Notice2021-23434
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Schedule of Transaction Credits and Charges at Equity 7, Section 118(a)
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
October 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 206 (Thursday, October 28, 2021)</title>
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[Federal Register Volume 86, Number 206 (Thursday, October 28, 2021)]
[Notices]
[Pages 59771-59774]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-23434]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93407; File No. SR-NASDAQ-2021-081]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Exchange's Schedule of Transaction Credits and Charges at
Equity 7, Section 118(a)
October 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 October 13, 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 schedule of
transaction credits and charges, 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 <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
schedule of transaction credits and charges, at Equity 7, Section
118(a).
Each month, the Exchange determines the applicability to a member
of the various credits and charges set forth in this schedule based, in
part, on the nature and extent of a member's activities on the Exchange
during the month. Credits generally apply to members that add liquidity
to the Exchange during the month, with credit amounts varying based
upon the extent or nature of such liquidity adding activity, or other
criteria, while transaction charges that are discounted
[[Page 59772]]
from the standard rate apply to members that remove liquidity from the
Exchange during the month, with the amounts of the discounts varying
based upon the extent or nature of such liquidity removal activity, or
other criteria.
Among the order types that comprise a member's activity on the
Exchange during a month are Midpoint Extended Life Orders (``M-
ELOs'').\3\ Generally, the M-ELO order type (including its Holding
Period) is designed to create additional trading opportunities on the
Exchange for investors with longer investment time horizons. M-ELO
Order will only execute against other M-ELO orders, as well as certain
other qualified midpoint orders on the continuous book.
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\3\ Pursuant to Equity 4, Rule 4702(b)(14), a ``Midpoint
Extended Life Order'' is an Order Type with a Non-Display Order
Attribute that is priced at the midpoint between the NBBO and that
will not be eligible to execute until a minimum period of 10
milliseconds has passed after acceptance of the Order by the System.
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Currently, the Exchange charges a member that executes a M-ELO
Order a flat fee of $0.0004 per share executed (for securities priced
at $1 or more), but does not provide a credit for liquidity provided or
charge a fee for liquidity removed.\4\ The design of the tiers of the
Section 118 ``Nasdaq Market Center Order Execution and Routing''
mandates that member's trading activity that is not treated as
``liquidity provided,'' necessarily becomes activity classified as
``liquidity removed.'' Accordingly, before the proposed change became
effective, all M-ELO trading activity was classified as removing
liquidity.
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\4\ Although the proposed rule change will classify all M-ELO
trading activity as ``liquidity provided,'' a member that executes a
M-ELO Order will continue to be assessed a fee of $0.0004 per share
executed.
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Nasdaq now proposes to count all M-ELO Orders that a member
executes on Nasdaq during the month as liquidity-adding activity on
Nasdaq for the purposes of calculating the extent of a member's trading
activity during the month on Nasdaq and determining the charges and
credits applicable to such member's activity.\5\ A M-ELO Order must
rest on the book for at least 10 milliseconds, and therefore Nasdaq
believes this approach is appropriate because M-ELO is an order type
that focuses on the execution quality experience. Nasdaq believes that
these qualities allow a M-ELO Order to have a lesser market price
impact thus contributing to the market quality by providing passive
liquidity.
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\5\ Where a fee in a particular tier is determined based on
shares of non-displayed liquidity (without specifying the treatment
of M-ELO Orders) provided in all securities that represent more than
a certain threshold of Consolidated Volume, executed M-ELO Orders
will not be counted towards such non-displayed liquidity.
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The purpose of counting all M-ELO Orders that a member executes on
Nasdaq during the month as liquidity-adding activity on Nasdaq for the
purposes of calculating the extent of a member's trading activity
during the month is to provide extra incentives to members to be
actively involved in M-ELO on the Exchange. The Exchange believes that
if such incentives are effective, then any ensuing increase in M-ELO
activity on the Exchange will improve market quality, to the benefit of
all participants.
2. Statutory Basis
The Exchange believes that its proposals are consistent with
Section 6(b) of the Act,\6\ in general, and further the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\7\ 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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\6\ 15 U.S.C. 78f(b).
\7\ 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'. . . .'' \8\
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\8\ 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.'' \9\
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\9\ 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 count all M-ELO
Orders that a member executes on Nasdaq during the month as liquidity-
adding activity on Nasdaq for the purposes of calculating the extent of
a member's trading activity during the month on Nasdaq and determining
the charges and credits applicable to such member's activity.
The proposal is reasonable because it will provide extra incentives
to members to engage in substantial amounts of MELO-related activity on
the Exchange during a month. Nasdaq believes that the qualities of a M-
ELO Order cause it to have a lesser market price impact thus
contributing to the market quality by providing passive liquidity. The
Exchange believes that if such incentives are effective, then any
ensuing increase in M-ELO Orders will improve the quality of the M-ELO
market, and the market overall, to the benefit of M-ELO and all market
participants.
[[Page 59773]]
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 Fees and Credits
The Exchange believes that it is an equitable allocation to modify
the eligibility requirements for its transaction credits and fees
because the proposal will encourage members to increase the extent to
which they add M-ELO liquidity to the Exchange. Nasdaq believes that
the qualities of a M-ELO Order cause it to have a lesser market price
impact thus contributing to the market quality by providing passive
liquidity. To the extent that the Exchange succeeds in increasing the
levels of M-ELO 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 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.
The Exchange believes that its proposal to amend the qualifying
criteria for its transaction fees and credits is not unfairly
discriminatory because these credits and fees are available to all
members. Nasdaq believes that the qualities of a M-ELO Order cause it
to have a lesser market price impact thus contributing to the market
quality by providing passive liquidity. Moreover, the proposal stands
to improve the overall market quality of the Exchange, to the benefit
of all market participants, by incentivizing members to increase the
extent of their M-ELO liquidity provision or activity on the Exchange.
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 proposals will place any
category of Exchange participant at a competitive disadvantage because
the change represents a reasonable effort to enhance the ability of
longer-term trading interest to participate effectively on an exchange,
without discriminating unfairly against other market participants or
inappropriately or unnecessarily burdening competition. Nasdaq believes
that the qualities of a M-ELO Order cause it to have a lesser market
price impact thus contributing to the market quality by providing
passive liquidity. In addition, the proposal is applicable to all
members on equal terms.
The Exchange notes that its members are free to trade on other
venues to the extent they believe that the proposed treatment of M-ELO
Orders is not desirable. 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 or credit 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 and 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 and credits in response, and because market participants may
readily adjust their order routing practices, the Exchange believes
that the degree to which fee and credit changes in this market may
impose any burden on competition is extremely limited.
The proposal is 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 44% of industry volume.
The Exchange's proposal is pro-competitive in that the Exchange
intends for the change to increase M-ELO liquidity addition 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.
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
[[Page 59774]]
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#ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab"><span class="__cf_email__" data-cfemail="5f2d2a333a723c3032323a312b2c1f2c3a3c71383029">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2021-081 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-2021-081. 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-2021-081 and should be submitted
on or before November 18, 2021.
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\11\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23434 Filed 10-27-21; 8:45 am]
BILLING CODE 8011-01-P
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