[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69402-69405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27198]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87725; File No. SR-FINRA-2019-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the Securities Transaction Credits
Applicable to FINRA/Nasdaq TRF Participants
December 12, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 5, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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 FINRA. FINRA has
designated the proposed rule change as ``establishing or changing a
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon receipt of this filing by the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 7610A to modify the
securities transaction credits that apply to FINRA members that utilize
the FINRA/Nasdaq Trade Reporting Facility Carteret (the ``FINRA/Nasdaq
TRF Carteret'') and the FINRA/Nasdaq Trade Reporting Facility Chicago
(the ``FINRA/Nasdaq TRF Chicago'') (collectively, the ``FINRA/Nasdaq
TRFs'').
The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The FINRA/Nasdaq TRFs are facilities of FINRA that are operated by
Nasdaq, Inc. (``Nasdaq''). In connection with the establishment of the
FINRA/Nasdaq TRFs, FINRA and Nasdaq entered into a limited liability
company agreement (the ``LLC Agreement''). Under the LLC Agreement,
FINRA, the ``SRO Member,'' has sole regulatory responsibility for the
FINRA/Nasdaq TRFs. Nasdaq, the ``Business Member,'' is primarily
responsible for the management of the FINRA/Nasdaq TRFs' business
affairs, including establishing pricing for use of the FINRA/Nasdaq
TRFs, to the extent those affairs are not inconsistent with the
regulatory and oversight functions of FINRA. Additionally, the Business
Member is obligated to pay the cost of regulation and is entitled to
the profits and losses, if any, derived from the operation of the
FINRA/Nasdaq TRFs.
Pursuant to FINRA Rule 7610A, FINRA members that report over-the-
counter (``OTC'') trades in NMS stocks to the FINRA/Nasdaq TRFs
(``Participants'') may qualify for revenue sharing payments, in the
form of transaction credits, based upon those transactions that are
attributable to such Participants.\5\ This rule is administered by
Nasdaq, in its capacity as the Business Member and operator of the
FINRA/Nasdaq TRFs on behalf of FINRA.\6\
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\5\ A transaction is attributable to a Participant if the
Participant is identified as the Executing Party in a trade report
submitted to a FINRA/Nasdaq TRF that the FINRA/Nasdaq TRF
subsequently submits to the Consolidated Tape Association or the
Nasdaq Securities Information Processor. Credits are paid on a
quarterly basis.
\6\ FINRA's oversight of this function performed by the Business
Member is conducted through a recurring assessment and review of TRF
operations by an outside independent audit firm.
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Rule 7610A sets forth tiered schedules of transaction credits that
describe, for reports in transactions in each Tape (A, B and C), the
percentage of attributable revenue sharing that a Participant will
receive if it achieves specified percentages of market share. The
schedules provide for ``Retail Participants'' \7\ to receive higher
revenue
[[Page 69403]]
sharing percentages than other FINRA members at the two lowest tiers
for transactions in each Tape. For reference purposes, the existing
transaction credit schedules are as follows:
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\7\ Supplementary Material .01 to Rule 7620A defines a ``Retail
Participant'' as a ``participant in the FINRA/Nasdaq Trade Reporting
Facility for which substantially all of its trade reporting activity
on the FINRA/Nasdaq Trade Reporting Facility comprises Retail
Orders.'' The term ``Retail Order'' is also defined under Rule
7620A.01.
Tape A
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Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
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Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 95 95
equal to 1%......................
Less than 1% but greater than or 75 75
equal to 0.50%...................
Less than 0.50% but greater than 20 75
or equal to 0.10%................
Less than 0.10%................... 0 75
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Tape B
------------------------------------------------------------------------
Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
------------------------------------------------------------------------
Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 90 90
equal to 1%......................
Less than 1% but greater than or 70 70
equal to 0.35%...................
Less than 0.35% but greater than 10 70
or equal to 0.10%................
Less than 0.10%................... 0 70
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Tape C
------------------------------------------------------------------------
Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
------------------------------------------------------------------------
Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 95 95
equal to 1%......................
Less than 1% but greater than or 75 75
equal to 0.50%...................
Less than 0.50% but greater than 20 75
or equal to 0.10%................
Less than 0.10%................... 0 75
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Nasdaq, as the Business Member, has determined to modify the
schedule of transaction credits applicable to the FINRA/Nasdaq TRFs to
provide a more competitive distribution of pricing incentives and
benefits among Participants to the extent that they engage in a
substantial volume of Executing Party activity. The proposed amended
schedule is also designed to be more competitive with the schedule of
transaction credits applicable to the other FINRA TRF.\8\ FINRA
proposes to amend Rule 7610A accordingly.
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\8\ Pursuant to FINRA Rule 7610B, the FINRA/NYSE TRF presently
shares with its participants, for all Tapes, 100% of attributable
revenue for market shares greater than or equal to 2.0%, 95% of
attributable revenue for market shares greater than or equal to 0.5%
but less than 2.0%, 85% of attributable revenue for market shares
greater than or equal to 0.1% but less than 0.5%, and 0% of
attributable revenue for market shares of less than 0.1%.
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The proposed rule change would amend the third revenue sharing tier
for both Retail and non-Retail Participants (i.e., Participants that
achieve market shares of less than 1.0% but greater than or equal to
0.50% for Tape A and C securities, and less than 1.0% but greater than
or equal to 0.35% for Tape B securities) by increasing the percentage
of revenue shared with Participants that qualify for the tier.
Specifically, Participants that achieve a market share of less than
1.0% but greater than or equal to 0.50% in securities in Tapes A and C
(or greater than or equal to 0.35% for Tape B securities) will be
eligible to receive 85% of attributable revenues for securities in all
Tapes.
Nasdaq, as the Business Member, estimates that 13 Participants
currently qualify for the existing revenue sharing tier. Assuming that
these Participants continue to qualify for this tier, Nasdaq estimates,
based on current trade reporting activity, that all of these
Participants will experience an increase in the amount of the credits
that they receive. Based on a review of trade reporting activity for
the period July 2018 to June 2019, Nasdaq estimates that these
Participants could potentially receive between $10,000 and $190,000
more credits than they receive today. No new product or service will
accompany the proposed changes to revenue sharing credits.
FINRA has filed the proposed rule change for immediate
effectiveness. The operative date will be January 1, 2020.
[[Page 69404]]
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\9\ which requires, among
other things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. All similarly situated members are subject to the same fee
structure and access to the FINRA/Nasdaq TRFs is offered on fair and
nondiscriminatory terms.
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\9\ 15 U.S.C. 78o-3(b)(5).
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The Proposal Is Reasonable
The proposed change to modify the revenue sharing credits for the
FINRA/Nasdaq TRFs is reasonable in several respects. As a threshold
matter, the FINRA/Nasdaq TRFs are subject to significant competitive
forces in the market for trade reporting services for OTC trades in NMS
stocks that constrain its pricing determinations in that market. The
competing FINRA TRF presently offers a similar tiered pricing structure
to that of the FINRA/Nasdaq TRFs, including a schedule of revenue
sharing credits that apply based upon its participants achieving
certain levels of market share.\10\ Participants can freely and do
shift their trade reporting activity between the various FINRA TRFs in
response to pricing, product or service changes. The proposed rule
change renders more generous the FINRA/Nasdaq TRFs' revenue sharing
credits to maintain and increase activity and market share.
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\10\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are
operated by different business members competing for market share,
FINRA does not take a position on whether the pricing for one TRF is
more favorable or competitive than the pricing for the other TRF.
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The Proposal Is an Equitable Allocation of Credits and Charges
The proposed rule change will allocate revenue sharing credits
fairly among FINRA/Nasdaq TRF Participants. Nasdaq, as the Business
Member, has determined to increase the revenue sharing credits that the
FINRA/Nasdaq TRFs offer to their Participants as a means of rewarding
those Participants that engage in substantial amounts of trade
reporting activity on the FINRA/Nasdaq TRFs, reducing the costs to such
Participants of reporting trades to the FINRA/Nasdaq TRFs, and
improving the competitive standing of the FINRA/Nasdaq TRFs relative to
their competitor, which offers similar credits to its participants.
Nasdaq believes it is equitable to target such increases only to
Participants with market shares of less than 1.0% but greater than or
equal to 0.50% (for securities in Tapes A and C) and 0.35% (for
securities in Tape B). The tier selected accounts for 5% of the
Transaction Credit eligible Participant base and 17% of trade reporting
volume of the FINRA/Nasdaq TRFs and it is a tier that is particularly
vulnerable to competition from the other FINRA TRF, which presently
offers to share 95% of attributable revenues with its participants that
achieve market shares of equal to or greater than 0.5% and less than
2.0%. The proposed rule change will render the FINRA/Nasdaq TRFs more
competitive with its competitors in terms of revenue sharing for
Participants in this market segment.
The Proposal Is Not Unfairly Discriminatory
The proposed rule change is not unfairly discriminatory. As an
initial matter, nothing about the volume-based tiered pricing model of
the FINRA/Nasdaq TRFs is inherently unfair. Instead, it is a rational
pricing model that is well-established and ubiquitous in today's
economy among firms in various industries--from co-branded credit cards
to grocery stores to cellular telephone data plans--that use it to
reward the loyalty of their best customers that provide high levels of
business activity and incent other customers to increase the extent of
their business activity. It is also a pricing model that FINRA TRFs
have long employed under FINRA rules filed with the Commission.
Nasdaq, as the Business Member, intends for the proposal to
increase incentives to FINRA/Nasdaq TRF Participants to engage in
substantial trade reporting activity on the FINRA/Nasdaq TRFs. The
increased incentive will be available to all Participants with market
shares of less than 1.0% but greater than or equal to 0.50% (Tapes A
and C securities) and 0.35% (Tape B securities).
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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.
Intramarket Competition
Nasdaq, as the Business Member, does not believe that the proposed
rule change will place any category of Participant at a competitive
disadvantage. As discussed above, all Participants that currently
qualify for credits will continue to qualify for credits under the
proposed rule change and will receive higher rates of credits than they
do today. Meanwhile, Participants that do not qualify for the proposed
tiers (or that do not qualify for the higher of the proposed tiers) may
grow or modify their businesses so that they will do so. Participants
are free to report their OTC trades in NMS stocks to the competing TRF
to the extent they believe that the credits provided are not
attractive. Price competition between the TRFs is substantial, with
trade reporting activity and market share moving freely between them in
reaction to fee and credit changes.
Intermarket Competition
Nasdaq believes that the proposed modifications to the schedule of
credits applicable to the FINRA/Nasdaq TRFs will not impose a burden on
competition among the FINRA trade reporting facilities because use of
the FINRA/Nasdaq TRFs is completely voluntary and subject to
competition.\11\ Currently, with the exception of FINRA/Nasdaq TRF
Retail Participants in the lowest tier, the competing FINRA TRF
provides higher transaction credits to its participants than the FINRA/
Nasdaq TRFs for engaging in similar levels of trade reporting activity.
Nasdaq, as the Business Member, seeks to increase the credits that the
FINRA/Nasdaq TRFs provide to market participants so that these credits
are more competitive. Nasdaq believes that the proposed increase in
credits is necessary to retain reported volume. Indeed, firms that
report OTC trades in NMS stocks can readily favor competing facilities
if they deem fee levels at a particular facility to be excessive, or
credit opportunities available at other facilities to be more
favorable.
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\11\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are
operated by different business members competing for market share,
FINRA does not take a position on whether the pricing for one TRF is
more favorable or competitive than the pricing for the other TRF.
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The competition, in turn, is free to modify its own fees and
credits in response to this proposed rule change to maintain or
increase its attractiveness to participants. Accordingly, Nasdaq
believes that the risk that this proposed rule change will impose any
burden on intermarket competition is extremely limited.
If market participants determine that the changes proposed herein
are inadequate or unattractive, it is likely that the FINRA/Nasdaq TRFs
will lose market share as a result. Accordingly, the proposed rule
change will not impair the ability of the other FINRA
[[Page 69405]]
TRF to maintain its competitive standing.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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 \12\ and paragraph (f)(2) of Rule 19b-4
thereunder.\13\ 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. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2019-029 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2019-029. 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 website (http://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 website 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 such filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2019-029 and should be submitted
on or before January 8, 2020.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27198 Filed 12-17-19; 8:45 am]
BILLING CODE 8011-01-P