[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Notices]
[Pages 51518-51521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18202]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89554; File No. SR-BX-2020-018]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Transaction Credits, at Equity 7, Section 118(a)

August 14, 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 August 3, 2020, Nasdaq BX, Inc. (``BX'' 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 transaction credits, 
at Equity 7, Section 118(a).
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

[[Page 51519]]

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 operates on the ``taker-maker'' model, whereby it 
generally pays credits to members that take liquidity and charges fees 
to members that provide liquidity. Currently, the Exchange has a 
schedule, at Equity 7, Section 118(a), which consists of several 
different credits that it provides for orders in securities priced at 
$1 or more per share that access liquidity on the Exchange and several 
different charges that it assesses for orders in such securities that 
add liquidity on the Exchange.
    Over the course of the last few months, the Exchange has 
experimented with various reformulations of its pricing schedule with 
the aim of increasing activity on the Exchange, improving market 
quality, and increasing market share.\3\ Although these changes have 
met with some success, the Exchange has yet to achieve the results it 
desires. Accordingly, the Exchange proposes to again revise its pricing 
schedule, in large part, in a further attempt to improve the 
attractiveness of the market to new and existing participants.
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    \3\ See Securities Exchange Act Release No. 34-89114 (June 22, 
2020), 85 FR 38418 (June 26, 2020) (SR-BX-2020-011); Securities 
Exchange Act Release No. 34-88857 (May 12, 2020), 85 FR 29766 (May 
18, 2020) (SR-BX-2020-008); Securities Exchange Act Release No. 34-
87271 (October 10, 2019), 84 FR 55621 (October 17, 2019) (SR-BX-
2019-035); Securities Exchange Act Release No. 34-87271 [sic] 
(September 24, 2019), 84 FR 57530 (October 25, 2019) (SR-BX-2019-
031); Securities Exchange Act Release No. 34-86120 (June 17, 2019); 
84 FR 29270 (June 21, 2019) (SR-BX-2019-026 [sic]); Securities 
Exchange Act Release No. 34-85912 (May 22, 2019); 84 FR 24834 (May 
29, 2019) (SR-BX-2019-013).
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Description of the Changes
    The Exchange proposes to revise its schedule of credits to add one 
new credit. Specifically, the Exchange proposes to provide a $0.0018 
per share executed credit (for securities in Tapes A and B) and a 
$0.0017 per share executed credit (for securities in Tape C) for orders 
that access liquidity (excluding orders with Midpoint pegging and 
excluding orders that receive price improvement and execute against an 
order with a Non-displayed price) entered by a member that: (i) 
Accesses at least 35% more liquidity, as a percentage of total 
Consolidated Volume during a month, than it did during July 2020; (ii) 
accesses liquidity equal to or exceeding 0.01% of total Consolidated 
Volume during a month; and (iii) adds liquidity equal to or exceeding 
an average daily volume of 50,000 shares for the month. The Exchange 
believes that that the availability of the new credits will incentivize 
members to grow their existing level of liquidity removal activity on 
the Exchange, and in particular, to grow such levels relative to a 
baseline of such activity. In doing so, the Exchange intends to improve 
the overall quality and attractiveness of the Nasdaq BX market.
Impact of the Changes
    Those participants that act as net removers of liquidity from the 
Exchange will benefit directly from the proposed addition of new 
credits that would apply to orders that remove liquidity from the 
Exchange. Other participants will also benefit from the new credit 
insofar as any ensuing increase in liquidity removal activity will 
improve the overall quality of the market.
    The Exchange notes that its proposal is not otherwise targeted at 
or expected to be limited in its applicability to a specific segment(s) 
of market participants nor will it apply differently to different types 
of market participants.
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. 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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    \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 change to its schedule of credits is 
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, and it represents a small percentage of the overall market. 
It is also only one of several taker-maker exchanges. Competing equity 
exchanges offer similar tiered pricing structures to that of the 
Exchange, including schedules of rebates and fees that apply based upon

[[Page 51520]]

members achieving certain volume thresholds.\8\
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    \8\ See CBOE EDGA Fee Schedule, at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; NYSE National Fee Schedule, 
at https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf.
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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\ 
Separately, the Exchange has provided the SEC staff with multiple 
examples of instances where pricing changes by BX and other exchanges 
have resulted in shifts in exchange market share. Within the foregoing 
context, the proposal represents a reasonable attempt by the Exchange 
to increase its liquidity and 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 these examples of shifts in 
liquidity and market share, along with many others, have occurred 
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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    The Exchange has designed its proposed schedule of credits to 
provide increased overall incentives to members to increase their 
liquidity removal activity on the Exchange. An increase in liquidity 
removal activity on the Exchange will, in turn, improve the quality of 
the Nasdaq BX market and increase its attractiveness to existing and 
prospective participants. Generally, the proposed new credit will be 
comparable to, if not favorable to, those that its competitors 
provide.\10\
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    \10\ See n. 8, supra.
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    The Exchange notes that those participants that are dissatisfied 
with the proposed credit are free to shift their order flow to 
competing venues that offer them higher credits.
The Proposal is an Equitable Allocation of Credits
    The Exchange believes its proposal will allocate its proposed new 
credit fairly among its market participants. It is equitable for the 
Exchange to increase its credits to participants whose orders remove 
liquidity from the Exchange as a means of incentivizing increased 
liquidity removal activity on the Exchange as well as to tie the 
receipt of the credits to the member engaging in a threshold volume of 
combined liquidity removal activity on the Exchange. Furthermore, it is 
equitable for the Exchange to propose higher credits for participants 
with orders in securities in Tapes A and B than it proposes for 
participants with orders in Tape C due to the Exchange's desire to 
specifically promote increased liquidity removal activity in securities 
in Tapes A and B. An increase in overall liquidity removal activity on 
the Exchange will improve the quality of the Nasdaq BX market and 
increase its attractiveness to existing and prospective participants.
    Any participant that is dissatisfied with the proposed new credit 
is free to shift their order flow to competing venues that provide more 
favorable pricing or less stringent qualifying criteria.
The Proposed Credit is 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.
    The Exchange intends for its 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. Both net 
removers and net adders of liquidity to the Exchange stand to benefit 
directly from the proposed change. That is, to the extent that the 
proposed changes increase liquidity a removal activity on the Exchange, 
this will improve market quality and the attractiveness of the Nasdaq 
BX market, to the benefit of all existing and prospective participants.
    Furthermore, it is not unfairly discriminatory for the Exchange to 
propose a higher credit for participants with orders in securities in 
Tapes A and B than it proposes for participants with orders in Tape C 
because the Exchange seeks to promote increased liquidity removal 
activity specifically in securities in Tapes A and B.
    Moreover, any participant that is dissatisfied with the proposed 
new credit is free to shift their order flow to competing venues that 
provide more favorable pricing or less stringent qualifying criteria.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intramarket Competition
    The Exchange does not believe that its proposal will place any 
category of Exchange participant at a competitive disadvantage. As 
noted above, all members of the Exchange will benefit from any increase 
in market activity that the proposal effectuates. Members may grow or 
modify their businesses so that they can receive the higher credit. 
Moreover, members are free to trade on other venues to the extent they 
believe that the credit provided 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. 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
    Addressing whether the proposal 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 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 credits 
in response, and because market participants may readily adjust their 
order routing practices, the Exchange believes that the degree to which 
credits changes in this market may impose any

[[Page 51521]]

burden on competition is extremely limited.
    The proposed restated schedule of credits is 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 has less than 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 presently comprises approximately 40% of industry volume.
    The Exchange intends for the proposed change to its schedule of 
credits to increase member incentives to engage in the removal of 
liquidity from the Exchange. These changes are procompetitive and 
reflective of the Exchange's efforts to make it an attractive and 
vibrant venue to market participants.
    In sum, if the changes 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 
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.\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 Number SR-BX-2020-018 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-BX-2020-018. 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-BX-2020-018, and should be submitted on 
or before September 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
J. Matthew DeLesDernier,
Assistant Secretary.


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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2020-18202 Filed 8-19-20; 8:45 am]
BILLING CODE 8011-01-P


