Document ID: SEC-2019-1405-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2019-09-30T04:00Z

[Federal Register Volume 84, Number 189 (Monday, September 30, 2019)]
[Notices]
[Pages 51686-51690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21092]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87094; File No. SR-Phlx-2019-35]

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

September 24, 2019.
    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 12, 2019, 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 fees at 
Equity 7, Section 3, as described further below.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Presently, the Exchange has a pricing schedule, at Equity 7, 
Section 3, which sets forth several different fees that it charges for 
orders in securities priced at $1 or more per share that remove 
liquidity from the Exchange and several different credits that it 
providers for orders in such securities that add liquidity on the 
Exchange. The pricing schedule also provides a supplemental credit to 
member organizations that make significant contributions to improving 
the market during each month. The Exchange proposes to amend this 
pricing schedule to increase removal activity on the Exchange and to 
improve overall market quality.
Changes To Remove Fees
    The Exchange proposes to largely restate its schedule of charges 
for member organizations that enter orders that execute on the 
Exchange. Presently, the Exchange charges a fee of $0.0029 per share 
executed in securities in all three Tapes entered by a member 
organization that accesses 0.065% or more of Consolidated Volume \3\ 
during a month. For all other member organizations, the exchange 
presently charges execution fees of $0.0030 per share executed. The 
Exchange proposes to eliminate the $0.0029 fee and replace it with two 
tiers of fees. First, the Exchange proposes to charge a fee of $0.0024 
per share executed in securities entered by a member organization that 
accesses 0.055% or more of Consolidated Volume during a month and that 
adds 0.025% or more of Consolidated Volume during a month. Second, the 
Exchange proposes to charge a fee of $0.0025 per share executed in 
securities entered by a member organization that accesses 0.01% or more 
of Consolidated Volume during the month and that adds 5,000 shares or 
more to the Exchange during a month. The Exchange proposes to maintain 
its existing $0.0030 per share executed fee for all other member 
organizations.
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    \3\ As used in Equity 7, Section 3, the term ``Consolidated 
Volume'' means the total consolidated volume reported to all 
consolidated transaction reporting plans by all exchanges and trade 
reporting facilities during a month in equity securities, excluding 
executed orders with a size of less than one round lot. For purposes 
of calculating Consolidated Volume and the extent of a member's 
trading activity, the date of the annual reconstitution of the 
Russell Investments Indexes are excluded from both total 
Consolidated Volume and the member's trading activity.
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    The purpose of these changes, which will reduce the overall fees 
that the Exchange charges to member organizations that remove liquidity 
from the Exchange, is to increase the extent of member organizations' 
removal activity on the Exchange. Moreover, by tying the availability 
of the two new, reduced removal fees to the extent of member 
organizations' liquidity adding activity on the Exchange, the Exchange 
intends to incentivize member organizations to maintain or increase 
their liquidity adding activity on the Exchange at the same time that 
they increase their removal activity, which in turn will help to 
improve overall market quality.
Changes To Add Credits
    Additionally, the Exchange proposes to largely restate its schedule 
of credits to member organizations that provide displayed liquidity to 
the Exchange.

[[Page 51687]]

Presently, the Exchange provides the following credits for member 
organizations that provide displayed liquidity to the Exchange: (1) A 
$0.0030 per share executed credit for quotes/orders entered by member 
organizations that provide and access 0.20% or more of Consolidated 
Volume during a month; (2) a $0.0027 per share executed credit for 
quotes/orders entered by member organizations that provide and access 
0.15% or more of Consolidated Volume during a month; (3) a $0.0027 per 
share executed credit for quotes/orders entered in securities listed on 
exchanges other than Nasdaq or the NYSE by member organizations that 
(i) provide a minimum of 1 million shares a day on average in 
securities listed on Exchanges other than Nasdaq or NYSE and (ii) 
double the daily average share volume provided in Securities Listed on 
Exchanges other than Nasdaq or NYSE during the month versus the member 
organization's daily average share volume provided in Securities Listed 
on Exchanges other than Nasdaq or NYSE in February 2017; \4\ (4) a 
$0.0025 per share executed credit for quotes/orders entered by member 
organizations that provide and access 0.05% or more of Consolidated 
volume during a month; and (5) a $0.0023 per share executed credit for 
all other quotes/orders.
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    \4\ If a member had no activity in February 2017 in Securities 
Listed on Exchanges other than Nasdaq or NYSE or became a member 
after February 2017, its February 2017 daily average share volume in 
Securities Listed on Exchanges other than Nasdaq or NYSE is zero for 
purposes of determining that member's eligibility for the credit in 
subsequent months.
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    The Exchange proposes to replace those credits with the following: 
(1) A $0.0026 per share executed credit for quotes/orders entered by 
member organizations that provide 0.15% or more of total Consolidated 
Volume during a month; and (2) a $0.0024 per share executed credit for 
quotes/orders entered by member organizations that provide 0.07% or 
more of total Consolidated Volume during a month. Additionally, the 
Exchange will continue to provide a $0.0023 per share executed credit 
for all other quotes/orders.
    The Exchange proposes these changes to its schedule of transaction 
credits to offset its costs of reducing its transaction fees.
Changes to QMM Program
    Earlier this year, the Exchange established a Qualified Market 
Maker (``QMM'') Program and related credits to incentivize member 
organizations to make significant contributions to market quality by 
providing liquidity at the national best bid and offer (``NBBO'') in a 
large number of securities for a significant portion of the day.\5\ The 
program is designed to attract liquidity both from traditional market 
makers and from other firms that are willing to commit capital to 
support liquidity at the NBBO. Under existing Equity 7, Section 3, a 
member organization that qualifies as a QMM--i.e., because it quotes at 
the NBBO at least 10 percent of the time during regular market hours in 
an average of at least 750 securities per day during a month--is 
entitled to receive a supplemental credit of $0.0002 per share executed 
for executions of displayed orders in securities in Tape A priced at $1 
or more per share that provide liquidity on the Exchange.
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    \5\ See Securities Exchange Act Release No. 34-85862 (May 15, 
2019), 84 FR 23112 (May 21, 2019) (SR-Phlx-2019-19).
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    The Exchange now proposes to amend the QMM Program in several 
respects. First, the Exchange proposes to adjust downward the average 
number of securities for which a member organization must quote at the 
NBBO during a month to qualify as a QMM as well as the amount of the 
credit that the Exchange will pay to a member organization that 
qualifies as a QMM. Whereas presently, a member organization must quote 
at the NBBO at least 10 percent of the time for an average of at least 
750 securities per day to qualify as a QMM, the Exchange proposes to 
reduce this number to 500 securities per day. Under the proposal, 
however, a member organization that meets this adjusted criteria will 
be entitled to a supplemental credit of $0.0001 per share executed with 
respect to all of its displayed orders in all securities priced at $1 
or more that provide liquidity, rather than $0.0002 per share executed 
with respect to all of its displayed orders only in securities in Tape 
A that are priced at $1 or more that provide liquidity.
    Additionally, the Exchange proposes to establish a new second tier 
QMM Program credit for QMMs that quote at the NBBO for the requisite 
time for a larger average number of securities. Specifically, the 
Exchange proposes to provide a credit of $0.0002 per share executed 
with respect to all displayed orders of a QMM in securities priced at 
$1 or more per share that provide liquidity, provided that the QMM 
quotes the NBBO at least 10 percent of the time during Market Hours in 
an average of at least 650 securities per day during a month. To the 
extent that a QMM qualifies for this new credit, it will apply in lieu 
of the $0.0001 QMM credit described above.
    The Exchange intends for its proposed amendments to its QMM Program 
to broaden and fortify participation in the Program. The Exchange 
intends to broaden participation in the Program by lowering the 
qualifying criteria for QMMs so that member organizations will be able 
to qualify that either cannot do so now or simply do not wish to quote 
at the NBBO at least 10 percent of the time for an average of at least 
750 securities per day. The proposal intends to fortify existing 
participation in the Program by easing the burden on existing QMMs to 
maintain their qualifications as such. That is, member organizations 
that quote at the NBBO at least 10 percent of the time in as few as an 
average of 500 securities per day during a month will be able to earn a 
$0.0001 per share executed supplemental credit, whereas now, member 
organizations that engage in the same level of activity would earn no 
supplemental credit at all. Meanwhile, the $0.0002 per share executed 
supplemental credit would be available to member organizations that 
quote at the NBBO in only an average of 650 securities per day during a 
month, whereas now, such a credit is available only when member 
organizations quote at the NBBO for an average of at least 750 
securities per day during a month.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\7\ 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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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 and 
charges 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

[[Page 51688]]

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'. . . .'' \8\
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    \8\ 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.'' \9\
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    \9\ 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.\10\
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    \10\ See Cboe EDGX U.S. Equities Exchange Fee Schedule, 
available at https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/.
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    Within this environment, market participants can freely and often 
do shift their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules.\11\ Within 
the foregoing context, the proposal represents a reasonable attempt by 
the Exchange to increase its market share relative to its competitors.
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    \11\ The Exchange perceives no regulatory, structural, or cost 
impediments to market participants shifting order flow away from it. 
In particular, the Exchange notes that such shifts in liquidity and 
market share occur within the context of market participants' 
existing duties of Best Execution and obligations under the Order 
Protection Rule under Regulation NMS.
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    Generally, the Exchange's proposed schedule of credits and charges 
in Equity 7, Section 3 provide increased overall incentives to member 
organizations to increase their liquidity removal activity on the 
Exchange, and to do so broadly in orders in securities in all Tapes. An 
increase in overall liquidity removal activity on the Exchange will, in 
turn, improve the quality of the Exchange's equity market and increase 
its attractiveness to existing and prospective participants. The 
proposed new fees are consistent with the current design of Equity 7, 
Section 3 because they provide incrementally lower fees in return for 
increased removal and provision of liquidity on the Exchange. Moreover, 
the proposed credits will be comparable to, if not favorable to, those 
that its competitors provide.\12\
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    \12\ See n. 10, supra.
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    The proposed changes to the Exchange's QMM Program is also a 
reasonable attempt to improve market quality by broadening its QMM 
Program. By lowering the thresholds for member organizations to qualify 
as QMMs and to receive supplemental credits for quoting at the NBBO for 
a significant percentage of the trading day in a significant percentage 
of securities, the Exchange will encourage new member organizations to 
become QMMs and help ensure that existing QMMs continue to qualify as 
such. The Exchange also proposes to broaden the utility of the QMM 
credits it provides to QMMs by making the credits applicable to 
displayed orders in all Tapes, rather than only to those in Tape A.
The Proposals Are an Equitable Allocation of Credits and Charges
    The Exchange believes its proposals will allocate its proposed 
credits and charges fairly among its market participants. The proposal 
will provide a member organization with an opportunity to pay lower 
fees for removing liquidity from the Exchange than it does now. It is 
equitable for the Exchange to lower its fees to participants whose 
orders remove liquidity from the Exchange as a means of incentivizing 
increased liquidity removal activity and to do so broadly in orders in 
securities in all Tapes. An increase in overall liquidity removal 
activity on the Exchange will improve the quality of the Exchange's 
equity market and increase its attractiveness to existing and 
prospective participants.
    Meanwhile, the Exchange believes that it is reasonable to offset 
the costs of charging lower fees for liquidity removal by lowering its 
credits for liquidity provision to the Exchange. Although the proposed 
credits will be lower, in many cases, than the existing credits, and 
may be harder to achieve, the Exchange believes that the proposed 
credits will continue to be comparable to liquidity adding rebates 
provided by its competitors.\13\ That said, the Exchange again notes 
that those participants that do not wish to receive lower credits are 
free to shift their order flow to competing venues that offer them 
higher credits.
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    \13\ See id.
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    Finally, the Exchange believes its proposal to adjust the 
qualification criteria and supplemental credits applicable to its QMM 
program is an equitable allocation of proposed credits because the 
modified qualification criteria will continue to require member 
organizations to quote significantly at the NBBO for a large number of 
securities and will continue to contribute to market quality in a 
meaningful way. In fact, by lowering the thresholds for member 
organizations to qualify as QMMs and to receive supplemental credits, 
the Exchange will encourage new member organizations to become QMMs and 
help ensure that existing QMMs continue to qualify as such, which will 
further improve market quality.
The Proposal Is Not Unfairly Discriminatory
    The Exchange believes that the proposals are not unfairly 
discriminatory. As an initial matter, the Exchange believes that 
nothing about its volume-based tiered pricing model is inherently 
unfair; instead, it is a rational pricing model that is well-
established and ubiquitous in today's economy among firms in various 
industries--from co-branded credit cards to grocery stores to cellular 
telephone data plans--that use it to reward the loyalty of their best 
customers that provide high levels of business activity and incent 
other customers to increase the extent of their business activity. It 
is also a pricing model that the Exchange and its competitors have long 
employed with the assent of the Commission. It is fair because it 
incentivizes customer activity that increases liquidity, enhances price 
discovery, and improves the overall quality of the equity markets.
    The Exchange intends for the proposal to improve market quality for 
all members on the Exchange and by extension attract more liquidity to 
the market, improving market wide quality and price discovery. Although 
net removers of liquidity will benefit most from the proposed lower 
charges, this result is fair insofar as increased liquidity removal 
activity will help to improve market quality and the

[[Page 51689]]

attractiveness of the Exchange's equity market to all existing and 
prospective participants.
    The Exchange's proposal to modify the QMM program is not unfairly 
discriminatory because any member organization may quote at the NBBO at 
the level required by the modified qualification criteria of the QMM 
Program and, in fact, the modified criteria will render qualification 
as a QMM easier for member organizations to achieve.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intramarket Competition
    The Exchange does not believe that its proposals will place any 
category of Exchange participant at a competitive disadvantage. As 
noted above, all members of the Exchange will benefit from an increase 
in the removal of liquidity by those that choose to meet the tier 
qualification criteria. Members may grow their businesses so that they 
have the capacity to pay lower removal fees. Moreover, members are free 
to trade on other venues to the extent they believe that the fees 
assessed and credits provided are not attractive. As one can observe by 
looking at any market share chart, price competition between exchanges 
is fierce, with liquidity and market share moving freely between 
exchanges in reaction to fee and credit changes. The Exchange notes 
that the tier structure is consistent with broker-dealer fee practices 
as well as the other industries, as described above.
    Moreover, the Exchange's proposal to modify its QMM program will 
not burden intramarket competition because the QMM Program, as 
modified, will continue to provide all member organizations with an 
opportunity to obtain supplemental credits for transactions if they 
improve the market by providing significant quoting at the NBBO in a 
large number of securities which the Exchange believes will improve 
market quality. By relaxing the qualification criteria, the 
modifications will make the Program more accessible to new member 
organizations and easier for existing QMMs to remain in the Program.
Intermarket Competition
    Addressing whether the proposed fee could impose a burden on 
competition on other SROs that is not necessary or appropriate, the 
Exchange believes that its proposed modifications to its schedule of 
credits and charges will not impose a burden on competition because the 
Exchange's execution services are completely voluntary and subject to 
extensive competition both from the other 12 live exchanges and from 
off-exchange venues, which include 32 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 fees to remain competitive 
with other exchanges and with alternative trading systems that have 
been exempted from compliance with the statutory standards applicable 
to exchanges. Because competitors are free to modify their own fees in 
response, and because market participants may readily adjust their 
order routing practices, the Exchange believes that the degree to which 
fee changes in this market may impose any burden on competition is 
extremely limited.
    The proposed restated schedule of credits and charges and the 
proposed modifications to the QMM Program are reflective of this 
competition because, as a threshold issue, the Exchange is a relatively 
small market so its ability to burden intermarket competition is 
limited. In this regard, even the largest U.S. equities exchange by 
volume only has 17-18% market share, which in most markets could hardly 
be categorized as having enough market power to burden competition. 
Moreover, as noted above, price competition between exchanges is 
fierce, with liquidity and market share moving freely between exchanges 
in reaction to fee and credit changes. This is in addition to free flow 
of order flow to and among off-exchange venues which comprised more 
than 37% of industry volume for the month of July 2019.
    In sum, the Exchange intends for the proposed fees and credits and 
modified QMM Program to increase member incentives to remove liquidity 
from the Exchange and to contribute to market quality, which is 
reflective of fierce competition for order flow noted above; however, 
if the proposed fees and credits are unattractive to market 
participants, it is likely that the Exchange will either fail to 
increase its market share or even lose market share as a result. 
Accordingly, the Exchange does not believe that the proposed new fees 
and credits will impair the ability of members or competing order 
execution venues to maintain their competitive standing in the 
financial markets.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\14\
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    \14\ 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-2019-35 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-2019-35. 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

[[Page 51690]]

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-2019-35 and should be submitted on 
or before October 21, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21092 Filed 9-27-19; 8:45 am]
BILLING CODE 8011-01-P