Notice2024-10081
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Fee Schedule at Equity 7, Section 3 To Implement a Market Data Revenue Rebate Program
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Published
May 9, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 91 (Thursday, May 9, 2024)</title>
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[Federal Register Volume 89, Number 91 (Thursday, May 9, 2024)]
[Notices]
[Pages 39668-39671]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-10081]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100060; File No. SR-Phlx-2024-18]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Its Fee
Schedule at Equity 7, Section 3 To Implement a Market Data Revenue
Rebate Program
May 3, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 25, 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 fee schedule at Equity 7,
Section 3 to implement a Market Data Revenue Rebate program, 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 fee schedule at Equity 7,
Section 3 to adopt a Market Data Revenue (``MDR'') Rebate program for
Nasdaq PSX.\3\ In sum, the proposed MDR Rebate program calls for 40% of
MDR that exceeds fixed thresholds in any one of two pools (``Excess
MDR'') to be shared with PSX Participants in proportion to their
respective eligible quoting activity in Tape A and C securities, as
described further below. The proposed MDR Rebate program is designed to
improve displayed liquidity and promote order flow to the Exchange by
offering an incentive for market participants to quote on the Exchange.
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\3\ The Exchange initially filed the proposed pricing change on
April 1, 2024 (SR-Phlx-2024-16). On April 15, 2024, the Exchange
withdrew that filing and submitted SR-Phlx-2024-17. On April 25,
2024, the Exchange withdrew that filing and submitted this filing.
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Background
The Securities Information Processors (``SIPs''), which include the
Unlisted Trading Privileges and the Consolidated Tape Association,
collect fees from
[[Page 39669]]
subscribers for trade and quote tape data received from trading centers
and reporting facilities, such as the Exchange (collectively ``SIP
Participants''). After deducting the cost of operating each tape, the
profits are allocated among the SIP Participants on a quarterly basis,
according to a complex set of calculations that consider estimates of
anticipated MDR, adjustments to comport to actual MDR from previous
quarters and a non-linear aggregation of total trading and quoting
activity in Tape A, B and C securities in attributing MDR to each SIP
Participant. Based on these calculations, the SIPs provide MDR payments
to each SIP Participant during the first month of each quarter for
trade and quote data from the previous calendar quarter, which are
subject to adjustment through subsequent quarterly payments. These
payments can be divided into six pools (i.e., trade and quote activity
in Tape A, B and C securities).
Proposed PSX MDR Rebate Program
As the Exchange does not currently share MDR with Participants, the
Exchange now proposes to implement a PSX MDR Rebate program to share
MDR attributed to quote activity only by adopting a PSX MDR Rebate
program in Equity 7, Section 3.
Specifically, proposed Section (a) provides that, assuming that the
requirements of this PSX MDR Rebate Section are met, a PSX Participant
may receive a quarterly MDR rebate in proportion to the PSX
Participant's quoting of displayed orders in Tape A and C securities
from the previous calendar quarter (``MDR Rebate''), as described
further in Section (e).
Proposed Section (b) provides that, to qualify for the MDR Rebate,
a PSX Participant must quote at the National Best Bid or Offer
(``NBBO'') at least 25% of the time during Market Hours in an average
of at least 250 securities for Tape A securities or at least 300
securities for Tape C securities through the PSX Participant's MPID. A
PSX Participant is considered to be quoting at the NBBO if the PSX
Participant's MPID quotes a displayed order of at least 100 shares in
the security and prices the order at either the national best bid or
the national best offer or both the national best bid and offer for the
security. To qualify for the MDR Rebate, the PSX Participant must meet
the requirement for an average of at least 250 securities for Tape A
securities or at least 300 securities for Tape C securities per day
over the course of the quarter.
Proposed Section (c) provides that MDR will be calculated
separately for quotes in each Tape A and C security, for a total of two
MDR pools. If the MDR received by the Exchange in any given pool
exceeds the following thresholds in any given calendar quarter, 40% of
such excess MDR will be payable to PSX Participants in proportion to
their respective quoting of displayed orders in that pool:
------------------------------------------------------------------------
Tape A Tape C
------------------------------------------------------------------------
$110,000 $200,000
------------------------------------------------------------------------
The proposed thresholds were selected based on historical data of
PSX's quoting revenue from Q2 2023-Q4 2023. The dollar values represent
the amount of MDR that must be paid to the Exchange by the SIPs before
the Excess MDR would be eligible for distribution.
The Exchange proposes to adopt two of the six MDR pools utilized by
the SIPs, excluding the pools for trading activity and the pool for
quoting activity in Tape B, and attributing the proposed MDR Rebates to
PSX Participants for quote activity in Tapes A and C. Currently, PSX
Participants are most actively quoting Tape B securities on PSX. The
Exchange proposes to establish the MDR Rebates for quoting activity in
Tapes A and C because the Exchange wants to encourage increased quoting
at the NBBO for Tapes A and C.
Section (d) provides a de minimis requirement that states that a
PSX Participant will not receive an MDR Rebate in any calendar quarter
in which the total MDR Rebate attributed to the PSX Participant is less
than $500. If a PSX Participant is eligible for MDR Rebates from both
pools, the PSX Participant will be eligible to receive an MDR rebate
equal to the sum of the rebates. However, if the sum of the rebates is
less than $500, the PSX Participant will not receive a payment and the
rebate will be kept by the Exchange. The purpose of the de minimis
requirement is to encourage significant quote activity and for the
Exchange to avoid having to pay PSX Participants for de minimis Excess
MDR.\4\
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\4\ For example, it would be unduly burdensome to the Exchange
to calculate and pay MDR Rebates to PSX Participants if the total
Excess MDR of all the pools was $4000 and ten PSX Participants were
each attributed $400 in rebates.
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In attributing eligible quote activity to PSX Participants, the
Exchange proposes to utilize a set of calculations similar to those
used by the SIPs in allocating MDR to SIP Participants. Section (e) of
the proposed rule language describes the steps for calculating MDR
Rebates:
Step 1. Calculate, on a daily basis (per MPID), the product of
three factors: number of shares in the quotation, the duration of the
quotation at the NBBO (for both the bid and the offer), and the price
of the security.
Step 2. For each security, sum the daily values from Step 1 across
the quarter, the sum of which represents the PSX Participant's quote
credits (per MPID) in each security.
Step 3. For each security, sum all PSX Participants' quote credits
to obtain the total quote credits available per security.
Step 4. Divide each PSX Participant's quote credits (per MPID)
(from Step 2) into the total quote credits available per security (from
Step 3) to obtain a Participant's percentage of the security they are
quoting (per MPID).
Step 5. Calculate the income allocation weight for each security
based on the share of revenue allocated to the symbol by the SIP that
quarter.
Step 6. For each security, multiply a PSX Participant's percentage
of security they are quoting (per MPID) (from Step 4) by the income
allocation weight of the security (from Step 5).
Step 7. For each PSX Participant's MPID, sum the values calculated
in Step 6 across all securities in the pool (i.e., in the same Tape) to
obtain the PSX Participant's allocation percentage for the excess MDR
in the pool.
Step 8. For each PSX Participant with eligible quote activity in
the pool, multiply the PSX Participant's allocation percentage (from
Step 7) by the excess MDR in the pool to determine the dollar amount of
the PSX Participant's MDR Rebate in the pool.
As for calculating the pool of funds from which MDR Rebates will be
paid, unlike the SIPs, the Exchange will derive MDR Rebate allocation
from a fixed value that will not be subject to adjustment (i.e., the
amount of MDR actually received by the Exchange on a quarterly basis).
This avoids the problem of having to adjust MDR rebates that have
already been paid to PSX Participants to comport to adjustments to MDR
made by the SIPs.\5\
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\5\ For example, if MDR paid to the Exchange was less than
anticipated in Q3 2024 due to an adjustment to the MDR paid to the
Exchange in Q2 2024 (i.e., actual MDR in Q2 fell short of
estimates), the Exchange will not recoup the difference from the PSX
Participants that had been paid the Q2 MDR Rebate. Instead, the MDR
Rebate for Q3 will be calculated based on the actual MDR paid to the
Exchange in Q3.
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The following Example, which the Exchange provides in the proposed
rule language, illustrates how Excess MDR will be calculated and
distributed:
Step 1. On the first day of the quarter, PSX Participant A earns
59,000 quote
[[Page 39670]]
credits in MPID 1 for Security X (a Tape C security): 59 seconds x $10
x 100 shares.
Step 2. Assume PSX Participant A earns 4,000,000 quote credits for
Security X in MPID 1 after summing its daily quote credits across the
quarter.
Step 3. Assume there are five PSX Participants (i.e., Participants
A, B, C, D and E) that had eligible quote activity in Security X during
the quarter. The quarterly quote credits for Security X are as follows:
------------------------------------------------------------------------
Security X Quote
Participant Credits
------------------------------------------------------------------------
A.................................................... 4,000,000
B.................................................... 1,000,000
C.................................................... 3,500,000
D.................................................... 2,500,000
E.................................................... 5,000,000
------------------
Total............................................ 16,000,000
------------------------------------------------------------------------
Step 4. PSX Participant A's percentage of Security X it quoted is
25%: 4,000,000/16,000,000.
Step 5. Assume the SIP allocated revenue of $360,000 to Security X
for the quarter and $36,000,000 to all securities in the Tape C pool
for the quarter. The income allocation weight for security X is 1%:
$360,000/$36,000,000.
Step 6. PSX Participant A's allocation percentage for the excess
MDR in Security X in MPID 1 is 0.25%: 25% x 1%.
Step 7. Assume, after summing the allocation percentage calculated
in Step 6 across all securities in the Tape C pool, PSX Participant A's
allocation percentage is 2.5% in MPID 1.
Step 8. Assume PSX Participant A quoted at the NBBO at least 25% of
the time during Market Hours in an average of at least 300 securities
in Tape C through MPID 1, in accordance with section (b) above.
The following table represents the proposed MDR pool thresholds:
------------------------------------------------------------------------
Tape A Tape C
------------------------------------------------------------------------
$110,000 $200,000
------------------------------------------------------------------------
Under this Example, assume that the quarterly MDR paid to the
Exchange is apportioned as follows:
------------------------------------------------------------------------
Tape A Tape C
------------------------------------------------------------------------
$110,000 $350,000
------------------------------------------------------------------------
Under this Example, the Tape C pool has excess MDR in the amount of
$150,000. However, the Tape A pool has no excess MDR because the actual
MDR received in the Tape A pool was equal to its $110,000 threshold.
Thus, PSX Participants may be paid MDR Rebates for attributed eligible
quoting activity from 40% of the excess MDR in the Tape C pool, which
is $60,000.
The attributed MDR for PSX Participant A in MPID 1 is $1,500: 2.5%
x 60,000. Sincethe attributed MDR is greater than $500, PSX Participant
A would receive an MDRpayment in the amount of $1,500.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\6\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\7\ 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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\6\ 15 U.S.C. 78f(b).
\7\ 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'. . ..'' \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. As such, the
proposal represents a reasonable attempt by the Exchange to increase
its liquidity and market share relative to its competitors.
The Exchange believes it is reasonable, equitable, and not unfairly
discriminatory for the Exchange to adopt a PSX MDR Rebate program that
provides for sharing of Excess MDR with PSX Participants in proportion
to their respective eligible quoting activity in Tape A and C
securities, as described above. The Exchange believes the proposal is
reasonable as it will provide an incentive for PSX Participants to
increase quoting in displayed liquidity in Tape A and C securities on
the Exchange. An increase in displayed liquidity and order flow to the
Exchange will, in turn, improve the quality of the market and increase
its attractiveness to existing and prospective participants. In
addition, the proposal is equitable and not unfairly discriminatory as
the proposal would equitably allocate MDR Rebates among PSX
Participants by paying MDR Rebates according to the total quoting
activity in Tape A and C securities attributable to a PSX Participant
in any given calendar quarter. The MDR Rebates are available to all PSX
Participants.
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.
[[Page 39671]]
Intramarket Competition
The Exchange does not believe that its proposal will place any
category of Exchange participant at a competitive disadvantage.
As noted above, the Exchange's proposal is intended to have market-
improving effects, by increasing displayed liquidity and order flow to
the Exchange, to the benefit of all participants. The Exchange notes
that its participants 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 50% of industry
volume.
In sum, if the change proposed herein is 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
change 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
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#daa8afb6bff7b9b5b7b7bfb4aea99aa9bfb9f4bdb5ac"><span class="__cf_email__" data-cfemail="097b7c656c246a6664646c677d7a497a6c6a276e667f">[email protected]</span></a>. Please include
file number SR-Phlx-2024-18 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-2024-18. 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,
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-2024-18, and should
be submitted on or before May 30, 2024.
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,
Deputy Secretary.
[FR Doc. 2024-10081 Filed 5-8-24; 8:45 am]
BILLING CODE 8011-01-P
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