[Federal Register Volume 89, Number 91 (Thursday, May 9, 2024)]
[Notices]
[Pages 39668-39671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10081]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100060; File No. SR-Phlx-2024-18]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its Fee 
Schedule at Equity 7, Section 3 To Implement a Market Data Revenue 
Rebate Program

May 3, 2024.
    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 April 25, 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 fee schedule at Equity 7, 
Section 3 to implement a Market Data Revenue Rebate program, 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 fee schedule at Equity 7, 
Section 3 to adopt a Market Data Revenue (``MDR'') Rebate program for 
Nasdaq PSX.\3\ In sum, the proposed MDR Rebate program calls for 40% of 
MDR that exceeds fixed thresholds in any one of two pools (``Excess 
MDR'') to be shared with PSX Participants in proportion to their 
respective eligible quoting activity in Tape A and C securities, as 
described further below. The proposed MDR Rebate program is designed to 
improve displayed liquidity and promote order flow to the Exchange by 
offering an incentive for market participants to quote on the Exchange.
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    \3\ The Exchange initially filed the proposed pricing change on 
April 1, 2024 (SR-Phlx-2024-16). On April 15, 2024, the Exchange 
withdrew that filing and submitted SR-Phlx-2024-17. On April 25, 
2024, the Exchange withdrew that filing and submitted this filing.
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Background
    The Securities Information Processors (``SIPs''), which include the 
Unlisted Trading Privileges and the Consolidated Tape Association, 
collect fees from

[[Page 39669]]

subscribers for trade and quote tape data received from trading centers 
and reporting facilities, such as the Exchange (collectively ``SIP 
Participants''). After deducting the cost of operating each tape, the 
profits are allocated among the SIP Participants on a quarterly basis, 
according to a complex set of calculations that consider estimates of 
anticipated MDR, adjustments to comport to actual MDR from previous 
quarters and a non-linear aggregation of total trading and quoting 
activity in Tape A, B and C securities in attributing MDR to each SIP 
Participant. Based on these calculations, the SIPs provide MDR payments 
to each SIP Participant during the first month of each quarter for 
trade and quote data from the previous calendar quarter, which are 
subject to adjustment through subsequent quarterly payments. These 
payments can be divided into six pools (i.e., trade and quote activity 
in Tape A, B and C securities).
Proposed PSX MDR Rebate Program
    As the Exchange does not currently share MDR with Participants, the 
Exchange now proposes to implement a PSX MDR Rebate program to share 
MDR attributed to quote activity only by adopting a PSX MDR Rebate 
program in Equity 7, Section 3.
    Specifically, proposed Section (a) provides that, assuming that the 
requirements of this PSX MDR Rebate Section are met, a PSX Participant 
may receive a quarterly MDR rebate in proportion to the PSX 
Participant's quoting of displayed orders in Tape A and C securities 
from the previous calendar quarter (``MDR Rebate''), as described 
further in Section (e).
    Proposed Section (b) provides that, to qualify for the MDR Rebate, 
a PSX Participant must quote at the National Best Bid or Offer 
(``NBBO'') at least 25% of the time during Market Hours in an average 
of at least 250 securities for Tape A securities or at least 300 
securities for Tape C securities through the PSX Participant's MPID. A 
PSX Participant is considered to be quoting at the NBBO if the PSX 
Participant's MPID quotes a displayed order of at least 100 shares in 
the security and prices the order at either the national best bid or 
the national best offer or both the national best bid and offer for the 
security. To qualify for the MDR Rebate, the PSX Participant must meet 
the requirement for an average of at least 250 securities for Tape A 
securities or at least 300 securities for Tape C securities per day 
over the course of the quarter.
    Proposed Section (c) provides that MDR will be calculated 
separately for quotes in each Tape A and C security, for a total of two 
MDR pools. If the MDR received by the Exchange in any given pool 
exceeds the following thresholds in any given calendar quarter, 40% of 
such excess MDR will be payable to PSX Participants in proportion to 
their respective quoting of displayed orders in that pool:

------------------------------------------------------------------------
               Tape A                               Tape C
------------------------------------------------------------------------
                  $110,000                             $200,000
------------------------------------------------------------------------

    The proposed thresholds were selected based on historical data of 
PSX's quoting revenue from Q2 2023-Q4 2023. The dollar values represent 
the amount of MDR that must be paid to the Exchange by the SIPs before 
the Excess MDR would be eligible for distribution.
    The Exchange proposes to adopt two of the six MDR pools utilized by 
the SIPs, excluding the pools for trading activity and the pool for 
quoting activity in Tape B, and attributing the proposed MDR Rebates to 
PSX Participants for quote activity in Tapes A and C. Currently, PSX 
Participants are most actively quoting Tape B securities on PSX. The 
Exchange proposes to establish the MDR Rebates for quoting activity in 
Tapes A and C because the Exchange wants to encourage increased quoting 
at the NBBO for Tapes A and C.
    Section (d) provides a de minimis requirement that states that a 
PSX Participant will not receive an MDR Rebate in any calendar quarter 
in which the total MDR Rebate attributed to the PSX Participant is less 
than $500. If a PSX Participant is eligible for MDR Rebates from both 
pools, the PSX Participant will be eligible to receive an MDR rebate 
equal to the sum of the rebates. However, if the sum of the rebates is 
less than $500, the PSX Participant will not receive a payment and the 
rebate will be kept by the Exchange. The purpose of the de minimis 
requirement is to encourage significant quote activity and for the 
Exchange to avoid having to pay PSX Participants for de minimis Excess 
MDR.\4\
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    \4\ For example, it would be unduly burdensome to the Exchange 
to calculate and pay MDR Rebates to PSX Participants if the total 
Excess MDR of all the pools was $4000 and ten PSX Participants were 
each attributed $400 in rebates.
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    In attributing eligible quote activity to PSX Participants, the 
Exchange proposes to utilize a set of calculations similar to those 
used by the SIPs in allocating MDR to SIP Participants. Section (e) of 
the proposed rule language describes the steps for calculating MDR 
Rebates:
    Step 1. Calculate, on a daily basis (per MPID), the product of 
three factors: number of shares in the quotation, the duration of the 
quotation at the NBBO (for both the bid and the offer), and the price 
of the security.
    Step 2. For each security, sum the daily values from Step 1 across 
the quarter, the sum of which represents the PSX Participant's quote 
credits (per MPID) in each security.
    Step 3. For each security, sum all PSX Participants' quote credits 
to obtain the total quote credits available per security.
    Step 4. Divide each PSX Participant's quote credits (per MPID) 
(from Step 2) into the total quote credits available per security (from 
Step 3) to obtain a Participant's percentage of the security they are 
quoting (per MPID).
    Step 5. Calculate the income allocation weight for each security 
based on the share of revenue allocated to the symbol by the SIP that 
quarter.
    Step 6. For each security, multiply a PSX Participant's percentage 
of security they are quoting (per MPID) (from Step 4) by the income 
allocation weight of the security (from Step 5).
    Step 7. For each PSX Participant's MPID, sum the values calculated 
in Step 6 across all securities in the pool (i.e., in the same Tape) to 
obtain the PSX Participant's allocation percentage for the excess MDR 
in the pool.
    Step 8. For each PSX Participant with eligible quote activity in 
the pool, multiply the PSX Participant's allocation percentage (from 
Step 7) by the excess MDR in the pool to determine the dollar amount of 
the PSX Participant's MDR Rebate in the pool.
    As for calculating the pool of funds from which MDR Rebates will be 
paid, unlike the SIPs, the Exchange will derive MDR Rebate allocation 
from a fixed value that will not be subject to adjustment (i.e., the 
amount of MDR actually received by the Exchange on a quarterly basis). 
This avoids the problem of having to adjust MDR rebates that have 
already been paid to PSX Participants to comport to adjustments to MDR 
made by the SIPs.\5\
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    \5\ For example, if MDR paid to the Exchange was less than 
anticipated in Q3 2024 due to an adjustment to the MDR paid to the 
Exchange in Q2 2024 (i.e., actual MDR in Q2 fell short of 
estimates), the Exchange will not recoup the difference from the PSX 
Participants that had been paid the Q2 MDR Rebate. Instead, the MDR 
Rebate for Q3 will be calculated based on the actual MDR paid to the 
Exchange in Q3.
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    The following Example, which the Exchange provides in the proposed 
rule language, illustrates how Excess MDR will be calculated and 
distributed:
    Step 1. On the first day of the quarter, PSX Participant A earns 
59,000 quote

[[Page 39670]]

credits in MPID 1 for Security X (a Tape C security): 59 seconds x $10 
x 100 shares.
    Step 2. Assume PSX Participant A earns 4,000,000 quote credits for 
Security X in MPID 1 after summing its daily quote credits across the 
quarter.
    Step 3. Assume there are five PSX Participants (i.e., Participants 
A, B, C, D and E) that had eligible quote activity in Security X during 
the quarter. The quarterly quote credits for Security X are as follows:

------------------------------------------------------------------------
                                                        Security X Quote
                     Participant                            Credits
------------------------------------------------------------------------
A....................................................          4,000,000
B....................................................          1,000,000
C....................................................          3,500,000
D....................................................          2,500,000
E....................................................          5,000,000
                                                      ------------------
    Total............................................         16,000,000
------------------------------------------------------------------------

    Step 4. PSX Participant A's percentage of Security X it quoted is 
25%: 4,000,000/16,000,000.
    Step 5. Assume the SIP allocated revenue of $360,000 to Security X 
for the quarter and $36,000,000 to all securities in the Tape C pool 
for the quarter. The income allocation weight for security X is 1%: 
$360,000/$36,000,000.
    Step 6. PSX Participant A's allocation percentage for the excess 
MDR in Security X in MPID 1 is 0.25%: 25% x 1%.
    Step 7. Assume, after summing the allocation percentage calculated 
in Step 6 across all securities in the Tape C pool, PSX Participant A's 
allocation percentage is 2.5% in MPID 1.
    Step 8. Assume PSX Participant A quoted at the NBBO at least 25% of 
the time during Market Hours in an average of at least 300 securities 
in Tape C through MPID 1, in accordance with section (b) above.
    The following table represents the proposed MDR pool thresholds:

------------------------------------------------------------------------
               Tape A                               Tape C
------------------------------------------------------------------------
                  $110,000                             $200,000
------------------------------------------------------------------------

    Under this Example, assume that the quarterly MDR paid to the 
Exchange is apportioned as follows:

------------------------------------------------------------------------
               Tape A                               Tape C
------------------------------------------------------------------------
                  $110,000                             $350,000
------------------------------------------------------------------------

    Under this Example, the Tape C pool has excess MDR in the amount of 
$150,000. However, the Tape A pool has no excess MDR because the actual 
MDR received in the Tape A pool was equal to its $110,000 threshold. 
Thus, PSX Participants may be paid MDR Rebates for attributed eligible 
quoting activity from 40% of the excess MDR in the Tape C pool, which 
is $60,000.
    The attributed MDR for PSX Participant A in MPID 1 is $1,500: 2.5% 
x 60,000. Sincethe attributed MDR is greater than $500, PSX Participant 
A would receive an MDRpayment in the amount of $1,500.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\7\ 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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    \6\ 15 U.S.C. 78f(b).
    \7\ 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'. . ..'' \8\
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    \8\ 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.'' \9\
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    \9\ 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. 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 it is reasonable, equitable, and not unfairly 
discriminatory for the Exchange to adopt a PSX MDR Rebate program that 
provides for sharing of Excess MDR with PSX Participants in proportion 
to their respective eligible quoting activity in Tape A and C 
securities, as described above. The Exchange believes the proposal is 
reasonable as it will provide an incentive for PSX Participants to 
increase quoting in displayed liquidity in Tape A and C securities on 
the Exchange. An increase in displayed liquidity and order flow to the 
Exchange will, in turn, improve the quality of the market and increase 
its attractiveness to existing and prospective participants. In 
addition, the proposal is equitable and not unfairly discriminatory as 
the proposal would equitably allocate MDR Rebates among PSX 
Participants by paying MDR Rebates according to the total quoting 
activity in Tape A and C securities attributable to a PSX Participant 
in any given calendar quarter. The MDR Rebates are available to all PSX 
Participants.

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.

[[Page 39671]]

Intramarket Competition
    The Exchange does not believe that its proposal will place any 
category of Exchange participant at a competitive disadvantage.
    As noted above, the Exchange's proposal is intended to have market-
improving effects, by increasing displayed liquidity and order flow to 
the Exchange, to the benefit of all participants. The Exchange notes 
that its participants 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 50% of industry 
volume.
    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.\10\
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    \10\ 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-2024-18 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-2024-18. 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, 
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-2024-18, and should 
be submitted on or before May 30, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-10081 Filed 5-8-24; 8:45 am]
BILLING CODE 8011-01-P