Notice2021-12475
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule at Equity 7, Section 114(f)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 15, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 113 (Tuesday, June 15, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 113 (Tuesday, June 15, 2021)]
[Notices]
[Pages 31759-31764]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-12475]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92134; File No. SR-NASDAQ-2021-046]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Exchange's Pricing Schedule at Equity 7, Section 114(f)
June 9, 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 May 27, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Exchange's Pricing Schedule at
Equity 7, Section 114(f) (``Pricing Schedule'').
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, 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
Pricing Schedule at Equity 7, Section 114(f) applicable to the
Designated Liquidity Provider (``DLP'') \3\ Program. The Exchange
proposes to amend the rebates applicable for DLPs in Nasdaq-listed
securities with monthly incentives that are directly tied to meeting
market quality metrics (``MQMs''). Specifically, the Exchange proposes
to (1) add Exchange Traded Fund Shares listed on Nasdaq pursuant to
Nasdaq Rule 5704, Proxy Portfolio Shares listed on Nasdaq pursuant to
Nasdaq Rule 5750, and Managed Portfolio Shares listed on Nasdaq
pursuant to Nasdaq Rule 5760 to the list of securities that may be
designated as a Qualified Security, as long as it has at least one DLP;
(2) amend Equity 7, Section 114(f)(4) to revise the monthly performance
criteria related to the specific rebates provided under Equity 7,
Section 114(f)(5), as well as to address secondary DLPs (``Secondary
DLPs''); (3) change the current schedule under Equity 7, Section
114(f)(5) from three tiers to five tiers, establish both standard
rebates (``Standard Rebate'') and enhanced rebates (``Enhanced
Rebate''), as well as address Secondary DLPs; and (4) change the
existing Additional Tape C ETP Incentives in Equity 7, Section
114(f)(5)(B), as well as add a new tier to the schedule.
---------------------------------------------------------------------------
\3\ Equity 7, Section 114(f)(2) defines a ``Designated Liquidity
Provider'' or ``DLP'' as a registered Nasdaq market maker for a
Qualified Security (defined below) that has committed to maintain
minimum performance standards. A DLP will be selected by Nasdaq
based on factors including, but not limited to, experience with
making markets in exchange-traded products, adequacy of capital,
willingness to promote Nasdaq as a marketplace, issuer preference,
operational capacity, support personnel, and history of adherence to
Nasdaq rules and securities laws. Nasdaq may limit the number of
DLPs in a security, or modify a previously established limit, upon
prior written notice to members.
---------------------------------------------------------------------------
Description of the Changes
The proposal amends the rebates applicable for DLPs in Nasdaq-
listed securities with monthly incentives that are directly tied to
meeting MQMs.\4\ The Exchange believes that these changes will
encourage DLPs to maintain better market quality in Nasdaq-listed
securities, and, in particular, in lower volume securities where
transaction-based compensation (i.e., rebates) may not be sufficient.
The Exchange currently offers a DLP Program, which applies to
transactions in a Qualified Security \5\ by one of its DLPs associated
with its DLP Program market participant identifier (``MPID'').
---------------------------------------------------------------------------
\4\ The Exchange is also making a technical change in the second
sentence of Equity 7, Section 114(f)(5)(B) to change ``Rebate'' to
``rebate''.
\5\ Equity 7, Section 114(f)(1) says a security may be
designated as a ``Qualified Security'' if: (a) It is an exchange-
traded product listed on Nasdaq pursuant to Nasdaq Rules 5705, 5710,
5720, 5735, or 5745; and (b) it has at least one DLP.
---------------------------------------------------------------------------
Add Exchange Traded Fund Shares, Proxy Portfolio Shares and Managed
Portfolio Shares To List That May Be Designated as a Qualified Security
The Exchange proposes to amend Equity 7, Section 114(f)(1)(A) to
add Exchange Traded Fund Shares listed on Nasdaq pursuant to Nasdaq
Rule 5704,\6\ Proxy Portfolio Shares listed on Nasdaq pursuant to
Nasdaq Rule 5750 and Managed Portfolio Shares listed on Nasdaq pursuant
to Nasdaq Rule 5760 to the list of securities that may be designated as
a Qualified Security, as long as it has at least one DLP. Nasdaq Rule
5704 (Exchange Traded Fund Shares), Nasdaq Rule 5750 (Proxy Portfolio
Shares) and Nasdaq Rule 5760 (Managed Portfolio Shares) were all fairly
recently adopted and should be added to the existing list that already
includes: Nasdaq Rule 5705--Exchange Traded Funds: Portfolio Depository
Receipts and Index Fund Shares; Nasdaq Rule 5710--Securities Linked to
the Performance of Indexes and Commodities (Including Currencies);
Nasdaq Rule 5720--Trust Issued Receipts; Nasdaq Rule 5735--Managed Fund
Shares; and Nasdaq Rule 5745--
[[Page 31760]]
Exchange-Traded Managed Fund Shares (``NextShares''). Both Proxy
Portfolio Shares and Managed Portfolio Shares are semi-transparent
exchange-traded funds (``ETFs'') that also need support from a market
quality perspective just like traditional ETFs. Since these products
are new and incubating, the Exchange believes the DLP changes will be
beneficial to these ETFs as well.
---------------------------------------------------------------------------
\6\ The inclusion of Nasdaq Rule 5704 to the list of securities
that may be designated as a Qualified Security is not a substantive
change, but being added as a clarification because the securities
listed under Nasdaq Rule 5704 are already covered by Nasdaq Rules
5705 and 5735.
---------------------------------------------------------------------------
Amend Monthly Performance Criteria for Rebates and Address Secondary
DLPs
The Exchange also proposes to amend Equity 7, Section 114(f)(4) to
revise the monthly performance criteria related to the specific rebates
provided under Equity 7, Section 114(f)(5). Currently, to qualify for
the basic rebate, which is being renamed the ``Primary DLP Rebate,''
under Equity 7, Section 114(f)(4), a DLP must be at the national best
bid (best offer) (``NBBO'') at least 20% of the time on average in the
assigned exchange-traded product (``ETP''). As amended, a Primary DLP
will need to meet all four of the Standard MQMs in the assigned ETP as
measured by Nasdaq to qualify for the Standard Rebate and all four of
the Enhanced MQMs in the assigned ETP as measured by Nasdaq to qualify
for the Enhanced Rebate. These MQMs are measured on average in the
assigned ETP during regular market hours: \7\ (1) Time at the NBBO will
be 20% for the Standard Rebate and 50% for the Enhanced Rebate; (2)
time within 5 basis points of NBBO will be 50% for the Standard Rebate
and 75% for the Enhanced Rebate; (3) notional depth will be $100,000
(within 150 basis points of NBBO) for the Standard Rebate and $100,000
(within 50 basis points of NBBO) for the Enhanced Rebate; and (4)
average spread will be less than 125 basis points for the Standard
Rebate and less than 25 basis points for the Enhanced Rebate.
---------------------------------------------------------------------------
\7\ Equity 7, Section 114(h)(9) says ``The term ``regular market
hours'' means 9:30 a.m. through 4:00 p.m., or such shorter period as
may be designated by Nasdaq on a day when the securities markets
close early.''
---------------------------------------------------------------------------
Nasdaq is proposing these changes to the DLP Program to modernize
it so that it becomes a program that is more market quality focused
rather than transaction-based. The new MQMs are intended to encourage
DLPs to uphold better quality markets in Nasdaq-listed ETPs and also
ensure a scalable business model to support new and incubating ETPs
that often trade less on a daily basis (i.e., certain rebates will be
on a fixed amount rather than on a per executed share basis).
Additionally, the Exchange proposes to amend Equity 7, Section
114(f)(4) to address Secondary DLPs. If there are two DLP assignments
for a Nasdaq-listed ETP, the Secondary DLP will be determined by using
the factors in Section 114(f)(2). The Secondary DLP will qualify for
rebates in ETPs if it meets two of the four Enhanced MQMs noted above.
The Exchange believes that allowing two DLPs will work to further
support the market quality in lower average daily volume (``ADV'') ETPs
and increase resiliency in market quality performance. By incentivizing
more than one market maker to meet the increased MQMs, lower ADV ETPs
now have more market makers who are incentivized to provide quote
quality and layering of notional depth, which can be a benefit if the
Primary DLP has an unforeseen quoting or technology issue. Also, by
adding the MQMs, the Primary and Secondary DLP are incentivized to not
only provide quotes at the NBBO but also other important quote quality
metrics around the NBBO.
Amend Rebate Tiers To Include Standard and New Enhanced Rebates and
Update Schedule From Three to Five Tiers, and Address Secondary DLPs
Currently, the Exchange provides rebates in Equity 7, Section
114(f)(5)(A) that are in lieu of or in addition to, as specified [sic],
other rebates or fees provided under Equity 7, Sections 114 and 118.
The Exchange proposes to change the current schedule of three tiers \8\
to an updated schedule with five tiers and will clarify that the
rebates will only apply to MPIDs where a member is a Primary DLP.
---------------------------------------------------------------------------
\8\ The current three tiers are: (1) $0.0070 per executed share
for ETPs with monthly ADV less than 500,000 in the prior month; (2)
$0.0042 per executed share for ETPs with monthly ADV between 500,000
and 5 million in the prior month; and (3) $0.0036 per executed share
for ETPs with monthly ADV greater than 5 million in the prior month.
Enhanced Rebates are not addressed in the current schedule.
---------------------------------------------------------------------------
The proposed amended schedule contains five tiers based on monthly
ADV and includes both a Standard Rebate and an Enhanced Rebate for
Primary DLPs. Tier 1 will apply to ETPs with monthly ADV greater than 1
million in the prior month with a Standard Rebate of $0.0034 per
executed share and with an Enhanced Rebate of $0.0036 per executed
share. Tier 2 will apply to ETPs with monthly ADV between 250,001 and 1
million in the prior month with a Standard Rebate of $0.0040 per
executed share and with an Enhanced Rebate of $0.0042 per executed
share. Tier 3 will apply to ETPs with monthly ADV between 150,001 and
250,000 in the prior month with a Standard Rebate of $200 per month and
with an Enhanced Rebate of $350 per month. Tier 4 will apply to ETPs
with monthly ADV between 50,001 and 150,000 in the prior month with a
Standard Rebate of $225 per month and with an Enhanced Rebate of $450
per month. Tier 5 will apply to ETPs with monthly ADV less than 50,001
in the prior month with a Standard Rebate of $300 per month and with an
Enhanced Rebate of $500 per month. The Tier 3-5 rebates will be in
addition to any other rebates the Primary DLP qualifies for under
Equity 7, Sections 114 and 118.
Currently, the Exchange's DLP Program incentivizes DLPs with a
transaction-style rebate with one market quality requirement (time at
inside at least 20%). While this does benefit some ETPs, it may not be
satisfactory for lower volume ETPs, which are often new and incubating
products that need a different support model from the Nasdaq. The
Exchange believes the changes will better position these ETPs for
success and benefit the issuers and market makers by offering a fixed
rebate for meeting more market quality requirements in lower volume
ETPs.
Nasdaq believes that by allowing a hybrid-style rebate program
(transaction and fixed rebate), the Exchange can better support the
market makers' business model. The Exchange believes that the amended
DLP Program and market quality requirements will serve to better align
the Exchange incentives with a more scalable and reliable model for
DLPs, as well as increase market quality performance in Nasdaq-listed
ETPs. The Exchange decided to retain a per executed share rebate model
for ETPs with an ADV greater than 250,001. Based on issuer and market
maker feedback, it was evident that for more actively traded ETPs this
model may provide greater incentives for DLPs while still holding DLPs
to more stringent MQMs.
The Exchange also proposes that if there is more than one DLP to an
assigned ETP, then the Secondary DLP receives $150 per month or an
additional $0.0003 per executed share, depending upon the tier, which
will be in addition to any other rebate the Secondary DLP is eligible
for under Equity 7, Sections 114 and 118. The Exchange believes that by
allowing two DLPs (the Secondary DLP will be determined by using the
factors in Equity 7, Section 114(f)(2)) will work to further support
the market quality in lower ADV ETPs and increase resiliency in market
quality performance.
[[Page 31761]]
Change Existing Additional Tape C ETP Incentives and Add New Tier
In addition, the Exchange proposes to change the existing
Additional Tape C ETP Incentives in Equity 7, Section 114(f)(5)(B), as
well as add a new tier. The rebates are provided to an eligible member
for each displayed share that adds liquidity in a Tape C ETP that meets
the criteria of Equity 7, Section 114(f)(1)(A) and will only apply to
the MPID where a member is a DLP.
The Exchange proposes to amend the Incremental Tape C ETP Rebate
for Tier 1 (applicable to members with a minimum monthly average of 10
assigned ETPs as a DLP) to decrease from $0.0003 per executed share to
$0.0002 per executed share. The Exchange proposes to amend the
Incremental Tape C ETP Rebate for Tier 2 (applicable to members with a
minimum monthly average of 25 assigned ETPs as a DLP) to decrease from
$0.0004 per executed share to $0.0003 per executed share. The Exchange
proposes to amend the Incremental Tape C ETP Rebate for Tier 3
(applicable to members with a minimum monthly average of 50 assigned
ETPs as a DLP) to decrease from $0.0005 per executed share to $0.0004
per executed share. Finally, the Exchange proposes to add a Tier 4 that
will have an Incremental Tape C ETP Rebate of $0.0005 per executed
share applicable to members with a minimum monthly average of 100
assigned ETPs as a DLP. In addition, the Exchange will eliminate the
existing language at the end of the rule.\9\ The Exchange is updating
the Tape C ETP rebate to better reflect the growing number of ETP
listings on Nasdaq. The Exchange is proposing to eliminate the existing
language at the end of Equity 7, Section 114(f)(5)(B) that follows the
Additional Tape C ETP Incentives schedule because the Exchange believes
it was not an effective part of the DLP Program, and that the amended
rebates will be more impactful to ETF issuers and market makers.
---------------------------------------------------------------------------
\9\ The rule language currently says ``If a current DLP has less
than 10 DLP assignments, but increases the number of ETPs for which
it is a DLP by 100%, the DLP will receive an incremental additional
Tape C ETP rebate of $0.0001. A DLP receiving its first assignment
will count as a 100% increase. This incremental rebate is only
available for the first 100% increase and thus is not available for
subsequent increases of 100%.''
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposals are consistent with
Section 6(b) of the Act,\10\ in general, and further the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\11\ 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 its
facilities and do not unfairly discriminate between customers, issuers,
brokers or dealers. The Exchange also notes that its ETP listing
business operates in a highly-competitive market in which market
participants, which include both DLPs and ETP issuers, can readily
transfer their listings or opt not to participate, respectively, if
they deem fee levels, liquidity incentive programs, or any other factor
at a particular venue to be insufficient or excessive. The proposed
rule change reflects a competitive pricing structure designed to
incentivize issuers to list new products and transfer existing products
to the Exchange and market participants to enroll and participate as
DLPs on the Exchange, which the Exchange believes will enhance market
quality in qualified ETPs listed on the Exchange.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Add Exchange Traded Fund Shares, Proxy Portfolio Shares and Managed
Portfolio Shares To List That May Be Designated as a Qualified Security
The Exchange believes that the change to expand the list of
securities that may be designated as a ``Qualified Security'' to
include Exchange Traded Fund Shares under Nasdaq Rule 5704, Proxy
Portfolio Shares under Nasdaq Rule 5750 and Managed Portfolio Shares
under Nasdaq Rule 5760, as long as they have at least one DLP, is
reasonable and would be consistent with the public interest and the
protection of investors because investors will not be harmed and in
fact would benefit from increased clarity and transparency of the
Pricing Schedule. The inclusion of Exchange Traded Fund Shares is not a
substantive change, but being added as a clarification because the
securities listed under Nasdaq Rule 5704 are already covered by Nasdaq
Rules 5705 and 5735 and this simply clarifies that such a security may
be designated as a ``Qualified Security.'' The addition of Proxy
Portfolio Shares and Managed Portfolio Shares to the list of securities
that may be designated as a ``Qualified Security'' is reasonable
because low ADV semi-transparent ETPs also need support from a market
quality perspective just like traditional ETPs. Since these products
are new and incubating, the Exchange believes the DLP changes will be
beneficial to these ETFs as well.
Amend Equity 7, Section 114(f)(4) To Revise the Monthly Performance
Criteria Related to Specific Rebates Provided Under Equity 7, Section
114(f)(5), and To Address Secondary DLPs
The Exchange believes that amending Equity 7, Section 114(f)(4) to
revise the monthly performance criteria related to the specific rebates
provided under Equity 7, Section 114(f)(5) by better aligning the
behavior required to qualify for rebates with the nature of the rebates
provided is reasonable because the Exchange must from time to time
assess the effectiveness of the incentives it provides to market
participants in return for the beneficial behavior required to receive
the incentive. In this case, the Exchange is amending the program so
that a Primary DLP will need to meet all four of the Standard MQMs in
the assigned ETP as measured by Nasdaq to qualify for the Standard
Rebate and all four of the Enhanced MQMs in the assigned ETP as
measured by Nasdaq to qualify for the Enhanced Rebate. These MQMs are
measured on average in the assigned ETP during regular market hours:
(1) Time at the NBBO will be 20% for the Standard Rebate and 50% for
the Enhanced Rebate; (2) time within 5 basis points of NBBO will be 50%
for the Standard Rebate and 75% for the Enhanced Rebate; (3) notional
depth will be $100,000 (within 150 basis points of NBBO) for the
Standard Rebate and $100,000 (within 50 basis points of NBBO) for the
Enhanced Rebate; and (4) average spread will be less than 125 basis
points for the Standard Rebate and less than 25 basis points for the
Enhanced Rebate.
The Exchange believes that the proposed eligibility criteria are an
equitable allocation and are not unfairly discriminatory because the
Exchange will apply the same criteria to all DLPs. The Exchange also
believes that the proposed eligibility criteria are an equitable
allocation and are not unfairly discriminatory among Exchange members
because any member may become a market maker and take the steps
necessary to also become a DLP, including meeting the proposed minimum
criteria under Equity 7, Section 114(f)(4).\12\ The DLP Program is
limited to Exchange market makers because of their unique role in the
markets, including their obligation to provide liquidity in the
securities in which they are registered. Thus, the DLP Program is a
further extension of
[[Page 31762]]
the market maker's role in providing liquidity in specific securities,
to the benefit of all market participants.
---------------------------------------------------------------------------
\12\ The Exchange will select DLPs based on the factors in
Equity 7, Section 114(f)(2).
---------------------------------------------------------------------------
The Exchange also believes these changes are an equitable
allocation and are not unfairly discriminatory because the Exchange is
proposing these changes to the DLP Program to modernize it so that it
becomes a program that is more market quality focused rather than
transaction-based (i.e., the Exchange will pay fixed amount rebates
that fall within Tiers 3-5). The new MQMs are intended to encourage
DLPs to uphold better quality markets in Nasdaq-listed ETPs and also
ensure a scalable business model to support new and incubating ETPs
that often trade less on a daily basis.
The Exchange believes that its proposal to amend Equity 7, Section
114(f)(4) to address Secondary DLPs is reasonable because it allows
that if there are two DLP assignments for a Nasdaq-listed ETP (the
Secondary DLP will be determined by using the factors in Section
114(f)(2)) and that the Secondary DLP will qualify for rebates in ETPs
if it meets two of the four Enhanced MQMs as noted above. The Exchange
believes that this proposal is an equitable allocation and is not
unfairly discriminatory because allowing two DLPs will work to further
support the market quality in lower ADV ETPs and increase resiliency in
market quality performance. Additionally, the Exchange believes that by
incentivizing more than one market maker to meet the increased MQMs,
lower ADV ETPs now have more market makers who are incentivized to
provide quote quality and layering of notional depth, which can be a
benefit if the Primary DLP has an unforeseen quoting or technology
issue. Also, by adding the MQMs, the Primary and Secondary DLP are
incentivized to not only provide quotes at the NBBO but also other
important quote quality metrics around the NBBO.
The Exchange believes that its proposals to add additional MQMs and
rebates are not unfairly discriminatory because these rebates are
available to all qualifying members and reward meaningful quote quality
and liquidity in ETPs. Moreover, these proposals stand to improve the
overall market quality of the Exchange, to the benefit of all market
participants, by allowing a hybrid-style rebate program (transaction
and fixed rebate), the Exchange can better support the market makers'
business model. The Exchange believes that the amended DLP Program and
market quality requirements will serve to better align the Exchange
incentives with a more scalable and reliable model for DLPs, as well as
increase market quality performance in Nasdaq-listed ETPs.
Amend Rebate Tiers To Include Standard and New Enhanced Rebates and
Update Schedule From Three to Five Tiers, and Address Secondary DLPs
The Exchange believes that its proposal to amend the DLP Program's
rebate tiers to include Standard and new Enhanced Rebates and updating
the Pricing Schedule from three to five tiers, and to clarify that the
rebates will only apply to MPIDs where a member is a Primary DLP, and
that Tier 3-5 rebates will be in addition to any other rebates the
Primary DLP qualifies for under Equity 7, Sections 114 and 118, is
reasonable because it will encourage DLPs to uphold better quality
markets in Nasdaq-listed ETPs through being more market quality focused
rather than transaction-based. Currently, the Exchange's DLP Program
incentivizes DLPs with a transaction-style rebate with one market
quality requirement (time at inside at least 20%). Although this does
benefit some ETPs, it may not be satisfactory for lower volume ETPs,
which are often new and incubating products that need a different
support model from the Exchange.
The Exchange believes that amending the DLP Program as proposed is
an equitable allocation of rebates and is not unfairly discriminatory
because it will allocate its rebates fairly among its market
participants (i.e., the Exchange will pay higher rebates to DLPs that
meet higher MQMs and will pay DLPs higher fixed rebates for the ETPs
with lower ADVs). It will better position these lower volume ETPs for
success and will benefit issuers and market makers by offering a fixed
rebate for meeting more market quality requirements in lower volume
ETPs.
Specifically, the Exchange proposes to change the current schedule
under Equity 7, Section 114(f)(5) from three tiers to five tiers.\13\
The proposed five tiers are based on monthly ADV and includes both a
Standard Rebate and an Enhanced Rebate. The Exchange believes this
proposal is an equitable allocation of rebates and is not unfairly
discriminatory because by allowing for a fixed payment in lower ADV
products, it provides for a more reliable business model for DLPs while
adding on quote and market quality requirements and reflects an
equitable allocation of rebates. Additionally, by allowing a hybrid
style rebate program (transaction-based and a fixed rebate), the
Exchange can better support the market makers' business model. The
Exchange believes that the DLP Program, as amended, will better align
incentives with a more scalable and reliable model for DLPs and
increase market quality performance in Nasdaq-listed ETPs.
Additionally, retaining a per executed share rebate model for ETPs with
an ADV greater than 250,001 may provide greater incentives for DLPs
while still holding DLPs to more stringent MQMs.
---------------------------------------------------------------------------
\13\ See supra note 8.
---------------------------------------------------------------------------
The Exchange also believes that its proposal that if there is more
than one DLP to an assigned ETP, then the Secondary DLP receives $150
per month or an additional $0.0003 per executed share, depending upon
the tier, will be in addition to any other rebate the Secondary DLP is
eligible for under Equity 7, Sections 114 and 118 is an equitable
allocation of rebates and is not unfairly discriminatory because
allowing two DLPs (the Secondary DLP will be determined by using the
factors in Section 114(f)(2)) will work to further support the market
quality in lower ADV ETPs and increase resiliency in market quality
performance.
The Exchange believes that its proposals are not unfairly
discriminatory. As an initial matter, the Exchange believes that
nothing about its 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
rebate cards [sic] 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 Exchange also believes that its amended Pricing Schedule is not
unfairly discriminatory because if successful, it stands to improve the
quality of the Nasdaq market, to the benefit of all market
participants. 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.
Change Existing Additional Tape C ETP Incentives and Add New Tier
The Exchange believes that its proposal to amend the existing
[[Page 31763]]
Additional Tape C ETP Incentives in Equity 7, Section 114(f)(5)(B) and
add a new tier is reasonable because it allows an eligible member for
each displayed share that adds liquidity in a Tape C ETP that meets the
criteria of Equity 7, Section 114(f)(1)(A) to receive a rebate and
limits it those MPIDs where a member is a DLP. ETP listings is a highly
competitive market in which ETP issuers and DLPs can opt to not
participate or transfer listings. The additional tier reflects the
growing number of ETPs listed on Nasdaq.
In addition, the Exchange believes it is reasonable to eliminate
the existing language at the end of the rule because the Exchange
believes it was not an effective part of the DLP Program, and that the
amended rebates will be more impactful to ETF issuers and market
makers. The Exchange also believes that making a technical change in
the second sentence of Equity 7, Section 114(f)(5)(B) to change
``Rebate'' to ``rebate'' is reasonable since it is merely a
clarification that improves the sentence.
The Exchange believes that amending the DLP Program as proposed is
an equitable allocation of rebates and is not unfairly discriminatory
because it will allocate its rebates fairly among its market
participants (i.e., the Exchange will pay higher rebates for DLPs with
more ETPs assigned). Additionally, it will better position these lower
volume ETPs for success and will benefit issuers and market makers.
The Exchange also believes that amending the DLP Program as
proposed is an equitable allocation of rebates and is not unfairly
discriminatory because it is intended to encourage DLPs to promote
better market quality and liquidity in qualified Nasdaq-listed ETPs. By
providing increased rebates based on better market quality and their
DLP footprint, the Exchange believes that it will encourage DLPs to
register, quote and trade in more ETPs on Nasdaq. Additionally, the
Exchange believes the updated rebates will incentivize DLPs to register
to support additional ETPs, especially lower ADV products.
The Exchange also believes that its proposal to amend the existing
Additional Tape C ETP Incentives in Equity 7, Section 114(f)(5)(B) and
add a new tier is not unfairly discriminatory because if successful, it
stands to improve the quality of the Nasdaq market, to the benefit of
all market participants. 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.
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. The Exchange notes that it
operates in a highly competitive market in which market participants
can readily favor competing venues if they deem rebates or 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 rebates 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 rebates and fees in response, and because market participants may
readily adjust their order routing practices, the Exchange believes
that the degree to which rebate and fee changes in this market may
impose any burden on competition is extremely limited.
In this instance, the Exchange is proposing to modify the
incentives provided to market makers for participation in the DLP
program in an effort to improve the program by providing more targeted
incentives to improve and increase market quality in ETPs that are in
need of such improvement the most. The Exchange uses incentives, such
as the rebates of the DLP program, to incentivize market participants
to improve the market. The Exchange must, from time to time, assess the
effectiveness of incentives and adjust them when they are not as
effective as the Exchange believes they could be. Moreover, the
Exchange is ultimately limited in the amount of rebates it may offer.
The proposed new criteria and incentives are reflective of such an
analysis.
The Exchange notes that participation in the DLP program is
entirely voluntary and, to the extent that registered market makers
determine that the rebates are not in line with the level of market-
improving behavior the Exchange requires, a DLP may elect to deregister
as such with no penalty. The Exchange notes that it is amending the
MQMs required for a DLP to receive an increased rebate under the
program, and thus there is a risk that a DLP may not qualify for any of
the increased incentives under the amended program if it provides the
same level market participation, but will still qualify for their
regular base rebate.
The Exchange does not believe that the proposed changes place an
unnecessary burden on competition and, in sum, if the changes proposed
herein are unattractive to market makers, it is likely that the
Exchange will lose participation in the DLP program as a result. As
noted above, the Exchange is continuing to limit eligibility for the
program to Exchange market makers. The Exchange believes that Exchange
market makers are best positioned to provide market improvement in DLP
Program ETPs in light of their unique function in the markets.
Moreover, any Exchange member may elect to take the steps necessary to
become an Exchange market maker and therefore become eligible for the
program if they choose. The Exchange will continue to select DLPs based
on the factors in Equity 7, Section 114(f)(2). Thus, the Exchange does
not believe that the proposal represents a burden on competition among
Exchange members, or that the proposal 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.\14\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
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.
[[Page 31764]]
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4c3e392029612f2321212922383f0c3f292f622b233a"><span class="__cf_email__" data-cfemail="5c2e293039713f3331313932282f1c2f393f723b332a">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2021-046 on the subject line.
Paper Comments
<bullet> 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-2021-046. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2021-046 and should be submitted
on or before July 6, 2021.
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-12475 Filed 6-14-21; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on June 15, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.