[Federal Register Volume 85, Number 231 (Tuesday, December 1, 2020)]
[Notices]
[Pages 77317-77321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26402]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90503; File No. SR-MRX-2020-18]


Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its 
Pricing Schedule at Options 7 for Orders Entered Into the Exchange's 
Price Improvement Mechanism

November 24, 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 November 13, 2020, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Pricing Schedule at Options 7 in 
connection with the pricing for orders

[[Page 77318]]

entered into the Exchange's Price Improvement Mechanism (``PIM'').\3\
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    \3\ PIM is a process by which an Electronic Access Member 
(``EAM'') can provide price improvement opportunities for a 
transaction wherein the EAM seeks to facilitate an order it 
represents as agent, and/or a transaction wherein the EAM solicited 
interest to execute against an order it represents as agent. See 
Options 3, Section 13.
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    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/mrx/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 Exchange's 
Pricing Schedule at Options 7 in connection with the pricing for orders 
entered into the Exchange's PIM.
    Today for both regular and complex PIM orders, the Exchange pays a 
PIM break-up rebate to an originating Priority Customer \4\ PIM order 
that executes with a response (order or quote), other than the PIM 
contra-side order, of $0.40 per contract in Penny Symbols and $1.00 per 
contract in Non-Penny Symbols.\5\ The Exchange also offers a higher PIM 
break-up rebate in note 3 of Options 7, Section 3.A for Members that 
meet certain cumulative volume requirements. In particular, Members 
that execute an average daily volume (``ADV'') of 10,000 PIM 
originating contracts or greater within a month are currently eligible 
to receive a rebate of (i) $0.45 per contract in Penny Symbols (in lieu 
of $0.40 per contract) for complex PIM orders only, and (ii) $1.05 per 
contract in Non-Penny Symbols (in lieu of $1.00 per contract) for both 
regular and complex PIM orders.
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    \4\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in Nasdaq MRX Options 1, 
Section 1(a)(36).
    \5\ Break-up rebates apply only to regular PIM orders of 500 or 
fewer contracts and to complex PIM orders where the largest leg is 
500 or fewer contracts. See Options 7, Section 3.A.
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    The Exchange now proposes a number of changes to the break-up 
rebate structure. First, the Exchange proposes to lower the base 
rebates to $0.25 in Penny Symbols and $0.60 per contract in Non-Penny 
Symbols. Second, the Exchange proposes to replace the existing note 3 
incentive described above with a new program. As amended, note 3 of 
Options 7, Section 3.A would provide:
    Break-up Rebates are provided for an originating Priority Customer 
PIM Order that executes with any response (order or quote) other than 
the PIM contra-side order. Members that are not in an Affiliated Member 
or Affiliated Entity relationship and that execute 0.05% or greater of 
Customer Total Consolidated Volume in non-PIM Priority Customer 
contracts within a month will receive an additional rebate of: (i) 
$0.20 per contract in Penny Symbols for Complex PIM Orders only, (ii) 
$0.15 per contract in Penny Symbols for Regular PIM Orders only, and 
(iii) $0.45 per contract in Non-Penny Symbols for both Regular and 
Complex PIM Orders. Alternatively, Affiliated Members or Affiliated 
Entities will be eligible to receive the rebates in this note 3 without 
any additional volume requirements. The Exchange will provide the 
rebate to the OFP arm of an Affiliated Member relationship, or the 
Appointed OFP arm of an Affiliated Entity relationship.
    The new program replaces the current cumulative ADV threshold with 
a total industry percentage threshold, specifically a Customer Total 
Consolidated Volume \6\ percentage threshold. The Exchange notes that 
the proposed percentage threshold of 0.05% or greater of Customer Total 
Consolidated Volume is comparable in terms of requisite volume to the 
existing ADV threshold of 10,000 or greater contracts. The Exchange is 
proposing to replace the current cumulative volume thresholds with 
total industry volume percentages to align with increasing Member 
activity on MRX over time. The Exchange notes that total industry 
percentage thresholds are established concepts within its Pricing 
Schedule.\7\
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    \6\ Customer Total Consolidated Volume means the total volume 
cleared at The Options Clearing Corporation in the Customer range in 
equity and ETF options in that month. See Options 7, Section 3, 
Table 3.
    \7\ Specifically, the qualifying tier thresholds for the 
Exchange's maker/taker pricing are based on Customer Total 
Consolidated Volume percentages. See Options 7, Section 3, Table 3.
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    The Exchange is also modifying this qualification by requiring that 
Members execute 0.05% or greater of Customer Total Consolidated Volume 
in non-PIM Priority Customer contracts (instead of PIM originating 
contracts, as currently required). The Exchange believes this change 
will incentivize Members to bring a wider range of order flow for 
execution on the Exchange, which activity may result in tighter spreads 
making the Exchange a more attractive trading venue to the benefit of 
all market participants. As discussed in the following paragraph, this 
volume qualification only applies to Members that are not in affiliated 
relationships.
    The new program will also offer a new, alternative basis, to 
qualify for the higher break-up rebates in amended note 3. 
Specifically, as proposed, Members may enter into certain affiliated 
relationships (i.e., Affiliated Members \8\ or Affiliated Entities \9\) 
to qualify for the higher break-up rebates. The Exchange recently filed 
to permit Members to enter into Affiliated Entities in order to 
aggregate volume and qualify for certain pricing incentives, provided 
they are not Affiliated Members.\10\ Accordingly, the proposed changes 
are intended to enhance participation in the Exchange's new Affiliated 
Entity program in order to encourage additional order flow to MRX. As 
described above, the rebates in note 3 will be provided to the OFP \11\ 
arm of the Affiliated Member relationship, or

[[Page 77319]]

the Appointed OFP in the Affiliated Entity relationship, without 
additional volume requirements. The Exchange believes that this will 
encourage Members who are not Affiliated Members to enter into 
Affiliated Entity relationships and submit any amount of Priority 
Customer PIM order flow in order to receive the note 3 rebates. The 
Exchange will also make clear in note 3 that the 0.05% or greater 
Customer Total Consolidated Volume requirement only applies to Members 
that are not in an Affiliated Member or Affiliated Entity relationship.
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    \8\ An ``Affiliated Member'' is a Member that shares at least 
75% common ownership with a particular Member as reflected on the 
Member's Form BD, Schedule A. See Options 7, Section 1(c).
    \9\ An ``Affiliated Entity'' is a relationship between an 
Appointed Market Maker and an Appointed OFP for purposes of 
qualifying for certain pricing specified in the Pricing Schedule. 
Market Makers and OFPs are required to send an email to the Exchange 
to appoint their counterpart, at least 3 business days prior to the 
last day of the month to qualify for the next month. The Exchange 
will acknowledge receipt of the emails and specify the date the 
Affiliated Entity is eligible for applicable pricing, as specified 
in the Pricing Schedule. Each Affiliated Entity relationship will 
commence on the 1st of a month and may not be terminated prior to 
the end of any month. An Affiliated Entity relationship will 
terminate after a one (1) year period, unless either party 
terminates earlier in writing by sending an email to the Exchange at 
least 3 business days prior to the last day of the month to 
terminate for the next month. Affiliated Entity relationships must 
be renewed annually by each party sending an email to the Exchange. 
Affiliated Members may not qualify as a counterparty comprising an 
Affiliated Entity. Each Member may qualify for only one (1) 
Affiliated Entity relationship at any given time. See Options 7, 
Section 1(c).
    \10\ See SR-MRX-2020-21(not yet published).
    \11\ An ``OFP'' is any Member, other than a Market Maker, that 
submits orders, as agent or principal, to the Exchange. See Options 
7, Section 1(c)
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ 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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    \12\ 15 U.S.C. 78 f(b).
    \13\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange's proposed changes to its Pricing Schedule are 
reasonable in several respects. As a threshold matter, the Exchange is 
subject to significant competitive forces in the market for options 
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'. . . .'' \14\
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    \14\ NetCoalition v. SEC, 615 F.3d 525, 539 (DC 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.'' \15\
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    \15\ 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 
options security transaction services. The Exchange is only one of 
sixteen options exchanges to which market participants may direct their 
order flow. 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 this context, the Exchange believes that its proposal for the 
PIM break-up rebates is reasonable. While the Exchange is proposing to 
lower the base break-up rebates to $0.25 in Penny Symbols and $0.60 per 
contract in Non-Penny Symbols, the Exchange believes that market 
participants will continue to be incentivized to send Priority Customer 
order flow to PIM to receive the base break-up rebate. Furthermore, the 
Exchange notes the proposed break-up rebates remain in line with 
similar rebates provided at other exchanges.\16\
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    \16\ See MIAX Options (``MIAX'') Fee Schedule, Sections 1(a)(v) 
and (vi), which set forth MIAX Price Improvement Mechanism 
(``PRIME'') and MIAX Complex PRIME (``cPRIME'') pricing. MIAX PRIME 
and cPRIME Break-up Credits are $0.25 per contract (Penny Classes) 
and $0.60 per contract (Non-Penny Classes). See also Cboe Exchange, 
Inc. (``Cboe'') Fee Schedule, Break-Up Credits, which provides 
Break-Up Credits of $0.25 per contract (Penny Classes) and $0.60 per 
contract (Non-Penny Classes) to orders executed in Cboe's Automated 
Improvement Mechanism.
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    In addition, the Exchange believes that the amended note 3 
incentive providing higher break-up rebates to qualifying Members, as 
described above, is reasonable in several respects. Regarding the 
change in the volume qualification to replace the current cumulative 
ADV threshold with a total industry percentage threshold, the Exchange 
notes that this is to align with increasing Member activity on MRX over 
time. The Exchange is proposing to base the volume qualification on a 
percentage of industry volume in recognition of the fact that the 
volume executed by a Member may rise or fall with industry volume. A 
percentage of industry volume calculation allows the note 3 
qualification to be calibrated to current market volumes rather than 
requiring a static amount of volume regardless of market conditions. 
While the amount of volume required by the proposed qualification in 
note 3 may change in any given month due to increases or decreases in 
industry volume, the Exchange believes that the proposed threshold 
requirement is set at an appropriate level. As discussed above, the 
proposed threshold of 0.05% Customer Total Consolidated Volume is 
comparable to the existing ADV threshold of 10,000 contracts, so the 
Exchange anticipates minimal impact to Members as a result of replacing 
the current cumulative volume threshold with the new total industry 
percentage threshold. Furthermore, as noted above, total industry 
percentage thresholds are established concepts within its Pricing 
Schedule.\17\
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    \17\ Specifically, the qualifying tier thresholds for the 
Exchange's maker/taker pricing are based on Customer Total 
Consolidated Volume percentages. See Options 7, Section 3, Table 3.
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    The Exchange also believes that modifying this qualification in 
note 3 to require Members that are not in an Affiliated Member or 
Affiliated Entity relationship to execute 0.05% or greater of Customer 
Total Consolidated Volume in non-PIM Priority Customer contracts 
(instead of PIM originating contracts, as currently required) is 
reasonable because this change will incentivize Members to bring a 
wider range of order flow for execution on the Exchange. This could 
ultimately result in increased trading opportunities, tighter spreads 
and greater price discovery, making the Exchange a more attractive 
trading venue to the benefit of all market participants.
    Furthermore, the Exchange believes that the new, alternative basis, 
to qualify for the higher break-up rebates in amended note 3 is 
reasonable. In particular, the Exchange will permit Affiliated Members 
or Affiliated Entities to send any amount of Priority Customer PIM 
volume for purposes of qualifying for higher break-up rebates. The 
Exchange believes that this will attract additional Priority Customer 
PIM order flow to the Exchange and will fortify participation in the 
Exchange's Affiliated Entity program, as noted above. Permitting 
Members to enter into an Affiliated Entity relationship for purposes of 
qualifying the OFP arm of an Affiliated Member relationship, or the 
Appointed OFP of an Affiliated Entity relationship, for the higher 
break-up rebates in amended note 3 may also

[[Page 77320]]

encourage the counterparties that comprise the Affiliated Members or 
Affiliated Entities to incentivize each other to attract and seek to 
execute more Priority Customer volume in PIM. In turn, market 
participants would benefit from the increased liquidity with which to 
interact and potentially tighter spreads on orders. Overall, 
incentivizing market participants with increased opportunities to earn 
higher break-up rebates may increase the quality of the liquidity 
available on MRX.
    The Exchange believes that the PIM break-up rebate changes, as 
proposed, are equitable and not unfairly discriminatory because the 
proposed rebates will apply equally to all Priority Customer PIM 
originating orders that execute against PIM responses. The Exchange's 
proposal to permit Affiliated Members or Affiliated Entities to send 
any amount of Priority Customer PIM volume for purposes of qualifying 
the OFP arm or the Appointed OFP for the higher break-up rebates in 
note 3 is equitable and not unfairly discriminatory because all Members 
who are not Affiliated Members may elect to become an Affiliated 
Entity. While Priority Customer PIM orders will continue to receive the 
break-up rebate, as opposed to other market participant orders, the 
Exchange believes that this application of the rebate is equitable and 
not unfairly discriminatory because Priority Customer order flow 
enhances liquidity on the Exchange. This, in turn, provides more 
trading opportunities and attracts other market participants, thus 
facilitating tighter spreads, increased order flow and trading 
opportunities to the benefit of all market participants. Moreover, the 
Exchange has historically provided lower pricing or other incentives to 
Priority Customers in order to attract such order flow to MRX.

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.
    In terms of intra-market competition, the Exchange does not believe 
that its proposal will place any category of Exchange market 
participant at a competitive disadvantage. The proposed changes to the 
Exchange's PIM break-up rebate program are designed to incentivize 
market participants to direct PIM order flow to the Exchange. While PIM 
break-up rebates apply directly to Priority Customer orders, the 
Exchange believes that the proposed changes benefit all market 
participants by fortifying and encouraging additional liquidity and 
order flow to MRX. Furthermore, the Exchange believes that encouraging 
additional activity by Affiliated Members and Affiliated Entities in 
the manner discussed above likewise benefits all market participants as 
it contributes to the Exchange's depth of book as well as to the top of 
book liquidity. To the extent that the proposal attracts more 
liquidity, this increased order flow would continue to make the 
Exchange a more competitive venue for order execution and all of the 
Exchange's market participants should benefit from the improved market 
quality. Enhanced market quality and increased transaction volume that 
results from the anticipated increase in order flow directed to the 
Exchange would benefit all market participants and improve competition 
on the Exchange.
    In terms of inter-market competition, the Exchange notes that it 
operates in a highly competitive market in which market participants 
can readily favor competing venues if they deem fee levels at a 
particular venue to be excessive, or rebate opportunities available at 
other venues to be more favorable. In such an environment, the Exchange 
must continually adjust its fees to remain competitive with other 
options 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.
    Moreover, as noted above, price competition between exchanges is 
fierce, with liquidity and market share moving freely between exchanges 
in reaction to fee and rebate changes. 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 \18\ and Rule 19b-4(f)(2) \19\ thereunder. 
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.
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \19\ 17 CFR 240.19b-4(f)(2).
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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-MRX-2020-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-MRX-2020-18. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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

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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-MRX-
2020-18 and should be submitted on or before December 22, 2020.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26402 Filed 11-30-20; 8:45 am]
BILLING CODE 8011-01-P


