Daily Rules, Proposed Rules, and Notices of the Federal Government
NASDAQ is proposing a change to modify rebates for order execution and its fees for order entry ports through the introduction of new market quality incentive programs on a pilot basis. NASDAQ will implement the proposed change on November 1, 2012. The text of the proposed rule change is available at
In its filing with the Commission, the self-regulatory organization 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
NASDAQ is introducing two new pricing programs designed to create incentives for members to improve market quality. The programs will be in effect on a pilot basis from November 1, 2012 until April 30, 2013, subject to being modified, terminated, extended, or made permanent through a subsequent proposed rule change. The pilot nature of the proposals will allow NASDAQ to assess and report to the Commission on the effects of the programs on bid-ask spreads, depth of liquidity at the inside, and such other factors as may be deemed relevant.
First, under the NBBO Setter Incentive program, NASDAQ will provide an enhanced liquidity provider rebate with respect to displayed liquidity-providing orders that set the national best bid or best offer ("NBBO") or join another trading center with a protected quotation at the NBBO. The NBBO Setter Incentive credit will be paid on a monthly basis, and the amount will be determined by multiplying $0.0005 or $0.0002 by the number of shares of displayed liquidity provided to which a particular rate applies. A member will receive an NBBO Setter Incentive credit at the $0.0002 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; 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. Thus, the credit will be paid for orders that incur risk by setting the inside market or allowing NASDAQ to join another trading center that has already set the inside market, thereby aiding price discovery and NASDAQ's market quality. The credit will not be paid with respect to orders that join another order on NASDAQ that has already established or joined the NBBO.
A member will receive 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; and
* Was entered through a market participant identifier ("MPID") that qualified for the Qualified Market Maker ("QMM") program during the month. The QMM program is the other market quality incentive being introduced by NASDAQ in this proposed rule change, and is discussed below.
NASDAQ is proposing a market quality incentive program under which 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;
* Through such MPID the member quotes at the NBBO at least 25% of the time during regular market hours
Thus, to be a QMM, a member must make a significant contribution to market quality by providing liquidity at the NBBO in a large number of stocks for a significant portion of the day. In addition, the member must avoid imposing the burdens on NASDAQ and its market participants that may be associated with excessive rates of entry of orders away from the inside and/or order cancellation. A QMM may be, but is not required to be, a registered market maker in any security; thus, the QMM designation does not by itself impose a two-sided quotation obligation or convey any of the benefits associated with being a registered market maker. The designation will, however, reflect the QMM's commitment to provide meaningful and consistent support to market quality and price discovery by extensive quoting at the NBBO in a large number of securities. Thus, the program is designed to attract liquidity both from traditional market makers and from other firms that are willing to commit capital to support liquidity at the NBBO. Through these incentives, NASDAQ hopes to provide improved trading conditions for all market participants through narrower bid-ask spreads and increased depth of liquidity available at the inside market. In addition, the program reflects an effort to use financial incentives to encourage a wider variety of members, including members that may be characterized as high-frequency trading firms, to make positive commitments to promote market quality.
A member that is a QMM with respect to a particular MPID will receive:
* An NBBO Setter Incentive credit of $0.0005 with respect to orders that qualify for the NBBO Setter Incentive program (
* A 25% discount on fees for ports used for entering orders for that MPID,
NASDAQ is proposing these discounts as a means of recognizing the value of market participants that consistently quote at the NBBO in a large number of securities. Even when such market participants are not formally registered as market makers, they risk capital by offering immediately executable liquidity at the price most favorable to market participants on the opposite side of the market. Such activity promotes price discovery and dampens volatility and enhances the attractiveness of NASDAQ as a trading venue. A discount on order entry port fees is an appropriate incentive to encourage broad-based liquidity provision because active management of quotes across over 1,000 securities may require a member to employ numerous order entry ports. NASDAQ further notes that the proposed discount on port fees is similar in structure and purpose to a provision of the fee schedule for BATS's options market under which the $1,000 per month fee for a port with bulk-quoting capabilities is waived if a member achieves certain market quality standards with respect to options on more than 25 underlying securities.
In addition to the foregoing changes, NASDAQ is also modifying the name of Rule 7014 to reflect the fact that it includes a range of market quality incentive programs, adding definitions of "NBBO", "trading center", and "protected quotation", and "regular market hours" to the rule, and making conforming changes to the letter designations of paragraphs within the rule.
NASDAQ believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,
The proposed NBBO Setter Incentive program is intended to encourage 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 believes that the level of the credits available through the program--$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, which range from $0.0020 to $0.00295 per share executed. NASDAQ further notes that by introducing the program, NASDAQ is reducing 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 actionable orders. Accordingly, NASDAQ believes that it is consistent with an equitable allocation of fees to pay an enhanced 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.
Similarly, the proposed QMM program is intended to encourage 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 believes that the proposed 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 $10,000. Finally, NASDAQ believes that the discount is
Finally, 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. 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. NASDAQ believes that the proposed rule change reflects this competitive environment because it is designed to reduce fees for members that enhance the quality of NASDAQ's market.
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. Because the market for order execution is extremely competitive, members may readily opt to disfavor NASDAQ's execution services if they believe that alternatives offer them better value. By reducing fees for order execution and order entry ports, the proposal is a manifestation of the continued intense level of competition in the market for order execution.
Written comments were neither solicited nor received.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.