[Federal Register Volume 86, Number 12 (Thursday, January 21, 2021)]
[Notices]
[Pages 6383-6385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01136]



[[Page 6383]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90918; File No. SR-Phlx-2021-01]


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

January 13, 2021.
    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 January 4, 2021, 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.
---------------------------------------------------------------------------

    \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 pricing schedule at 
Equity 7, Section 3, as described further below.
    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 Exchange proposes to amend its pricing schedule, at Equity 7, 
Section 3, to make several changes to its Qualified Market Maker 
(``QMM'') Program. The QMM Program provides supplemental incentives to 
member organizations that meet certain quality standards in acting as 
market makers for securities on the Exchange.
    Specifically, the Exchange proposes to adjust upward the average 
number of securities for which a member organization that qualifies as 
a QMM must quote at the national best bid and offer (``NBBO'') during a 
month to receive a supplemental credit of $0.0002 per share executed, 
as set forth in Equity 7, Section 3(c)(3). Currently, a member 
organization must quote at the NBBO at least 10% of the time for an 
average of at least 500 securities per day to qualify for the $0.0002 
per share executed supplemental credit. The Exchange proposes to 
increase this number to 650 securities.
    The Exchange proposes to increase the threshold number of 
securities in which a member organization must quote at the NBBO during 
a month to qualify for this supplemental credit as a means of 
encouraging QMMs to broaden the scope of their quoting activities on 
the Exchange. The Exchange believes that QMM activity on the Exchange 
is already robust enough to accommodate the establishment of a higher 
qualification threshold without compromising the ability of existing 
QMMs to maintain their current statuses in the program.
    Second, 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 $0.0003 per share executed in Tape A securities 
or $0.0002 per share executed in Tape B and Tape C securities, as set 
forth in Equity 7, Section 3(c)(4). Currently, a member organization 
must quote at the NBBO at least 10% of the time for an average of at 
least 850 securities per day, and provide 0.12% or more of total 
Consolidated Volume during a month, to qualify for this supplemental 
credit. The Exchange proposes to reduce the threshold number of 
securities that must be quoted to 800 securities.
    The Exchange proposes to lower the number of securities in which a 
member organization must quote at the NBBO during a month to qualify 
for this supplemental credit so as to render this credit more readily 
attainable for QMMs. The Exchange hopes that the proposal will lead to 
additional member organizations qualifying for the credit, which in 
turn would entail more QMMs quoting at the NBBO at least 10% of the 
time during the trading day in more securities than they do now, to the 
benefit of market quality.
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.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

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'. . . .'' \5\
---------------------------------------------------------------------------

    \5\ NetCoalition v. SEC, 615 F.3d 525, 539 (DC 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

[[Page 6384]]

broader forms that are most important to investors and listed 
companies.'' \6\
---------------------------------------------------------------------------

    \6\ 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.\7\
---------------------------------------------------------------------------

    \7\ See Cboe EDGX U.S. Equities Exchange Fee Schedule, available 
at https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/.
---------------------------------------------------------------------------

    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.\8\ Within 
the foregoing context, the proposal represents a reasonable attempt by 
the Exchange to increase its market share relative to its competitors.
---------------------------------------------------------------------------

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

    The Exchange's proposal to increase the threshold numbers of 
securities in which QMMs must quote at the NBBO during a month to 
qualify for the supplemental credit at Equity 7, Section 3(c)(2) [sic] 
will encourage QMMs to broaden the scope of their quoting activities on 
the Exchange. The Exchange believes that it is appropriate to 
periodically reassess and recalibrate the baselines for its pricing 
tiers when participant activity is adequate to support doing so. In 
this instance, QMM activity on the Exchange is robust enough to 
accommodate the establishment of a higher qualification threshold 
without compromising the ability of existing QMMs to maintain their 
current statuses in the program.
    Additionally, the Exchange's proposal to ease one of its 
qualifications for the $0.0003/$0.0002 per share executed supplemental 
credit set forth in Equity 7, Section 3(c)(4) is also a reasonable 
attempt to improve the accessibility of that supplemental credit and 
will encourage member organizations to try to qualify for it.
The Proposals Are an Equitable Allocation of Credits
    The Exchange believes its proposals will allocate its proposed 
credits fairly among its market participants.
    The Exchange believes its proposal to raise the qualification 
criteria applicable its QMM supplemental credit, at Equity 7, Section 
3(c)(2) [sic], is equitable because the proposal will encourage member 
organizations to quote significantly at the NBBO for a larger number of 
securities, which in turn will contribute to market quality in a 
meaningful way. At the same time, the proposed recalibrated 
qualification threshold will not compromise the ability of QMMs that 
currently qualify for this supplemental credit to continue to do so.
    The Exchange also believes that it is equitable to lower a 
qualification threshold for its highest supplemental credit, at Equity 
7, Section 3(c)(4), because the proposal will render the credit more 
readily attainable to member organizations. It is equitable for the 
Exchange to make it easier for member organizations to qualify for this 
supplemental credit because doing so may encourage member organizations 
to broaden the extent to which they quote securities at the NBBO, which 
in turn stands to improve the quality of the Exchange's equity market 
and increase its attractiveness to existing and prospective 
participants.
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 its proposals to increase participation 
and the extent of participation in its QMM program, which in turn would 
improve market quality for all member organizations on the Exchange.
    The Exchange's proposal to raise the qualification requirements for 
its supplemental QMM credit, at Equity 7, Section 3(c)(2) [sic], is not 
unfairly discriminatory because no member organization that presently 
qualifies for this supplemental credit will fail to qualify for it upon 
raising the requirements. Although any member organization that newly 
qualifies for this credit will need to quote at the NBBO for a larger 
number of securities than they would need to do now, this is fair 
because meeting the heightened requirement will improve market quality. 
Meanwhile, the proposal to lower the qualification criteria for the 
highest supplemental QMM credit, at Equity 7, Section 3(c)(4), will 
improve the accessibility of that credit to member organizations. 
Again, if this proposal results in more member organizations meeting 
the requirements for this supplemental credit, then market quality will 
improve.

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

[[Page 6385]]

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 live exchanges and from off-
exchange venues, which include 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 comprises more than 40% of industry 
volume in recent months.
    In sum, the Exchange intends for the modified QMM Program to 
increase member organizations incentives to quote more securities at 
the NBBO for at least 10 percent of the day, which stands to improve 
the quality of the Exchange's market and its attractiveness to 
participants; however, if the proposals 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 amended 
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.\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-Phlx-2021-01 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-2021-01. 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-2021-01 and should be submitted on 
or before February 9, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

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

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01136 Filed 1-19-21; 8:45 am]
BILLING CODE 8011-01-P