[Federal Register Volume 84, Number 190 (Tuesday, October 1, 2019)]
[Notices]
[Pages 52150-52152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21242]
[[Page 52150]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87109; File No. SR-Phlx-2019-36]
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
September 25, 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 13, 2019, 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 transaction fees at
Equity 7, Section 3, as described further below.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.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
Presently, the Exchange has a pricing schedule, at Equity 7,
Section 3, which sets forth several different fees that it charges for
orders in securities priced at $1 or more per share that remove
liquidity from the Exchange and several different credits that it
providers for orders in such securities that add liquidity on the
Exchange. The Exchange recently amended this pricing schedule to
increase removal activity on the Exchange and to improve overall market
quality.\3\ Currently, the Exchange provides the following schedule of
credits for displayed orders/quotes that provide liquidity to the
Exchange:
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\3\ See SR-Phlx-2019-35.
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$0.0026 per share executed credit for quotes/orders
entered by member organizations that provide 0.15% or more of total
Consolidated Volume during a month;
$0.0024 per share executed credit for quotes/orders
entered by member organizations that provide 0.07% or more of total
Consolidated Volume during a month; and
$0.0023 per share executed credit for all other quotes/
orders.
The Exchange now proposes to reduce its $0.0023 per share executed
credit for all other displayed quotes/orders to $0.0020 per share
executed. The Exchange proposes this change to further offset the costs
of its recent reductions to its transaction fees, as set forth in SR-
Phlx-2019-35, which the Exchange intends to incentivize increased
liquidity removal activity on the Exchange, and to further improve
overall market quality. Nasdaq [sic] notes that it mistakenly omitted
this change when it filed SR-Phlx-2019-35, and wishes to correct that
omission going forward.
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 credit for all other
displayed orders/quotes 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\ See Cboe EDGX U.S. Equities Exchange Fee Schedule, available
at https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/.
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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
[[Page 52151]]
context, the proposal represents a reasonable attempt by the Exchange
to further offset the costs of its recent action \10\ to improve market
quality and increase its 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.
\10\ See SR-Phlx-2019-35.
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Generally, the Exchange's schedule of credits and charges in Equity
7, Section 3, as recently amended by SR-Phlx-2019-35, is intended to
provide strong incentives to member organizations to increase their
liquidity removal activity on the Exchange, and to do so broadly in
orders in securities in all Tapes. The Exchange believes that an
increase in overall liquidity removal 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
proposal to reduce the Exchange's credit for all other displayed
orders/quotes is an effort to help offset the costs of its recent
reductions in transaction fees for removing liquidity from the
Exchange. Even as lowered, the proposed amended credit will be
comparable to, if not favorable to, those that its competitors
provide.\11\
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\11\ See n. 8, supra.
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The Proposal Is an Equitable Allocation of Credits and Charges
The Exchange believes its proposal will allocate its proposed
credits fairly among its market participants. The Exchange believes
that it is equitable to offset the costs of its recent proposal to
charge lower fees for liquidity removal \12\ by lowering its
corresponding credits for liquidity provision to the Exchange. Although
the proposed amended credit will be lower than the existing credit, the
Exchange believes that the proposed credit will continue to be
comparable to liquidity adding rebates provided by its competitors.\13\
That said, the Exchange again notes that those participants that do not
wish to receive the lower credit are free to shift their order flow to
competing venues that offer them higher credits.
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\12\ See SR-Phlx-2019-35.
\13\ See n. 8, supra.
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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 offset its costs of
improving market quality for all members on the Exchange. Although net
adders of liquidity will bear the burden of the lower credit, this
result is fair insofar as increased liquidity removal activity that the
lower credit facilitates will help to improve overall 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--and even those that receive
the lower proposed credit--will benefit from an increase in the removal
of liquidity by those that choose to meet the tier qualification
criteria. Moreover, members are free to trade on other venues to the
extent they believe that the 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 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
The Exchange believes that its proposed modification to its
schedule of credits 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
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 credits in response, and because market
participants may readily adjust their order routing practices, the
Exchange believes that the degree to which credit changes in this
market may impose any burden on competition is extremely limited.
The proposed amended credit 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 37% of industry
volume for the month of July 2019.
In sum, the Exchange intends for the proposed amended credit to
support increases in member incentives to remove liquidity from the
Exchange and to contribute to market quality, which is reflective of
fierce competition for order flow noted above; however, if the proposed
amended credit is 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 amended credit 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 52152]]
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.\14\
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\14\ 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-2019-36 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-2019-36. 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-2019-36 and should be submitted on
or before October 22, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21242 Filed 9-30-19; 8:45 am]
BILLING CODE 8011-01-P