Monday, October 29, 2012

Equity Trader Alert #2012 - 46
NASDAQ to Introduce new Pricing Incentives, November 1, 2012

What is being announced?

Effective Thursday, November 1, 2012, pending filing with the Securities and Exchange Commission (SEC), The NASDAQ Stock Market^® (NASDAQ^®) will introduce NBBO Setter pricing and the QMM program. These programs will provide preferred rates on certain transactions and discounts for order entry ports for eligible NASDAQ Members.

What is NBBO Setter Pricing?

NASDAQ will begin providing additional rebates to firms upon execution for displayed orders that are the first to set a new level of the National Best Bid or Offer (NBBO), or that bring the NASDAQ Best Bid or Offer (QBBO) to the NBBO.

These orders will need to be displayed for at least a round lot at the time of execution to receive the rebate. These "Setter Shares" will earn a rebate of at least $0.0002 per share in addition to standard rebates for stocks above $1.

What is a Qualified Market Maker (QMM)?

A Member MPID attains QMM status by meeting certain quoting requirements each month. QMMs must:

• Maintain a one- or two-sided quote at the NBBO in an average of 1,000 securities for 25% of market hours each month.
• Be in compliance with NASDAQ's excessive messaging policy. Firms must ensure that their weighted order to trade ratio does not exceed a certain threshold, outlined in detail in the Excessive Messaging Policy.

What are the benefits of being a QMM?

• QMMs receive a 25% discount on order entry ports, up to $10,000 per MPID monthly.
• QMMs receive preferred rates for NBBO Setter Shares. QMMs receive a $0.0005 additional rebate for each Setter Share executed, in addition to their normal liquidity provision rebates.

How does the quoting requirement work?

At the end of each month, NASDAQ will calculate the average daily number of securities meeting the 25% standard. The 25% standard is met for a security if an MPID displays either a bid, an ask or both at the NBBO 25% of market hours.

How can my firm become a QMM?

All NASDAQ Members are eligible to attain QMM status on a month-to-month basis. NASDAQ will monitor the activity of all Members to determine which MPIDs qualify for QMM status. Members will be notified of their qualification as a QMM and automatically receive the preferred rates outlined above.

My firm uses multiple MPIDs to submit orders. How can I qualify under the program?

Each MPID is evaluated separately for QMM status. The $10,000 maximum discount on order entry ports also applies to each MPID separately. For example, firms with three MPIDs can attain a maximum $30,000 discount.

How is QMM status determined?

QMM status is determined at the end of each month using the standards outlined above and applied on an MPID basis.

Will there be any indication on order acknowledgements that an order was submitted at the price level necessary to receive the NBBO Setter incentive?

Order acknowledgements delivered via OUCH 4.2 will identify when an order is accepted at a price level eligible for the preferred rates for Setter Shares. For more information, please refer to the OUCH 4.2 Specifications.

Will NBBO Setter Shares receive a different liquidity code?

Orders that improve the NBBO will receive a '7' liquidity code. Orders that bring the NASDAQ Best Bid or Offer (QBBO) to prices equal to the NBBO will receive an '8' liquidity code. Currently, there is no economic difference between these liquidity codes.

Where can I find more information?

• Refer to the NASDAQ QMM FAQs on the NASDAQ OMX Trader^® website
• Contact Transaction Services U.S. Market Sales