[Federal Register Volume 89, Number 35 (Wednesday, February 21, 2024)]
[Notices]
[Pages 13122-13125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03450]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99537; File No. SR-Phlx-2024-04]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Equity 7, 
Section 3(a)

    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 1, 2024, 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 its pricing schedule at Equity 7, 
Section 3(a), 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 purpose of the proposed rule change is to provide an additional 
calculation for purposes of determining whether a member qualifies for 
credits set forth in Equity 7, Section 3(a) that pertain to providing 
liquidity.
    Presently, the Exchange provides its members with various credits 
for executing orders that add liquidity to the Exchange and charges 
them various fees for executing orders, that remove liquidity from the 
Exchange, as set forth in Equity 7, Section 3(a) of the Exchange's 
Rules. The charges and credits in Equity 7, Section 3(a) apply to the 
use of the order execution and routing services of the Nasdaq PSX 
System by members for all securities priced at $1 or more that it 
trades. Members may qualify for tiers of discounted fees and premium 
credits based, in part, upon their volume on the Exchange as a 
percentage of total ``Consolidated Volume.''
    Pursuant to Equity 7, Section 3(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 following are excluded from both total Consolidated 
Volume and the member's trading activity: (1) the date of the annual 
reconstitution of the Russell Investments Indexes; (2) the dates on 
which stock options, stock index options, and stock index futures 
expire (i.e., the third Friday of March, June, September, and 
December); (3) the dates of the rebalance of the MSCI Equities Indexes 
(i.e., on a quarterly basis); (4) the dates of the rebalance of the S&P 
400, S&P 500, and S&P 600 Indexes (i.e., on a quarterly basis); and (5) 
the date of the annual reconstitution of the Nasdaq-100 and Nasdaq 
Biotechnology Indexes.
    Generally, the ratio of consolidated volumes in securities priced 
at or above $1 (``dollar plus volume'') relative to consolidated 
volumes inclusive of securities priced below a dollar is usually stable 
from month to month, such that ``Consolidated Volume'' has been a 
reasonable baseline for determining tiered incentives for members that 
execute dollar plus volume on the Exchange. However, there have been a 
few months where

[[Page 13123]]

volumes in securities priced below a dollar (``sub-dollar volume'') 
have been elevated, thereby impacting the ratio mentioned above.
    Anomalous rises in sub-dollar volume stand to have a material 
adverse impact on members' qualifications for pricing tiers/incentives 
because such qualifications depend members upon achieving threshold 
percentages of volumes as a percentage of Consolidated Volume, and an 
extraordinary rise in sub-dollar volume stands to elevate Consolidated 
Volume. As a result, members may find it more difficult, if not 
practically impossible, to qualify for or to continue to qualify for 
their existing incentives during months where there are such rises in 
sub-dollar volumes, even if their dollar plus volumes have not 
diminished relative to prior months.
    The Exchange believes that it would be unfair for its members that 
execute significant dollar plus volumes on the Exchange to fail to 
achieve or to lose their existing incentives for such volumes due to 
anomalous behavior that is extraneous to them. Therefore, the Exchange 
wishes to amend its Rules to help avoid extraordinary spikes in sub-
dollar volumes from adversely affecting a member's qualification of 
incentives for their dollar plus stock executions.
    Accordingly, the Exchange proposes to amend its pricing schedule at 
Equity 7, Section 3(a) to state that, for purposes of calculating a 
member's qualifications for credits that pertain to providing liquidity 
set forth in Section 3(a), the Exchange will calculate a member's 
volume and total Consolidated Volume twice. First, the Exchange will 
calculate a member's volume and total Consolidated Volume as presently 
set forth in Equity 7, Section 3(a) (i.e., inclusive of volume that 
consists of executions in securities priced less than $1). Second, the 
Exchange will calculate a member's volume and total Consolidated Volume 
exclusive of volume that consists of executions in securities priced 
less than $1, while also increasing the distinct qualifying volume 
percentage thresholds, as set forth in Section 3(a), by 10%. 
Thereafter, the Exchange proposes to assess which of these two 
calculations would qualify the member for the most advantageous credits 
for the month and then it will apply those to the member.
    Although the Exchange wishes to avoid extraordinary spikes in sub-
dollar volumes from adversely affecting a member's qualification of 
incentives for their dollar plus stock executions, the Exchange 
proposes to include certain limits on the proposal to efficiently 
allocate the Exchange's limited resources for incentives. Specifically, 
as noted above, the Exchange proposes to limit the application of the 
proposed calculation excluding sub-dollar volumes to those incentives 
in Section 3(a) that pertain to providing liquidity. In addition, as 
noted above, the Exchange proposes to increase the distinct qualifying 
volume percentage thresholds set forth in Section 3(a) by 10% for 
purposes of the proposed calculation excluding sub-dollar volumes.\3\ 
The Exchange wishes to impose such limitations in order to limit the 
cost impact on the Exchange, while still providing some relief to 
members in months with extraordinary spikes in sub-dollar volumes. The 
Exchange has limited resources to devote to incentive programs, and it 
is appropriate for the Exchange to reallocate these incentives 
periodically in a manner that best achieves the Exchange's overall mix 
of objectives.
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    \3\ For example, the Exchange provides a credit of $0.0033 per 
share executed to members providing liquidity for orders entered by 
a member that provide 0.15% or more of total Consolidated Volume 
during the month. See Equity 7, Section 3(a). Under the proposal, in 
addition to calculating the member's volume and total Consolidated 
Volume exclusive of volume that consists of executions in securities 
priced less than $1, the distinct qualifying volume percentage 
threshold would be increased by 10%. Therefore, for purposes of this 
example, in order to qualify for the credit using volumes excluding 
sub-dollar activity, the member would need to provide 0.165% or more 
of total Consolidated Volume during the month (i.e., 0.15% + 
(10%)(0.15%)).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\4\ in general, and furthers the objectives of sections 
6(b)(4) and 6(b)(5) of the Act,\5\ 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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    \4\ 15 U.S.C. 78f(b).
    \5\ 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'. . . .'' \6\
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    \6\ 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.'' \7\
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    \7\ 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.
    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.
    The Exchange believes that the proposal is reasonable and equitable 
because, in its absence, members may experience material adverse 
impacts on their ability to qualify for certain incentives during a 
month with an anomalous rise in sub-dollar volumes. The Exchange does 
not wish to penalize members that execute significant volumes on the 
Exchange due to anomalous and extraneous trading activities of a small 
number of firms in sub-dollar securities. The proposed rule would seek 
to provide a means for members that provide liquidity to avoid

[[Page 13124]]

such a penalty by determining whether calculating member volume and 
total Consolidated Volume to include or exclude sub-dollar volume \8\ 
would result in Exchange members qualifying for the most advantageous 
credits, and then applying the calculations that would result in the 
incentives for providing liquidity that are most advantageous to each 
member. The Exchange believes it is reasonable to limit the proposal by 
applying the proposed calculation to incentives that pertain to 
providing liquidity and increasing the distinct qualifying volume 
percentage thresholds by 10% when using the proposed calculation 
excluding sub-dollar volumes because the Exchange has limited resources 
to devote to incentive programs, and it is appropriate for the Exchange 
to reallocate these incentives periodically in a manner that best 
achieves the Exchange's overall mix of objectives. The Exchange 
believes that the proposed rule change is an equitable allocation and 
is not unfairly discriminatory because the Exchange does not intend for 
the proposal to advantage any particular member and the Exchange will 
apply the proposed calculation to all similarly situated members.
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    \8\ As noted above, in considering whether a member meets 
qualifying credit criteria using the proposed calculation excluding 
sub-dollar volumes, the distinct qualifying volume percentage 
thresholds would be increased by 10%.
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    Those participants that are dissatisfied with the changes to the 
Exchange's schedule of credits are free to shift their order flow to 
competing venues that provide more favorable fees or generous 
incentives.

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.
    The Exchange intends for its proposal to help avoid pricing 
disadvantages due to anomalous spikes in sub-dollar volumes and is not 
intended to provide a competitive advantage to any particular member. 
The Exchange also intends for its proposal to reallocate its limited 
resources more efficiently and to align them with the Exchange's 
overall mix of objectives. The Exchange notes that its members are free 
to trade on other venues to the extent they believe that the proposal 
is 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.
Intermarket Competition
    In terms of inter-market competition, 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 and 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 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 or fee changes in this market may impose any burden on 
competition is extremely limited. The proposal is reflective of this 
competition.
    Even the largest U.S. equities exchange by volume 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.
    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.\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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-Phlx-2024-04 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-2024-04. 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 (https://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,

[[Page 13125]]

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. Do 
not include personal identifiable information in submissions; you 
should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-Phlx-2024-04, and should 
be submitted on or before March 13, 2024.

    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).

    Dated: February 14, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03450 Filed 2-20-24; 8:45 am]
BILLING CODE 8011-01-P