[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Notices]
[Pages 68496-68499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26985]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87708; File No. SR-NASDAQ-2019-094]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Exchange's Transaction Fees at Equity 7, Section 118(a)
December 10, 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 November 27, 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 the Exchange's transaction fees at
Equity 7, Section 118(a) to: (i) Adjust the criteria for members to
qualify for a credit; and (ii) to adjust the categories of credits
which the Exchange will provide to members that enter Orders with
Midpoint Pegging that receive price improvement with respect to the
national best bid and best offer (``NBBO''), as described further
below.
While these amendments are effective upon filing, the Exchange has
designated the proposed amendments to be operative on December 2, 2019.
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 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 proposes to amend the schedule of credits it provides
to members, pursuant to Equity 7, Section 118(a), in two respects.
First, the Exchange proposes to amend its schedule of credits by
[[Page 68497]]
adjusting a volume threshold to qualify for one of the credits it
provides to its members. For Orders in securities in each of Tapes A,
B, and C, the Exchange presently provides a $0.00305 per share executed
credit to a member with shares of liquidity provided in all securities
through one or more of its Nasdaq Market Center MPIDs that represent
more than 1.25% of Consolidated Volume \3\ during the month. The
Exchange proposes to raise the qualifying volume threshold for this
credit from 1.25% to 1.50% of Consolidated Volume. The Exchange intends
for this amendment to incentivize members to increase the extent of
their liquidity adding activity to qualify for and to continue to
qualify for this credit.
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\3\ As used in Equity 7, Section 118(a), 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.
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Second, the Exchange proposes to amend its credits for Non-
Displayed Orders \4\ in securities in each Tape (other than
Supplemental orders) that provide liquidity to the Exchange. Under the
existing schedules for these credits, a member that enters a Midpoint
Order \5\ that adds liquidity to the Exchange may be entitled to
receive one of several tiers of rebates and supplemental rebates, which
vary to the extent that the member also engages in specified volumes,
amounts, and types of corresponding activities.\6\ The Exchange also
provides rebates for between $0.0010 and $0.0005 per share executed for
other types of Non-Displayed Orders entered by members that achieve
certain specified volume thresholds. Finally, the Exchange provides no
credits to, but also imposes no charges upon, members that enter other
Non-Displayed Orders if they do not achieve the specified volume or
activity thresholds.
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\4\ As set forth in Rule 4702(b), a ``Non-Displayed Order'' is
an Order Type that is not displayed to other participants, but
nevertheless remains available for potential execution against
incoming Orders until executed in full or cancelled.
\5\ Pursuant to Rule 4703, an ``Order with Midpoint Pegging'' is
a Non-Displayed Order that is pegged with reference to the midpoint
between the Inside Bid and the Inside Offer (the ``Midpoint'').
\6\ The Exchange provides a baseline rebate of $0.0010 per share
executed for Midpoint Orders. It provides higher rebates, varying
from $0.0013 per share executed to $0.0025 per share executed, for
Midpoint Orders where members provide specified threshold volumes of
Midpoint Orders during a month, add certain threshold numbers of
shares, or increases its orders provided and executed by specified
amounts. Additionally, the Exchange provides a supplemental rebate
of between $0.0001 and $0.0002 per share executed for Midpoint
Orders where members execute specified average daily volumes of
shares through Midpoint Extended Life Orders. See Equity 7, Section
118(a).
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The Exchange proposes to amend the schedule of credits (and
supplemental credits) that apply to Midpoint Orders that add liquidity
to the Exchange and, in particular, buy (sell) Orders with Midpoint
Pegging that receive execution prices that are lower (higher) than the
midpoint of the NBBO. Under the proposal, members entering Orders with
Midpoint Pegging that execute at prices which are less aggressive than
the midpoint of the NBBO will be entitled to receive credits applicable
to ``other non-displayed orders''--to the extent such members achieve
certain volume thresholds during a month--or no credits if they do not
achieve these thresholds (in which case the executions will, however,
continue to be free of charge). The Exchange believes that it is
reasonable to offer the credit schedule applicable to Non-Displayed
Orders to members that enter Orders with Midpoint Pegging which execute
at prices less aggressive than the midpoint of the NBBO because such
Orders behave the same way as do Non-Displayed Orders. Moreover,
members that enter Orders with Midpoint Pegging which execute at prices
less aggressive than the midpoint of the NBBO already benefit from the
fact that their orders receive price improvements, such that these
members do not require additional inducements to enter their Orders on
the Exchange.
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.
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\7\ 15 U.S.C. 78f(b).
\8\ 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 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' . . . .'' \9\
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\9\ 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.'' \10\
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\10\ 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.
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. As such, the
proposal represents a reasonable attempt by the Exchange to increase
its liquidity and market share relative to its competitors.
In particular, the Exchange proposes to raise the volume threshold
to qualify for its $0.00305 per share executed credit as a means of
encouraging members to increase their extent of their
[[Page 68498]]
liquidity adding activity to qualify for or to continue to qualify for
this credit. To the extent that this proposal results in an increase in
liquidity adding activity on the Exchange, this will improve the
quality of the Nasdaq market and increase its attractiveness to
existing and prospective participants.
Likewise, the Exchange believes that it is reasonable to treat
Orders with Midpoint Pegging that execute at prices that are less
aggressive than the midpoint of the NBBO the same as ``other Non-
Displayed Orders,'' because Orders with Midpoint Pegging that execute
at prices that are less aggressive than the midpoint of the NBBO behave
the same way that Non-Displayed Orders behave. Furthermore, these
Orders receive price improvements and incur no execution fees, which
benefit members. Therefore, members that enter these Orders already
have incentives to submit them to the Exchange and do not require added
incentives in the form of credits to do so.
The Exchange notes that those participants that are dissatisfied
with the proposed amended credits are free to shift their order flow to
competing venues.
The Proposal Is an Equitable Allocation of Charges
The Exchange believes its proposal will allocate its charges fairly
among its market participants. It is equitable for the Exchange to
raise the qualification requirement for the $0.00305 per share executed
credit as a means of incentivizing increased liquidity providing
activity on the Exchange. An increase in liquidity providing activity
on the Exchange will improve the quality of the Nasdaq market and
increase its attractiveness to existing and prospective participants.
It is also equitable to treat Orders with Midpoint Pegging that
execute at prices that are less aggressive than the midpoint of the
NBBO the same as ``other Non-Displayed Orders,'' because Orders with
Midpoint Pegging that execute at prices that are less aggressive than
the midpoint of the NBBO behave the same way that Non-Displayed Orders
behave. Furthermore, these Orders receive price improvements and incur
no execution fees, which benefit members. Therefore, members that enter
these Orders already have incentives to submit them to the Exchange and
do not require added incentives in the form of credits to do so.
The Proposed Amended Credits Are 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.
Although the Exchange's proposal to raise the qualifying criteria
for its $0.00305 per share executed credit will require members to add
more liquidity than is currently required to qualify for this credit,
any resulting increase in liquidity to the market will improve market-
wide quality and price discovery, to the benefit all market
participants. And although under the proposal, Exchange members
entering Orders with Midpoint Pegging that execute at prices less
aggressive than the midpoint of the NBBO will receive the schedule of
credits applicable to Non-Displayed Orders going forward, this is not
unfairly discriminatory because these Orders behave in the same manner
as do Non-Displayed Orders, and it is fair to treat such Orders the
same. Moreover, members that enter these Orders with Midpoint Pegging
will continue to receive the benefits of price improvements and no
execution charges associated with their Orders. Finally, the Exchange
will be able to apply the savings from changes to its credit schedule
to incentivize market improving behavior in other areas, again, to the
ultimate benefit of all market participants. Finally, the Exchange
notes that any participant that does not find the amended credits to be
sufficiently is attractive is free to shift its order flow to a
competing venue.
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. All
members of the Exchange will benefit from any increase in market
activity that the proposal to amend the $0.00305 per share executed
credit effectuates. Members that enter Orders with Midpoint Pegging
that execute at prices less aggressive than the midpoint of the NBBO
will also continue to receive benefits in the form of free executions
and price improvements on their Orders.
Moreover, members are free to trade on other venues to the extent
they believe that the credits provided are too low or the qualification
criteria 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
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 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 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 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 credits are reflective of this competition
because, even as one of the largest U.S. equities exchanges by volume,
the Exchange has less than 20% 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
[[Page 68499]]
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.
The Exchange's proposal to raise the qualification requirement for
its $0.00305 per share executed credit is procompetitive in that it is
intended to increase liquidity on the Exchange and thereby render the
Exchange a more attractive and vibrant venue to market participants.
Similarly, the proposed amendments to the Exchange's schedule of
credits applicable to Non-Displayed Orders (other than Supplemental
Orders) is not a burden on competition because the Exchange has limited
resources to apply as credits and such resources must be applied in a
manner that the Exchange believes will best improve market quality
thereon. The Exchange believes that providing credits to members that
are already receiving price improvement is not the most efficient
allocation of such limited resources, since such Orders already receive
the benefits of price improvement and free execution, and thus do not
need to be incentivized. Instead, this proposal will allow the Exchange
to apply its limited resources to other areas wherein it can promote
market-improving behavior by its participants. In doing so, the
proposed changes again have the potential to make the Exchange a more
attractive trading venue, and consequently may promote competition
among markets.
In sum, if the change 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
change 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-2019-094 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-NASDAQ-2019-094. 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-2019-094 and should be submitted
on or before January 6, 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. 2019-26985 Filed 12-13-19; 8:45 am]
BILLING CODE 8011-01-P