[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.
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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 [email protected]. 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