[Federal Register Volume 85, Number 185 (Wednesday, September 23, 2020)]
[Notices]
[Pages 59834-59836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20937]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89913; File No. SR-Phlx-2020-45]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Transaction Credits at Equity 7, Section 3

September 17, 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 September 10, 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 transaction credits 
at Equity 7, Section 3, 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 revise its schedule of order execution and 
routing credits, at Equity 7, Section 3, to add three new credits for 
member organizations with non-displayed orders that provide liquidity 
to the Exchange. Presently, the Exchange already provides one such 
credit--a $0.0023 per share executed credit for all orders with 
midpoint pegging that provide liquidity. For all other non-display 
orders that provide liquidity, it presently provides no credits. Going 
forward, the Exchange proposes to add the following new credits for 
member organizations with non-displayed orders that provide liquidity 
to the Exchange:
     A $0.0004 per share executed credit for orders entered by 
a member organization that provides 0.01% or more of total Consolidated 
Volume \3\ during the month through non-displayed orders (other than 
midpoint orders) that provide liquidity;
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    \3\ As used in this Rule, the term ``Consolidated Volume'' shall 
mean 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. See Equity 7, Section 
3.
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     A $0.0007 per share executed credit for orders entered by 
a member organization that provides 0.02% or more of total Consolidated 
Volume during the month through non-displayed orders (other than 
midpoint orders) that provide liquidity; and
     A $0.0012 per share executed credit for orders entered by 
a member organization that provides 0.05% or more of total Consolidated 
Volume during the month through non-displayed orders (other than 
midpoint orders) that provide liquidity.
    The Exchange believes that the addition of these three new credits 
will incentivize member organizations to add non-displayed liquidity to 
the Exchange. Moreover, the proposal broadens the availability of 
credits to member organizations that add non-displayed liquidity other 
than midpoint pegging orders. In incentivizing member organizations to 
increase the extent of their non-displayed liquidity adding activity on 
the Exchange, the Exchange intends to improve the overall quality and 
attractiveness of the PSX market.
Impact of the Changes
    Those participants that act as significant providers of non-
displayed liquidity to the Exchange will benefit directly from the 
proposed addition of the new credits. Other participants will also 
benefit from the new credits insofar as any increase in liquidity 
adding activity on the Exchange will improve the overall quality of the 
market, to the benefit of all member organizations.
    The Exchange notes that its proposal is not otherwise targeted at 
or expected to be limited in its applicability to a specific segment 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 changes to its schedule of credits are 
reasonable in

[[Page 59835]]

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. 
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. Within the 
foregoing context, the proposal represents a reasonable attempt by the 
Exchange to increase its liquidity and market share relative to its 
competitors.
    The Exchange has designed its proposed schedule of credits to 
provide increased overall incentives to members to increase their 
liquidity adding activity on the Exchange. An increase in liquidity 
adding activity on the Exchange will, in turn, improve the quality of 
the PSX market and increase its attractiveness to existing and 
prospective participants.
    The Exchange notes that those participants that are dissatisfied 
with the proposed new credits 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 
credits fairly among its market participants. It is equitable for the 
Exchange to increase its credits to participants whose orders add 
liquidity to the Exchange as a means of incentivizing increased 
liquidity adding activity on the Exchange as well as to base the 
receipt of the credits on a member organization engaging in a threshold 
volume of liquidity adding activity on the Exchange. An increase in 
overall liquidity adding activity on the Exchange will improve the 
quality of the PSX market and increase its attractiveness to existing 
and prospective participants.
    Any participant that is dissatisfied with the proposed new credits 
is free to shift their order flow to competing venues that provide more 
generous 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.
    To the extent that the proposed changes succeed in increasing 
liquidity adding activity on the Exchange, this will improve market 
quality and the attractiveness of the PSX market, to the benefit of all 
existing and prospective participants.
    Moreover, any participant that is dissatisfied with the proposed 
new credits is free to shift their order flow to competing venues that 
provide more generous 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 member organizations of the Exchange will benefit from 
any increase in market activity that the proposal effectuates. Member 
organizations may grow or modify their businesses so that they can 
receive the higher credits. Moreover, member organizations 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.
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 from a multitude of other live exchanges and off-exchange 
venues. 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

[[Page 59836]]

Exchange must continually adjust 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 change in this market may impose any burden on competition is 
extremely limited.
    The proposed new credits 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 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 comprises 
approximately 44% of industry volume.
    The Exchange intends for the proposed changes to its schedule of 
credits to increase member organization incentives to engage in the 
addition of non-displayed liquidity on 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 member organizations 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.\8\
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    \8\ 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-Phlx-2020-45 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-2020-45. 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-Phlx-2020-45 and should be submitted on 
or before October 14, 2020.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20937 Filed 9-22-20; 8:45 am]
BILLING CODE 8011-01-P


