Notice2024-15766
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Pricing Schedule at Equity 7, Section 114(h)
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Published
July 18, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 138 (Thursday, July 18, 2024)</title>
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[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Notices]
[Pages 58432-58436]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-15766]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100517; File No. SR-NASDAQ-2024-035]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Its Pricing Schedule at Equity 7, Section 114(h)
July 12, 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 July 1, 2024, 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 pricing schedule at
Equity 7, Section 114(h), 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
[[Page 58433]]
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
fees that pertain to accessing liquidity set forth in Section 114(e)
and rebates that pertain to providing liquidity set forth in Section
114(g).
Presently, the Exchange provides its members with several market
quality incentive programs in Equity 7, Section 114. One of these
programs is the Qualified Market Maker (``QMM'') Program, which
provides supplemental incentives to members that meet certain quality
standards in acting as market makers for securities on the Exchange.
Pursuant to Equity 7, Section 114(e), a member that qualifies as a QMM
is entitled to receive a rebate per share executed with respect to all
displayed orders (other than Designated Retail Orders, as defined in
Equity 7, Section 118) in securities priced at $1 or more per share
that provide liquidity in each of Tapes A, B, and C. Such a rebate is
in addition to any rebate payable under Equity 7, Section 118(a).
Specifically, the Exchange offers two tiers of rebates to QMMs (``Tier
1'' and ``Tier 2'').
Among other incentives, the QMM Program also provides for fee
incentives in Equity 7, Section 114(e). Specifically, Nasdaq will
charge a QMM a fee of $0.0030 per share executed for orders in Nasdaq-
listed securities priced at $1 or more per share that access liquidity
on the Nasdaq Market Center, and charge a QMM a fee of $0.00295 per
share executed for orders in securities listed on exchanges other than
Nasdaq priced at $1 or more per share that access liquidity on the
Nasdaq Market Center; provided, however, that the QMM's volume of
liquidity added through one or more of its Nasdaq Market Center MPIDs
during the month (as a percentage of Consolidated Volume) is not less
than 1.00%. Nasdaq will charge a QMM that meets the criteria of Tier 2
a fee of $0.0029 per share executed for orders in securities listed on
exchanges other than Nasdaq priced at $1 or more per share that access
liquidity on the Nasdaq Market Center if the QMM has a combined
Consolidated Volume (adding and removing liquidity) of at least 3.70%,
MOC/LOC volume greater than 0.35% of Consolidated Volume, and provides
0.15% or more of Consolidated Volume through midpoint orders.
Another market quality incentive program provided by the Exchange
is the NBBO Program, in Equity 7, Section 114(g). Under the NBBO
Program, Nasdaq provides a rebate per share executed with respect to
all other displayed orders (other than Designated Retail Orders, as
defined in Equity 7, Section 118) in securities priced at $1 or more
per share that provide liquidity, establish the NBBO, and displayed a
quantity of at least one round lot at the time of execution. The rebate
is in addition to any rebate or credit payable under Equity 7, Section
118(a) and other programs under Equity 7, Section 114. This rebate is
provided to executions from orders originating on ports meeting the
following requirements. To qualify for the $0.0004 per share executed
NBBO Program rebate in NYSE-listed securities and in securities listed
on exchanges other than Nasdaq and NYSE, a member must execute shares
of liquidity provided in all securities through one or more of its
Nasdaq Market Center MPIDs that represents 1.0% or more of Consolidated
Volume during the month and the order must have been entered on a port
that has a ratio of at least 25% NBBO liquidity provided \3\ to
liquidity provided by displayed quotes/orders (other than Supplemental
Orders or Designated Retail Orders) during the month.
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\3\ NBBO liquidity provided means liquidity provided from orders
(other than Designated Retail Orders, as defined in Equity 7,
Section 118), that establish the NBBO, and displayed a quantity of
at least one round lot at the time of execution.
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Members may qualify for QMM Program and NBBO Program incentives
described above based, in part, upon their volume on the Exchange as a
percentage of total ``Consolidated Volume.'' Pursuant to Equity 7,
Section 114(h)(5), the term ``Consolidated Volume'' shares the meaning
of that term set forth in Equity 7, Section 118(a). Equity 7, Section
118(a) defines ``Consolidated Volume'' to mean 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 shall be 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.
Equity 7, Section 114(h)(5) also provides that, for purposes of
calculating a member's qualifications for Tiers 1 and 2 of the QMM
Program credits set forth in paragraph (e) of Section 114, 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 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
applying distinct qualifying volume thresholds to each Tier, as set
forth in paragraph (e). The Exchange will then assess which of these
two calculations would qualify the member for the most advantageous
credits for the month and then it will apply those credits to the
member.
The Exchange proposes to make clarifying and formatting changes to
Equity 7, Section 114(h)(5). First, the Exchange proposes to clarify
that the statement that ``Consolidated Volume'' shall have the same
meaning as the term has under Equity 7, Section 118(a) is subject to
certain qualifications that follow. In addition, the Exchange proposes
to add subsection (A) before the existing language regarding the
calculations for a member's qualifications for Tiers 1 and 2 of the QMM
Program credits and remove existing parentheses surrounding such
language.
In Equity 7, Section 114(h)(5)(B), the Exchange proposes to provide
an additional calculation for purposes of determining whether a member
qualifies for fees that pertain to accessing liquidity set forth in
Section 114(e) and rebates that pertain to providing liquidity set
forth in Section 114(g). Specifically, the Exchange proposes to provide
that, for purposes of calculating a member's qualifications for fees
that pertain to accessing liquidity set forth in Section 114(e) and
rebates that pertain to providing liquidity set forth in Section
114(g), 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
[[Page 58434]]
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 by 10%. The Exchange
will then assess which of these two calculations would qualify the
member for the most advantageous fees/rebates for the month and then it
will apply those to the member. Currently, the Exchange uses these
calculations for purposes of calculating a member's qualifications for
credits that pertain to providing liquidity set forth in Equity 7,
Section 118(a).
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 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.
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 fees that
pertain to accessing liquidity set forth in Section 114(e) and rebates
that pertain to providing liquidity set forth in Section 114(g). In
addition, as noted above, the Exchange proposes to increase the
distinct qualifying volume percentage thresholds by 10% for purposes of
the proposed calculation excluding sub-dollar volumes.\4\ 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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\4\ For example, the Exchange charges a QMM a fee of $0.00295
per share executed for orders in securities listed on exchanges
other than Nasdaq priced at $1 or more per share that access
liquidity on the Nasdaq Market Center; provided, however, that the
QMM's volume of liquidity added through one or more of its Nasdaq
Market Center MPIDs during the month (as a percentage of
Consolidated Volume) is not less than 1.00%. See Equity 7, Section
114(e). 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 fee using volumes excluding sub-dollar activity, the member
would need to provide 1.1% or more of total Consolidated Volume
during the month (i.e., 1% + (10%)(1%)).
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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 Exchange's proposed changes to its schedule of fees and 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'. . . .'' \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. Competing equity exchanges offer similar tiered pricing
structures and market quality incentive programs 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
[[Page 58435]]
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 to avoid such a penalty by determining whether
calculating member volume and total Consolidated Volume to include or
exclude sub-dollar volume \9\ would result in Exchange members
qualifying for the most advantageous incentives, and then applying the
calculations that would result in the incentives that are most
advantageous to each member. The Exchange believes it is reasonable to
limit the proposal by (1) applying the proposed calculation to
incentives that pertain to accessing liquidity set forth in Section
114(e) and rebates that pertain to providing liquidity set forth in
Section 114(g), and (2) 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 also
believes that it is appropriate to make the clarifying and formatting
changes described above to increase clarity and transparency in the
Rules, consistent with the public interest and the protection of
investors. 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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\9\ 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 fees and 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.\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#98eaedf4fdb5fbf7f5f5fdf6ecebd8ebfdfbb6fff7ee"><span class="__cf_email__" data-cfemail="b1c3c4ddd49cd2dedcdcd4dfc5c2f1c2d4d29fd6dec7">[email protected]</span></a>. Please include
file number SR-NASDAQ-2024-035 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-2024-035. 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
[[Page 58436]]
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 a.m. and 3
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-NASDAQ-2024-035 and should be submitted
on or before August 8, 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. 2024-15766 Filed 7-17-24; 8:45 am]
BILLING CODE 8011-01-P
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