[Federal Register Volume 85, Number 81 (Monday, April 27, 2020)]
[Notices]
[Pages 23404-23407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08821]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88708; File No. SR-Phlx-2020-25]


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

April 21, 2020.
    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 14, 2020, 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.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, 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
    Presently, the Exchange has a pricing schedule, at Equity 7, 
Section 3, which sets forth several different credits that it provides 
for orders in securities priced at $1 or more per share that add 
liquidity to the Exchange. The pricing schedule also provides a 
supplemental credit to member organizations that make significant 
contributions to improving the market during each month. The Exchange 
proposes to amend this pricing schedule to lower the volume threshold 
for receiving a credit when a member organization adds liquidity to the 
Exchange.
    Presently, the Exchange provides a $0.0026 per share executed 
credit for quotes/orders entered by member organizations that provide 
0.15% or more of Consolidated Volume \3\ during a

[[Page 23405]]

month. The Exchange proposes to decrease the percentage of Consolidated 
Volume to 0.10%. The purpose of this change, which will make it easier 
for a member organization to receive the credit, is to incentivize 
member organizations to maintain or increase their liquidity adding 
activity on the Exchange, which in turn will help to improve overall 
market quality. The Exchange also proposes to add the word ``total'' 
prior to the words ``Consolidated Volume'' in the description of credit 
to member organizations providing liquidity. This is a non-substantive 
change intended to provide clarity and to the description of 
Consolidated Volume.
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    \3\ As used in Equity 7, Section 3, 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 date of the annual reconstitution of the 
Russell Investments Indexes are excluded from both total 
Consolidated Volume and the member's trading activity.
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    The Exchange also proposes to make changes to its Qualified Market 
Maker (``QMM'') Program. More specifically, the Exchange proposes to 
adjust downward the average number of securities for which a member 
organization must quote at the national best bid and offer (``NBBO'') 
during a month to qualify as a QMM. Presently, a member organization 
must quote at the NBBO at least 10% of the time during market hours -, 
for an average of at least 500 securities per day during a month to 
qualify as a QMM and to receive a supplemental credit of $0.0001 per 
share executed with respect to all of its displayed orders priced at 
$1.00 or more per share that provide liquidity. The Exchange proposes 
to reduce the threshold number of securities to 400. Additionally, 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 $0.0002 per share executed. Currently, a member organization 
must quote at the NBBO at least 10% of the time during market hours for 
an average of at least 650 securities per day to qualify for the 
$0.0002 per share executed supplemental credit. The Exchange proposes 
to reduce this number to 500 securities. Reducing the average number of 
securities in which a member organization must quote at the NBBO for at 
least 10% of the time during market hours during a month will fortify 
existing participation in the QMM Program by easing the burden on 
members to qualify as QMMs and to better enable existing QMMs to 
maintain their qualifications as such. It will also ease the burden on 
QMMs to qualify for the supplemental credits.
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 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' . . . .'' \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.\8\
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    \8\ 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 their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules.\9\ 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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    \9\ 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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    Generally, the Exchange's proposal to decrease the required 
percentage of total consolidated volume for liquidity provided by 
member organizations improves the overall incentive to member 
organizations to increase their liquidity addition activity on the 
Exchange. An increase in overall liquidity addition activity on the 
Exchange, in turn, will improve the quality of the Exchange's equity 
market and increase its attractiveness to existing and prospective 
participants. Moreover, the proposed credits will be comparable to, if 
not favorable to, those provided by its competitors.\10\
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    \10\ See Cboe EDGX U.S. Equities Exchange Fee Schedule at n. 1 
(Add Volume Tiers), available at https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/.
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    The proposed changes to the Exchange's QMM Program is also a 
reasonable attempt to improve market quality by broadening its QMM 
Program. By lowering the quoting threshold for member organizations to 
qualify as QMMs and to receive supplemental credits for quoting at the 
NBBO for a significant percentage of the trading day, the Exchange will 
encourage new member organizations to

[[Page 23406]]

become QMMs and help ensure that existing QMMs continue to qualify as 
such.
The Proposals Are an Equitable Allocation of Credits
    The Exchange believes its proposals will allocate its proposed 
credits fairly among its market participants. The proposals will 
provide a member organization with an easier opportunity to receive a 
credit for adding liquidity to the Exchange than it does now. It is 
equitable for the Exchange to make it easier to receive a credit for 
member organizations whose orders add liquidity to the Exchange as a 
means of incentivizing increased liquidity addition activity. An 
increase in overall liquidity addition activity on the Exchange will 
improve the quality of the Exchange's equity market and increase its 
attractiveness to existing and prospective participants.
    Finally, the Exchange believes its proposal to adjust the 
qualification and supplemental credit criteria applicable to its QMM 
program is equitable because the modified qualification criteria will 
continue to require member organizations to quote significantly at the 
NBBO for a large number of securities and will continue to contribute 
to market quality in a meaningful way. In fact, by lowering the 
thresholds for member organizations to qualify as QMMs and to receive 
supplemental credits, the Exchange will encourage new member 
organizations to become QMMs and help ensure that existing QMMs 
continue to qualify as such, which will further improve market quality.
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 the proposal to improve market quality for 
all members on the Exchange and by extension attract more liquidity to 
the market, improving market wide quality and price discovery. Although 
net adders of liquidity will benefit most from the proposed lower total 
consolidated volume percentage requirement, this result is fair insofar 
as an uptick in liquidity addition activity will help to improve market 
quality and the attractiveness of the Exchange's equity market to all 
existing and prospective participants.
    The Exchange's proposal to modify the QMM program is not unfairly 
discriminatory because any member organization may quote at the NBBO at 
the levels required by the modified qualification criteria of the QMM 
Program and, in fact, the modified criteria will allow qualification as 
a QMM easier for member organizations to achieve.
    Additionally, the Exchange's inclusion of the word ``total'' is a 
non-substantive change solely intended to add clarification to the term 
Consolidated Volume.

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 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 12 live exchanges and from 
off-exchange venues, which include 33 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

[[Page 23407]]

comprised more than 38% of industry volume for the month of February 
2020.
    In sum, the Exchange intends for the proposed credit and modified 
QMM Program to increase member incentives to add liquidity to the 
Exchange and to contribute to market quality, which is reflective of 
fierce competition for order flow noted above; however, if the proposed 
credit and QMM Program incentives 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 new fees 
and 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.\11\
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    \11\ 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 rule-comments@sec.gov. Please include 
File No. SR-Phlx-2020-25 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 No. SR-Phlx-2020-25. 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 No. SR-Phlx-2020-25, and should be submitted on or 
before May 18, 2020.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08821 Filed 4-24-20; 8:45 am]
 BILLING CODE 8011-01-P


