Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Securities Transaction Credits Applicable to FINRA/Nasdaq TRF Participants, 69402-69405 [2019-27198]
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69402
Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Notices
On September 13, 2019, the
Commission issued an order instituting
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change (‘‘OIP’’).7 The Commission
received one comment letter, from
Nasdaq, in response to the OIP.8
Section 19(b)(2) of the Act 9 provides
that, after initiating disapproval
proceedings, the Commission shall issue
an order approving or disapproving the
proposed rule change not later than 180
days after the date of publication of
notice of filing of the proposed rule
change. The Commission may extend
the period for issuing an order
approving or disapproving the proposed
rule change, however, by not more than
60 days if the Commission determines
that a longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for notice and
comment in the Federal Register on
June 18, 2019. The 180th day after
publication of the Notice is December
15, 2019, and February 13, 2020 is an
additional 60 days from that date.
The Commission finds it appropriate
to designate a longer period within
which to issue an order approving or
disapproving the proposed rule change
so that it has sufficient time to consider
the proposed rule change and the
comment letter. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,10 designates
February 13, 2020 as the date by which
the Commission shall either approve or
disapprove the proposed rule change
(File No. SR–NASDAQ–2019–049).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–27196 Filed 12–17–19; 8:45 am]
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BILLING CODE 8011–01–P
institute proceedings to determine whether to
disapprove the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 86969
(September 13, 2019), 84 FR 49353 (September 19,
2019).
8 See letter from Jeffrey S. Davis, Senior Vice
President and Senior Deputy General Counsel,
Nasdaq, to Vanessa A. Countryman, Secretary,
Commission, dated November 12, 2019.
9 15 U.S.C. 78s(b)(2).
10 Id.
11 17 CFR 200.30–3(a)(57).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87725; File No. SR–FINRA–
2019–029]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Modify the Securities
Transaction Credits Applicable to
FINRA/Nasdaq TRF Participants
December 12, 2019.
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 December
5, 2019, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) 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 FINRA. FINRA has
designated the proposed rule change as
‘‘establishing or changing a due, fee or
other charge’’ under Section
19(b)(3)(A)(ii) of the Act 3 and Rule 19b–
4(f)(2) thereunder,4 which renders the
proposal effective upon receipt of this
filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 7610A to modify the securities
transaction credits that apply to FINRA
members that utilize the FINRA/Nasdaq
Trade Reporting Facility Carteret (the
‘‘FINRA/Nasdaq TRF Carteret’’) and the
FINRA/Nasdaq Trade Reporting Facility
Chicago (the ‘‘FINRA/Nasdaq TRF
Chicago’’) (collectively, the ‘‘FINRA/
Nasdaq TRFs’’).
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA 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,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
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rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA 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 FINRA/Nasdaq TRFs are facilities
of FINRA that are operated by Nasdaq,
Inc. (‘‘Nasdaq’’). In connection with the
establishment of the FINRA/Nasdaq
TRFs, FINRA and Nasdaq entered into
a limited liability company agreement
(the ‘‘LLC Agreement’’). Under the LLC
Agreement, FINRA, the ‘‘SRO Member,’’
has sole regulatory responsibility for the
FINRA/Nasdaq TRFs. Nasdaq, the
‘‘Business Member,’’ is primarily
responsible for the management of the
FINRA/Nasdaq TRFs’ business affairs,
including establishing pricing for use of
the FINRA/Nasdaq TRFs, to the extent
those affairs are not inconsistent with
the regulatory and oversight functions of
FINRA. Additionally, the Business
Member is obligated to pay the cost of
regulation and is entitled to the profits
and losses, if any, derived from the
operation of the FINRA/Nasdaq TRFs.
Pursuant to FINRA Rule 7610A,
FINRA members that report over-thecounter (‘‘OTC’’) trades in NMS stocks
to the FINRA/Nasdaq TRFs
(‘‘Participants’’) may qualify for revenue
sharing payments, in the form of
transaction credits, based upon those
transactions that are attributable to such
Participants.5 This rule is administered
by Nasdaq, in its capacity as the
Business Member and operator of the
FINRA/Nasdaq TRFs on behalf of
FINRA.6
Rule 7610A sets forth tiered schedules
of transaction credits that describe, for
reports in transactions in each Tape (A,
B and C), the percentage of attributable
revenue sharing that a Participant will
receive if it achieves specified
percentages of market share. The
schedules provide for ‘‘Retail
Participants’’ 7 to receive higher revenue
5 A transaction is attributable to a Participant if
the Participant is identified as the Executing Party
in a trade report submitted to a FINRA/Nasdaq TRF
that the FINRA/Nasdaq TRF subsequently submits
to the Consolidated Tape Association or the Nasdaq
Securities Information Processor. Credits are paid
on a quarterly basis.
6 FINRA’s oversight of this function performed by
the Business Member is conducted through a
recurring assessment and review of TRF operations
by an outside independent audit firm.
7 Supplementary Material .01 to Rule 7620A
defines a ‘‘Retail Participant’’ as a ‘‘participant in
the FINRA/Nasdaq Trade Reporting Facility for
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Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Notices
sharing percentages than other FINRA
members at the two lowest tiers for
transactions in each Tape. For reference
69403
purposes, the existing transaction credit
schedules are as follows:
TAPE A
Percent of
attributable
revenue shared
Percentage market share
Greater than or equal to 2% ........................................................................................................................
Less than 2% but greater than or equal to 1% ...........................................................................................
Less than 1% but greater than or equal to 0.50% ......................................................................................
Less than 0.50% but greater than or equal to 0.10% .................................................................................
Less than 0.10% ..........................................................................................................................................
98
95
75
20
0
Percent of
attributable
revenue shared
(retail
participants)
98
95
75
75
75
TAPE B
Percent of
attributable
revenue shared
Percentage market share
Greater than or equal to 2% ........................................................................................................................
Less than 2% but greater than or equal to 1% ...........................................................................................
Less than 1% but greater than or equal to 0.35% ......................................................................................
Less than 0.35% but greater than or equal to 0.10% .................................................................................
Less than 0.10% ..........................................................................................................................................
98
90
70
10
0
Percent of
attributable
revenue shared
(retail
participants)
98
90
70
70
70
TAPE C
Percent of
attributable
revenue shared
Percentage market share
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Greater than or equal to 2% ........................................................................................................................
Less than 2% but greater than or equal to 1% ...........................................................................................
Less than 1% but greater than or equal to 0.50% ......................................................................................
Less than 0.50% but greater than or equal to 0.10% .................................................................................
Less than 0.10% ..........................................................................................................................................
98
95
75
20
0
Percent of
attributable
revenue shared
(retail
participants)
98
95
75
75
75
Nasdaq, as the Business Member, has
determined to modify the schedule of
transaction credits applicable to the
FINRA/Nasdaq TRFs to provide a more
competitive distribution of pricing
incentives and benefits among
Participants to the extent that they
engage in a substantial volume of
Executing Party activity. The proposed
amended schedule is also designed to be
more competitive with the schedule of
transaction credits applicable to the
other FINRA TRF.8 FINRA proposes to
amend Rule 7610A accordingly.
The proposed rule change would
amend the third revenue sharing tier for
both Retail and non-Retail Participants
(i.e., Participants that achieve market
shares of less than 1.0% but greater than
or equal to 0.50% for Tape A and C
securities, and less than 1.0% but
greater than or equal to 0.35% for Tape
B securities) by increasing the
percentage of revenue shared with
Participants that qualify for the tier.
Specifically, Participants that achieve a
market share of less than 1.0% but
greater than or equal to 0.50% in
securities in Tapes A and C (or greater
than or equal to 0.35% for Tape B
securities) will be eligible to receive
85% of attributable revenues for
securities in all Tapes.
Nasdaq, as the Business Member,
estimates that 13 Participants currently
qualify for the existing revenue sharing
tier. Assuming that these Participants
continue to qualify for this tier, Nasdaq
estimates, based on current trade
reporting activity, that all of these
Participants will experience an increase
in the amount of the credits that they
receive. Based on a review of trade
reporting activity for the period July
2018 to June 2019, Nasdaq estimates
that these Participants could potentially
receive between $10,000 and $190,000
more credits than they receive today. No
new product or service will accompany
the proposed changes to revenue
sharing credits.
FINRA has filed the proposed rule
change for immediate effectiveness. The
operative date will be January 1, 2020.
which substantially all of its trade reporting activity
on the FINRA/Nasdaq Trade Reporting Facility
comprises Retail Orders.’’ The term ‘‘Retail Order’’
is also defined under Rule 7620A.01.
8 Pursuant to FINRA Rule 7610B, the FINRA/
NYSE TRF presently shares with its participants,
for all Tapes, 100% of attributable revenue for
market shares greater than or equal to 2.0%, 95%
of attributable revenue for market shares greater
than or equal to 0.5% but less than 2.0%, 85% of
attributable revenue for market shares greater than
or equal to 0.1% but less than 0.5%, and 0% of
attributable revenue for market shares of less than
0.1%.
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Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Notices
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(5) of the Act,9 which
requires, among other things, that
FINRA rules provide for the equitable
allocation of reasonable dues, fees and
other charges among members and
issuers and other persons using any
facility or system that FINRA operates
or controls. All similarly situated
members are subject to the same fee
structure and access to the FINRA/
Nasdaq TRFs is offered on fair and
nondiscriminatory terms.
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The Proposal Is Reasonable
The proposed change to modify the
revenue sharing credits for the FINRA/
Nasdaq TRFs is reasonable in several
respects. As a threshold matter, the
FINRA/Nasdaq TRFs are subject to
significant competitive forces in the
market for trade reporting services for
OTC trades in NMS stocks that
constrain its pricing determinations in
that market. The competing FINRA TRF
presently offers a similar tiered pricing
structure to that of the FINRA/Nasdaq
TRFs, including a schedule of revenue
sharing credits that apply based upon its
participants achieving certain levels of
market share.10 Participants can freely
and do shift their trade reporting
activity between the various FINRA
TRFs in response to pricing, product or
service changes. The proposed rule
change renders more generous the
FINRA/Nasdaq TRFs’ revenue sharing
credits to maintain and increase activity
and market share.
The Proposal Is an Equitable Allocation
of Credits and Charges
The proposed rule change will
allocate revenue sharing credits fairly
among FINRA/Nasdaq TRF Participants.
Nasdaq, as the Business Member, has
determined to increase the revenue
sharing credits that the FINRA/Nasdaq
TRFs offer to their Participants as a
means of rewarding those Participants
that engage in substantial amounts of
trade reporting activity on the FINRA/
Nasdaq TRFs, reducing the costs to such
Participants of reporting trades to the
FINRA/Nasdaq TRFs, and improving the
competitive standing of the FINRA/
Nasdaq TRFs relative to their
competitor, which offers similar credits
to its participants. Nasdaq believes it is
equitable to target such increases only to
9 15
U.S.C. 78o–3(b)(5).
the FINRA/Nasdaq TRFs and the
FINRA/NYSE TRF are operated by different
business members competing for market share,
FINRA does not take a position on whether the
pricing for one TRF is more favorable or
competitive than the pricing for the other TRF.
10 Because
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Participants with market shares of less
than 1.0% but greater than or equal to
0.50% (for securities in Tapes A and C)
and 0.35% (for securities in Tape B).
The tier selected accounts for 5% of the
Transaction Credit eligible Participant
base and 17% of trade reporting volume
of the FINRA/Nasdaq TRFs and it is a
tier that is particularly vulnerable to
competition from the other FINRA TRF,
which presently offers to share 95% of
attributable revenues with its
participants that achieve market shares
of equal to or greater than 0.5% and less
than 2.0%. The proposed rule change
will render the FINRA/Nasdaq TRFs
more competitive with its competitors
in terms of revenue sharing for
Participants in this market segment.
The Proposal Is Not Unfairly
Discriminatory
The proposed rule change is not
unfairly discriminatory. As an initial
matter, nothing about the volume-based
tiered pricing model of the FINRA/
Nasdaq TRFs 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 FINRA TRFs have long
employed under FINRA rules filed with
the Commission.
Nasdaq, as the Business Member,
intends for the proposal to increase
incentives to FINRA/Nasdaq TRF
Participants to engage in substantial
trade reporting activity on the FINRA/
Nasdaq TRFs. The increased incentive
will be available to all Participants with
market shares of less than 1.0% but
greater than or equal to 0.50% (Tapes A
and C securities) and 0.35% (Tape B
securities).
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule changes will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intramarket Competition
Nasdaq, as the Business Member, does
not believe that the proposed rule
change will place any category of
Participant at a competitive
disadvantage. As discussed above, all
Participants that currently qualify for
credits will continue to qualify for
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credits under the proposed rule change
and will receive higher rates of credits
than they do today. Meanwhile,
Participants that do not qualify for the
proposed tiers (or that do not qualify for
the higher of the proposed tiers) may
grow or modify their businesses so that
they will do so. Participants are free to
report their OTC trades in NMS stocks
to the competing TRF to the extent they
believe that the credits provided are not
attractive. Price competition between
the TRFs is substantial, with trade
reporting activity and market share
moving freely between them in reaction
to fee and credit changes.
Intermarket Competition
Nasdaq believes that the proposed
modifications to the schedule of credits
applicable to the FINRA/Nasdaq TRFs
will not impose a burden on
competition among the FINRA trade
reporting facilities because use of the
FINRA/Nasdaq TRFs is completely
voluntary and subject to competition.11
Currently, with the exception of FINRA/
Nasdaq TRF Retail Participants in the
lowest tier, the competing FINRA TRF
provides higher transaction credits to its
participants than the FINRA/Nasdaq
TRFs for engaging in similar levels of
trade reporting activity. Nasdaq, as the
Business Member, seeks to increase the
credits that the FINRA/Nasdaq TRFs
provide to market participants so that
these credits are more competitive.
Nasdaq believes that the proposed
increase in credits is necessary to retain
reported volume. Indeed, firms that
report OTC trades in NMS stocks can
readily favor competing facilities if they
deem fee levels at a particular facility to
be excessive, or credit opportunities
available at other facilities to be more
favorable.
The competition, in turn, is free to
modify its own fees and credits in
response to this proposed rule change to
maintain or increase its attractiveness to
participants. Accordingly, Nasdaq
believes that the risk that this proposed
rule change will impose any burden on
intermarket competition is extremely
limited.
If market participants determine that
the changes proposed herein are
inadequate or unattractive, it is likely
that the FINRA/Nasdaq TRFs will lose
market share as a result. Accordingly,
the proposed rule change will not
impair the ability of the other FINRA
11 Because the FINRA/Nasdaq TRFs and the
FINRA/NYSE TRF are operated by different
business members competing for market share,
FINRA does not take a position on whether the
pricing for one TRF is more favorable or
competitive than the pricing for the other TRF.
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Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Notices
TRF to maintain its competitive
standing.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor 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)
of the Act 12 and paragraph (f)(2) of Rule
19b–4 thereunder.13 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 necessary or appropriate in the
public interest, for the protection of
investors, or 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
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2019–029 on the subject line.
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Paper Comments
• 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–FINRA–2019–029. 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 (https://www.sec.gov/
rules/sro.shtml). 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 such
filing also will be available for
inspection and copying at the principal
office of FINRA. 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–FINRA–
2019–029 and should be submitted on
or before January 8, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–27198 Filed 12–17–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87728; File No. SR–Phlx–
2019–51]
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The Exchange proposes to delete Phlx
Rules 800–853, 867 and 868, under the
title ‘‘Standards for Trading Securities
Pursuant to Unlisted Trading
Privileges.’’ Phlx Rules 860–866 are
being relocated to new PSX Rules 3236–
3242, respectively. The Exchange
proposes to amend Phlx Rule 1000,
titled ‘‘Applicability, Definitions and
References,’’ PSX Rule 3100, titled
‘‘Limit Up-Limit Down Plan and
Trading Halts on PSX,’’ and Rule 3202,
titled ‘‘Application of Other Rules of the
Exchange.’’ The Exchange proposes to
adopt a new PSX Rule 3204, titled
‘‘Securities Traded under Unlisted
Trading Privileges,’’ PSX Rule 3232,
titled ‘‘Advertising Practices,’’ PSX Rule
3233, titled ‘‘Prevention of the Misuse of
Material, Nonpublic Information’’ and
PSX Rule 3234, titled ‘‘Additional
Requirements for Securities Issued by
Nasdaq or its Affiliates.’’ Phlx Rule 136,
titled ‘‘Trading Halts in Certain
Exchange Traded Funds,’’ is being
deleted and replaced with new
proposed rules. PSX Rule 3234 is being
added to the PSX Rules to specify that
equity Affiliate Securities will not be
listed on the Exchange. Finally, the
Exchange is amending Phlx Rule 990,
‘‘Additional Requirements for Securities
Listed on the Exchange Issued by
Nasdaq or its Affiliates’’ to make clear
the rule is applicable to equities and
options.
December 12, 2019.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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 December
3, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
U.S.C. 78s(b)(3)(A).
13 17 CFR 240.19b–4(f)(2).
comments on the proposed rule change
from interested persons.
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Securities
Traded Pursuant to Unlisted Trading
Privileges
14 17
12 15
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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.
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]]>Agencies
[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69402-69405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27198]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87725; File No. SR-FINRA-2019-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the Securities Transaction Credits
Applicable to FINRA/Nasdaq TRF Participants
December 12, 2019.
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 December 5, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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 FINRA. FINRA has
designated the proposed rule change as ``establishing or changing a
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon receipt of this filing by the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 7610A to modify the
securities transaction credits that apply to FINRA members that utilize
the FINRA/Nasdaq Trade Reporting Facility Carteret (the ``FINRA/Nasdaq
TRF Carteret'') and the FINRA/Nasdaq Trade Reporting Facility Chicago
(the ``FINRA/Nasdaq TRF Chicago'') (collectively, the ``FINRA/Nasdaq
TRFs'').
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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 FINRA/Nasdaq TRFs are facilities of FINRA that are operated by
Nasdaq, Inc. (``Nasdaq''). In connection with the establishment of the
FINRA/Nasdaq TRFs, FINRA and Nasdaq entered into a limited liability
company agreement (the ``LLC Agreement''). Under the LLC Agreement,
FINRA, the ``SRO Member,'' has sole regulatory responsibility for the
FINRA/Nasdaq TRFs. Nasdaq, the ``Business Member,'' is primarily
responsible for the management of the FINRA/Nasdaq TRFs' business
affairs, including establishing pricing for use of the FINRA/Nasdaq
TRFs, to the extent those affairs are not inconsistent with the
regulatory and oversight functions of FINRA. Additionally, the Business
Member is obligated to pay the cost of regulation and is entitled to
the profits and losses, if any, derived from the operation of the
FINRA/Nasdaq TRFs.
Pursuant to FINRA Rule 7610A, FINRA members that report over-the-
counter (``OTC'') trades in NMS stocks to the FINRA/Nasdaq TRFs
(``Participants'') may qualify for revenue sharing payments, in the
form of transaction credits, based upon those transactions that are
attributable to such Participants.\5\ This rule is administered by
Nasdaq, in its capacity as the Business Member and operator of the
FINRA/Nasdaq TRFs on behalf of FINRA.\6\
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\5\ A transaction is attributable to a Participant if the
Participant is identified as the Executing Party in a trade report
submitted to a FINRA/Nasdaq TRF that the FINRA/Nasdaq TRF
subsequently submits to the Consolidated Tape Association or the
Nasdaq Securities Information Processor. Credits are paid on a
quarterly basis.
\6\ FINRA's oversight of this function performed by the Business
Member is conducted through a recurring assessment and review of TRF
operations by an outside independent audit firm.
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Rule 7610A sets forth tiered schedules of transaction credits that
describe, for reports in transactions in each Tape (A, B and C), the
percentage of attributable revenue sharing that a Participant will
receive if it achieves specified percentages of market share. The
schedules provide for ``Retail Participants'' \7\ to receive higher
revenue
[[Page 69403]]
sharing percentages than other FINRA members at the two lowest tiers
for transactions in each Tape. For reference purposes, the existing
transaction credit schedules are as follows:
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\7\ Supplementary Material .01 to Rule 7620A defines a ``Retail
Participant'' as a ``participant in the FINRA/Nasdaq Trade Reporting
Facility for which substantially all of its trade reporting activity
on the FINRA/Nasdaq Trade Reporting Facility comprises Retail
Orders.'' The term ``Retail Order'' is also defined under Rule
7620A.01.
Tape A
------------------------------------------------------------------------
Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
------------------------------------------------------------------------
Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 95 95
equal to 1%......................
Less than 1% but greater than or 75 75
equal to 0.50%...................
Less than 0.50% but greater than 20 75
or equal to 0.10%................
Less than 0.10%................... 0 75
------------------------------------------------------------------------
Tape B
------------------------------------------------------------------------
Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
------------------------------------------------------------------------
Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 90 90
equal to 1%......................
Less than 1% but greater than or 70 70
equal to 0.35%...................
Less than 0.35% but greater than 10 70
or equal to 0.10%................
Less than 0.10%................... 0 70
------------------------------------------------------------------------
Tape C
------------------------------------------------------------------------
Percent of
Percent of attributable
Percentage market share attributable revenue shared
revenue shared (retail
participants)
------------------------------------------------------------------------
Greater than or equal to 2%....... 98 98
Less than 2% but greater than or 95 95
equal to 1%......................
Less than 1% but greater than or 75 75
equal to 0.50%...................
Less than 0.50% but greater than 20 75
or equal to 0.10%................
Less than 0.10%................... 0 75
------------------------------------------------------------------------
Nasdaq, as the Business Member, has determined to modify the
schedule of transaction credits applicable to the FINRA/Nasdaq TRFs to
provide a more competitive distribution of pricing incentives and
benefits among Participants to the extent that they engage in a
substantial volume of Executing Party activity. The proposed amended
schedule is also designed to be more competitive with the schedule of
transaction credits applicable to the other FINRA TRF.\8\ FINRA
proposes to amend Rule 7610A accordingly.
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\8\ Pursuant to FINRA Rule 7610B, the FINRA/NYSE TRF presently
shares with its participants, for all Tapes, 100% of attributable
revenue for market shares greater than or equal to 2.0%, 95% of
attributable revenue for market shares greater than or equal to 0.5%
but less than 2.0%, 85% of attributable revenue for market shares
greater than or equal to 0.1% but less than 0.5%, and 0% of
attributable revenue for market shares of less than 0.1%.
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The proposed rule change would amend the third revenue sharing tier
for both Retail and non-Retail Participants (i.e., Participants that
achieve market shares of less than 1.0% but greater than or equal to
0.50% for Tape A and C securities, and less than 1.0% but greater than
or equal to 0.35% for Tape B securities) by increasing the percentage
of revenue shared with Participants that qualify for the tier.
Specifically, Participants that achieve a market share of less than
1.0% but greater than or equal to 0.50% in securities in Tapes A and C
(or greater than or equal to 0.35% for Tape B securities) will be
eligible to receive 85% of attributable revenues for securities in all
Tapes.
Nasdaq, as the Business Member, estimates that 13 Participants
currently qualify for the existing revenue sharing tier. Assuming that
these Participants continue to qualify for this tier, Nasdaq estimates,
based on current trade reporting activity, that all of these
Participants will experience an increase in the amount of the credits
that they receive. Based on a review of trade reporting activity for
the period July 2018 to June 2019, Nasdaq estimates that these
Participants could potentially receive between $10,000 and $190,000
more credits than they receive today. No new product or service will
accompany the proposed changes to revenue sharing credits.
FINRA has filed the proposed rule change for immediate
effectiveness. The operative date will be January 1, 2020.
[[Page 69404]]
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\9\ which requires, among
other things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. All similarly situated members are subject to the same fee
structure and access to the FINRA/Nasdaq TRFs is offered on fair and
nondiscriminatory terms.
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\9\ 15 U.S.C. 78o-3(b)(5).
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The Proposal Is Reasonable
The proposed change to modify the revenue sharing credits for the
FINRA/Nasdaq TRFs is reasonable in several respects. As a threshold
matter, the FINRA/Nasdaq TRFs are subject to significant competitive
forces in the market for trade reporting services for OTC trades in NMS
stocks that constrain its pricing determinations in that market. The
competing FINRA TRF presently offers a similar tiered pricing structure
to that of the FINRA/Nasdaq TRFs, including a schedule of revenue
sharing credits that apply based upon its participants achieving
certain levels of market share.\10\ Participants can freely and do
shift their trade reporting activity between the various FINRA TRFs in
response to pricing, product or service changes. The proposed rule
change renders more generous the FINRA/Nasdaq TRFs' revenue sharing
credits to maintain and increase activity and market share.
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\10\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are
operated by different business members competing for market share,
FINRA does not take a position on whether the pricing for one TRF is
more favorable or competitive than the pricing for the other TRF.
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The Proposal Is an Equitable Allocation of Credits and Charges
The proposed rule change will allocate revenue sharing credits
fairly among FINRA/Nasdaq TRF Participants. Nasdaq, as the Business
Member, has determined to increase the revenue sharing credits that the
FINRA/Nasdaq TRFs offer to their Participants as a means of rewarding
those Participants that engage in substantial amounts of trade
reporting activity on the FINRA/Nasdaq TRFs, reducing the costs to such
Participants of reporting trades to the FINRA/Nasdaq TRFs, and
improving the competitive standing of the FINRA/Nasdaq TRFs relative to
their competitor, which offers similar credits to its participants.
Nasdaq believes it is equitable to target such increases only to
Participants with market shares of less than 1.0% but greater than or
equal to 0.50% (for securities in Tapes A and C) and 0.35% (for
securities in Tape B). The tier selected accounts for 5% of the
Transaction Credit eligible Participant base and 17% of trade reporting
volume of the FINRA/Nasdaq TRFs and it is a tier that is particularly
vulnerable to competition from the other FINRA TRF, which presently
offers to share 95% of attributable revenues with its participants that
achieve market shares of equal to or greater than 0.5% and less than
2.0%. The proposed rule change will render the FINRA/Nasdaq TRFs more
competitive with its competitors in terms of revenue sharing for
Participants in this market segment.
The Proposal Is Not Unfairly Discriminatory
The proposed rule change is not unfairly discriminatory. As an
initial matter, nothing about the volume-based tiered pricing model of
the FINRA/Nasdaq TRFs 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 FINRA TRFs
have long employed under FINRA rules filed with the Commission.
Nasdaq, as the Business Member, intends for the proposal to
increase incentives to FINRA/Nasdaq TRF Participants to engage in
substantial trade reporting activity on the FINRA/Nasdaq TRFs. The
increased incentive will be available to all Participants with market
shares of less than 1.0% but greater than or equal to 0.50% (Tapes A
and C securities) and 0.35% (Tape B securities).
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule changes will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
Nasdaq, as the Business Member, does not believe that the proposed
rule change will place any category of Participant at a competitive
disadvantage. As discussed above, all Participants that currently
qualify for credits will continue to qualify for credits under the
proposed rule change and will receive higher rates of credits than they
do today. Meanwhile, Participants that do not qualify for the proposed
tiers (or that do not qualify for the higher of the proposed tiers) may
grow or modify their businesses so that they will do so. Participants
are free to report their OTC trades in NMS stocks to the competing TRF
to the extent they believe that the credits provided are not
attractive. Price competition between the TRFs is substantial, with
trade reporting activity and market share moving freely between them in
reaction to fee and credit changes.
Intermarket Competition
Nasdaq believes that the proposed modifications to the schedule of
credits applicable to the FINRA/Nasdaq TRFs will not impose a burden on
competition among the FINRA trade reporting facilities because use of
the FINRA/Nasdaq TRFs is completely voluntary and subject to
competition.\11\ Currently, with the exception of FINRA/Nasdaq TRF
Retail Participants in the lowest tier, the competing FINRA TRF
provides higher transaction credits to its participants than the FINRA/
Nasdaq TRFs for engaging in similar levels of trade reporting activity.
Nasdaq, as the Business Member, seeks to increase the credits that the
FINRA/Nasdaq TRFs provide to market participants so that these credits
are more competitive. Nasdaq believes that the proposed increase in
credits is necessary to retain reported volume. Indeed, firms that
report OTC trades in NMS stocks can readily favor competing facilities
if they deem fee levels at a particular facility to be excessive, or
credit opportunities available at other facilities to be more
favorable.
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\11\ Because the FINRA/Nasdaq TRFs and the FINRA/NYSE TRF are
operated by different business members competing for market share,
FINRA does not take a position on whether the pricing for one TRF is
more favorable or competitive than the pricing for the other TRF.
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The competition, in turn, is free to modify its own fees and
credits in response to this proposed rule change to maintain or
increase its attractiveness to participants. Accordingly, Nasdaq
believes that the risk that this proposed rule change will impose any
burden on intermarket competition is extremely limited.
If market participants determine that the changes proposed herein
are inadequate or unattractive, it is likely that the FINRA/Nasdaq TRFs
will lose market share as a result. Accordingly, the proposed rule
change will not impair the ability of the other FINRA
[[Page 69405]]
TRF to maintain its competitive standing.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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) of the Act \12\ and paragraph (f)(2) of Rule 19b-4
thereunder.\13\ 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
necessary or appropriate in the public interest, for the protection of
investors, or 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.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(2).
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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
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2019-029 on the subject line.
Paper Comments
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-FINRA-2019-029. 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 (https://www.sec.gov/rules/sro.shtml).
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 such filing also will be available for inspection
and copying at the principal office of FINRA. 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-FINRA-2019-029 and should be submitted
on or before January 8, 2020.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27198 Filed 12-17-19; 8:45 am]
BILLING CODE 8011-01-P
