[Federal Register Volume 86, Number 35 (Wednesday, February 24, 2021)]
[Notices]
[Pages 11343-11345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91159; File No. SR-Phlx-2021-09]


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

February 18, 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 February 10, 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.
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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, 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 a change 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 percentage 
of time for which a member organization must quote at the national best 
bid and offer (``NBBO'') during market hours to qualify as a QMM as set 
forth in Equity 7, Section 3(c)(1). Currently, a member organization 
must quote at the NBBO at least 10 percent of the time during market 
hours in an average of at least 400 securities per day during a month 
to qualify as a QMM. The Exchange proposes to increase the percentage 
to 15 percent.
    The Exchange proposes to increase the threshold percentage of time 
in which a member organization must quote at the NBBO during a month to 
qualify as a QMM as a means of encouraging member organizations to 
increase liquidity adding activity, increase quoting at the NBBO, 
enhance price discovery, and improve the overall quality of the equity 
markets. 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.
    The Exchange also proposes to make conforming changes to Equity 7, 
Section 3(c)(5) to add the proposed 15 percent NBBO requirement.
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.
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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 changes to its 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\
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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.\7\
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    \7\ 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

[[Page 11344]]

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.
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    \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.
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    The Exchange's proposal to increase the threshold percentage of 
time in which a member organization must quote at the NBBO during a 
month in order to qualify for the QMM designation pursuant to Equity 7, 
Section 3(c)(1), will encourage member organizations to increase 
liquidity adding activity, enhance price discovery, and improve the 
overall quality of the equity markets. The Exchange believes that it is 
appropriate to periodically reassess and recalibrate the baselines for 
its QMM qualifications 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.
The Proposal Is an Equitable Allocation
    The Exchange believes its proposal allocates its QMM qualifications 
fairly among its market participants. The Exchange also believes that 
its proposal to amend the qualification criteria for the QMM Program is 
an equitable allocation because it will bolster the effectiveness of 
the QMM program for all market participants, which is an important 
contributor to the quality of the Nasdaq market, by ensuring that 
qualified market participants are contributing to increased liquidity 
adding activity, enhanced price discovery, and improvements to the 
overall quality of the equity markets.
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 QMM qualification criteria 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 proposal to increase 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 QMM qualification requirement 
at Equity 7, Section 3(c)(1), is not unfairly discriminatory because 
although any member organization that currently qualifies as a QMM will 
need to quote at the NBBO for a higher percentage of the time than they 
would need to do now, this is fair because meeting the heightened 
requirement will improve market quality and enhance price discovery.

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. 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 
qualifications. Members may grow their businesses so that they have the 
capacity to qualify as a QMM. Moreover, members are free to trade on 
other venues to the extent they believe that the qualification criteria 
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.
    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 qualify as a QMM 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 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 QMM 
qualification standards 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 
make adjustments 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.
    In sum, the Exchange intends for the modified QMM Program to 
increase member organizations incentives to quote securities at the 
NBBO for at least 15 percent of the day, which stands to improve the 
quality of the Exchange's market and its attractiveness to 
participants; however, if the proposal is 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 
modification to the QMM qualifications 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.

[[Page 11345]]

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\
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    \9\ 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-2021-09 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-2021-09. 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-2021-09 and should be submitted on 
or before March 17, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-03724 Filed 2-23-21; 8:45 am]
BILLING CODE 8011-01-P