Document ID: SEC-2022-1503-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-11-18T05:00Z

[Federal Register Volume 87, Number 222 (Friday, November 18, 2022)]
[Notices]
[Pages 69360-69362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-25235]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96311; File No. SR-NASDAQ-2022-063]

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

November 15, 2022.
    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 4, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's schedule of credits 
at Equity 7, Section 118(a), as described further below.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to amend the Exchange's 
schedule of credits, at Equity 7, Section 118(a).\3\ Specifically, with 
respect to its schedule of credits for non-displayed midpoint orders 
(other than Supplemental Orders) that provide liquidity, the Exchange 
proposes to add a new supplemental credit in Tapes A, B and C and make 
conforming changes to its schedule of credits.
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    \3\ The Exchange initially filed the proposed pricing changes on 
November 1, 2022 (SR-NASDAQ-2022-062). The instant filing replaces 
SR-NASDAQ-2022-062, which was withdrawn on November 4, 2022.
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    The Exchange proposes to provide a new supplemental credit for 
midpoint orders (excluding buy (sell) orders with midpoint pegging that 
receive an execution price that is lower (higher) than the midpoint of 
the NBBO) that provide liquidity to the Exchange. Specifically, the 
Exchange proposes to provide a supplemental credit of $0.0001 per share 
executed for midpoint orders (excluding buy (sell) orders with midpoint 
pegging that receive an execution price that is lower (higher) than the 
midpoint of the NBBO) if the member executes at least 0.35% of 
Consolidated Volume through providing midpoint orders and through 
Midpoint Extended Life Orders (``M-ELO'') during the month, and (ii) 
executes at least 0.20% of Consolidated Volume through providing 
midpoint orders during the month.
    The proposed credit will be in addition to other credits otherwise 
available to members for adding non-displayed liquidity to the 
Exchange, meaning that this supplemental credit is cumulative. Members 
that receive this new supplemental credit will be entitled to a 
combined credit (regular and supplemental) up to a maximum of $0.0028 
per share executed for midpoint orders. Members that do not receive 
this new supplemental credit are entitled to a combined credit (regular 
and supplemental) up to a maximum of $0.0027 per share executed for 
midpoint orders.
    The purpose of the new credit is to provide extra incentive to 
members that provide non-displayed liquidity to the Exchange to do so 
through midpoint orders. The Exchange believes that if such incentive 
is effective, then any ensuing increase in liquidity to the Exchange 
will improve market quality, to the benefit of all 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.
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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 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

[[Page 69361]]

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. Competing equity exchanges offer similar tiered pricing 
structures to that of the Exchange, including schedules of rebates and 
fees that apply based upon members achieving certain volume thresholds.
    Within this environment, market participants can freely and often 
do shift their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules. As such, the 
proposal represents a reasonable attempt by the Exchange to increase 
its liquidity and market share relative to its competitors.
    The Exchange believes it is reasonable to establish a supplemental 
credit of $0.0001 per share executed for midpoint orders (excluding buy 
(sell) orders with midpoint pegging that receive an execution price 
that is lower (higher) than the midpoint of the NBBO) if the member 
executes at least 0.35% of Consolidated Volume through providing 
midpoint orders and through M-ELO during the month, and (ii) executes 
at least 0.20% of Consolidated Volume through providing midpoint orders 
during the month. This proposal is reasonable because it will provide 
extra incentive to members that provide non-displayed liquidity to the 
Exchange to do so through midpoint orders. The Exchange believes that 
if such incentive is effective, then any ensuing increase in liquidity 
to the Exchange will improve market quality, to the benefit of all 
participants.
    The Exchange believes that it is reasonable to exclude from the 
supplemental credit orders with midpoint pegging which execute at 
prices less aggressive than the midpoint of the NBBO because such 
orders already receive price improvements, such that members do not 
require additional inducements to enter these orders on the Exchange.
    The Exchange notes that those market participants that are 
dissatisfied with the proposal are free to shift their order flow to 
competing venues that offer more generous pricing or less stringent 
qualifying criteria.
The Proposal Is an Equitable Allocation of Credits
    The Exchange believes its proposal will allocate its charges and 
credits fairly among its market participants.
    The Exchange believes that it is an equitable allocation to 
establish a new transaction credit because the proposal will encourage 
the addition of non-displayed liquidity to the Exchange through 
midpoint orders. To the extent that the Exchange succeeds in increasing 
the levels of liquidity and activity on the Exchange, then the Exchange 
will experience improvements in its market quality, which stands to 
benefit all market participants.
    Any participant that is dissatisfied with the proposal is free to 
shift their order flow to competing venues that provide more generous 
pricing or less stringent qualifying criteria.
The Proposal Is Not Unfairly Discriminatory
    The Exchange believes that its 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 
enhances price discovery and improves the overall quality of the equity 
markets.
    The Exchange believes that its proposal to adopt a new credit is 
not unfairly discriminatory because the credit is available to all 
members. Moreover, the proposal stands to improve the overall market 
quality of the Exchange, to the benefit of all market participants, by 
incentivizing members to increase liquidity adding activity in midpoint 
orders on the Exchange. Any participant that is dissatisfied with the 
proposal 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, the Exchange's proposal to add a new transaction 
credit is intended to have market-improving effects, to the benefit of 
all members. Any member may elect to achieve the level of liquidity in 
midpoint orders and volume in M-ELO required in order to qualify for 
the new credit.
    The Exchange notes that its members are free to trade on other 
venues to the extent they believe that the Exchange's fee schedule 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.
Intermarket Competition
    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 credits and 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 credits and 
fees in response, and because market participants may readily adjust 
their order routing practices, the Exchange believes that the degree to 
which credit or fee changes in this market may impose any burden on 
competition is extremely limited.
    The proposed new credit 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 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

[[Page 69362]]

addition to free flow of order flow to and among off-exchange venues 
which comprises more than 40% of industry volume in recent months.
    The Exchange's proposal to add a new transaction credit is pro-
competitive in that the Exchange intends for the credit to increase 
liquidity addition activity in midpoint orders on the Exchange, thereby 
rendering the Exchange a more attractive and vibrant venue to market 
participants.
    In sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange does not believe that the proposed 
change 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.\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 [email protected]. Please include 
File Number SR-NASDAQ-2022-063 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2022-063. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2022-063 and should be submitted 
on or before December 9, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-25235 Filed 11-17-22; 8:45 am]
BILLING CODE 8011-01-P