[Federal Register Volume 85, Number 143 (Friday, July 24, 2020)]
[Notices]
[Pages 44945-44947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16021]
[[Page 44945]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89341; File No. SR-Phlx-2020-36]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Pricing Schedule at Equity 7, Section 3
July 20, 2020.
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 July 9, 2020, Nasdaq PHLX LLC (``Phlx'' 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 the Exchange. 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
The Exchange proposes to amend the Exchange's pricing schedule at
Equity 7, Section 3.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the
principal office of the Exchange, 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, 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to provide additional
credits to the Qualified Market Maker (``QMM'') Program. More
specifically, the Exchange proposes to provide a credit of $0.0003 per
share executed in Tape A securities and a credit of $0.0002 per share
executed in Tape B and Tape C securities with respect to all displayed
orders of a QMM in securities priced at $1 or more per share that
provide liquidity, provided that the QMM provides 0.12% or more of
total Consolidated Volume during the month and quotes the NBBO at least
10% of the time during Market Hours in an average of at least 850
securities per day during a month. Such credit will be in addition to
any credit provided under Equity 7, Section 3. The Exchange believes
these new credits will help improve market quality on its platform, as
discussed below.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\3\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\4\ 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, and is
not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers. The proposal is also consistent with
Section 11A of the Act relating to the establishment of the national
market system for securities.
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\3\ 15 U.S.C. 78f(b).
\4\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal Is Reasonable
The Exchange's proposed additional credits provided to its QMMs are
reasonable in several respects. As a threshold matter, the Exchange is
subject to significant competitive forces in the market for equity
securities transaction services that constrain its pricing
determinations in that market. The fact that this market is competitive
has long been recognized by the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C. Circuit stated as follows: ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \5\
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\5\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \6\
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\6\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
equity security transaction services. The Exchange is only one of
several equity venues to which market participants may direct their
order flow. Competing equity exchanges offer similar tiered pricing
structures to that of the Exchange, including schedules of rebates and
fees that apply based upon members achieving certain volume thresholds.
Within this environment, market participants can freely and often
do shift their order flow among the Exchange and competing venues in
response to changes in their respective pricing schedules. As such, the
proposal represents a reasonable attempt by the Exchange to increase
its liquidity and market share relative to its competitors.
In particular, the Exchange proposes to add an additional QMM
rebate that would provide a credit of $0.0003 per share executed in
Tape A and a credit of $0.0002 per share executed in Tape B and Tape C
with the goal of increasing the overall incentive to QMMs to further
increase their liquidity addition activity on the Exchange. The
proposal will also provide an incentive for QMMs to add liquidity at
the NBBO in more securities, which is intended to improve market
quality. To the extent that this proposed change leads to an increase
in overall liquidity activity on the Exchange and more competitive
pricing, this will improve the quality of the Exchange's market and
increase its attractiveness to existing and prospective participants.
[[Page 44946]]
The Proposal Is an Equitable Allocation of Credits
The Exchange believes its proposal will allocate its proposed
credits fairly among its market participants. The proposal will provide
a QMM with an additional opportunity to receive credits for adding
liquidity to the Exchange. It is equitable for the Exchange to provide
an additional means for QMMs to receive credits whose orders add
liquidity to the Exchange as a means of incentivizing increased
liquidity addition activity. An increase in overall liquidity addition
activity on the Exchange will improve the quality of the Exchange's
equity market and increase its attractiveness to existing and
prospective participants. Furthermore, it is equitable for the Exchange
to propose credit for participants with orders in securities in Tapes A
due to the Exchange's goal to specifically promote increased liquidity
in securities in Tape A. An increase in overall liquidity adding
activity on the Exchange will improve the quality of the PSX market and
increase its attractiveness to existing and prospective participants.
Any participant that is dissatisfied with the proposed new credits
is free to shift their order flow to competing venues that provide more
favorable pricing or less stringent qualifying criteria.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory. As an initial matter, the Exchange believes that
nothing about its pricing model 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 the
Exchange and its competitors have long employed with the assent of the
Commission. It is fair because it incentivizes customer activity that
increases liquidity, enhances price discovery, and improves the overall
quality of the equity markets.
The Exchange's proposal to add additional credits to the QMM
Program is not unfairly discriminatory because any member organization
may quote at the NBBO at the levels required by the proposed additional
credit criteria and may provide the level of liquidity required by the
proposed additional credit criteria, and in fact, the proposed
additional credits will not only enable a member organization to meet
the qualifications for a QMM, it would also enable the member
organization to obtain a credit in addition to any credit provided for
under Equity 7, Section 3.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
The Exchange does not believe that its proposal will place any
category of Exchange participants at a competitive disadvantage. The
Exchange's proposed credit for quoting at the NBBO and providing
liquidity will not place any burden on intramarket competition because
all members will have the opportunity to obtain the additional proposed
credits if the member increases liquidity and quotes at the NBBO, which
will further improve overall market quality.
Moreover, the Exchange's proposal to modify its QMM Program will
not burden intramarket competition because the proposed additional
credits within the QMM Program will provide members with an added
incentive to continue to provide all member organizations with an
opportunity to obtain supplemental credits for transactions if they
improve the market by providing significant quoting at the NBBO in a
large number of securities which the Exchange believes will improve
market quality.
Intermarket Competition
Addressing whether the proposed credits could impose a burden on
competition on other SROs that is not necessary or appropriate, the
Exchange believes that its proposed modification to its QMM Program
will not impose a burden on competition because the Exchange's
execution services are completely voluntary and subject to extensive
competition both from the other 12 live exchanges and from off-exchange
venues, which include 34 alternative trading systems that trade
national market system stock. The Exchange 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, the Exchange must continually
adjust its credits 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,
the Exchange believes that the degree to which new credits in this
market may impose any burden on competition is extremely limited.
The proposed credits for adding liquidity are reflective of this
competition because, as a threshold issue, the Exchange is a relatively
small market so its ability to burden intermarket competition is
limited. In this regard, even the largest U.S. equities exchange by
volume only has 17-18% market share, which in most markets could hardly
be categorized as having enough market power to burden competition.
Moreover, as noted above, price competition between exchanges is
fierce, with liquidity and market share moving freely between exchanges
in reaction to fee and credit changes. This is in addition to free flow
of order flow to and among off-exchange venues which comprised more
than 41% of industry volume for the month of June 2020.
In sum, the Exchange intends for the proposed credits to increase
member incentives to add liquidity to the Exchange and to contribute to
market quality, which is reflective of fierce competition for order
flow noted above; however, if the proposed credit and QMM Program
incentives are unattractive to market participants, it is likely that
the Exchange will either fail to increase its market share or even lose
market share as a result. Accordingly, the Exchange does not believe
that the proposed new credits 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.
[[Page 44947]]
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)(ii) of the Act.\7\
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\7\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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.
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-Phlx-2020-36 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-Phlx-2020-36. 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 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. 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-Phlx-2020-36, and should be submitted on
or before August 14, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16021 Filed 7-23-20; 8:45 am]
BILLING CODE 8011-01-P