Document ID: SEC-2019-1879-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-12-16T05:00Z

[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Notices]
[Pages 68496-68499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26985]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87708; File No. SR-NASDAQ-2019-094]

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

December 10, 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 November 27, 2019, 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 fees at 
Equity 7, Section 118(a) to: (i) Adjust the criteria for members to 
qualify for a credit; and (ii) to adjust the categories of credits 
which the Exchange will provide to members that enter Orders with 
Midpoint Pegging that receive price improvement with respect to the 
national best bid and best offer (``NBBO''), as described further 
below.
    While these amendments are effective upon filing, the Exchange has 
designated the proposed amendments to be operative on December 2, 2019.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.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
    The Exchange proposes to amend the schedule of credits it provides 
to members, pursuant to Equity 7, Section 118(a), in two respects.
    First, the Exchange proposes to amend its schedule of credits by

[[Page 68497]]

adjusting a volume threshold to qualify for one of the credits it 
provides to its members. For Orders in securities in each of Tapes A, 
B, and C, the Exchange presently provides a $0.00305 per share executed 
credit to a member with shares of liquidity provided in all securities 
through one or more of its Nasdaq Market Center MPIDs that represent 
more than 1.25% of Consolidated Volume \3\ during the month. The 
Exchange proposes to raise the qualifying volume threshold for this 
credit from 1.25% to 1.50% of Consolidated Volume. The Exchange intends 
for this amendment to incentivize members to increase the extent of 
their liquidity adding activity to qualify for and to continue to 
qualify for this credit.
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    \3\ As used in Equity 7, Section 118(a), 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.
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    Second, the Exchange proposes to amend its credits for Non-
Displayed Orders \4\ in securities in each Tape (other than 
Supplemental orders) that provide liquidity to the Exchange. Under the 
existing schedules for these credits, a member that enters a Midpoint 
Order \5\ that adds liquidity to the Exchange may be entitled to 
receive one of several tiers of rebates and supplemental rebates, which 
vary to the extent that the member also engages in specified volumes, 
amounts, and types of corresponding activities.\6\ The Exchange also 
provides rebates for between $0.0010 and $0.0005 per share executed for 
other types of Non-Displayed Orders entered by members that achieve 
certain specified volume thresholds. Finally, the Exchange provides no 
credits to, but also imposes no charges upon, members that enter other 
Non-Displayed Orders if they do not achieve the specified volume or 
activity thresholds.
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    \4\ As set forth in Rule 4702(b), a ``Non-Displayed Order'' is 
an Order Type that is not displayed to other participants, but 
nevertheless remains available for potential execution against 
incoming Orders until executed in full or cancelled.
    \5\ Pursuant to Rule 4703, an ``Order with Midpoint Pegging'' is 
a Non-Displayed Order that is pegged with reference to the midpoint 
between the Inside Bid and the Inside Offer (the ``Midpoint'').
    \6\ The Exchange provides a baseline rebate of $0.0010 per share 
executed for Midpoint Orders. It provides higher rebates, varying 
from $0.0013 per share executed to $0.0025 per share executed, for 
Midpoint Orders where members provide specified threshold volumes of 
Midpoint Orders during a month, add certain threshold numbers of 
shares, or increases its orders provided and executed by specified 
amounts. Additionally, the Exchange provides a supplemental rebate 
of between $0.0001 and $0.0002 per share executed for Midpoint 
Orders where members execute specified average daily volumes of 
shares through Midpoint Extended Life Orders. See Equity 7, Section 
118(a).
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    The Exchange proposes to amend the schedule of credits (and 
supplemental credits) that apply to Midpoint Orders that add liquidity 
to the Exchange and, in particular, buy (sell) Orders with Midpoint 
Pegging that receive execution prices that are lower (higher) than the 
midpoint of the NBBO. Under the proposal, members entering Orders with 
Midpoint Pegging that execute at prices which are less aggressive than 
the midpoint of the NBBO will be entitled to receive credits applicable 
to ``other non-displayed orders''--to the extent such members achieve 
certain volume thresholds during a month--or no credits if they do not 
achieve these thresholds (in which case the executions will, however, 
continue to be free of charge). The Exchange believes that it is 
reasonable to offer the credit schedule applicable to Non-Displayed 
Orders to members that enter Orders with Midpoint Pegging which execute 
at prices less aggressive than the midpoint of the NBBO because such 
Orders behave the same way as do Non-Displayed Orders. Moreover, 
members that enter Orders with Midpoint Pegging which execute at prices 
less aggressive than the midpoint of the NBBO already benefit from the 
fact that their orders receive price improvements, such that these 
members do not require additional inducements to enter their Orders on 
the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\8\ 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. The proposal is also consistent with 
Section 11A of the Act relating to the establishment of the national 
market system for securities.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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' . . . .'' \9\
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    \9\ 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.'' \10\
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    \10\ 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.
    In particular, the Exchange proposes to raise the volume threshold 
to qualify for its $0.00305 per share executed credit as a means of 
encouraging members to increase their extent of their

[[Page 68498]]

liquidity adding activity to qualify for or to continue to qualify for 
this credit. To the extent that this proposal results in an increase in 
liquidity adding activity on the Exchange, this will improve the 
quality of the Nasdaq market and increase its attractiveness to 
existing and prospective participants.
    Likewise, the Exchange believes that it is reasonable to treat 
Orders with Midpoint Pegging that execute at prices that are less 
aggressive than the midpoint of the NBBO the same as ``other Non-
Displayed Orders,'' because Orders with Midpoint Pegging that execute 
at prices that are less aggressive than the midpoint of the NBBO behave 
the same way that Non-Displayed Orders behave. Furthermore, these 
Orders receive price improvements and incur no execution fees, which 
benefit members. Therefore, members that enter these Orders already 
have incentives to submit them to the Exchange and do not require added 
incentives in the form of credits to do so.
    The Exchange notes that those participants that are dissatisfied 
with the proposed amended credits are free to shift their order flow to 
competing venues.
The Proposal Is an Equitable Allocation of Charges
    The Exchange believes its proposal will allocate its charges fairly 
among its market participants. It is equitable for the Exchange to 
raise the qualification requirement for the $0.00305 per share executed 
credit as a means of incentivizing increased liquidity providing 
activity on the Exchange. An increase in liquidity providing activity 
on the Exchange will improve the quality of the Nasdaq market and 
increase its attractiveness to existing and prospective participants.
    It is also equitable to treat Orders with Midpoint Pegging that 
execute at prices that are less aggressive than the midpoint of the 
NBBO the same as ``other Non-Displayed Orders,'' because Orders with 
Midpoint Pegging that execute at prices that are less aggressive than 
the midpoint of the NBBO behave the same way that Non-Displayed Orders 
behave. Furthermore, these Orders receive price improvements and incur 
no execution fees, which benefit members. Therefore, members that enter 
these Orders already have incentives to submit them to the Exchange and 
do not require added incentives in the form of credits to do so.
The Proposed Amended Credits Are Not Unfairly Discriminatory
    The Exchange believes that the 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 
incentivizes customer activity that increases liquidity, enhances price 
discovery, and improves the overall quality of the equity markets.
    Although the Exchange's proposal to raise the qualifying criteria 
for its $0.00305 per share executed credit will require members to add 
more liquidity than is currently required to qualify for this credit, 
any resulting increase in liquidity to the market will improve market-
wide quality and price discovery, to the benefit all market 
participants. And although under the proposal, Exchange members 
entering Orders with Midpoint Pegging that execute at prices less 
aggressive than the midpoint of the NBBO will receive the schedule of 
credits applicable to Non-Displayed Orders going forward, this is not 
unfairly discriminatory because these Orders behave in the same manner 
as do Non-Displayed Orders, and it is fair to treat such Orders the 
same. Moreover, members that enter these Orders with Midpoint Pegging 
will continue to receive the benefits of price improvements and no 
execution charges associated with their Orders. Finally, the Exchange 
will be able to apply the savings from changes to its credit schedule 
to incentivize market improving behavior in other areas, again, to the 
ultimate benefit of all market participants. Finally, the Exchange 
notes that any participant that does not find the amended credits to be 
sufficiently is attractive is free to shift its order flow to a 
competing venue.

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. All 
members of the Exchange will benefit from any increase in market 
activity that the proposal to amend the $0.00305 per share executed 
credit effectuates. Members that enter Orders with Midpoint Pegging 
that execute at prices less aggressive than the midpoint of the NBBO 
will also continue to receive benefits in the form of free executions 
and price improvements on their Orders.
    Moreover, members are free to trade on other venues to the extent 
they believe that the credits provided are too low or the qualification 
criteria 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.
Intermarket Competition
    The Exchange believes that its proposed modification to its 
schedule of credits 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 credits 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 
credit 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

[[Page 68499]]

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.
    The Exchange's proposal to raise the qualification requirement for 
its $0.00305 per share executed credit is procompetitive in that it is 
intended to increase liquidity on the Exchange and thereby render the 
Exchange a more attractive and vibrant venue to market participants.
    Similarly, the proposed amendments to the Exchange's schedule of 
credits applicable to Non-Displayed Orders (other than Supplemental 
Orders) is not a burden on competition because the Exchange has limited 
resources to apply as credits and such resources must be applied in a 
manner that the Exchange believes will best improve market quality 
thereon. The Exchange believes that providing credits to members that 
are already receiving price improvement is not the most efficient 
allocation of such limited resources, since such Orders already receive 
the benefits of price improvement and free execution, and thus do not 
need to be incentivized. Instead, this proposal will allow the Exchange 
to apply its limited resources to other areas wherein it can promote 
market-improving behavior by its participants. In doing so, the 
proposed changes again have the potential to make the Exchange a more 
attractive trading venue, and consequently may promote competition 
among markets.
    In sum, if the change proposed herein is 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.\11\
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    \11\ 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-2019-094 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-2019-094. 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-2019-094 and should be submitted 
on or before January 6, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-26985 Filed 12-13-19; 8:45 am]
BILLING CODE 8011-01-P