[Federal Register Volume 85, Number 202 (Monday, October 19, 2020)]
[Notices]
[Pages 66395-66399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23014]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90163; File No. SR-NASDAQ-2020-066]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Equity 7, Section 118(a)

October 13, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 66396]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 1, 2020, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's schedule of credits, 
as set forth in Equity 7, Section 118(a) of the Exchange's Rulebook.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/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 Exchange proposes to amend its schedule of credits at Equity 7, 
Section 118, to add several new credits.
New Supplemental Credit for Displayed Orders in Securities in Tape B
    Presently, the Exchange offers a supplemental credit of $0.0001 per 
share executed--in addition to the range of credits it normally 
offers--to members with displayed orders/quotes (other than 
Supplemental Orders \3\ or Designated Retail Orders \4\) in securities 
in Tape B (securities listed on exchanges other than Nasdaq or NYSE) 
that provide liquidity to the Exchange, to the extent that such members 
add liquidity in securities in Tape B representing at least 0.10% of 
Consolidated Volume \5\ during the month through one or more of their 
Nasdaq Market Center MPIDs.
---------------------------------------------------------------------------

    \3\ As set forth in Rule 4703(b)(6)(A), a ``Supplemental Order'' 
is an Order Type with a Non-Display Order Attribute that is held on 
the Nasdaq Book in order to provide liquidity at the NBBO through a 
special execution process described in Rule 4757(a)(1)(D).
    \4\ As set forth in Equity 7, Section 118, a ``Designated Retail 
Order'' is an agency or riskless principal order that meets the 
criteria of FINRA Rule 5320.03 and that originates from a natural 
person and is submitted to Nasdaq by a member that designates it 
pursuant to this section, provided that no change is made to the 
terms of the order with respect to price or side of market and the 
order does not originate from a trading algorithm or any other 
computerized methodology. An order from a ``natural person'' can 
include orders on behalf of accounts that are held in a corporate 
legal form--such as an Individual Retirement Account, Corporation, 
or a Limited Liability Company--that has been established for the 
benefit of an individual or group of related family members, 
provided that the order is submitted by an individual. Members must 
submit a signed written attestation, in a form prescribed by Nasdaq, 
that they have implemented policies and procedures that are 
reasonably designed to ensure that substantially all orders 
designated by the member as ``Designated Retail Orders'' comply with 
these requirements. Orders may be designated on an order by-order 
basis, or by designating all orders on a particular order entry port 
as Designated Retail Orders.
    \5\ Pursuant to 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. 
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 is excluded from both total 
Consolidated Volume and the member's trading activity.
---------------------------------------------------------------------------

    In addition to this credit the Exchange now proposes to add a new 
supplemental $0.00005 per share executed credit for members that add 
displayed liquidity in securities in Tape B constituting Designated 
Retail Orders where members add liquidity in securities in Tape B 
representing at least 0.10% of Consolidated Volume during the month 
through one or more of their Nasdaq Market Center MPIDs.
    Thus, under the proposal, to the extent that a member provides 
liquidity in securities in Tape B that represents more than 0.10% of 
Consolidated Volume during a month, then the member will qualify for 
the following: (i) Any of the regular per share executed credits set 
forth in Equity 7, Section 118(a)(3) for which the member otherwise 
qualifies; (ii) a supplemental $0.0001 per share executed credit 
applicable to the member's displayed add orders (other than its 
Supplemental Orders or Designated Retail Orders); and (iii) a 
supplemental $0.00005 per share executed credit applicable to the 
member's displayed add orders that constitute Designated Retail Orders 
(other than Supplemental Orders).
    The Exchange intends for the new supplemental credit to provide a 
further incentivize to its members to add displayed liquidity to the 
Exhange in securities in Tape B. Moreover, the Exchange intends for the 
proposal to broaden the availability of its supplemental credits to 
members that add displayed retail liquidity to the Exchange, as the 
existing supplemental credit excludes Designated Retail Orders. In 
incentivizing members to increase the extent of their displayed 
liquidity adding activity on the Exchange, and the extent of their 
retail liquidity adding activity on the Exchange, the Exchange intends 
to improve the overall quality and attractiveness of the market.
New Credits for Non-Displayed Orders
    Presently, the Exchange offers a range of credits for non-displayed 
orders (other than Supplemental Orders) that provide liquidity to the 
Exchange. For example, for orders in securities in Tapes A and B, the 
Exchange presently offers a member a $0.0015 per share executed credit 
for other non-displayed orders if the member (i) provides 0.10% or more 
of Consolidated Volume through non-displayed orders (other than 
midpoint orders) and (ii) provides 0.15% or more of Consolidated Volume 
through midpoint orders during the month. For orders in securities in 
Tape C, these same qualification requirements presently entitle a 
member to receive a credit of $0.0010 per share executed.
    The Exchange proposes to add two additional credit tiers for orders 
in securities in each Tape. For orders in securities in Tapes A and B, 
the Exchange proposes to offer the following credits:
     $0.00175 per share executed for other nondisplayed orders 
if the member (i) provides 0.225% or more of Consolidated Volume 
through non-displayed orders (other than midpoint orders) and (ii) 
provides 0.165% or more of Consolidated Volume through midpoint orders 
during the month; and
     $0.0020 per share executed for other nondisplayed orders 
if the member (i) provides 0.275% or more of Consolidated Volume 
through non-displayed orders (other than midpoint orders) and (ii) 
provides 0.175% or more of Consolidated Volume through midpoint orders 
during the month.
    For orders in securities in Tape C, these same qualification 
requirements described above would entitle a member to receive credits 
of $0.00125 per share

[[Page 66397]]

executed and $0.0015 per share executed, respectively.
    The Exchange intends for these new credits to provide increased 
incentives to its members to add significant amounts of non-displayed 
liquidity to the Exhange, including in both midpoint and non-midpoint 
orders. Although the Exchange intends to provide such incentives to 
members who add non-displayed liquidity in securities in all Tapes, it 
intends to provide a higher incentive to members who add non-displayed 
liquidity in orders in securities in Tapes A and B, where the Exchange 
has determined that the market would benefit most from additional such 
liquidity. In incentivizing members to increase the extent of their 
non-displayed liquidity adding activity on the Exchange, the Exchange 
intends to improve the overall quality and attractiveness of the 
market.
Impact of the Changes
    Those participants that act as significant providers of displayed 
retail liquidity to the Exchange in securities in Tape B will benefit 
directly from the proposed addition of the new supplemental credit, 
while participants that act as significant providers of non-displayed 
liquidity will benefit directly from the new non-displayed credits. 
Other participants will also benefit from the new credits insofar as 
any increase in liquidity adding activity on the Exchange will improve 
the overall quality of the market, to the benefit of all member 
organizations.
    The Exchange notes that its proposals are not otherwise targeted at 
or expected to be limited in their applicability to a specific segment 
of market participants nor will they apply differently to different 
types of market participants.
2. Statutory Basis
    The Exchange believes that its proposals are consistent with 
Section 6(b) of the Act,\6\ in general, and further the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\7\ in particular, in that they 
provide for the equitable allocation of reasonable dues, fees and other 
charges among members and issuers and other persons using any facility, 
and are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The proposals are also consistent with 
Section 11A of the Act relating to the establishment of the national 
market system for securities.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

The Proposals Are 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'. . .'' \8\
---------------------------------------------------------------------------

    \8\ 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)).
---------------------------------------------------------------------------

    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.'' \9\
---------------------------------------------------------------------------

    \9\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    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. Within the 
foregoing context, the proposals represent a reasonable attempt by the 
Exchange to increase its liquidity and market share relative to its 
competitors.
    The Exchange has designed its proposed new supplemental displayed 
credit to provide increased overall incentives to members to increase 
their retail displayed liquidity adding activity on the Exchange in 
securities in Tape B, and it has designed its proposed new non-
displayed credits to increase incentives to members to increase their 
non-displayed liquidity adding activity on the Exchange. An increase in 
liquidity adding activity on the Exchange will, in turn, improve the 
quality of the Nasdaq market and increase its attractiveness to 
existing and prospective participants.
    The Exchange notes that those market participants that are 
dissatisfied with the new credits are free to shift their order flow to 
competing venues that offer them lower charges or higher credits.
The Proposals Are an Equitable Allocation of Credits
    The Exchange believes its proposals will allocate its credits 
fairly among its market participants. It is equitable for the Exchange 
to establish the proposed new supplemental credit as a means of 
incentivizing members to provide meaningful amounts of liquidity to the 
Exchange in securities, including both displayed and non-displayed 
liquidity. To the extent that the Exchange succeeds in increasing 
liquidity activity on the Exchange and in attracting additional retail 
order flow, then the Exchange would experience improvements in its 
market quality, which would benefit all market participants.
    The Exchange also believes it is equitable for the Exchange to 
target its proposed supplemental credit to members with displayed 
orders in securities in Tape B, and to Designated Retail Orders, in 
particular, due to the Exchange's assessment that the market would 
benefit from an increase in displayed liquidity in securities in Tape B 
as well as additional retail liquidity in securities in Tape B. 
Likewise, the Exchange believes that it is equitable for it to provide 
higher new non-displayed credits to members with non-displayed orders 
in securities in Tapes A and B, because the Exchange has determined 
that the market would specifically benefit from additional non-
displayed liquidity in securities in those Tapes.
    Any participant that is dissatisfied with the proposed new credits 
is free to shift their order flow to competing

[[Page 66398]]

venues that provide more generous pricing or less stringent qualifying 
criteria.
The Proposed Credits Are 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.
    Moreover, the Exchange believes that its new proposed supplemental 
displayed credit and its new proposed non-displayed credits are not 
unfairly discriminatory because they stand to improve the overall 
market quality of the Exchange, to the benefit of all market 
participants, by incentivizing members to provide meaningful amounts of 
liquidity. Additionally, it is not unfairly discriminatory to target 
the new supplemental credit to orders in securities in Tape B and to 
provide higher non-displayed credits to orders in securities in Tapes A 
and B because the Exchange believes that the market would benefit from 
additional liquidity in those areas. The Exchange notes that it has 
limited funds to apply in the form of incentives, and thus must deploy 
those limited funds to incentives that it believes will be the most 
effective at improving market quality in areas that the Exchange 
determines are in need of improvement.
    Finally, any participant that is dissatisfied with the proposed new 
credits is free to shift their order flow to competing venues that 
provide more generous pricing or less stringent qualifying criteria.

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 participant at a competitive disadvantage. To the 
contrary, the proposed changes will provide opportunities for members 
to receive new credits based upon their market-improving behavior. Any 
member may elect to provide the levels of market activity required in 
order to receive the new credits. Furthermore, all members of the 
Exchange will benefit from any increase in market activity that the 
proposals effectuates.
    Moreover, members are free to trade on other venues to the extent 
they believe that the proposed credits 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 proposals will not burden 
competition because the Exchange's execution services are completely 
voluntary and subject to extensive competition both from the multitude 
of other live exchanges and from off-exchange venues. 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 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 fees in response, and because market participants may readily 
adjust their order routing practices, the Exchange believes that the 
degree to which fee and credit changes in this market may impose any 
burden on competition is extremely limited.
    The proposed new 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 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 comprises upwards of 40% of industry volume.
    The Exchange's proposals are pro-competitive in that the Exchange 
intends for them to increase liquidity on the Exchange and thereby 
render the Exchange a more attractive and vibrant venue to market 
participants.
    In sum, if the changes proposed herein are 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 
changes 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.\10\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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

[[Page 66399]]

     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2020-066 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-2020-066. 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-2020-066 and should be submitted 
on or before November 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23014 Filed 10-16-20; 8:45 am]
BILLING CODE 8011-01-P