistent with an equitable allocation of 
fees because use of such orders benefits other market participants to 
the extent that they execute at the midpoint between the national best 
bid and best offer and thereby offer price improvement. Accordingly, 
while NASDAQ's fee schedule reflects incentives for the use of 
displayed orders, which aid in price discovery, it also reflects a 
preference for midpoint orders over other forms of non-displayed orders 
because of these price improvement benefits. The change is not unfairly 
discriminatory because NASDAQ offers other means by which a member 
might earn a comparable rebate, including the basic rebate of $0.0020 
per share executed paid with respect to displayed orders.
    The proposed introduction of a volume-based requirement for members 
to receive the current credit of $0.0010 per share executed for non-
displayed orders, and the proposed reduction in the credit for members 
not meeting the volume-based requirement, is reasonable because the 
volume requirement is modest, requiring members to provide an average 
daily volume of 1 million or more shares using non-displayed orders. 
Moreover, the changes are reasonable because members are able to 
receive much

[[Page 29198]]

higher rebates using midpoint orders or displayed orders. The changes 
are consistent with an equitable allocation of fees and not unfairly 
discriminatory because they are consistent with NASDAQ's stated policy 
of encouraging the use of displayed orders and midpoint orders, which 
promote price discovery and price improvement, respectively, rather 
than non-displayed orders. Accordingly, while NASDAQ offers non-
displayed orders to provide members with an option to conceal trading 
interest when they believe that doing so is to their advantage, 
nevertheless NASDAQ believes that it is equitable and not unfairly 
discriminatory for its fees to encourage usage of other order types.
    The changes with respect to TFTY, SOLV, CART, SAVE, DOTI and 
directed orders that execute at BX are reasonable because they will 
result in members using these routing strategies to access BX receiving 
a consistent credit of $0.0004 per share executed, which is equivalent 
to the basic credit paid by BX with respect to orders that access 
liquidity on BX but that do not achieve BX's volume tiers, or no credit 
for directed orders, which is consistent with NASDAQ's practice of 
charging a higher markup for directed orders. Thus, while the change 
will result in a reduction of credits paid to members using these 
routing strategies, such members will continue to receive a credit 
equivalent to that received by many BX members.\29\ The change is 
consistent with an equitable allocation of fees because use of NASDAQ's 
router and the affected routing strategies is voluntary and members may 
use other methods to route orders to other execution venues. 
Accordingly, the change is allocated solely to members that opt to use 
NASDAQ's router to access BX and that opt to use the routing strategies 
to which the change applies. In addition, the change is consistent with 
an equitable allocation and is not unfairly discriminatory because it 
is consistent with NASDAQ's practice of charging a markup for use of 
routing services above the fee charged to NASDAQ by the destination 
market, which allows NASDAQ to cover other costs of operation and to 
earn a profit.
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    \29\ Depending on routed volumes, NASDAQ may receive a credit of 
$0.0014 per share executed with respect to these orders. However, to 
the extent that the credit provided to members is lower, it reflects 
a charge for the use of NASDAQ's routing service, designed to cover 
other costs of operation and to allow a profit. To this extent, the 
change is consistent with other existing routing fees that are set 
in excess of the charges assessed to NASDAQ's router by the 
destination market.
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    The change with respect to directed orders that execute at PSX is 
reasonable because it will make the charge for such orders equal to the 
charge for directed orders that access liquidity at numerous other 
venues. The change is consistent with an equitable allocation of fees 
because use of NASDAQ's router and the use of directed orders is 
voluntary and members may use other methods to route orders to other 
execution venues. Accordingly, the change is allocated solely to 
members that opt to use NASDAQ's router to access PSX using directed 
orders. In addition, the change is consistent with an equitable 
allocation and is not unfairly discriminatory because the difference 
between the fee charged by PSX ($0.0030 per share executed) and the 
routing fee charged by NASDAQ will be generally consistent with the 
markup applicable to orders routed to other venues, allowing NASDAQ to 
cover other costs of operation and to earn a profit.
    The change with respect to SAVE or SOLV orders that execute at 
venues other than BX, PSX, or NYSE is reasonable because it is a small 
increase of only $0.0001 per share executed. Moreover, depending on the 
execution venue to which an order is routed, the fee of $0.0030 may be 
equal to the access fee charged by the recipient market or may reflect 
a markup. The change is consistent with an equitable allocation of fees 
because use of NASDAQ's router and the affected routing strategies is 
voluntary and members may use other methods to route orders to other 
execution venues. Accordingly, the change is allocated solely to 
members that opt to use NASDAQ's router and that opt to use the routing 
strategies in question. In addition, the change is consistent with an 
equitable allocation and not unfairly discriminatory because it relates 
to a wide range of trading venues to which NASDAQ may route orders 
under the SAVE and SOLV strategies. To the extent that the fee reflects 
a markup above the fees charged by destination venues, it allows NASDAQ 
to cover other costs of operation and to earn a profit.
    The changes with respect to directed orders and TFTY orders routed 
to NYSE are reasonable because they reflect modest increases of $0.0001 
or $0.0002 per share executed to the applicable fees. The modified fees 
reflect markups of $0.0003 or $0.0004 above the fee of $0.0025 per 
share executed charged to NASDAQ by NYSE with respect to routed orders, 
but such markups allow NASDAQ not only to cover the access fees charged 
to it, but also to cover other costs of operation and to allow a 
profit. The changes are consistent with an equitable allocation of fees 
because use of NASDAQ's router and the affected routing strategies is 
voluntary and members may use other methods to route orders to NYSE. 
Accordingly, the change is allocated solely to members that opt to use 
NASDAQ's router to access NYSE using directed orders or the TFTY 
strategy. The change is not unfairly discriminatory because the 
difference between the fee charged by NYSE ($0.0025 per share executed) 
and the routing fee charged by NASDAQ will continue to be lower than 
the markup applicable to other routed orders, including directed orders 
sent to certain other trading venues, but will be made more consistent 
by the change. In addition, the change is consistent with an equitable 
allocation and not unfairly discriminatory because it is consistent 
with NASDAQ's practice of charging a markup for use of routing services 
above the fee charged to NASDAQ by the destination market, which allows 
NASDAQ to cover other costs of operation and to allow a profit.

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. NASDAQ notes that 
it operates in a highly competitive market in which market participants 
can readily favor competing venues if they deem fee levels at a 
particular venue to be excessive, or rebate opportunities available at 
other venues to be more favorable. In such an environment, NASDAQ must 
continually adjust its fees to remain competitive with other exchanges 
and with alternative trading systems that have been exempted from 
compliance with the statutory standards applicable to exchanges. 
Because competitors are free to modify their own fees in response, and 
because market participants may readily adjust their order routing 
practices, NASDAQ believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited. In 
this instance, although some of the proposed changes impose conditions 
on the availability of certain previously introduced pricing 
incentives, the incentive programs in question remain in place and are 
themselves reflective of the need for exchanges to offer significant 
financial incentives to attract order flow. Similarly, although the 
proposed rule change includes increases in routing fees and decreases 
with respect to rebates for non-displayed orders, the

[[Page 29199]]

impact of these changes is limited to voluntary aspects of NASDAQ's 
services for which numerous alternatives exist. Accordingly, if the 
changes are unattractive to market participants, it is likely that 
NASDAQ will lose market share as a result. As a result, NASDAQ does not 
believe that the proposed changes will impair the ability of members or 
competing order execution venues to maintain their competitive standing 
in the financial markets.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \30\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\31\ 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.
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f)(2).
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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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please 
include File Number SR-NASDAQ-2013-075 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-2013-075. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2013-075 and should 
be submitted on or before June 7, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11775 Filed 5-16-13; 8:45 am]
BILLING CODE 8011-01-P