Notice2024-03450
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Equity 7, Section 3(a)
Primary source
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Published
February 21, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 35 (Wednesday, February 21, 2024)</title>
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[Federal Register Volume 89, Number 35 (Wednesday, February 21, 2024)]
[Notices]
[Pages 13122-13125]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-03450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99537; File No. SR-Phlx-2024-04]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Equity 7,
Section 3(a)
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 February 1, 2024, 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 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 its pricing schedule at Equity 7,
Section 3(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/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 purpose of the proposed rule change is to provide an additional
calculation for purposes of determining whether a member qualifies for
credits set forth in Equity 7, Section 3(a) that pertain to providing
liquidity.
Presently, the Exchange provides its members with various credits
for executing orders that add liquidity to the Exchange and charges
them various fees for executing orders, that remove liquidity from the
Exchange, as set forth in Equity 7, Section 3(a) of the Exchange's
Rules. The charges and credits in Equity 7, Section 3(a) apply to the
use of the order execution and routing services of the Nasdaq PSX
System by members for all securities priced at $1 or more that it
trades. Members may qualify for tiers of discounted fees and premium
credits based, in part, upon their volume on the Exchange as a
percentage of total ``Consolidated Volume.''
Pursuant to Equity 7, Section 3(a), the term ``Consolidated
Volume'' means the total consolidated volume reported to all
consolidated transaction reporting plans by all exchanges and trade
reporting facilities during a month in equity securities, excluding
executed orders with a size of less than one round lot. For purposes of
calculating Consolidated Volume and the extent of a member's trading
activity, the following are excluded from both total Consolidated
Volume and the member's trading activity: (1) the date of the annual
reconstitution of the Russell Investments Indexes; (2) the dates on
which stock options, stock index options, and stock index futures
expire (i.e., the third Friday of March, June, September, and
December); (3) the dates of the rebalance of the MSCI Equities Indexes
(i.e., on a quarterly basis); (4) the dates of the rebalance of the S&P
400, S&P 500, and S&P 600 Indexes (i.e., on a quarterly basis); and (5)
the date of the annual reconstitution of the Nasdaq-100 and Nasdaq
Biotechnology Indexes.
Generally, the ratio of consolidated volumes in securities priced
at or above $1 (``dollar plus volume'') relative to consolidated
volumes inclusive of securities priced below a dollar is usually stable
from month to month, such that ``Consolidated Volume'' has been a
reasonable baseline for determining tiered incentives for members that
execute dollar plus volume on the Exchange. However, there have been a
few months where
[[Page 13123]]
volumes in securities priced below a dollar (``sub-dollar volume'')
have been elevated, thereby impacting the ratio mentioned above.
Anomalous rises in sub-dollar volume stand to have a material
adverse impact on members' qualifications for pricing tiers/incentives
because such qualifications depend members upon achieving threshold
percentages of volumes as a percentage of Consolidated Volume, and an
extraordinary rise in sub-dollar volume stands to elevate Consolidated
Volume. As a result, members may find it more difficult, if not
practically impossible, to qualify for or to continue to qualify for
their existing incentives during months where there are such rises in
sub-dollar volumes, even if their dollar plus volumes have not
diminished relative to prior months.
The Exchange believes that it would be unfair for its members that
execute significant dollar plus volumes on the Exchange to fail to
achieve or to lose their existing incentives for such volumes due to
anomalous behavior that is extraneous to them. Therefore, the Exchange
wishes to amend its Rules to help avoid extraordinary spikes in sub-
dollar volumes from adversely affecting a member's qualification of
incentives for their dollar plus stock executions.
Accordingly, the Exchange proposes to amend its pricing schedule at
Equity 7, Section 3(a) to state that, for purposes of calculating a
member's qualifications for credits that pertain to providing liquidity
set forth in Section 3(a), the Exchange will calculate a member's
volume and total Consolidated Volume twice. First, the Exchange will
calculate a member's volume and total Consolidated Volume as presently
set forth in Equity 7, Section 3(a) (i.e., inclusive of volume that
consists of executions in securities priced less than $1). Second, the
Exchange will calculate a member's volume and total Consolidated Volume
exclusive of volume that consists of executions in securities priced
less than $1, while also increasing the distinct qualifying volume
percentage thresholds, as set forth in Section 3(a), by 10%.
Thereafter, the Exchange proposes to assess which of these two
calculations would qualify the member for the most advantageous credits
for the month and then it will apply those to the member.
Although the Exchange wishes to avoid extraordinary spikes in sub-
dollar volumes from adversely affecting a member's qualification of
incentives for their dollar plus stock executions, the Exchange
proposes to include certain limits on the proposal to efficiently
allocate the Exchange's limited resources for incentives. Specifically,
as noted above, the Exchange proposes to limit the application of the
proposed calculation excluding sub-dollar volumes to those incentives
in Section 3(a) that pertain to providing liquidity. In addition, as
noted above, the Exchange proposes to increase the distinct qualifying
volume percentage thresholds set forth in Section 3(a) by 10% for
purposes of the proposed calculation excluding sub-dollar volumes.\3\
The Exchange wishes to impose such limitations in order to limit the
cost impact on the Exchange, while still providing some relief to
members in months with extraordinary spikes in sub-dollar volumes. The
Exchange has limited resources to devote to incentive programs, and it
is appropriate for the Exchange to reallocate these incentives
periodically in a manner that best achieves the Exchange's overall mix
of objectives.
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\3\ For example, the Exchange provides a credit of $0.0033 per
share executed to members providing liquidity for orders entered by
a member that provide 0.15% or more of total Consolidated Volume
during the month. See Equity 7, Section 3(a). Under the proposal, in
addition to calculating the member's volume and total Consolidated
Volume exclusive of volume that consists of executions in securities
priced less than $1, the distinct qualifying volume percentage
threshold would be increased by 10%. Therefore, for purposes of this
example, in order to qualify for the credit using volumes excluding
sub-dollar activity, the member would need to provide 0.165% or more
of total Consolidated Volume during the month (i.e., 0.15% +
(10%)(0.15%)).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\4\ in general, and furthers the objectives of sections
6(b)(4) and 6(b)(5) of the Act,\5\ 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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\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange's proposed changes to its schedule of credits are
reasonable in several respects. As a threshold matter, the Exchange is
subject to significant competitive forces in the market for equity
securities transaction services that constrain its pricing
determinations in that market. The fact that this market is competitive
has long been recognized by the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C. Circuit stated as follows: ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \6\
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\6\ 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.'' \7\
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\7\ 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.
The Exchange believes that the proposal is reasonable and equitable
because, in its absence, members may experience material adverse
impacts on their ability to qualify for certain incentives during a
month with an anomalous rise in sub-dollar volumes. The Exchange does
not wish to penalize members that execute significant volumes on the
Exchange due to anomalous and extraneous trading activities of a small
number of firms in sub-dollar securities. The proposed rule would seek
to provide a means for members that provide liquidity to avoid
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such a penalty by determining whether calculating member volume and
total Consolidated Volume to include or exclude sub-dollar volume \8\
would result in Exchange members qualifying for the most advantageous
credits, and then applying the calculations that would result in the
incentives for providing liquidity that are most advantageous to each
member. The Exchange believes it is reasonable to limit the proposal by
applying the proposed calculation to incentives that pertain to
providing liquidity and increasing the distinct qualifying volume
percentage thresholds by 10% when using the proposed calculation
excluding sub-dollar volumes because the Exchange has limited resources
to devote to incentive programs, and it is appropriate for the Exchange
to reallocate these incentives periodically in a manner that best
achieves the Exchange's overall mix of objectives. The Exchange
believes that the proposed rule change is an equitable allocation and
is not unfairly discriminatory because the Exchange does not intend for
the proposal to advantage any particular member and the Exchange will
apply the proposed calculation to all similarly situated members.
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\8\ As noted above, in considering whether a member meets
qualifying credit criteria using the proposed calculation excluding
sub-dollar volumes, the distinct qualifying volume percentage
thresholds would be increased by 10%.
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Those participants that are dissatisfied with the changes to the
Exchange's schedule of credits are free to shift their order flow to
competing venues that provide more favorable fees or generous
incentives.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
The Exchange does not believe that its proposal will place any
category of Exchange participant at a competitive disadvantage.
The Exchange intends for its proposal to help avoid pricing
disadvantages due to anomalous spikes in sub-dollar volumes and is not
intended to provide a competitive advantage to any particular member.
The Exchange also intends for its proposal to reallocate its limited
resources more efficiently and to align them with the Exchange's
overall mix of objectives. The Exchange notes that its members are free
to trade on other venues to the extent they believe that the proposal
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
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 proposal is reflective of this
competition.
Even the largest U.S. equities exchange by volume 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 40% of industry
volume.
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.\9\
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\9\ 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4331362f266e202c2e2e262d3730033026206d242c35"><span class="__cf_email__" data-cfemail="0775726b622a64686a6a626973744774626429606871">[email protected]</span></a>. Please include
file number SR-Phlx-2024-04 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-2024-04. 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="https://www.sec.gov/rules/sro.shtml">https://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,
[[Page 13125]]
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. Do
not include personal identifiable information in submissions; you
should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-Phlx-2024-04, and should
be submitted on or before March 13, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
Dated: February 14, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03450 Filed 2-20-24; 8:45 am]
BILLING CODE 8011-01-P
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