[Federal Register Volume 85, Number 224 (Thursday, November 19, 2020)]
[Notices]
[Pages 73822-73825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25501]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90423; File No. SR-NASDAQ-2020-074)


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange's Transaction Credits at Equity 7, Section 118

November 13, 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 November 2, 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 transaction credits 
at Equity 7, Section 118, as described further below.
    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 a new credit for executing orders in securities in 
all three Tapes.
    Presently, the Exchange offers its members a credit of $0.00295 per 
share of displayed orders/quotes (other than Supplemental Orders or 
Designated Retail Orders) that provide liquidity to the extent such 
members (i) have shares of liquidity provided in all securities through 
one or more of its Nasdaq Market Center MPIDs that represent 0.70% or 
more of Consolidated Volume \3\ during the month; (ii) execute 0.20% or 
more of Consolidated Volume during the month through providing midpoint 
orders and through MELO; and (iii) remove at least 1.10% of 
Consolidated Volume during the month of Consolidated Volume during the 
month through one or more of their Nasdaq Market Center MPIDs [sic]. 
The purpose of this credit is to incent members to engage in 
substantial volumes of liquidity adding and removal activity on the 
Exchange during a month and, in particular, to execute a substantial 
percentage of such volume through the provision of midpoint and 
Midpoint Extended Life Orders, or ``M-ELOs.''
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    The Exchange now proposes to add a new, higher credit for members 
that meet similar criteria, albeit with higher volume requirements. 
Specifically, the Exchange proposes to provide a new credit of $0.00305 
per share of displayed orders/quotes (other than Supplemental Orders or 
Designated Retail Orders) that provide liquidity to the extent such 
members (i) have shares of liquidity provided in all securities through 
one or more of its Nasdaq Market Center MPIDs that represent 1.20% or 
more of Consolidated

[[Page 73823]]

Volume \4\ during the month; (ii) execute 0.40% or more of Consolidated 
Volume during the month through providing midpoint orders and through 
MELO; and (iii) remove at least 1.10% of Consolidated Volume during the 
month of Consolidated Volume during the month through one or more of 
their Nasdaq Market Center MPIDs [sic].
---------------------------------------------------------------------------

    \4\ 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 incentivizing members to increase the extent of their liquidity 
addingand removal activity on the Exchange, and the extent of their 
midpoint and M-ELO execution 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 and removers 
of liquidity, and who execute substantial volumes of midpoint and M-ELO 
orders on the Exchange, will benefit directly from the proposed 
addition of the new credit. Other participants will also benefit from 
the new credit insofar as any increase in liquidity adding and removal 
activity on the Exchange will improve the overall quality of the 
market, to the benefit of all members.
    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 proposal is consistent with Section 
6(b) of the Act,\5\ in general, and further the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\6\ 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.
---------------------------------------------------------------------------

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

The Proposal is Reasonable
    The Exchange's proposed change to its schedule of credits 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'. . . .'' \7\
---------------------------------------------------------------------------

    \7\ 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.'' \8\
---------------------------------------------------------------------------

    \8\ 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 proposal represents a reasonable attempt by the 
Exchange to increase its liquidity and market share relative to its 
competitors.
    The Exchange has designed its proposed new credit to provide 
increased overall incentives to members to increase their liquidity 
adding and removal activity on the Exchange, and their execution 
activity in midpoint and M-ELO orders. An increase in liquidity adding 
and removal 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 credit are free to shift their order flow to 
competing venues that offer them lower charges or higher credits.
The Proposal is an Equitable Allocation of Credits
    The Exchange believes its proposal will allocate its credits fairly 
among its market participants. It is equitable for the Exchange to 
establish the proposed new credit as a means of incentivizing members 
to provide and remove meaningful amounts of liquidity to the Exchange, 
including in midpoint and M-ELO orders. To the extent that the Exchange 
succeeds in increasing overall activity on the Exchange, including in 
midpoint and M-ELO orders, then the Exchange would experience 
improvements in its market quality, which would benefit all market 
participants.
    Any participant that is dissatisfied with the proposed new credit 
is free to shift their order flow to competing venues that provide more 
generous pricing or less stringent qualifying criteria.
The Proposed Credit 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

[[Page 73824]]

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 credit is not 
unfairly discriminatory because it stands to improve the overall market 
quality of the Exchange, to the benefit of all market participants, by 
incentivizing members to provide and remove meaningful amounts of 
liquidity.
    Finally, any participant that is dissatisfied with the proposed new 
credit 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 proposal will place any 
category of Exchange participant at a competitive disadvantage. To the 
contrary, the proposed change will provide an opportunity for members 
to receive a higher credit based upon their market-improving behavior. 
Any member may elect to provide the levels of market activity required 
in order to receive the new credit. 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 credit is 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 proposal 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 credit is 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 proposal is pro-competitive in that the Exchange 
intends for it to increase liquidity adding and removal activity on the 
Exchange and thereby render the Exchange a more attractive and vibrant 
venue to market participants.
    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.\9\
---------------------------------------------------------------------------

    \9\ 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
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2020-074 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-2020-074. 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

[[Page 73825]]

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-2020-074, and should 
be submitted on or before December 10, 2020.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25501 Filed 11-18-20; 8:45 am]
BILLING CODE 8011-01-P