[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Notices]
[Pages 49779-49782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20474]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86997; File No. SR-NASDAQ-2019-071]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Equity 7, Section 118(a)
September 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 September 3, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' 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 Equity 7, Sections 118(a)(1), (2)
and (3) to add a new credit under each of these rules for non-displayed
orders (other than Supplemental Orders) that provide liquidity.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.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
[[Page 49780]]
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 amend Equity 7,
Sections 118(a)(1), (2) and (3) to add a new credit under each of these
rules for non-displayed orders (other than Supplemental Orders) that
provide liquidity. Equity 7, Section 118(a) provides the fees assessed
and credits provided for the use of the order execution and routing
services of the Nasdaq Market Center by members for all securities
priced at $1 or more that it trades. The Exchange is proposing to adopt
a credit of $0.0010 per share executed applicable to Nasdaq-listed
securities (``Tape C'') under paragraph (a)(1) of the rule, and credits
of $0.0015 per share executed applicable to securities listed on NYSE
(``Tape A'') and securities listed on exchanges other than Nasdaq and
NYSE (``Tape B'') under paragraphs (a)(2) and (a)(3) of the rule,
respectively. To qualify for each of these credits a member must
provide 0.10% or more of Consolidated Volume \3\ through non-displayed
orders (other than midpoint orders), and provide 0.15% or more of
Consolidated Volume through midpoint orders during the month. The
proposed credits are provided to qualifying members for non-displayed
orders not otherwise covered by the lists of credits provided for non-
displayed orders (other than Supplemental Orders) that provide
liquidity under each of the respective paragraphs of Equity 7, Section
118(a).
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\3\ The term ``Consolidated Volume'' means the total
consolidated volume reported to all consolidated transaction
reporting plans by all exchanges and trade reporting facilities
during a month in equity securities, excluding executed orders with
a size of less than one round lot. For purposes of calculating
Consolidated Volume and the extent of a member's trading activity
the date of the annual reconstitution of the Russell Investments
Indexes shall be excluded from both total Consolidated Volume and
the member's trading activity. See Equity 7, Section 118(a).
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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 designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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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 change to its schedule of credits and
charges 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'. . . .'' \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. 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\ CBOE BZX provides a rebate of $0.0015 per share executed for
non-displayed orders that add liquidity in the securities of any
tape. See Cboe BZX U.S. Equities Exchange Fee Schedule, available at
https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
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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\ 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 such shifts in liquidity and
market share occur 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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Generally, the Exchange's proposed schedule of credits and charges
Equity 7, Section 118(a) provide increased overall incentives to
members to increase their liquidity provision activity on the Exchange,
and to do so broadly in orders in securities in all Tapes. An increase
in overall liquidity provision activity on the Exchange will, in turn,
improve the quality of the Exchange's equity market and increase its
attractiveness to existing and prospective participants. The proposed
new credits are consistent with the current design of Equity 7, Section
118(a) because it provides incrementally increased incentives in return
for increased liquidity provision in non-displayed orders. Moreover,
the proposed credits 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 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 member with an opportunity to earn a higher credit for its non-
displayed orders above the current credits provided to members that
provide 0.03% or more of Consolidated Volume during the month through
midpoint orders or other non-displayed orders, which are $0.0005 per
share executed for Tape C securities and $0.0010 per share executed for
Tape A and B securities. Like these current credits, the proposed
credits for Tape A and B securities are higher than the proposed
credits for Tape C securities. This is reflective of the Exchange's
[[Page 49781]]
desire to increase market share in Tape A and B securities, which is
lower in comparison to market share in Tape C securities.
Moreover, it is equitable for the Exchange to increase its overall
credits to participants whose orders provide liquidity to the Exchange
as a means of incentivizing increased liquidity provision activity and
to do so broadly in orders in securities in all Tapes. An increase in
overall liquidity provision activity on the Exchange will improve the
quality of the Exchange's equity market and increase its attractiveness
to existing and prospective participants.
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 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 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. Although
net providers of liquidity will benefit most from the proposed credits,
this result is fair insofar as increased liquidity provision activity
will help to improve market quality and the attractiveness of the
Exchange's equity market to all existing and prospective participants.
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 an increase
in the provision 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 higher credits. 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 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 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 new credits are reflective of this competition
because, even as one of the largest U.S. equities exchanges by volume,
the Exchange only has approximately 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 July
2019.
In sum, the Exchange intends for the proposed credits to increase
member incentives to provide liquidity in non-displayed Orders to the
Exchange, which is reflective of fierce competition for order flow
noted above; however, if the proposed credits 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.
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 Number SR-NASDAQ-2019-071 on the subject line.
[[Page 49782]]
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-NASDAQ-2019-071. 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-NASDAQ-2019-071 and should be submitted
on or before October 15, 2019.
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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20474 Filed 9-20-19; 8:45 am]
BILLING CODE 8011-01-P