[Federal Register Volume 85, Number 96 (Monday, May 18, 2020)]
[Notices]
[Pages 29766-29770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10518]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88857; File No. SR-BX-2020-008]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Transaction Credits and Fees, at Equity 7, Section 118(a)
May 12, 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 May 1, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule
[[Page 29767]]
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 transaction credits
and fees, at Equity 7, Section 118(a), as described further below.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqbx.cchwallstreet.com/, 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 Exchange operates on the ``taker-maker'' model, whereby it
generally pays credits to members that take liquidity and charges fees
to members that provide liquidity. Currently, the Exchange has a
schedule, at Equity 7, Section 118(a), which consists of several
different credits that it provides for orders in securities priced at
$1 or more per share that access liquidity on the Exchange and several
different charges that it assesses for orders in such securities that
add liquidity on the Exchange.
Over the course of the last few months, the Exchange has
experimented with various reformulations of its pricing schedule with
the aim of increasing activity on the Exchange, improving market
quality, and increasing market share.\3\ Although these changes have
met with some success, the Exchange has yet to achieve the results it
desires. Accordingly, the Exchange proposes to again revise its pricing
schedule, in large part, in a further attempt to improve the
attractiveness of the market to new and existing participants.
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\3\ See Securities Exchange Act Release No. 34-87271 (October
10, 2019), 84 FR 55621 (October 17, 2019) (SR-BX-2019-035);
Securities Exchange Act Release No. 34-87271 (September 24, 2019),
84 FR 57530 (October 25, 2019) (SR-BX-2019-031); Securities Exchange
Act Release No. 34-86120 (June 17, 2019); 84 FR 29270 (June 21,
2019) (SR-BX-2019-026); Securities Exchange Act Release No. 34-85912
(May 22, 2019); 84 FR 24834 (May 29, 2019) (SR-BX-2019-013).
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Description of the Changes
Credits for Accessing Liquidity through the Exchange
The Exchange proposes to revise its schedule of credits to add one
new credit. Specifically, the Exchange proposes to provide a $0.0027
per share executed credit (for securities in Tapes A and B) and a
$0.0026 per share executed credit (for securities in Tape C) for orders
that access liquidity (excluding orders with Midpoint pegging and
excluding orders that receive price improvement and execute against an
order with a Non-displayed price) entered by a member: (i) Whose
combined liquidity removing and adding activities equal to or exceed
0.185% of total Consolidated Volume during a month; and (ii) adds
liquidity equal to or exceeding an average daily volume of 50,000
shares in a month. The Exchange believes that that the availability of
the new credits will incentivize members that currently qualify for one
of the lesser credits to increase their existing levels of liquidity
adding and removal activities on the Exchange to attain it. In doing
so, the Exchange intends to improve the overall quality and
attractiveness of the Nasdaq BX market.
Charges for Adding Liquidity to the Exchange
In addition to the above, the Exchange proposes to amend its
existing schedule of charges for adding displayed liquidity to the
Exchange.
First, the Exchange proposes to amend its existing $0.0026 per
share executed charge for displayed orders entered by a member that
adds liquidity equal to or exceeding 0.15% of total Consolidated Volume
during a month. The Exchange proposes to reduce the percentage of total
Consolidated Volume needed to qualify for this charge, from 0.15% to
0.11% total Consolidated Volume. By easing the volume requirements for
this charge, which represents a discount off of the standard $0.0030
per share executed charge (for all other orders), the Exchange intends
to increase the number of members that seek to and do qualify for it,
and thereby provide incentives for members to add liquidity to the
Exchange.
Second, the Exchange proposes to add to its schedule of charges a
new $0.0025 per share executed charge for displayed orders entered by a
member that adds liquidity equal to or exceeding 0.175% of total
Consolidated Volume during a month. The Exchange proposes to add this
new charge, which also represents a discount off of the standard
charge, to provide a new incentive for members that already qualify for
the $0.0026 per share executed charge to increase their volume of
liquidity adding activity so as to qualify for the further discounted
charge of $0.0025 per share executed.
Impact of the Changes
Those participants that act as net removers of liquidity from the
Exchange will benefit directly from the proposed addition of new
credits that would apply to orders that remove liquidity from the
Exchange. Those participants that act as net adders of liquidity will
also benefit from the new credits insofar as they are tied to members
achieving a threshold level of liquidity adding and removing activity
on the Exchange; any ensuing increase in liquidity adding and removing
activity will improve the overall quality of the market, to the benefit
of all members.
Meanwhile, the proposed changes to ease the qualifying volume
threshold to qualify for the $0.0026 per share executed charge and to
establish a new $0.0025 charge, will benefit participants that are net
adders of liquidity by enabling them to more easily qualify for the
existing $0.0026 per share executed discounted charge, and by providing
members with an incentive to increase their liquidity adding activity
to qualify for the new $0.0025 per share executed discounted charge.
The Exchange notes that its proposal is not otherwise targeted at or
expected to be limited in its applicability to a specific segment(s) of
market participants nor will it apply differently to different types of
market participants.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\4\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\5\ 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
[[Page 29768]]
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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\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal Is Reasonable
The Exchange's proposed changes to its schedule of credits and fees
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'. . . .'' \6\
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\6\ 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.'' \7\
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\7\ 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, and it represents a small percentage of the overall market.
It is also only one of several taker-maker exchanges. 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.\8\
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\8\ See CBOE EDGA Fee Schedule, at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; NYSE National Fee Schedule,
at https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf.
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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.\9\
Separately, the Exchange has provided the SEC staff with multiple
examples of instances where pricing changes by BX and other exchanges
have resulted in shifts in exchange market share. Within the foregoing
context, the proposal represents a reasonable attempt by the Exchange
to increase its liquidity and market share relative to its competitors.
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\9\ The Exchange perceives no regulatory, structural, or cost
impediments to market participants shifting order flow away from it.
In particular, the Exchange notes that these examples of shifts in
liquidity and market share, along with many others, have occurred
within the context of market participants' existing duties of Best
Execution and obligations under the Order Protection Rule under
Regulation NMS.
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The Exchange has designed its proposed schedule of credits and
charges to provide increased overall incentives to members to increase
their liquidity removal and adding activity on the Exchange. An
increase in liquidity removal and adding activity on the Exchange will,
in turn, improve the quality of the Nasdaq BX market and increase its
attractiveness to existing and prospective participants. Generally, the
proposed new credit and amended and new charges will be comparable to,
if not favorable to, those that its competitors provide.\10\
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\10\ See n. 8, supra.
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The Exchange notes that those participants that are dissatisfied
with the proposed credits or fees are free to shift their order flow to
competing venues that offer them higher credits or lower fees.
The Proposal Is an Equitable Allocation of Credits
The Exchange believes its proposal will allocate its proposed new
credits and amended and new charges fairly among its market
participants. It is equitable for the Exchange to increase its credits
to participants whose orders remove liquidity from the Exchange as a
means of incentivizing increased liquidity removal activity on the
Exchange as well as to tie the receipt of the credits to the member
engaging in a threshold volume of combined liquidity removal and adding
activity on the Exchange. Furthermore, it is equitable for the Exchange
to propose higher credits for participants with orders in securities in
Tapes A and B than it proposes for participants with orders in Tape C
due to the Exchange's desire to specifically promote increased
liquidity removal activity in securities in Tapes A and B. Likewise, it
is equitable for the Exchange to reduce charges to participants whose
orders add liquidity to the Exchange as a means of incentivizing
liquidity adding activity. An increase in overall liquidity removal and
addition activity on the Exchange will improve the quality of the
Nasdaq BX market and increase its attractiveness to existing and
prospective participants.
Any participant that is dissatisfied with the proposed new credist
or its amended or new charges is free to shift their order flow to
competing venues that provide more favorable pricing or less stringent
qualifying criteria.
The Proposed Credit 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 volume-based tiered 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 intends for its proposal to improve market quality for
all members on the Exchange and by extension attract more liquidity to
the market, improving market wide quality and price discovery. Both net
removers and net adders of liquidity to the Exchange stand to benefit
directly from the proposed changes. Moreover, to the extent that the
proposed changes increase liquidity addition and removal activity on
the Exchange, this will improve market quality and the attractiveness
of the Nasdaq BX market,
[[Page 29769]]
to the benefit of all existing and prospective participants.
Furthermore, it is not unfairly discriminatory for the Exchange to
propose higher credits for participants with orders in securities in
Tapes A and B than it proposes for participants with orders in Tape C
because the Exchange seeks to promote increased liquidity removal
activity specifically in securities in Tapes A and B.
Moreover, any participant that is dissatisfied with the proposed
new credits or proposed amended or new charges is free to shift their
order flow to competing venues that provide more favorable pricing or
less stringent qualifying criteria.
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 participant at a competitive disadvantage. As
noted above, all members of the Exchange will benefit from any increase
in market activity that the proposal effectuates. Members may grow or
modify their businesses so that they can receive the higher credits or
lower charge. Moreover, members are free to trade on other venues to
the extent they believe that the credit provided or fees imposed are
not attractive. As one can observe by looking at any market share
chart, price competition between exchanges is fierce, with liquidity
and market share moving freely between exchanges in reaction to fee and
credit changes. The Exchange notes that the tier structure is
consistent with broker-dealer fee practices as well as the other
industries, as described above.
Intermarket Competition
Addressing whether the proposal could impose a burden on
competition on other SROs that is not necessary or appropriate, the
Exchange believes that its proposed modifications to its schedule of
credits and charges 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 32 alternative trading systems. 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 fees and 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 and credits in response, and because market participants may
readily adjust their order routing practices, the Exchange believes
that the degree to which fee and credits changes in this market may
impose any burden on competition is extremely limited.
The proposed restated schedule of credits and charges is 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 has less than 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 37% of industry volume for the month of March
2019.
The Exchange intends for the proposed changes to its schedule of
credits and fees, in the aggregate, to increase member incentives to
engage in the removal and addition of liquidity on the Exchange. These
changes are procompetitive and reflective of the Exchange's efforts to
make it an attractive and vibrant venue to market participants.
In sum, if the changes proposed herein is unattractive to market
participants, it is likely that the Exchange will lose market share as
a result. Accordingly, the Exchange does not believe that the proposed
changes 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.
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.\11\
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\11\ 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 No. SR-BX-2020-008 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 No. SR-BX-2020-008. 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,
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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 No. SR-BX-2020-008, and should be
submitted on or before June 8, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10518 Filed 5-15-20; 8:45 am]
BILLING CODE 8011-01-P