Document ID: SEC-2021-0574-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-04-27T04:00Z

[Federal Register Volume 86, Number 79 (Tuesday, April 27, 2021)]
[Notices]
[Pages 22291-22294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08672]

[[Page 22291]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91619; File No. SR-NASDAQ-2021-020]

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

April 21, 2021.
    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 April 12, 2021, 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 transaction 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). Specifically, the 
Exchange proposes to (1) eliminate an existing credit of $0.0030 per 
share for members that meet specified volume requirements on both 
Nasdaq and the Nasdaq Options Market (``NOM'') when adding liquidity; 
and (2) amend an existing credit of $0.0030 per share for members that 
meet specified volume requirements on Nasdaq when adding liquidity and 
that qualify for Tier 4 of the MARS program on NOM.
Eliminate Existing Credit for Adding Liquidity on Nasdaq and NOM
    First, the Exchange proposes to eliminate an existing credit for 
securities in all three Tapes that it provides (other than Supplemental 
Orders or Designated Retail Orders) to members that meet a specified 
volume threshold on Nasdaq for displayed quotes/orders that add 
liquidity, and that also meet a specified volume threshold on NOM when 
adding liquidity. Specifically, it provides that a member will receive 
a credit of $0.0030 per share executed if the member (1) adds liquidity 
through one or more of its Nasdaq Market Center MPIDs during the month 
that, in all securities, represents at least 0.12% of Consolidated 
Volume \3\ during the month, and (2) adds Customer,\4\ Professional,\5\ 
Firm,\6\ Non-NOM Market Maker,\7\ and/or Broker-Dealer \8\ liquidity in 
Penny Pilot Options and/or Non-Penny Pilot Options of 1.15% or more of 
total industry ADV in the customer clearing range for Equity and ETF 
option contracts per day during the month on the Nasdaq Options Market.
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    \3\ Equity 7, Section 118(a) defines ``Consolidated Volume'' to 
mean the total consolidated volume reported to all consolidated 
transaction reporting plans by all exchanges and trade reporting 
facilities during a month in equity securities, excluding executed 
orders with a size of less than one round lot. 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 is excluded from both total Consolidated Volume 
and the member's trading activity.
    \4\ The term ``Customer'' applies to any transaction that is 
identified by a participant for clearing in the Customer range at 
The Options Clearing Corporation (``OCC'') which is not for the 
account of broker or dealer or for the account of a 
``Professional,'' as defined in Option 7, Section 1.
    \5\ A ``Professional'' is defined in Options 1, Section 1(a)(47) 
as ``any person or entity that (i) is not a broker or dealer in 
securities, and (ii) places more than 390 orders in listed options 
per day on average during a calendar month for its own beneficial 
account(s).''
    \6\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \7\ The term ``Non-NOM Market Maker'' or (``O'') is a registered 
market maker on another options exchange that is not a NOM Market 
Maker. A Non-NOM Market Maker must append the proper Non-NOM Market 
Maker designation to orders routed to NOM.
    \8\ The term ``Broker-Dealer'' or (``B'') applies to any 
transaction which is not subject to any of the other transaction 
fees applicable within a particular category.
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    This credit has not been effective in accomplishing its intended 
purpose, which is to incent members to increase their liquidity adding 
activity on both Nasdaq and NOM. The Exchange has observed that 
historically, few members have received this credit, only one member 
currently qualifies for it, and it has served to neither meaningfully 
increase activity on the Exchange or NOM nor improve the quality of 
those markets. The Exchange therefore proposes to eliminate it.
Amended Credit for Adding Liquidity on Nasdaq and Qualifying for MARS 
Tier 4
    The second change will raise a qualification requirement for an 
existing credit in securities in all Tapes that applies to members that 
meet certain Consolidated Volume thresholds on Nasdaq and which qualify 
for a certain tier status in the NOM Market Access and Routing subsidy 
or ``MARS'' program. Under the MARS program, NOM pays a subsidy to NOM 
Participants that provide certain order routing functionalities to 
other NOM Participants and/or that use such functionalities 
themselves.\9\ The MARS program provides different tiers of rebates or 
``MARS Payments'' to Participants that qualify for the program. The 
specified MARS Payment is paid on all executed Eligible Contracts that 
add liquidity, which are routed to NOM through a participating NOM 
Participant's System and meet the requisite Eligible Contracts ADV.\10\
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    \9\ See Securities Exchange Act Release No. 79251 (November 7, 
2016), 81 FR 79536 (November 14, 2016) (SR-NASDAQ-2016-149).
    \10\ To qualify for the program, the Participant's routing 
system (``System'') is required to: (1) Enable the electronic 
routing of orders to all of the U.S. options exchanges, including 
NOM; (2) provide current consolidated market data from the U.S. 
options exchanges; and (3) be capable of interfacing with NOM's API 
to access current NOM match engine functionality. Further, the 
Participant's System must also cause NOM to be the one of the top 
three default destination exchanges for (a) individually executed 
marketable orders if NOM is at the national best bid or offer 
(``NBBO''), regardless of size or time or (b) orders that establish 
a new NBBO on NOM's Order Book, but allow any user to manually 
override NOM as a default destination on an order-by-order basis. 
Any NOM Participant would be permitted to avail itself of this 
arrangement, provided that its order routing functionality 
incorporates the features described above and satisfies NOM that it 
appears to be robust and reliable. The Participant remains solely 
responsible for implementing and operating its System. See Options 
7, Section 2. To qualify for a MARS Payment tier, a NOM Participant 
that has System Eligibility, as described above, must have routed 
the requisite number of Eligible Contracts daily in a month 
(``Average Daily Volume''), which were executed on NOM. For the 
purpose of qualifying for the MARS Payment, Eligible Contracts may 
include Firm, Non-NOM Market Maker, Broker-Dealer, or Joint Back 
Office or ``JBO'' equity option orders that add liquidity and are 
electronically delivered and executed. Eligible Contracts do not 
include Mini Option orders. Id.

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[[Page 22292]]

    Specifically, the Exchange currently provides a $0.0030 per share 
executed credit for a member with displayed quotes/orders (other than 
Supplemental Orders or Designated Retail Orders) that provide more than 
0.50% of Consolidated Volume on Nasdaq, if the member also qualifies 
for Tier 4 of NOM's MARS program during the month. To qualify for the 
Tier 4 MARS Payment, a Participant must have routed at least 20,000 
Eligible Contracts daily in a month that are executed and that added 
liquidity.
    The Exchange proposes to amend this credit by raising, from 0.50% 
to 0.65%, the threshold percentage of Consolidated Volume that must 
consist of liquidity provided on Nasdaq to qualify for the credit. The 
purpose of this change is to incentivize members that currently qualify 
for this credit to further increase the extent of their liquidity 
providing activity on Nasdaq to continue to qualify for it. 
Periodically, the Exchange re-calibrates the qualifying criteria for 
its pricing tiers to keep pace with changes in member activity and to 
ensure that the criteria remain appropriately challenging for members 
to satisfy. In this instance, the Exchange concluded that the existing 
criteria were ripe for upward adjustment insofar as members have 
satisfied them comfortably for some time.
2. Statutory Basis
    The Exchange believes that its proposals are consistent with 
Section 6(b) of the Act,\11\ in general, and further the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ in particular, in that 
they provide for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. The proposals are also 
consistent with Section 11A of the Act relating to the establishment of 
the national market system for securities.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposals Are Reasonable
    The Exchange's proposals 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' . . .'' \13\
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    \13\ 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.'' \14\
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    \14\ 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. Within the 
foregoing context, the proposals represent reasonable attempts by the 
Exchange to increase its liquidity and market share relative to its 
competitors.
    The Exchange believes that it is reasonable to eliminate its 
existing $0.0030 per share executed credit for a member that (1) adds 
liquidity on Nasdaq that represents at least 0.12% of Consolidated 
Volume during the month; and (2) adds liquidity on NOM of 1.15% or more 
of total industry ADV in the customer clearing range per day during the 
month. As discussed above, the Exchange has observed that historically, 
few members have received this credit, and that only one member 
currently qualifies for it. The credit has served to neither 
meaningfully increase activity on the Exchange or NOM nor improve the 
quality of those markets. Under these circumstances, the Exchange 
believes it is reasonable to eliminate the credit and reallocate its 
limited resources to more effective incentive programs.
    The Exchange also believes that it is reasonable to raise the 
qualification criteria for the $0.0030 per share executed credit for a 
member that (i) provides liquidity on Nasdaq representing more than 
0.50% of Consolidated Volume; and (ii) qualifies for Tier 4 of the NOM 
MARS program. Periodically, the Exchange re-calibrates the qualifying 
criteria for its pricing tiers to keep pace with changes in member 
activity and to ensure that the criteria remain appropriately 
challenging for members to satisfy. In this instance, the Exchange 
concluded that it would be reasonable to raise the criteria to qualify 
for this credit insofar as members have satisfied the volume threshold 
comfortably for some time. The proposed change will incent members that 
currently qualify for this credit to further increase their liquidity 
providing activity on Nasdaq to continue to receive it.
    The Exchange notes that those market participants that are 
dissatisfied with the proposals are free to shift their order flow to 
competing venues that offer more generous pricing or less stringent 
qualifying criteria.
The Proposals Are Equitable Allocations of Credits
    The Exchange believes its proposals will allocate its charges and 
credits fairly among its market participants.
    The Exchange believes that is an equitable allocation to eliminate 
its existing $0.0030 per share executed credit for a member that (1) 
adds liquidity on Nasdaq that represents at least 0.12% of Consolidated 
Volume during the month; and (2) adds liquidity on NOM of 1.15% or more 
of total industry ADV in the customer clearing

[[Page 22293]]

range per day during the month. As discussed above, the Exchange has 
observed that historically, few members have received this credit, and 
only one currently does so. The credit has served to neither 
meaningfully increase activity on the Exchange or NOM nor improve the 
quality of those markets. Under these circumstances, the Exchange 
believes it is equitable to eliminate the credit and reallocate its 
limited resources to more effective incentive programs.
    The Exchange also believes that it is an equitable allocation 
increase the volume requirements for the $0.0030 per share executed 
credit for a member that (i) provides liquidity on Nasdaq representing 
more than 0.50% of Consolidated Volume; and (ii) qualifies for Tier 4 
of the NOM MARS program. Specifically, it is equitable for the Exchange 
to re-calibrate the qualifying criteria for its pricing tiers, from 
time to time, to keep pace with changes in member activity and to 
ensure that the criteria remain appropriately challenging for members 
to satisfy. In this instance, the proposed change will incent members 
that currently qualify for this credit to further increase their 
liquidity providing activity on Nasdaq to continue to receive it. To 
the extent that the proposed change succeeds in further increasing 
liquidity 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 proposals is free to 
shift their order flow to competing venues that provide more generous 
pricing or less stringent qualifying criteria.
The Proposals Are Not Unfairly Discriminatory
    The Exchange believes that its 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 proposal to eliminate one of the Exchange's transaction credits 
is not unfairly discriminatory because only one member qualifies for 
the credit, such that its elimination is fair and will have limited 
impact. The Exchange has limited resources with which to apply to 
incentives, and it must allocate those limited resources in a manner 
that prioritizes areas of greatest need and potential effect.
    The Exchange believes that its proposal to raise the qualifying 
Consolidated Volume criteria for one of its transaction credits is not 
unfairly discriminatory because this credit is available to all 
members. Moreover, the proposal will incentivize members that currently 
qualify for the credit to increase the extent of their liquidity adding 
activity on the Exchange to continue to qualify for it. To the extent 
that the proposal succeeds in this objective, then the resulting 
increase in liquidity stands to improve the overall market quality of 
the Exchange, to the benefit of all market participants.
    Any participant that is dissatisfied with the proposals 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 changes 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.
    The proposed elimination of one of the Exchange's existing 
transaction credits will have minimal competitive effect insofar as the 
credit is utilized currently by only one member. The Exchange notes 
that it offers other means to attain similar credit tiers.
    Meanwhile, the proposed increase to the qualifying criteria for 
another one of its transaction credits will have market-improving 
effects, to the benefit of all members. Any member may elect to achieve 
the levels of liquidity required in order to qualify for the amended 
credit.
    The Exchange notes that its members are free to trade on other 
venues to the extent they believe that the proposed qualification 
criteria for these credits 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 its pricing tier structure is consistent with broker-dealer fee 
practices as well as the other industries, as described above.
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 amended credits are reflective of this competition 
because, even as one of the largest U.S. equities exchanges by volume, 
the Exchange has less than 20% market share, which in most markets 
could hardly be categorized as having enough market power to burden 
competition. Moreover, as noted above, price competition between 
exchanges is fierce, with liquidity and market share moving freely 
between exchanges in reaction to fee and credit changes. This is in 
addition to free flow of order flow to and among off-exchange venues 
which comprises upwards of 50% of industry volume.
    The Exchange's proposals are pro-competitive in that the Exchange 
intends for them to increase liquidity 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 
changes will impair the ability of members or competing order execution 
venues to maintain their competitive standing in the financial markets.

[[Page 22294]]

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.\15\
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    \15\ 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-NASDAQ-2021-020 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-2021-020. 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-2021-020 and should be submitted 
on or before May 18, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08672 Filed 4-26-21; 8:45 am]
BILLING CODE 8011-01-P