[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]



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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

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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.

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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