[Federal Register Volume 85, Number 81 (Monday, April 27, 2020)]
[Notices]
[Pages 23404-23407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08821]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88708; File No. SR-Phlx-2020-25]
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
April 21, 2020.
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 April 14, 2020, 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 pricing schedule at
Equity 7, Section 3.
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 credits that it provides
for orders in securities priced at $1 or more per share that add
liquidity to the Exchange. The pricing schedule also provides a
supplemental credit to member organizations that make significant
contributions to improving the market during each month. The Exchange
proposes to amend this pricing schedule to lower the volume threshold
for receiving a credit when a member organization adds liquidity to the
Exchange.
Presently, the Exchange provides a $0.0026 per share executed
credit for quotes/orders entered by member organizations that provide
0.15% or more of Consolidated Volume \3\ during a
[[Page 23405]]
month. The Exchange proposes to decrease the percentage of Consolidated
Volume to 0.10%. The purpose of this change, which will make it easier
for a member organization to receive the credit, is to incentivize
member organizations to maintain or increase their liquidity adding
activity on the Exchange, which in turn will help to improve overall
market quality. The Exchange also proposes to add the word ``total''
prior to the words ``Consolidated Volume'' in the description of credit
to member organizations providing liquidity. This is a non-substantive
change intended to provide clarity and to the description of
Consolidated Volume.
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\3\ As used in Equity 7, Section 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 are excluded from both total
Consolidated Volume and the member's trading activity.
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The Exchange also proposes to make changes to its Qualified Market
Maker (``QMM'') Program. More specifically, the Exchange proposes to
adjust downward the average number of securities for which a member
organization must quote at the national best bid and offer (``NBBO'')
during a month to qualify as a QMM. Presently, a member organization
must quote at the NBBO at least 10% of the time during market hours -,
for an average of at least 500 securities per day during a month to
qualify as a QMM and to receive a supplemental credit of $0.0001 per
share executed with respect to all of its displayed orders priced at
$1.00 or more per share that provide liquidity. The Exchange proposes
to reduce the threshold number of securities to 400. Additionally, the
Exchange proposes to adjust downward the average number of securities
for which a member organization must quote at the NBBO at least 10% of
the time during market hours during a month to receive a supplemental
credit of $0.0002 per share executed. Currently, a member organization
must quote at the NBBO at least 10% of the time during market hours for
an average of at least 650 securities per day to qualify for the
$0.0002 per share executed supplemental credit. The Exchange proposes
to reduce this number to 500 securities. Reducing the average number of
securities in which a member organization must quote at the NBBO for at
least 10% of the time during market hours during a month will fortify
existing participation in the QMM Program by easing the burden on
members to qualify as QMMs and to better enable existing QMMs to
maintain their qualifications as such. It will also ease the burden on
QMMs to qualify for the supplemental credits.
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 changes to its schedule of credits and QMM
Program 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' . . . .'' \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 context, the proposal represents a reasonable attempt by
the Exchange to 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.
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Generally, the Exchange's proposal to decrease the required
percentage of total consolidated volume for liquidity provided by
member organizations improves the overall incentive to member
organizations to increase their liquidity addition activity on the
Exchange. An increase in overall liquidity addition activity on the
Exchange, in turn, will improve the quality of the Exchange's equity
market and increase its attractiveness to existing and prospective
participants. Moreover, the proposed credits will be comparable to, if
not favorable to, those provided by its competitors.\10\
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\10\ See Cboe EDGX U.S. Equities Exchange Fee Schedule at n. 1
(Add Volume Tiers), available at https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/.
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The proposed changes to the Exchange's QMM Program is also a
reasonable attempt to improve market quality by broadening its QMM
Program. By lowering the quoting threshold for member organizations to
qualify as QMMs and to receive supplemental credits for quoting at the
NBBO for a significant percentage of the trading day, the Exchange will
encourage new member organizations to
[[Page 23406]]
become QMMs and help ensure that existing QMMs continue to qualify as
such.
The Proposals Are an Equitable Allocation of Credits
The Exchange believes its proposals will allocate its proposed
credits fairly among its market participants. The proposals will
provide a member organization with an easier opportunity to receive a
credit for adding liquidity to the Exchange than it does now. It is
equitable for the Exchange to make it easier to receive a credit for
member organizations whose orders add liquidity to the Exchange as a
means of incentivizing increased liquidity addition activity. An
increase in overall liquidity addition activity on the Exchange will
improve the quality of the Exchange's equity market and increase its
attractiveness to existing and prospective participants.
Finally, the Exchange believes its proposal to adjust the
qualification and supplemental credit criteria applicable to its QMM
program is equitable because the modified qualification criteria will
continue to require member organizations to quote significantly at the
NBBO for a large number of securities and will continue to contribute
to market quality in a meaningful way. In fact, by lowering the
thresholds for member organizations to qualify as QMMs and to receive
supplemental credits, the Exchange will encourage new member
organizations to become QMMs and help ensure that existing QMMs
continue to qualify as such, which will further improve market quality.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that the proposals are 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 adders of liquidity will benefit most from the proposed lower total
consolidated volume percentage requirement, this result is fair insofar
as an uptick in liquidity addition activity will help to improve market
quality and the attractiveness of the Exchange's equity market to all
existing and prospective participants.
The Exchange's proposal to modify the QMM program is not unfairly
discriminatory because any member organization may quote at the NBBO at
the levels required by the modified qualification criteria of the QMM
Program and, in fact, the modified criteria will allow qualification as
a QMM easier for member organizations to achieve.
Additionally, the Exchange's inclusion of the word ``total'' is a
non-substantive change solely intended to add clarification to the term
Consolidated Volume.
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 proposals will place any
category of Exchange participants at a competitive disadvantage. As
noted above, all members of the Exchange will benefit from an increase
in the addition of liquidity by those that choose to meet the criteria.
Members may grow their businesses so that they have the capacity to
receive credits for providing liquidity. 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 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.
Moreover, the Exchange's proposal to modify its QMM program will
not burden intramarket competition because the QMM Program, as
modified, will continue to provide all member organizations with an
opportunity to obtain supplemental credits for transactions if they
improve the market by providing significant quoting at the NBBO in a
large number of securities which the Exchange believes will improve
market quality. By relaxing the qualification criteria, the
modifications will make the Program more accessible to new member
organizations and easier for existing QMMs to remain in the Program.
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 33 alternative trading systems that
trade national market system stock. 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 credit for adding liquidity and the proposed
modifications to the QMM Program are 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
[[Page 23407]]
comprised more than 38% of industry volume for the month of February
2020.
In sum, the Exchange intends for the proposed credit and modified
QMM Program to increase member incentives to add liquidity to the
Exchange and to contribute to market quality, which is reflective of
fierce competition for order flow noted above; however, if the proposed
credit and QMM Program incentives 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 fees
and 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 No. SR-Phlx-2020-25 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 No. SR-Phlx-2020-25. 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 No. SR-Phlx-2020-25, and should be submitted on or
before May 18, 2020.
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\12\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08821 Filed 4-24-20; 8:45 am]
BILLING CODE 8011-01-P