[Federal Register Volume 87, Number 118 (Tuesday, June 21, 2022)]
[Notices]
[Pages 36906-36908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13151]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95103; File No. SR-Phlx-2022-24]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend its 
Schedule of Credits, at Equity 7, Section 3

June 14, 2022.
    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 June 1, 2022, 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 schedule of credits, 
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: (1) adopt a new $0.0025 per share executed credit for 
member organizations that provide non-displayed liquidity with midpoint 
pegging of at least one million shares average daily value during the 
month; and (2) modify the per share executed credit for member 
organizations that provide non-displayed liquidity with midpoint 
pegging for all other orders from $0.0023 to $0.0018.
    Pursuant to Equity 7, Section 3, the Exchange currently provides a 
credit of $0.0023 per share executed to member organizations for all 
non-displayed orders with midpoint pegging that provide liquidity. The 
Exchange proposes to establish credit tiers for member organizations 
providing liquidity for non-displayed orders with midpoint pegging to 
provide an incentive for member organizations to engage in a 
significant amount of liquidity adding activity on the Exchange.
    The Exchange proposes establishing a new credit that will reward a 
member organization with a credit of $0.0025 per share executed to the 
extent that it provides a daily average volume of at least one million 
shares of non-displayed liquidity with midpoint pegging during the 
month. The proposed new credit for non-displayed orders with midpoint 
pegging will provide an additional incentive to member organizations to 
add liquidity to the Exchange. Insofar as the proposed new credit will 
require a qualifying member organization to provide at least one 
million shares average daily value during the month in order to qualify 
for the $0.0025 per share credit, the Exchange believes it is 
reasonable for

[[Page 36907]]

the amount of the proposed credit to be larger than the credit for 
other non-displayed orders with midpoint pegging, which the Exchange 
proposes to modify to $0.0018. To the extent that the proposed new 
credit structure succeeds in increasing liquidity on the Exchange, the 
quality of the Exchange's market will improve, to the benefit of all 
participants.
    In addition, the Exchange proposes lowering the credit to member 
organizations for all other non-displayed orders with midpoint pegging 
that provide liquidity during the month from $0.0023 to $0.0018 per 
share executed. The Exchange has limited resources available to it to 
offer its member organizations market-improving incentives, and it 
allocates those limited resources to those segments of the market where 
it perceives the need to be greatest and/or where it determines that 
the incentive is likely to achieve its intended objective, such as the 
proposed new credit and away from those that are less effective, such 
as this existing credit for midpoint pegged orders that add liquidity 
to the Exchange. Accordingly, the Exchange is reducing the amount of 
this credit from $0.0023 to $0.0018 per share executed.
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 member organizations 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 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'. . . .'' \5\
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    \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)).
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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 member organizations 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.
    The Exchange believes that its proposals are reasonable, equitable, 
and not unfairly discriminatory to: (1) establish a new $0.0025 per 
share executed credit for non-displayed orders with midpoint pegging 
that provide liquidity of at least one million shares average daily 
value during the month; and (2) reduce from $0.0023 to $0.0018 per 
share executed its existing credit for all other non-displayed orders 
with midpoint pegging that provide liquidity to the Exchange. The 
Exchange assesses a particular need to increase liquidity on the 
Exchange as a means of improving market quality. The proposal is 
reasonable in serving that purpose by providing a new incentive for 
member organizations to add a substantial amount of liquidity to the 
Exchange, while reducing an existing incentive for member organizations 
that add a lesser amount of liquidity to the Exchange. As noted above, 
the Exchange has limited resources available to it to offer its member 
organizations market-improving incentives, and it allocates those 
limited resources to those segments of the market where it perceives 
the need to be greatest and/or where it determines that the incentive 
is likely to achieve its intended objective. It is reasonable and 
equitable to address the need for increased liquidity on the Exchange 
by allocating its limited resources to establish a new credit that 
rewards member organizations that provide a substantial volume of 
liquidity to the Exchange and reduce an existing credit that rewards 
member organizations for providing a lesser volume of liquidity to the 
Exchange.
    The Exchange also believes that these proposals are an equitable 
allocation and not unfairly discriminatory because all market 
participants stand to benefit to the extent that the proposal is 
successful in increasing liquidity on the Exchange and improving market 
quality. Insofar as the $0.0025 credit will require a member 
organization to provide a daily average volume of at least one million 
shares of liquidity on the Exchange during the month, the Exchange 
believes it is reasonable, equitable, and not unfairly discriminatory 
for the amount of the proposed credit to be larger than the credit for 
all other non-displayed orders with midpoint pegging.
    Any member organization that is dissatisfied with the proposed 
credits is free to shift their order flow to competing venues that 
provide more favorable rates 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 participants at a competitive disadvantage. As 
noted above, all member organizations of the Exchange will benefit from 
an increase in activity on the Exchange. Moreover, member organizations 
are free to trade on other venues to the extent they believe that the 
credits provided are not attractive or

[[Page 36908]]

the qualifying criteria for such credits is too stringent. 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.
Intermarket Competition
    The Exchange believes that the proposed changes to its schedule of 
credits for non-displayed orders with midpoint pegging 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 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 credits and fees in response, and because market 
participants may readily adjust their order routing practices, the 
Exchange believes that the degree to which credit changes in this 
market may impose any burden on competition is extremely limited.
    The proposed changes to the Exchange's credits for non-displayed 
orders with midpoint pegging 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 proposed changes to credits 
for non-displayed orders with midpoint pegging to incent member 
organizations to add liquidity to the Exchange and to thereby 
contribute to market quality, which is reflective of fierce competition 
for order flow noted above; however, if the change proposed herein 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 change will impair the ability of member organizations 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.\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-2022-24 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-2022-24. 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-2022-24 and should be submitted on 
or before July 12, 2022.

    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. 2022-13151 Filed 6-17-22; 8:45 am]
BILLING CODE 8011-01-P