[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Notices]
[Pages 29270-29273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13116]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86120; File No. SR-BX-2019-019]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Credits at Equity 7, Section 118(a)
June 17, 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 June 4, 2019, Nasdaq BX, Inc. (``BX'' 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 credits 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 pays
credits to members that take liquidity and
[[Page 29271]]
charges fees to members that provide liquidity. Under Equity 7, Section
118(a), the Exchange describes the charges and credits applied for the
use of the order execution and routing services of the Exchange System
by members for all securities priced at $1 or more per share that it
trades. As described below, the Exchange is amending the qualification
criteria of a credit provided to members for entering Orders that
access liquidity in the BX System.
Description of the Change
The purpose of the proposed rule change is to reduce the
qualification criteria required to receive a credit for entering an
Order in a Tape A or C security that accesses liquidity in the BX
System. Specifically, the Exchange currently provides a credit of
$0.0015 per share executed for Tape A and C securities for an Order
that accesses 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 that accesses
liquidity equal to or exceeding 0.070% of total Consolidated Volume
during month. The Exchange is proposing to decrease the Consolidated
Volume requirement from 0.070% to 0.065%.\3\
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\3\ The Exchange calculates Consolidated Volume on a monthly
basis to determine qualification for the credit. Because the
Exchange is filing this on the second trading day of the month of
June 2019, it will apply qualification for the tier based on 0.070%
of total Consolidated Volume for the single trading day during which
this proposed change was not in effect. The Exchange will apply the
proposed 0.065% criteria for the remaining trading days during the
month. As a consequence, qualification for the credit will be
determined by a weighted combination of the two levels of
Consolidated Volume based on the number of trading days the
particular requirement is in effect.
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Applicability to and Impact on Participants \4\
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\4\ On May 21, 2019, the SEC Division of Trading and Markets
(the ``Division'') issued fee filing guidance titled ``Staff
Guidance on SRO Rule Filings Relating to Fees'' (``Guidance'').
Within the Guidance, the Division noted, among other things, that
the purpose discussion should address ``how the fee may apply
differently (e.g., additional cost vs. additional discount) to
different types of market participants (e.g., market makers,
institutional brokers, retail brokers, vendors, etc.) and different
sizes of market participants.'' See Guidance (available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees). The Guidance
also suggests that the purpose discussion should include numerical
examples. Where possible, the Exchange is including numerical
examples. In addition, the Exchange is providing data to the
Commission in support of its arguments herein. The Guidance covers
all aspects of a fee filing, which the Exchange has addressed
throughout this filing.
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The proposed reduction in the qualification criteria is not
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. Non-members
cannot qualify for the credit.\5\ The proposed change will lower the
threshold required to achieve a better remove rate and therefore will
make it more achievable for more members.\6\ Consequently, the proposed
change will not negatively impact members that do not qualify because
their credit opportunities will remain unchanged. Moreover, the
proposed fee is a reduction in costs for members that access quotes on
the Exchange, because in the absence of the proposed change members
would receive a lower rebate, resulting in a higher cost for
transacting on the Exchange. Based on April 2019 volumes, the existing
tier represents a minimum of 4.387 million shares removed. Based on
past experience administering similar pricing proposals, the Exchange
estimates that multiple members of various types would be reasonably
positioned to meet the amended tier.
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\5\ Id.
\6\ As substantiated by data provided to the Commission.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\7\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\8\ 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. Moreover, the Exchange believes that its
proposal complies with Commission guidance on SRO fee filings that the
Commission Staff issued on May 21, 2019.\9\
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(4) and (5).
\9\ See Guidance, supra note 4. Although the Exchange believes
that this filing complies with the Guidance, the Exchange does not
concede that the standards set forth in the Guidance are consistent
with the Exchange Act and reserves its right to challenge those
standards through administrative and judicial review, as
appropriate.
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The Proposal Is Reasonable
The Exchange's proposed reduction to the qualification requirement
is 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' . . . .'' \10\
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\10\ 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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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. These competing pricing
schedules, moreover, are presently comparable to if not more generous
than those that the Exchange provides.\11\
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\11\ The Exchange notes that NYSE National and CBOE EDGA offer
higher rebates for their members accessing liquidity on their
exchanges. CBOE EDGA provides a standard rebate for liquidity
removers of $0.0024 per share executed (or higher if a member
qualifies for a volume tier), and NYSE National has a range from a
fee of $0.0005 per share executed to a rebate of $0.0020 per share
executed. In addition, CBOE BYX offers a similar pricing schedule to
Nasdaq BX.
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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.\12\
Separately, the Exchange has provided the SEC staff multiple examples
of instances where pricing
[[Page 29272]]
changes by BX and other exchanges have resulted in shifts in exchange
market share.
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\12\ The Exchange perceives no regulatory, structural, or cost
impediments to market participants shifting order flow away from it.
See Guidance, supra note 4. 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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Within the foregoing context, the proposal represents a reasonable
attempt by the Exchange to increase its liquidity and market share
relative to its competitors. The Exchange also believes that the
particular adjustment that it proposes to its volume qualification
criteria for the $0.0015 per share executed credit is a reasonable
attempt to achieve this end because this credit tier is particularly
important to the Exchange's customers. That is, this credit is one for
which several Exchange members presently qualify and whose orders
comprise substantial remove volume on the Exchange. It is also a credit
tier that has been endangered by the recent decline in the Exchange's
market share insofar as this decline has made it more difficult for
members to achieve and maintain its total Consolidated Volume
requirement. Finally, the Exchange believes that adjusting the
qualification criteria for this particular credit will not only help
ensure that qualifying members will continue to qualify for the credit,
but it also will render the credit readily achievable for a broader
group of members. The Exchange estimates that the proposal will provide
multiple members with a reasonable opportunity to meet the adjusted
tier.
The Proposal Is an Equitable Allocation of Credits
The Exchange believes its proposal allocates its rebates fairly
among its market participants. The Exchange is not proposing to adjust
the amount of the credit, which will remain at the $0.0015 per share
executed level that the Commission has already approved. By proposing
to lower the criteria to qualify for the credit, the Exchange intends
to help ensure that those members that currently qualify for it will
continue to do so even as the Exchange's market share has declined. It
also intends to broaden the base of members who can qualify for it.
Finally, the Exchange intends that its proposal will help to stem or
reverse the loss in market share that the Exchange is experiencing.
The Exchange intends for the 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. The
proposal neither targets nor will it have a disparate impact on any
particular category of market participant, and in fact, will allow more
market participants to take advantage of the existing credit. The
Exchange calibrated the proposal to impact a broad swath of members
whose orders comprise substantial remove volume so that it would have a
significant effect. The Exchange expects that the proposal will enable
the multitude of members that currently qualify for the credit tier to
continue to do so. Additionally, based on May 2019 volume, the Exchange
estimates that the proposal will provide multiple members with a
reasonable opportunity to meet the adjusted tier. As to those members
that do not presently qualify for the credit tier, and will not qualify
for the adjusted tier, the proposal will not adversely impact their
existing pricing or their ability to qualify for other credit tiers.
The Proposed Fee 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.
Furthermore, the Exchange's proposal to adjust the qualification
criteria for the $0.0015 per share executed credit tier is not unfairly
discriminatory. The Exchange intends for the 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. The proposal neither targets nor will it have a disparate
impact on any particular category of market participant. Instead, the
Exchange calibrated the proposal to impact a broad swath of members
whose orders comprise substantial remove volume so that it would have a
significant effect. The Exchange expects that the proposal will enable
the multitude of existing members that currently qualify for the credit
tier to continue to do so. Additionally, based on May 2019 volume, the
Exchange estimates that the proposal will provide multiple members with
a reasonable opportunity to meet the adjusted tier. As to those members
that do not presently qualify for the credit tier, and will not qualify
for the adjusted tier (although they might in the future as their
business grows), the proposal will not adversely impact their existing
pricing or their ability to qualify for other credit tiers.
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
Addressing whether the proposed change could place certain market
participants at a relative disadvantage compared to other market
participants, the Exchange does not believe that members that do not
have the capacity to provide the level of Consolidated Volume required
by the proposal are disadvantaged. As noted above, all members benefit
from the removal of liquidity by those that choose to meet the tier
qualification criteria. Members may grow their businesses so that they
have the capacity to receive the credit. Moreover, members are free to
trade on other venues to the extent they believe that the fees assessed
and credits provided 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 proposed fee could impose a burden on
competition on other SROs that is not necessary or appropriate, the
Exchange believes that the proposed change to the qualification
criteria for the credit for accessing liquidity of Tape A and C does
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
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available at other venues to be more favorable. In such an environment,
the Exchange must continually adjust its fees 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
fee changes in this market may impose any burden on competition is
extremely limited.
The proposed reduced criteria 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 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 38% of industry
volume for the month of April 2019.
In sum, if the changes proposed herein are 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.\13\
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\13\ 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-BX-2019-019 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-BX-2019-019. 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-BX-2019-019 and should be submitted on
or before July 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13116 Filed 6-20-19; 8:45 am]
BILLING CODE 8011-01-P