[Federal Register Volume 85, Number 143 (Friday, July 24, 2020)]
[Notices]
[Pages 44945-44947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16021]



[[Page 44945]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89341; File No. SR-Phlx-2020-36]


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

July 20, 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 July 9, 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 https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 purpose of the proposed rule change is to provide additional 
credits to the Qualified Market Maker (``QMM'') Program. More 
specifically, the Exchange proposes to provide a credit of $0.0003 per 
share executed in Tape A securities and a credit of $0.0002 per share 
executed in Tape B and Tape C securities with respect to all displayed 
orders of a QMM in securities priced at $1 or more per share that 
provide liquidity, provided that the QMM provides 0.12% or more of 
total Consolidated Volume during the month and quotes the NBBO at least 
10% of the time during Market Hours in an average of at least 850 
securities per day during a month. Such credit will be in addition to 
any credit provided under Equity 7, Section 3. The Exchange believes 
these new credits will help improve market quality on its platform, as 
discussed below.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\3\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\4\ 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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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal Is Reasonable
    The Exchange's proposed additional credits provided to its QMMs 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'. . . .'' \5\
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    \5\ 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.'' \6\
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    \6\ 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 add an additional QMM 
rebate that would provide a credit of $0.0003 per share executed in 
Tape A and a credit of $0.0002 per share executed in Tape B and Tape C 
with the goal of increasing the overall incentive to QMMs to further 
increase their liquidity addition activity on the Exchange. The 
proposal will also provide an incentive for QMMs to add liquidity at 
the NBBO in more securities, which is intended to improve market 
quality. To the extent that this proposed change leads to an increase 
in overall liquidity activity on the Exchange and more competitive 
pricing, this will improve the quality of the Exchange's market and 
increase its attractiveness to existing and prospective participants.

[[Page 44946]]

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 QMM with an additional opportunity to receive credits for adding 
liquidity to the Exchange. It is equitable for the Exchange to provide 
an additional means for QMMs to receive credits 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. Furthermore, it is equitable for the Exchange 
to propose credit for participants with orders in securities in Tapes A 
due to the Exchange's goal to specifically promote increased liquidity 
in securities in Tape A. An increase in overall liquidity adding 
activity on the Exchange will improve the quality of the PSX market and 
increase its attractiveness to existing and prospective participants.
    Any participant that is dissatisfied with the proposed new credits 
is free to shift their order flow to competing venues that provide more 
favorable pricing or less stringent qualifying criteria.
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 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's proposal to add additional credits to the QMM 
Program is not unfairly discriminatory because any member organization 
may quote at the NBBO at the levels required by the proposed additional 
credit criteria and may provide the level of liquidity required by the 
proposed additional credit criteria, and in fact, the proposed 
additional credits will not only enable a member organization to meet 
the qualifications for a QMM, it would also enable the member 
organization to obtain a credit in addition to any credit provided for 
under Equity 7, Section 3.

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 participants at a competitive disadvantage. The 
Exchange's proposed credit for quoting at the NBBO and providing 
liquidity will not place any burden on intramarket competition because 
all members will have the opportunity to obtain the additional proposed 
credits if the member increases liquidity and quotes at the NBBO, which 
will further improve overall market quality.
    Moreover, the Exchange's proposal to modify its QMM Program will 
not burden intramarket competition because the proposed additional 
credits within the QMM Program will provide members with an added 
incentive to 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.
Intermarket Competition
    Addressing whether the proposed credits could impose a burden on 
competition on other SROs that is not necessary or appropriate, the 
Exchange believes that its proposed modification to its QMM Program 
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 34 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 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 new credits in this 
market may impose any burden on competition is extremely limited.
    The proposed credits for adding liquidity 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 comprised more 
than 41% of industry volume for the month of June 2020.
    In sum, the Exchange intends for the proposed credits 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 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.

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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.\7\
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    \7\ 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-2020-36 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-2020-36. 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-2020-36, and should be submitted on 
or before August 14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16021 Filed 7-23-20; 8:45 am]
BILLING CODE 8011-01-P