Notice2021-13658
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule at Equity 7, Section 3
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Published
June 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 121 (Monday, June 28, 2021)</title>
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[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34101-34104]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13658]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92231; File No. SR-Phlx-2021-37]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Pricing Schedule at Equity 7, Section 3
June 22, 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 June 11, 2021, Nasdaq PHLX LLC (``Phlx'' 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
[[Page 34102]]
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 pricing schedule at
Equity 7, Section 3, as described further below. The text of the
proposed rule change is available on the Exchange's website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/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 Exchange proposes to amend its pricing schedule, at Equity 7,
Section 3, to adopt a new $0.0033 per share executed credit for member
organizations that provide displayed liquidity to the Exchange and
receive an execution priced at or between $1.00 and $5.00. The Exchange
proposes to add this new credit and target it at securities executed at
prices between $1.00 and $5.00 because the Exchange observes that, at
present, liquidity in securities in this lower price segment is less
robust on the Exchange than it is in other price segments.\3\ The
Exchange hopes that the proposed credit will encourage member
organizations to increase the extent to which they quote or place
orders on the Exchange for securities priced at or between $1.00 and
$5.00. If the proposal is effective in achieving this purpose, then the
quality of the Exchange's market will improve, to the benefit of all
participants.\4\
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\3\ The Exchange notes that the threshold for prices at or below
$5.00 tracks the SEC's definition of a ``penny stock.'' See 17 CFR
240.3a5-1-1.
\4\ Although there may be value in offering credits to members
that provide liquidity in securities executed at other prices, or
that satisfy other criteria, the Exchange has limited resources
available to it to offer its members market-improving incentives,
and it allocates those limited resources to those segments of the
market where it perceives the need to be greatest and/or where it
determines that the incentive is likely to achieve its intended
objective.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\5\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\6\ 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.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal Is Reasonable and Is an Equitable Allocation of Credits
The Exchange's proposed change to its schedule of credits is
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' . . . .'' \7\
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\7\ 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.'' \8\
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\8\ 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.
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.\9\ Within
the foregoing context, the proposal represents a reasonable attempt by
the Exchange to increase its market share relative to its competitors.
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\9\ The Exchange perceives no regulatory, structural, or cost
impediments to market participants shifting order flow away from it.
In particular, the Exchange notes that such shifts in liquidity and
market share occur within the context of market participants'
existing duties of Best Execution and obligations under the Order
Protection Rule under Regulation NMS.
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The Exchange believes that it is reasonable and equitable to adopt
a new $0.0033 per share executed credit for member organizations that
provide displayed liquidity in securities that execute at prices at or
between $1.00 and $5.00 per share. As discussed above, the Exchange
observes a particular need to increase displayed liquidity in
securities at these prices because liquidity on the Exchange in such
lower priced securities is less robust than it is in other market
segments. It is reasonable and equitable to address this need by
allocating its limited resources to offer member organizations a credit
to incent them to provide the liquidity needed. If the proposal is
effective in achieving this purpose, then the quality of the Exchange's
market will improve, to the benefit of all participants.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory. The Exchange intends for its proposal to increase
displayed liquidity in securities executed at or between $1.00 and
$5.00 per share, where the Exchange observes that liquidity in such
lower securities is less robust than it is in other market segments.
Additional liquidity is needed for the Exchange to maintain and improve
its market quality. Although member organizations that are able to
provide liquidity in such securities are likely to benefit directly
[[Page 34103]]
from this proposal, any improvement in market quality that it
facilitates will ultimately benefit all market participants.
Although there may be value in offering credits to members that
provide liquidity in securities executed at other prices, or that
satisfy other criteria, the Exchange has limited resources available to
it to offer its members market-improving incentives, and it allocates
those limited resources to those segments of the market where it
perceives the need to be greatest and/or where it determines that the
incentive is likely to achieve its intended objective.
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 participants at a competitive disadvantage. As
noted above, all member organizations of the Exchange will benefit from
an increase in the addition of liquidity in securities priced at or
between $1.00 and $5.00. Moreover, member organizations are free to
trade on other venues to the extent they believe that the credit
provided is 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.
Intermarket Competition
The Exchange believes that its proposed new credit 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 live exchanges and from off-exchange venues, which include
alternative trading systems that trade national market system stock.
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 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 fees in response, and because market participants may readily
adjust their order routing practices, the Exchange believes that the
degree to which fee changes in this market may impose any burden on
competition is extremely limited.
The proposed credit for adding liquidity is reflective of this
competition because, as a threshold issue, the Exchange is a relatively
small market so its ability to burden intermarket competition is
limited. In this regard, even the largest U.S. equities exchange by
volume only has 17-18% 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 more
than 40% of industry volume in recent months.
In sum, the Exchange intends for the proposed credit to incent
member organizations to add displayed liquidity to the Exchange in
securities within a certain price range, and to thereby contribute to
market quality, which is reflective of fierce competition for order
flow noted above; however, if the proposed credit is unattractive to
market participants, it is likely that the Exchange will either fail to
increase its market share or even lose market share as a result.
Accordingly, the Exchange does not believe that the proposed new credit
will impair the ability of member organizations 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.\10\
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\10\ 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
<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#90e2e5fcf5bdf3fffdfdf5fee4e3d0e3f5f3bef7ffe6"><span class="__cf_email__" data-cfemail="0d7f786168206e6260606863797e4d7e686e236a627b">[email protected]</span></a>. Please include
File Number SR-Phlx-2021-37 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-Phlx-2021-37. 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
[[Page 34104]]
Number SR-Phlx-2021-37 and should be submitted on or before July 19,
2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13658 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P
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