Document ID: SEC-2019-1894-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-12-18T05:00Z

[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69402-69405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27198]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87725; File No. SR-FINRA-2019-029]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Modify the Securities Transaction Credits 
Applicable to FINRA/Nasdaq TRF Participants

December 12, 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 December 5, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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 FINRA. FINRA has 
designated the proposed rule change as ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 7610A to modify the 
securities transaction credits that apply to FINRA members that utilize 
the FINRA/Nasdaq Trade Reporting Facility Carteret (the ``FINRA/Nasdaq 
TRF Carteret'') and the FINRA/Nasdaq Trade Reporting Facility Chicago 
(the ``FINRA/Nasdaq TRF Chicago'') (collectively, the ``FINRA/Nasdaq 
TRFs'').
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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 FINRA/Nasdaq TRFs are facilities of FINRA that are operated by 
Nasdaq, Inc. (``Nasdaq''). In connection with the establishment of the 
FINRA/Nasdaq TRFs, FINRA and Nasdaq entered into a limited liability 
company agreement (the ``LLC Agreement''). Under the LLC Agreement, 
FINRA, the ``SRO Member,'' has sole regulatory responsibility for the 
FINRA/Nasdaq TRFs. Nasdaq, the ``Business Member,'' is primarily 
responsible for the management of the FINRA/Nasdaq TRFs' business 
affairs, including establishing pricing for use of the FINRA/Nasdaq 
TRFs, to the extent those affairs are not inconsistent with the 
regulatory and oversight functions of FINRA. Additionally, the Business 
Member is obligated to pay the cost of regulation and is entitled to 
the profits and losses, if any, derived from the operation of the 
FINRA/Nasdaq TRFs.
    Pursuant to FINRA Rule 7610A, FINRA members that report over-the-
counter (``OTC'') trades in NMS stocks to the FINRA/Nasdaq TRFs 
(``Participants'') may qualify for revenue sharing payments, in the 
form of transaction credits, based upon those transactions that are 
attributable to such Participants.\5\ This rule is administered by 
Nasdaq, in its capacity as the Business Member and operator of the 
FINRA/Nasdaq TRFs on behalf of FINRA.\6\
---------------------------------------------------------------------------

    \5\ A transaction is attributable to a Participant if the 
Participant is identified as the Executing Party in a trade report 
submitted to a FINRA/Nasdaq TRF that the FINRA/Nasdaq TRF 
subsequently submits to the Consolidated Tape Association or the 
Nasdaq Securities Information Processor. Credits are paid on a 
quarterly basis.
    \6\ FINRA's oversight of this function performed by the Business 
Member is conducted through a recurring assessment and review of TRF 
operations by an outside independent audit firm.
---------------------------------------------------------------------------

    Rule 7610A sets forth tiered schedules of transaction credits that 
describe, for reports in transactions in each Tape (A, B and C), the 
percentage of attributable revenue sharing that a Participant will 
receive if it achieves specified percentages of market share. The 
schedules provide for ``Retail Participants'' \7\ to receive higher 
revenue

[[Page 69403]]

sharing percentages than other FINRA members at the two lowest tiers 
for transactions in each Tape. For reference purposes, the existing 
transaction credit schedules are as follows:
---------------------------------------------------------------------------

    \7\ Supplementary Material .01 to Rule 7620A defines a ``Retail 
Participant'' as a ``participant in the FINRA/Nasdaq Trade Reporting 
Facility for which substantially all of its trade reporting activity 
on the FINRA/Nasdaq Trade Reporting Facility comprises Retail 
Orders.'' The term ``Retail Order'' is also defined under Rule 
7620A.01.

                                 Tape A
------------------------------------------------------------------------
                                                           Percent of
                                        Percent of        attributable
      Percentage market share          attributable      revenue shared
                                      revenue shared        (retail
                                                         participants)
------------------------------------------------------------------------
Greater than or equal to 2%.......                 98                 98
Less than 2% but greater than or                   95                 95
 equal to 1%......................
Less than 1% but greater than or                   75                 75
 equal to 0.50%...................
Less than 0.50% but greater than                   20                 75
 or equal to 0.10%................
Less than 0.10%...................                  0                 75
------------------------------------------------------------------------

                                 Tape B
------------------------------------------------------------------------
                                                           Percent of
                                        Percent of        attributable
      Percentage market share          attributable      revenue shared
                                      revenue shared        (retail
                                                         participants)
------------------------------------------------------------------------
Greater than or equal to 2%.......                 98                 98
Less than 2% but greater than or                   90                 90
 equal to 1%......................
Less than 1% but greater than or                   70                 70
 equal to 0.35%...................
Less than 0.35% but greater than                   10                 70
 or equal to 0.10%................
Less than 0.10%...................                  0                 70
------------------------------------------------------------------------

                                 Tape C
------------------------------------------------------------------------
                                                           Percent of
                                        Percent of        attributable
      Percentage market share          attributable      revenue shared
                                      revenue shared        (retail
                                                         participants)
------------------------------------------------------------------------
Greater than or equal to 2%.......                 98                 98
Less than 2% but greater than or                   95                 95
 equal to 1%......................
Less than 1% but greater than or                   75                 75
 equal to 0.50%...................
Less than 0.50% but greater than                   20                 75
 or equal to 0.10%................
Less than 0.10%...................                  0                 75
------------------------------------------------------------------------

    Nasdaq, as the Business Member, has determined to modify the 
schedule of transaction credits applicable to the FINRA/Nasdaq TRFs to 
provide a more competitive distribution of pricing incentives and 
benefits among Participants to the extent that they engage in a 
substantial volume of Executing Party activity. The proposed amended 
schedule is also designed to be more competitive with the schedule of 
transaction credits applicable to the other FINRA TRF.\8\ FINRA 
proposes to amend Rule 7610A accordingly.
---------------------------------------------------------------------------

    \8\ Pursuant to FINRA Rule 7610B, the FINRA/NYSE TRF presently 
shares with its participants, for all Tapes, 100% of attributable 
revenue for market shares greater than or equal to 2.0%, 95% of 
attributable revenue for market shares greater than or equal to 0.5% 
but less than 2.0%, 85% of attributable revenue for market shares 
greater than or equal to 0.1% but less than 0.5%, and 0% of 
attributable revenue for market shares of less than 0.1%.
---------------------------------------------------------------------------

    The proposed rule change would amend the third revenue sharing tier 
for both Retail and non-Retail Participants (i.e., Participants that 
achieve market shares of less than 1.0% but greater than or equal to 
0.50% for Tape A and C securities, and less than 1.0% but greater than 
or equal to 0.35% for Tape B securities) by increasing the percentage 
of revenue shared with Participants that qualify for the tier. 
Specifically, Participants that achieve a market share of less than 
1.0% but greater than or equal to 0.50% in securities in Tapes A and C 
(or greater than or equal to 0.35% for Tape B securities) will be 
eligible to receive 85% of attributable revenues for securities in all 
Tapes.
    Nasdaq, as the Business Member, estimates that 13 Participants 
currently qualify for the existing revenue sharing tier. Assuming that 
these Participants continue to qualify for this tier, Nasdaq estimates, 
based on current trade reporting activity, that all of these 
Participants will experience an increase in the amount of the credits 
that they receive. Based on a review of trade reporting activity for 
the period July 2018 to June 2019, Nasdaq estimates that these 
Participants could potentially receive between $10,000 and $190,000 
more credits than they receive today. No new product or service will 
accompany the proposed changes to revenue sharing credits.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date will be January 1, 2020.

[[Page 69404]]

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\9\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls. All similarly situated members are subject to the same fee 
structure and access to the FINRA/Nasdaq TRFs is offered on fair and 
nondiscriminatory terms.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

The Proposal Is Reasonable
    The proposed change to modify the revenue sharing credits for the 
FINRA/Nasdaq TRFs is reasonable in several respects. As a threshold 
matter, the FINRA/Nasdaq TRFs are subject to significant competitive 
forces in the market for trade reporting services for OTC trades in NMS 
stocks that constrain its pricing determinations in that market. The 
competing FINRA TRF presently offers a similar tiered pricing structure 
to that of the FINRA/Nasdaq TRFs, including a schedule of revenue 
sharing credits that apply based upon its participants achieving 
certain levels of market share.\10\ Participants can freely and do 
shift their trade reporting activity between the various FINRA TRFs in 
response to pricing, product or service changes. The proposed rule 
change renders more generous the FINRA/Nasdaq TRFs' revenue sharing 
credits to maintain and increase activity and market share.
---------------------------------------------------------------------------

    \10\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are 
operated by different business members competing for market share, 
FINRA does not take a position on whether the pricing for one TRF is 
more favorable or competitive than the pricing for the other TRF.
---------------------------------------------------------------------------

The Proposal Is an Equitable Allocation of Credits and Charges
    The proposed rule change will allocate revenue sharing credits 
fairly among FINRA/Nasdaq TRF Participants. Nasdaq, as the Business 
Member, has determined to increase the revenue sharing credits that the 
FINRA/Nasdaq TRFs offer to their Participants as a means of rewarding 
those Participants that engage in substantial amounts of trade 
reporting activity on the FINRA/Nasdaq TRFs, reducing the costs to such 
Participants of reporting trades to the FINRA/Nasdaq TRFs, and 
improving the competitive standing of the FINRA/Nasdaq TRFs relative to 
their competitor, which offers similar credits to its participants. 
Nasdaq believes it is equitable to target such increases only to 
Participants with market shares of less than 1.0% but greater than or 
equal to 0.50% (for securities in Tapes A and C) and 0.35% (for 
securities in Tape B). The tier selected accounts for 5% of the 
Transaction Credit eligible Participant base and 17% of trade reporting 
volume of the FINRA/Nasdaq TRFs and it is a tier that is particularly 
vulnerable to competition from the other FINRA TRF, which presently 
offers to share 95% of attributable revenues with its participants that 
achieve market shares of equal to or greater than 0.5% and less than 
2.0%. The proposed rule change will render the FINRA/Nasdaq TRFs more 
competitive with its competitors in terms of revenue sharing for 
Participants in this market segment.
The Proposal Is Not Unfairly Discriminatory
    The proposed rule change is not unfairly discriminatory. As an 
initial matter, nothing about the volume-based tiered pricing model of 
the FINRA/Nasdaq TRFs 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 FINRA TRFs 
have long employed under FINRA rules filed with the Commission.
    Nasdaq, as the Business Member, intends for the proposal to 
increase incentives to FINRA/Nasdaq TRF Participants to engage in 
substantial trade reporting activity on the FINRA/Nasdaq TRFs. The 
increased incentive will be available to all Participants with market 
shares of less than 1.0% but greater than or equal to 0.50% (Tapes A 
and C securities) and 0.35% (Tape B securities).

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

    FINRA does not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Intramarket Competition
    Nasdaq, as the Business Member, does not believe that the proposed 
rule change will place any category of Participant at a competitive 
disadvantage. As discussed above, all Participants that currently 
qualify for credits will continue to qualify for credits under the 
proposed rule change and will receive higher rates of credits than they 
do today. Meanwhile, Participants that do not qualify for the proposed 
tiers (or that do not qualify for the higher of the proposed tiers) may 
grow or modify their businesses so that they will do so. Participants 
are free to report their OTC trades in NMS stocks to the competing TRF 
to the extent they believe that the credits provided are not 
attractive. Price competition between the TRFs is substantial, with 
trade reporting activity and market share moving freely between them in 
reaction to fee and credit changes.
Intermarket Competition
    Nasdaq believes that the proposed modifications to the schedule of 
credits applicable to the FINRA/Nasdaq TRFs will not impose a burden on 
competition among the FINRA trade reporting facilities because use of 
the FINRA/Nasdaq TRFs is completely voluntary and subject to 
competition.\11\ Currently, with the exception of FINRA/Nasdaq TRF 
Retail Participants in the lowest tier, the competing FINRA TRF 
provides higher transaction credits to its participants than the FINRA/
Nasdaq TRFs for engaging in similar levels of trade reporting activity. 
Nasdaq, as the Business Member, seeks to increase the credits that the 
FINRA/Nasdaq TRFs provide to market participants so that these credits 
are more competitive. Nasdaq believes that the proposed increase in 
credits is necessary to retain reported volume. Indeed, firms that 
report OTC trades in NMS stocks can readily favor competing facilities 
if they deem fee levels at a particular facility to be excessive, or 
credit opportunities available at other facilities to be more 
favorable.
---------------------------------------------------------------------------

    \11\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are 
operated by different business members competing for market share, 
FINRA does not take a position on whether the pricing for one TRF is 
more favorable or competitive than the pricing for the other TRF.
---------------------------------------------------------------------------

    The competition, in turn, is free to modify its own fees and 
credits in response to this proposed rule change to maintain or 
increase its attractiveness to participants. Accordingly, Nasdaq 
believes that the risk that this proposed rule change will impose any 
burden on intermarket competition is extremely limited.
    If market participants determine that the changes proposed herein 
are inadequate or unattractive, it is likely that the FINRA/Nasdaq TRFs 
will lose market share as a result. Accordingly, the proposed rule 
change will not impair the ability of the other FINRA

[[Page 69405]]

TRF to maintain its competitive standing.

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

    Written comments were neither solicited nor 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) of the Act \12\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\13\ 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 
necessary or appropriate in the public interest, for the protection of 
investors, or 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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-FINRA-2019-029 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-FINRA-2019-029. 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 such filing also will be available for inspection 
and copying at the principal office of FINRA. 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-FINRA-2019-029 and should be submitted 
on or before January 8, 2020.
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27198 Filed 12-17-19; 8:45 am]
 BILLING CODE 8011-01-P