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Self-Regulatory Organizations; The NASDAQ Stock Market, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Rebates in Penny Pilot Options

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.

A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ proposes to modify Chapter XV, entitled “Options Pricing,” at Section 2(1) governing the rebates and fees assessed for option orders entered into NOM. The Exchange proposes to amend certain qualifications related to Customer and Professional Penny Pilot Options Rebates to Add Liquidity tiers to offer Participants a greater opportunity to earn Customer and Professional rebates. The Exchange also proposes to modify NOM Market Maker Penny Pilot Options Rebates to Add Liquidity to offer additional rebate opportunities. The Exchange believes that additional rebate opportunities will attract additional order flow to the Exchange to the benefit of all market participants.
Customer and Professional Rebates To Add Liquidity
Today, the Exchange offers tiered Penny Pilot Options Rebates to Add Liquidity to Customers and Professionals based on various criteria with rebates ranging from $0.20 to $0.48 per contract. Participants may qualify for Customer and Professional Penny Pilot Options Rebates to Add Liquidity in Tiers 1-5 and Tier 8 by adding a certain amount of Customer and/or Professional liquidity in Penny Pilot Options or Non-Penny Pilot Options as specified by each tier.
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The Exchange is proposing to amend these tiers and permit Participants to add Customer, Professional, Firm,
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Non-NOM Market Maker
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and/or Broker-Dealer
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liquidity in Penny Pilot Options and/or Non-Penny Pilot Options in order to qualify for the Customer and/or Professional Penny Pilot Options Rebates to Add Liquidity in Tiers 1-5 and Tier 8.

Tier 1 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of up to 0.10% of total industry customer equity and ETF option average daily volume (“ADV”) contracts per day in a month a $0.20 per contract rebate. The Exchange is proposing to amend Tier 1 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of up to 0.10% of total industry customer equity and ETF option average daily volume (“ADV”) contracts per day in a month would continue to receive a $0.20 per contract rebate.

Tier 2 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.10% to 0.20% of total industry customer equity and ETF option ADV contracts per day in a month a $0.25 per contract rebate. The Exchange is proposing to amend Tier 2 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.10% to 0.20% of total industry customer equity and ETF option ADV contracts per day in a month would continue to receive a $0.25 per contract rebate.

Tier 3 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.20% to 0.30% of total industry customer equity and ETF option ADV contracts per day in a month a $0.42 per contract rebate. The Exchange is proposing to amend Tier 3 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.20% to 0.30% of total industry customer equity and ETF option ADV contracts per day in a month would continue to receive a $0.42 per contract rebate.

Tier 4 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.30% to 0.40% of total industry customer equity and ETF option ADV contracts per day in a month a $0.43 per contract rebate. The Exchange is proposing to amend Tier 4 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.30% to 0.40% of total industry customer equity and ETF option ADV contracts per day in a month would continue to receive a $0.43 per contract rebate.

Tier 5 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.40% of total industry customer equity and ETF option ADV contracts per day in a month, or Participants that add (1) Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 25,000 or more contracts per day in a month, (2) the Participant has certified for the Investor Support Program set forth in Rule 7014, and (3) the Participant executed at least one order on NASDAQ’s equity market a $0.45 per contract rebate. The Exchange is proposing to amend Tier 5 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.40% of total industry customer equity and ETF option ADV contracts per day in a month, or Participant adds (1) Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 25,000 or more contracts per day in a month, (2) the Participant has certified for the Investor Support Program set forth in Rule 7014, and (3) the Participant executed at least one order on NASDAQ’s equity market would continue to receive a $0.45 per contract rebate.

Tier 8 currently offers Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 0.75% or more of national customer volume in multiply-listed equity and ETF options classes in a month a $0.48 per contract Customer rebate and a $0.47 per contract Professional rebate. The Exchange is proposing to amend Tier 8 to provide that Participants that add Customer, Professional, Firm, Non-NOM Market Maker and/or Broker-Dealer
liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 0.75% or more of national customer volume in multiply-listed equity and ETF options classes in a month would continue to receive a $0.48 per contract Customer rebate and a $0.47 per contract Professional rebate.
With respect to Tier 8, today, Participants that add Customer and/or Professional liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 1.25% or more of national customer volume in multiply-listed equity and ETF options classes in a month will receive an additional $0.02 per contract Penny Pilot Options Tier 8 Customer Rebate to Add Liquidity for each transaction which adds liquidity in Penny Pilot Options in that month. The Exchange also proposes to amend this incentive by also permitting Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity to qualify for the incentive. The amended rule text would provide, “Participants that add Customer, Professional, Firm, Non-NOM Market Maker, and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 1.25% or more of national customer volume in multiply-listed equity and ETF options classes in a month will receive an additional $0.02 per contract Penny Pilot Options Customer Rebate to Add Liquidity for each transaction which adds liquidity in Penny Pilot Options in that month.”
NOM Market Maker Rebates To Add Liquidity
Today, the Exchange pays NOM Market Maker Penny Pilot Options Rebates to Add Liquidity based on various criteria in six tiers with rebates which range from $0.20 to $0.42 per contract as noted below.

Today, the Tier 3 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity pays a $0.30 per contract rebate, except in QQQ, SPY and VXX which pay a $0.40 per contract rebate to Participants that add NOM Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.25% to 0.60% of total industry customer equity and ETF option ADV contracts per day in a month. The Exchange proposes to add AAPL to the list of symbols that are eligible for the Tier 3 rebate of $0.40 per contract. Today, the Exchange pays a Tier 3 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity of $0.30 per contract in AAPL. Today, the Tier 4 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity pays a $0.32 per contract rebate, except in QQQ, SPY and VXX which pay a $0.40 per contract rebate to Participants that add NOM Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of above 0.60% to 0.90% of total industry customer equity and ETF option ADV contracts per day in a month. The Exchange proposes to add AAPL to the list of symbols that are eligible for the Tier 4 rebate of $0.40 per contract. Today, the Exchange pays a Tier 4 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity of $0.32 per contract in AAPL. The Exchange believes that paying a higher rebate for AAPL transactions will encourage a greater number of transactions in AAPL.
Today, the Tier 6 NOM Market Maker Penny Pilot Option Rebate to Add Liquidity pay a $0.42 per contract rebate to Participants that add NOM Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.80% of total industry customer equity and ETF option ADV contracts per day in a month and qualifies for the Tier 7 or Tier 8 Customer and/or Professional Rebate to Add Liquidity in Penny Pilot Options or Participant adds NOM Market Maker liquidity in Penny Pilot Options and/or Non-Penny Pilot Options above 0.90% of total industry customer equity and ETF option ADV contracts per day in a month. The Exchange is proposing to amend the Tier 6 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity to also provide that a Participant that adds Customer, Professional, Firm, Non-NOM Market Maker, and/or Broker-Dealer liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 1.40% or more of national customer volume in multiply-listed equity and ETF options classes in a month may also qualify for the Tier 6 rebate of $0.42 per contract. This would provide Participants another method to qualify for the rebate.
2. Statutory Basis
NASDAQ believes that the proposed rule changes are consistent with the provisions of Section 6 of the Act,
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in general, and with Section 6(b)(4) of the Act,
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in particular, in that they provide 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 as described in detail below.

Customer and Professional Rebates To Add Liquidity
The Exchange’s proposal to amend the Customer and Professional Penny Pilot Options Rebates to Add Liquidity Tiers 1-5 and Tier 8 to provide that Participants may qualify for those rebates by adding not only Customer and Professional liquidity in Penny and/or Non-Penny Pilot Options, as specified in each tier, but also Firm, Non-NOM Market Maker and Broker-Dealer liquidity in Penny and/or Non-Penny Pilot Options is reasonable because the Exchange believes that the addition of the various types of market participant liquidity will allow additional Participants to qualify for these rebate tiers, who may not qualify today, or receive higher rebates. The Exchange believes that offering additional types of liquidity to qualify for the Customer and Professional Penny Pilot Options Rebates to Add Liquidity will incentivize Participants to send a greater amount of order flow to NOM.
The Exchange’s proposal to amend the Customer and Professional Penny Pilot Options Rebates to Add Liquidity Tiers 1-5 and Tier 8 to provide that Participants may qualify for those rebates by adding not only Customer and Professional liquidity in Penny and/or Non-Penny Pilot Options, as specified in each tier, but also Firm, Non-NOM Market Maker and Broker-Dealer liquidity in Penny and/or Non-Penny Pilot Options is equitable and not unfairly discriminatory because the Exchange is permitting all types of market participant liquidity in Tiers 1-5 and Tier 8 of its Customer and Professional Penny Pilot Options rebate tiers as a means to qualify for these rebates. Further, all Participants may qualify to be eligible for these rebates, provided they transact the requisite amount of liquidity. Customer liquidity offers unique benefits to the market which benefits all market participants. Customer liquidity benefits all market participants by providing more trading opportunities, which attracts market makers. An increase in the activity of these market participants in turn facilitates tighter spreads, which may cause an additional corresponding increase in order flow from other market participants. The Exchange believes that encouraging Participants to add Professional liquidity creates competition among options exchanges because the Exchange believes that the rebates may cause market participants to select NOM as a venue to send Professional order flow.
The Exchange believes that with respect to Tier 8, permitting Participants to add Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity, in addition to Customer and Professional liquidity, to qualify for the additional $0.02 per contract Tier 8 incentive is reasonable because the Exchange believes the opportunity to calculate the qualification for the incentive by adding other types of market participant liquidity will allow additional market participants to qualify for the incentive. Additionally, permitting other qualifying volume to count towards meeting the Tier 8 incentive will incentivize Participants to send a greater amount of order flow to NOM.
The Exchange believes that with respect to Tier 8, permitting Participants to add Firm, Non-NOM Market Maker and/or Broker-Dealer liquidity, in addition to Customer and Professional liquidity, to qualify for the additional $0.02 per contract Tier 8 incentive is equitable and not unfairly discriminatory because all Participants are eligible for the Tier 8 incentive, provided they transact the requisite volume.
NOM Market Maker Penny Pilot Options Rebates To Add Liquidity
The Exchange’s proposal to amend the NOM Market Maker Penny Pilot Options Rebate to Add Liquidity Tiers 3 and 4 to increase the AAPL rebate from $0.30 to $0.40 per contract in Tier 3 and from $0.32 to $0.40 per contract in Tier 4 is reasonable because the proposal seeks to encourage Participants to transact a greater amount of AAPL liquidity in order to receive the higher rebate of $0.40 per contract. The Exchange believes that offering Participants NOM Market Makers the ability to obtain higher rebates is reasonable because it will encourage additional order interaction.
The Exchange’s proposal to amend the NOM Market Maker Penny Pilot Options Rebate to Add Liquidity Tiers 3 and 4 to increase the AAPL rebate from $0.30 to $0.40 per contract in Tier 3 and from $0.32 to $0.40 per contract in Tier 4 is equitable and not unfairly discriminatory because all NOM Market Makers may qualify for the Tier 3 and Tier 4 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity.
The Exchange believes that it is reasonable, equitable, and not unfairly discriminatory to adopt different pricing for AAPL, as compared to other options, because pricing by symbol is a common practice on many U.S. options exchanges as a means to incentivize order flow to be sent to an exchange for execution in the most actively traded options classes, in this case actively traded Penny Pilot Options.
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The Exchange notes that AAPL is one of the most actively traded options in the U.S. The Exchange believes that this pricing will incentivize members to transact options on AAPL on NOM in order to obtain the higher $0.40 per contract rebate.

The Exchange’s proposal to amend the Tier 6 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity to offer an additional method
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to qualify for the $0.42 per contract rebate is reasonable because additional Participants may qualify for the Tier 6 rebate if they are able to transact the requisite volume specified in the additional proposed qualification to add any type of market participant liquidity. The Exchange also believes that this amendment to the Tier 6 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity will incentivize Participants to send a greater amount of order flow to NOM.

The Exchange’s proposal to amend the Tier 6 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity to offer an additional method to qualify for the $0.42 per contract is equitable and not unfairly discriminatory because all Participants may qualify for the Tier 6 rebate provided they transact the requisite amount of liquidity.
B. Self-Regulatory Organization’s Statement on Burden on Competition

NASDAQ does not believe that the proposed rule changes will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended.

The Exchange believes that amending Tiers 1-5 and Tier 8 of the Customer and Professional Penny Pilot Options Rebates to Add Liquidity, as well as the Tier 8 incentive of $0.02 per contract to permit Participants to add all types of market participant liquidity does not create an undue burden on competition, rather the proposal will incentivize market participants to send additional order flow to the Exchange. Customer liquidity offers unique benefits to the market which benefits all market participants. Customer liquidity benefits all market participants by providing more trading opportunities, which attracts market makers. An increase in the activity of these market participants in turn facilitates tighter spreads, which may cause an additional corresponding increase in order flow from other market participants. The Exchange believes that encouraging Participants to add Professional liquidity creates competition among options exchanges because the Exchange believes that the rebates may cause market participants to select NOM as a venue to send Professional order flow.
The Exchange’s proposal to amend the Tier 3 and 4 NOM Market Maker Penny Pilot Options Rebates to Add Liquidity to pay a higher rebate for AAPL of $0.40 per contract, similar to SPY, QQQ and VXX, does not create an undue burden on competition because all NOM Market Makers may qualify for the Tier 3 or 4 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity. The Exchange’s proposal to offer another means to qualify for the Tier 6 NOM Market Maker Penny Pilot Options Rebate to Add Liquidity does not create an undue burden on competition, rather the proposal will incentivize market participants to send additional order flow to the Exchange.
The Exchange believes the differing outcomes, rebates and fees created by the Exchange’s proposed pricing incentives contribute to the overall health of the market place to the benefit of all Participants that willing choose to transact options on NOM. For the reasons specified herein, the Exchange does not believe this proposal creates an undue burden on competition. The Exchange operates in a highly competitive market comprised of twelve U.S. options exchanges in which many sophisticated and knowledgeable market participants can readily and do send order flow to competing exchanges if they deem fee levels or rebate incentives at a particular exchange to be excessive or inadequate. These market forces support the Exchange belief that the proposed rebate structure and tiers proposed herein are competitive with rebates and tiers in place on other exchanges. The Exchange believes that this competitive marketplace continues to impact the rebates present on the Exchange today and substantially influences the proposals set forth above.
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.


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