[Federal Register Volume 85, Number 143 (Friday, July 24, 2020)]
[Notices]
[Pages 44941-44944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16024]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89343; File No. SR-NASDAQ-2020-041]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Equity 7, Section 118(a)

July 20, 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 July 9, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' 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, 
as set forth in Equity 7, Section 118(a) of the Exchange's Rulebook.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/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 amend the schedule of 
credits it provides to members, pursuant to Equity 7, Section 118(a), 
in several respects.
    First, the Exchange proposes to raise its requirements to qualify 
for an existing credit of $0.00305 per share executed that it provides 
to a member: (i) With shares of liquidity provided in all securities 
during the month representing at least 0.60% of Consolidated Volume \3\ 
during the month, through one or more of its Nasdaq Market Center 
MPIDs; (ii) which adds Nasdaq Options Market (``NOM'') Market Maker \4\ 
liquidity in Penny Pilot Options and/or Non-Penny Pilot Options of 
0.10% or more of total industry average daily volume (``ADV'') in the 
customer clearing range for equity and ETF option contracts per day in 
a month on NOM; and (iii) which adds Customer,\5\ Professional,\6\ 
Firm,\7\ Non-NOM Market Maker and/or Broker-Dealer liquidity in Penny 
Pilot Options and/or Non-Penny Pilot Options of 1.50% or more of total 
industry ADV in the customer clearing range for Equity and ETF option 
contracts per day in a

[[Page 44942]]

month on NOM. Specifically, the Exchange proposes to raise the 
qualifying 0.60% Consolidated Volume threshold to 0.95% and the 
qualifying 0.10% ADV threshold to 0.20%. The Exchange intends to raise 
the first of these qualification thresholds to incentivize members to 
increase the extent of their liquidity adding activity on the Exchange 
to qualify for and to continue to qualify for this credit. The Exchange 
intends to raise the second of these thresholds to incentivize members 
that also act as NOM Market Makers to increase the extent of their 
liquidity providing activity on NOM. With these proposed changes, the 
Exchange intends to improve the quality of both its equities market and 
also NOM.
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    \3\ Pursuant to Equity 7, Section 118(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 date of the annual reconstitution of 
the Russell Investments Indexes is excluded from both total 
Consolidated Volume and the member's trading activity.
    \4\ The term ``NOM Market Maker'' means a broker-dealer 
registered with NOM for the purpose of making markets in options 
contracts traded on NOM.
    \5\ The term ``Customer'' means a broker-dealer or a person that 
is not a broker or dealer in securities. See Options 1, Section 
1(a)(15).
    \6\ A ``Professional'' is defined in Options 1, Section 1(a)(47) 
of the NOM rules as ``any person or entity that (i) is not a broker 
or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s).''
    \7\ The term ``Firm'' applies to any transaction that is 
identified by a Participant for clearing in the Firm range at OCC.
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    Second, the Exchange proposes to provide a new credit for displayed 
quotes/orders (other than Supplemental Orders or Designated Retail 
Orders) of $0.00295 per share executed to a member, through one or more 
of its Nasdaq Market Center MPIDs: (i) With shares of liquidity 
provided in all securities during the month representing at least 0.50% 
of Consolidated Volume during the month; (ii) which adds at least 0.35% 
of Consolidated Volume during the month in securities in Tape C; and 
(iii) which adds at least 0.15% of Consolidated Volume during the month 
in Designated Retail Orders \8\ for securities in any Tape. The purpose 
of this credit is to provide members with a new incentive to add 
significant amounts of liquidity to the Exchange and, in particular, to 
add significant volumes of liquidity in securities in Tape C and in 
retail orders in securities in all Tapes. An increase in liquidity 
adding activity on the Exchange would help to improve the quality of 
the market for all participants, including but not limited to retail 
investors.
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    \8\ A ``Designated Retail Order'' is an agency or riskless 
principal order that meets the criteria of FINRA Rule 5320.03 and 
that originates from a natural person and is submitted to Nasdaq by 
a member that designates it as such, provided that no change is made 
to the terms of the order with respect to price or side of market 
and the order does not originate from a trading algorithm or any 
other computerized methodology. An order from a ``natural person'' 
can include orders on behalf of accounts that are held in a 
corporate legal form--such as an Individual Retirement Account, 
Corporation, or a Limited Liability Company--that has been 
established for the benefit of an individual or group of related 
family members, provided that the order is submitted by an 
individual. Members must submit a signed written attestation, in a 
form prescribed by Nasdaq, that they have implemented policies and 
procedures that are reasonably designed to ensure that substantially 
all orders designated by the member as Designated Retail Orders 
comply with these requirements. Orders may be designated on an 
order-by-order basis, or by designating all orders on a particular 
order entry port as Designated Retail Orders.
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    Lastly, the Exchange proposes to adopt a supplemental $0.00005 per 
share executed credit for displayed quotes/orders (other than 
Supplemental Orders) that add liquidity for a member, through one or 
more of its Nasdaq Market Center MPIDs: (i) With shares of liquidity 
provided in all securities during the month representing at least 0.50% 
of Consolidated Volume during the month; (ii) which adds at least 0.35% 
of Consolidated Volume during the month in securities in Tape C; (iii) 
which adds at least 0.15% of Consolidated Volume during the month in 
Designated Retail Orders for securities in any Tape; and (iv) which 
achieves at least a 60% add to total volume (adding and removing) ratio 
during a month. The Exchange refers to this proposed credit as 
``supplemental'' because members may earn it in addition to other 
credits. The Exchange intends for the supplemental credit to provide a 
further incentive for members to increase the proportion of their 
activity on the Exchange that is attributable to adding liquidity.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ 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. The proposal is also consistent with 
Section 11A of the Act relating to the establishment of the national 
market system for securities.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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'. . . .'' \11\
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    \11\ 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.'' \12\
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    \12\ 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.
    In particular, the Exchange proposes to raise two of its thresholds 
to qualify for its $0.00305 per share executed credit as a reasonable 
means of helping to further increase liquidity on both the Exchange and 
NOM, which if successful, will also improve the quality of both 
markets. Furthermore, the Exchange notes that the activity of members 
that currently qualify for this credit has grown, both on the Exchange 
and on NOM, such that an increase in credit qualifying criteria is now 
needed

[[Page 44943]]

to incentivize these market makers to further increase their liquidity 
providing activity.
    The Exchange also believes that it is reasonable to establish a new 
$0.00295 per share executed credit as a means of incentivizing members 
to provide meaningful amounts of liquidity to the Exchange, including 
in securities in Tape C as well as in retail orders in securities in 
any Tape. To the extent that the Exchange succeeds in increasing 
liquidity adding activity on the Exchange, including in securities in 
Tape C and in attracting additional retail order flow, then the 
Exchange would experience improvements in its market quality, which 
would benefit all market participants.
    For similar reasons, the Exchange believes that it is reasonable to 
establish a $0.00005 per share executed supplemental credit to members 
that achieve at least a 60% ratio of liquidity adding activity to total 
activity on the Exchange during a month, in addition to meeting the 
threshold of the new $0.00295 credit. This supplemental credit will 
serve as a heightened incentive for members to act as net adders of 
liquidity on the Exchange. Again, if this incentive works as intended, 
the Exchange believes that the quality of the market will improve 
accordingly.
    The Exchange notes that those participants that are dissatisfied 
with the proposed new and amended credits are free to shift their order 
flow to competing venues.
The Proposal Is an Equitable Allocation of Credits
    The Exchange believes its proposal will allocate its credits fairly 
among its market participants.
    In particular, it is equitable for the Exchange to raise two of its 
thresholds to qualify for its $0.00305 per share executed credit 
because the activity of members that currently qualify for this credit 
has grown, both on the Exchange and on NOM, such that an increase in 
credit qualifying criteria is now needed to incentivize these market 
makers to further increase their liquidity providing activity. An 
increase in liquidity adding activity on the Exchange and NOM would 
improve the quality of both markets, to the benefit of all 
participants.
    The Exchange also believes that it is equitable to establish a new 
$0.00295 per share executed credit. Again, this proposed credit stands 
to improve the market quality of the Exchange, to the benefit of all 
participants, by incentivizing members to provide meaningful amounts of 
liquidity to the Exchange, including in securities in Tape C as well as 
in retail orders in securities in any Tape. The Exchange also believes 
that it is equitable to target the credit, in part, to increased 
activity in Designated Retail Orders, because attracting retail order 
flow stands to benefit not only retail investors, but also others with 
whom additional retail liquidity can interact. Likewise, it is 
equitable to target the credit, in part, to liquidity adding activity 
in securities in Tape C, because the Exchange believes that the market 
for such securities would benefit from additional liquidity. The 
Exchange notes that it has limited funds to apply in the form of 
incentives, and thus must deploy those limited funds to incentives that 
it believes will be the most effective at improving market quality in 
areas that the Exchange determines are in need of improvement.
    For similar reasons, the Exchange believes that it is equitable to 
establish a $0.00005 per share executed supplemental credit to members 
that achieve at least a 60% ratio of liquidity adding activity to total 
activity on the Exchange during a month, in addition to meeting the 
requirements of the new $0.00295 credit. It is equitable to target the 
supplemental credit at members who act as net providers of liquidity to 
the Exchange because such members are most apt to help the Exchange to 
achieve its objective of increasing its pool of liquidity.
The Proposed Amended Credits Are Not Unfairly Discriminatory
    The Exchange believes that the proposal is 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.
    Although the Exchange's proposal to raise the qualifying criteria 
for its $0.00305 per share executed credit will require members to add 
more liquidity to the Exchange and on NOM than is currently required to 
qualify for this credit, any resulting increase in liquidity on the 
Exchange will improve market-wide quality and price discovery, to the 
benefit of all participants. Moreover, to the extent that the proposal 
causes NOM Market Makers to increase the extent of their liquidity 
adding activity on NOM, NOM market quality will improve, and all NOM 
participants will benefit.
    The Exchange also believes that its proposed $0.00295 per share 
executed credit is not unfairly discriminatory. Again, this proposed 
credit stands to improve the overall market quality of the Exchange, to 
the benefit of all participants, by incentivizing members to provide 
meaningful amounts of liquidity to the Exchange, including in 
securities in Tape C as well as in retail orders in securities in any 
Tape. It is not unfairly discriminatory to target the credit, in part, 
to increased activity in Designated Retail Orders, because attracting 
retail order flow stands to benefit not only retail investors, but also 
others with whom additional retail liquidity can interact. Likewise, it 
is not unfairly discriminatory to target the credit, in part, to 
liquidity adding activity in securities in Tape C, because the Exchange 
believes that the market for such securities would benefit from 
additional liquidity. The Exchange notes that it has limited funds to 
apply in the form of incentives, and thus must deploy those limited 
funds to incentives that it believes will be the most effective at 
improving market quality in areas that the Exchange determines are in 
need of improvement.
    For similar reasons, the Exchange believes that its proposed 
$0.00005 per share executed supplemental credit is not unfairly 
discriminatory. Although the Exchange proposes to target the 
supplemental credit at net adders of liquidity to the Exchange, it 
notes that all participants will benefit to the extent that this credit 
leads to an improvement in overall market quality.
    Finally, the Exchange notes that any participant that does not find 
the amended credits to be sufficiently attractive is free to shift its 
order flow to a competing venue.

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

[[Page 44944]]

Exchange participant at a competitive disadvantage. To the contrary, 
the proposed changes will provides opportunities for members to receive 
new and amended credits based on their market-improving behavior. Any 
member may elect to provide the levels of market activity required in 
order to receive the new or amended credits.
    Moreover, members are free to trade on other venues to the extent 
they believe that the credits provided are too low or the qualification 
criteria 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.
Intermarket Competition
    The Exchange believes that its proposed modification to its 
schedule of credits 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 34 alternative trading systems. 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 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 amended credits are reflective of this competition 
because, even as one of the largest U.S. equities exchanges by volume, 
the Exchange 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 comprised more than 42% of industry volume for the month of May 
2020.
    The Exchange's proposals are pro-competitive in that the Exchange 
intends for them to increase liquidity on the Exchange and thereby 
render the Exchange a more attractive and vibrant venue to market 
participants.
    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.\13\
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    \13\ 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 Number SR-NASDAQ-2020-041 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-NASDAQ-2020-041. 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-NASDAQ-2020-041, and should be submitted 
on or before August 14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16024 Filed 7-23-20; 8:45 am]
BILLING CODE 8011-01-P


