Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Transaction Credits, at Equity 7, Section 118(a), 51518-51521 [2020-18202]
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51518
Federal Register / Vol. 85, No. 162 / Thursday, August 20, 2020 / Notices
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an Equity Member or an associated
person of the Equity Member able to
acquire control or influence over the
result or timing of the order’s
execution.140 According to the
Exchange, the execution of a member’s
order is determined solely by what
quotes and orders, bids, or offers are
present in the System at the time the
Equity Member submits the order, and
the order priority based on the MIAX
PEARL Equities Rules.141 Accordingly,
the Commission believes that an Equity
Member and its associated persons do
not participate in the execution of an
order submitted to the System.
The third condition states that the
order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
condition is satisfied when automated
exchange facilities are used, as long as
the design of these systems ensures that
members do not possess any special or
unique trading advantages in handling
their orders after transmitting them to
the exchange.142 The Exchange has
represented that the design of the
System ensures that no Equity Member
has any special or unique trading
advantage in the handling of its orders
after transmitting its orders to the
Exchange.143 Based on the Exchange’s
representation that the design of the
System ensures that no Equity Member
has any special or unique trading
advantage in the handling of its orders
after transmitting its orders to the
Exchange, the Commission believes that
140 See MIAX PEARL 11(a) Letter, supra note 138,
at 3–4.
141 See id. at 4. The member may cancel or
modify the order, or modify the instruction for
executing the order, but only from off the floor. The
Commission has stated that the non-participation
requirement is satisfied under such circumstances,
so long as such modifications or cancellations are
also transmitted from off the floor. See Securities
Exchange Act Release No. 14713 (April 27, 1978),
43 FR 18557 (May 1, 1978) (‘‘1978 Release’’) (stating
that the ‘‘non-participation requirement does not
prevent initiating members from canceling or
modifying orders (or the instructions pursuant to
which the initiating member wishes orders to be
executed) after the orders have been transmitted to
the executing member, provided that any such
instructions are also transmitted from off the
floor’’).
142 In considering the operation of automated
execution systems operated by an exchange, the
Commission has noted that while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release, supra note 139.
143 See MIAX PEARL 11(a) Letter, supra note 138,
at 4.
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the System satisfies this condition of
Rule 11a2–2(T).
Fourth, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.144 Equity
Members trading for covered accounts
over which they exercise investment
discretion must comply with this
condition in order to rely on the rule’s
exemption.145
III. Conclusion
144 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated persons thereof exercises
investment discretion, to furnish at least annually
to the person authorized to transact business for the
account a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d). See also 1978
Release, supra note 141 (stating ‘‘[t]he contractual
and disclosure requirements are designed to assure
that accounts electing to permit transaction-related
compensation do so only after deciding that such
arrangements are suitable to their interests’’).
145 See MIAX PEARL 11(a) Letter, supra note 138,
at 4.
146 15 U.S.C. 78s(b)(2).
Frm 00116
Fmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.147
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–18204 Filed 8–19–20; 8:45 am]
BILLING CODE 8011–01–P
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,146 that the
proposed rule change (SR–PEARL–
2020–03), as modified by Amendment
No. 1 thereto, be, and it hereby is,
approved.
Although the Commission’s approval
of the proposed rule change is final, and
the proposed rules are therefore
effective, it is further ordered that the
operation of MIAX PEARL Equities is
conditioned on the satisfaction of the
requirements below:
A. Participation in National Market
System Plans Relating to Equities
Trading. MIAX PEARL must join all
relevant national market system plans
related to equities trading, including: (1)
The Consolidated Tape Association
Plan, the Consolidated Quotation Plan,
and the Nasdaq UTP Plan (or any
successors thereto); (2) the National
Market System Plan to Address
Extraordinary Market Volatility; and (3)
the National Market System Plan
Establishing Procedures Under Rule 605
of Regulation NMS.
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B. Regulatory Services Agreement and
Rule 17d–2 Agreements. MIAX PEARL
must ensure that all necessary changes
are made to its RSA with FINRA and
must be a party to the multi-party Rule
17d–2 agreements applicable to equities
trading and equities market
surveillance.
C. Intermarket Surveillance Group.
MIAX PEARL must join the Intermarket
Surveillance Group.
D. Minor Rule Violation Plan. MIAX
PEARL must submit a Minor Rule
Violation Plan to address Equity
Members.
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89554; File No. SR–BX–
2020–018]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Exchange’s Transaction Credits, at
Equity 7, Section 118(a)
August 14, 2020.
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 August 3,
2020, Nasdaq BX, Inc. (‘‘BX’’ 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s transaction credits, at Equity
7, Section 118(a).
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/bx/rules, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
147 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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 operates on the ‘‘takermaker’’ model, whereby it generally
pays credits to members that take
liquidity and charges fees to members
that provide liquidity. Currently, the
Exchange has a schedule, at Equity 7,
Section 118(a), which consists of several
different credits that it provides for
orders in securities priced at $1 or more
per share that access liquidity on the
Exchange and several different charges
that it assesses for orders in such
securities that add liquidity on the
Exchange.
Over the course of the last few
months, the Exchange has experimented
with various reformulations of its
pricing schedule with the aim of
increasing activity on the Exchange,
improving market quality, and
increasing market share.3 Although
these changes have met with some
success, the Exchange has yet to achieve
the results it desires. Accordingly, the
Exchange proposes to again revise its
pricing schedule, in large part, in a
further attempt to improve the
attractiveness of the market to new and
existing participants.
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Description of the Changes
The Exchange proposes to revise its
schedule of credits to add one new
3 See Securities Exchange Act Release No. 34–
89114 (June 22, 2020), 85 FR 38418 (June 26, 2020)
(SR–BX–2020–011); Securities Exchange Act
Release No. 34–88857 (May 12, 2020), 85 FR 29766
(May 18, 2020) (SR–BX–2020–008); Securities
Exchange Act Release No. 34–87271 (October 10,
2019), 84 FR 55621 (October 17, 2019) (SR–BX–
2019–035); Securities Exchange Act Release No. 34–
87271 [sic] (September 24, 2019), 84 FR 57530
(October 25, 2019) (SR–BX–2019–031); Securities
Exchange Act Release No. 34–86120 (June 17,
2019); 84 FR 29270 (June 21, 2019) (SR–BX–2019–
026 [sic]); Securities Exchange Act Release No. 34–
85912 (May 22, 2019); 84 FR 24834 (May 29, 2019)
(SR–BX–2019–013).
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credit. Specifically, the Exchange
proposes to provide a $0.0018 per share
executed credit (for securities in Tapes
A and B) and a $0.0017 per share
executed credit (for securities in Tape C)
for orders that access liquidity
(excluding orders with Midpoint
pegging and excluding orders that
receive price improvement and execute
against an order with a Non-displayed
price) entered by a member that: (i)
Accesses at least 35% more liquidity, as
a percentage of total Consolidated
Volume during a month, than it did
during July 2020; (ii) accesses liquidity
equal to or exceeding 0.01% of total
Consolidated Volume during a month;
and (iii) adds liquidity equal to or
exceeding an average daily volume of
50,000 shares for the month. The
Exchange believes that that the
availability of the new credits will
incentivize members to grow their
existing level of liquidity removal
activity on the Exchange, and in
particular, to grow such levels relative
to a baseline of such activity. In doing
so, the Exchange intends to improve the
overall quality and attractiveness of the
Nasdaq BX market.
Impact of the Changes
Those participants that act as net
removers of liquidity from the Exchange
will benefit directly from the proposed
addition of new credits that would
apply to orders that remove liquidity
from the Exchange. Other participants
will also benefit from the new credit
insofar as any ensuing increase in
liquidity removal activity will improve
the overall quality of the market.
The Exchange notes that its proposal
is not otherwise targeted at or expected
to be limited in its applicability to a
specific segment(s) of market
participants nor will it apply differently
to different types of market participants.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,4 in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5)
of the Act,5 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among members and issuers and other
persons using any facility, and is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers. The
proposal is also consistent with Section
11A of the Act relating to the
4 15
5 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(4) and (5).
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51519
establishment of the national market
system for securities.
The Proposal is Reasonable
The Exchange’s proposed change to
its schedule of credits is reasonable in
several respects. As a threshold matter,
the Exchange is subject to significant
competitive forces in the market for
equity securities transaction services
that constrain its pricing determinations
in that market. The fact that this market
is competitive has long been recognized
by the courts. In NetCoalition v.
Securities and Exchange Commission,
the D.C. Circuit stated as follows: ‘‘[n]o
one disputes that competition for order
flow is ‘fierce.’ . . . As the SEC
explained, ‘[i]n the U.S. national market
system, buyers and sellers of securities,
and the broker-dealers that act as their
order-routing agents, have a wide range
of choices of where to route orders for
execution’; [and] ‘no exchange can
afford to take its market share
percentages for granted’ because ‘no
exchange possesses a monopoly,
regulatory or otherwise, in the execution
of order flow from broker
dealers’. . . .’’ 6
The Commission and the courts have
repeatedly expressed their preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. In Regulation NMS, while
adopting a series of steps to improve the
current market model, the Commission
highlighted the importance of market
forces in determining prices and SRO
revenues and, also, recognized that
current regulation of the market system
‘‘has been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 7
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, and it
represents a small percentage of the
overall market. It is also only one of
several taker-maker exchanges.
Competing equity exchanges offer
similar tiered pricing structures to that
of the Exchange, including schedules of
rebates and fees that apply based upon
6 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir.
2010) (quoting Securities Exchange Act Release No.
59039 (December 2, 2008), 73 FR 74770, 74782–83
(December 9, 2008) (SR–NYSEArca–2006–21)).
7 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
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members achieving certain volume
thresholds.8
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.9 Separately, the Exchange
has provided the SEC staff with
multiple examples of instances where
pricing changes by BX and other
exchanges have resulted in shifts in
exchange market share. Within the
foregoing context, the proposal
represents a reasonable attempt by the
Exchange to increase its liquidity and
market share relative to its competitors.
The Exchange has designed its
proposed schedule of credits to provide
increased overall incentives to members
to increase their liquidity removal
activity on the Exchange. An increase in
liquidity removal activity on the
Exchange will, in turn, improve the
quality of the Nasdaq BX market and
increase its attractiveness to existing
and prospective participants. Generally,
the proposed new credit will be
comparable to, if not favorable to, those
that its competitors provide.10
The Exchange notes that those
participants that are dissatisfied with
the proposed credit are free to shift their
order flow to competing venues that
offer them higher credits.
The Proposal is an Equitable Allocation
of Credits
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The Exchange believes its proposal
will allocate its proposed new credit
fairly among its market participants. It
is equitable for the Exchange to increase
its credits to participants whose orders
remove liquidity from the Exchange as
a means of incentivizing increased
liquidity removal activity on the
Exchange as well as to tie the receipt of
the credits to the member engaging in a
threshold volume of combined liquidity
removal activity on the Exchange.
Furthermore, it is equitable for the
Exchange to propose higher credits for
participants with orders in securities in
Tapes A and B than it proposes for
participants with orders in Tape C due
8 See CBOE EDGA Fee Schedule, at https://
markets.cboe.com/us/equities/membership/fee_
schedule/edga/; NYSE National Fee Schedule, at
https://www.nyse.com/publicdocs/nyse/regulation/
nyse/NYSE_National_Schedule_of_Fees.pdf.
9 The Exchange perceives no regulatory,
structural, or cost impediments to market
participants shifting order flow away from it. In
particular, the Exchange notes that these examples
of shifts in liquidity and market share, along with
many others, have occurred within the context of
market participants’ existing duties of Best
Execution and obligations under the Order
Protection Rule under Regulation NMS.
10 See n. 8, supra.
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to the Exchange’s desire to specifically
promote increased liquidity removal
activity in securities in Tapes A and B.
An increase in overall liquidity removal
activity on the Exchange will improve
the quality of the Nasdaq BX market and
increase its attractiveness to existing
and prospective participants.
Any participant that is dissatisfied
with the proposed new credit is free to
shift their order flow to competing
venues that provide more favorable
pricing or less stringent qualifying
criteria.
The Proposed Credit is not Unfairly
Discriminatory
The Exchange believes that the
proposal is not unfairly discriminatory.
As an initial matter, the Exchange
believes that nothing about its volumebased tiered pricing model is inherently
unfair; instead, it is a rational pricing
model that is well-established and
ubiquitous in today’s economy among
firms in various industries—from cobranded credit cards to grocery stores to
cellular telephone data plans—that use
it to reward the loyalty of their best
customers that provide high levels of
business activity and incent other
customers to increase the extent of their
business activity. It is also a pricing
model that the Exchange and its
competitors have long employed with
the assent of the Commission. It is fair
because it incentivizes customer activity
that increases liquidity, enhances price
discovery, and improves the overall
quality of the equity markets.
The Exchange intends for its proposal
to improve market quality for all
members on the Exchange and by
extension attract more liquidity to the
market, improving market wide quality
and price discovery. Both net removers
and net adders of liquidity to the
Exchange stand to benefit directly from
the proposed change. That is, to the
extent that the proposed changes
increase liquidity a removal activity on
the Exchange, this will improve market
quality and the attractiveness of the
Nasdaq BX market, to the benefit of all
existing and prospective participants.
Furthermore, it is not unfairly
discriminatory for the Exchange to
propose a higher credit for participants
with orders in securities in Tapes A and
B than it proposes for participants with
orders in Tape C because the Exchange
seeks to promote increased liquidity
removal activity specifically in
securities in Tapes A and B.
Moreover, any participant that is
dissatisfied with the proposed new
credit is free to shift their order flow to
competing venues that provide more
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favorable pricing or less stringent
qualifying criteria.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule 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. As noted above, all
members of the Exchange will benefit
from any increase in market activity that
the proposal effectuates. Members may
grow or modify their businesses so that
they can receive the higher credit.
Moreover, members are free to trade on
other venues to the extent they believe
that the credit provided 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. The Exchange
notes that the tier structure is consistent
with broker-dealer fee practices as well
as the other industries, as described
above.
Intermarket Competition
Addressing whether the proposal
could impose a burden on competition
on other SROs that is not necessary or
appropriate, the Exchange believes that
its proposed modifications to its
schedule of credits will not impose a
burden on competition because the
Exchange’s execution services are
completely voluntary and subject to
extensive competition both from the
other 12 live exchanges and from offexchange venues, which include 34
alternative trading systems. 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 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 in response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which credits
changes in this market may impose any
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burden on competition is extremely
limited.
The proposed restated schedule of
credits is reflective of this competition
because, as a threshold issue, the
Exchange is a relatively small market so
its ability to burden intermarket
competition is limited. In this regard,
even the largest U.S. equities exchange
by volume has less than 17–18% 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 presently comprises
approximately 40% of industry volume.
The Exchange intends for the
proposed change to its schedule of
credits to increase member incentives to
engage in the removal of liquidity from
the Exchange. These changes are
procompetitive and reflective of the
Exchange’s efforts to make it an
attractive and vibrant venue to market
participants.
In sum, if the changes 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 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.
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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.11
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
11 15
U.S.C. 78s(b)(3)(A)(ii).
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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–
BX–2020–018 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–BX–2020–018. 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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BX–2020–018, and should
be submitted on or before September 10,
2020.
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51521
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–18202 Filed 8–19–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89558; File No. SR–NSCC–
2020–016]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change, as Modified by
Amendment No. 1, To Introduce the
Margin Liquidity Adjustment Charge
and Include a Bid-Ask Risk Charge in
the VaR Charge
August 14, 2020.
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 30,
2020, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule change
SR–NSCC–2020–016. On August 13,
2020, NSCC filed Amendment No. 1 to
the proposed rule change, to make
clarifications and corrections to the
proposed rule change.3 The proposed
rule change, as modified by Amendment
No. 1 (hereinafter, the ‘‘Proposed Rule
Change’’), is described in Items I, II and
III below, which Items have been
prepared primarily by the clearing
agency.4 The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 made clarifications and
corrections to the description of the proposed rule
change and Exhibits 3 and 5 of the filing, and these
clarifications and corrections have been
incorporated, as appropriate, into the description of
the proposed rule change in Item II below.
4 On July 30, 2020, NSCC filed this proposed rule
change as an advance notice (SR–NSCC–2020–804)
with the Commission pursuant to Section 806(e)(1)
of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010,
12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) under
the Act, 17 CFR 240.19b–4(n)(1)(i). On August 13,
2020, NSCC filed Amendment No. 1 to the advance
notice to make similar clarifications and corrections
to the advance notice. A copy of the advance notice,
as modified by Amendment No. 1 (hereinafter,
‘‘Advance Notice’’) is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
1 15
E:\FR\FM\20AUN1.SGM
20AUN1
Agencies
[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Notices]
[Pages 51518-51521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89554; File No. SR-BX-2020-018]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Transaction Credits, at Equity 7, Section 118(a)
August 14, 2020.
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 August 3, 2020, Nasdaq BX, Inc. (``BX'' 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 transaction credits,
at Equity 7, Section 118(a).
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
[[Page 51519]]
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 operates on the ``taker-maker'' model, whereby it
generally pays credits to members that take liquidity and charges fees
to members that provide liquidity. Currently, the Exchange has a
schedule, at Equity 7, Section 118(a), which consists of several
different credits that it provides for orders in securities priced at
$1 or more per share that access liquidity on the Exchange and several
different charges that it assesses for orders in such securities that
add liquidity on the Exchange.
Over the course of the last few months, the Exchange has
experimented with various reformulations of its pricing schedule with
the aim of increasing activity on the Exchange, improving market
quality, and increasing market share.\3\ Although these changes have
met with some success, the Exchange has yet to achieve the results it
desires. Accordingly, the Exchange proposes to again revise its pricing
schedule, in large part, in a further attempt to improve the
attractiveness of the market to new and existing participants.
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\3\ See Securities Exchange Act Release No. 34-89114 (June 22,
2020), 85 FR 38418 (June 26, 2020) (SR-BX-2020-011); Securities
Exchange Act Release No. 34-88857 (May 12, 2020), 85 FR 29766 (May
18, 2020) (SR-BX-2020-008); Securities Exchange Act Release No. 34-
87271 (October 10, 2019), 84 FR 55621 (October 17, 2019) (SR-BX-
2019-035); Securities Exchange Act Release No. 34-87271 [sic]
(September 24, 2019), 84 FR 57530 (October 25, 2019) (SR-BX-2019-
031); Securities Exchange Act Release No. 34-86120 (June 17, 2019);
84 FR 29270 (June 21, 2019) (SR-BX-2019-026 [sic]); Securities
Exchange Act Release No. 34-85912 (May 22, 2019); 84 FR 24834 (May
29, 2019) (SR-BX-2019-013).
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Description of the Changes
The Exchange proposes to revise its schedule of credits to add one
new credit. Specifically, the Exchange proposes to provide a $0.0018
per share executed credit (for securities in Tapes A and B) and a
$0.0017 per share executed credit (for securities in Tape C) for orders
that access liquidity (excluding orders with Midpoint pegging and
excluding orders that receive price improvement and execute against an
order with a Non-displayed price) entered by a member that: (i)
Accesses at least 35% more liquidity, as a percentage of total
Consolidated Volume during a month, than it did during July 2020; (ii)
accesses liquidity equal to or exceeding 0.01% of total Consolidated
Volume during a month; and (iii) adds liquidity equal to or exceeding
an average daily volume of 50,000 shares for the month. The Exchange
believes that that the availability of the new credits will incentivize
members to grow their existing level of liquidity removal activity on
the Exchange, and in particular, to grow such levels relative to a
baseline of such activity. In doing so, the Exchange intends to improve
the overall quality and attractiveness of the Nasdaq BX market.
Impact of the Changes
Those participants that act as net removers of liquidity from the
Exchange will benefit directly from the proposed addition of new
credits that would apply to orders that remove liquidity from the
Exchange. Other participants will also benefit from the new credit
insofar as any ensuing increase in liquidity removal activity will
improve the overall quality of the market.
The Exchange notes that its proposal is not otherwise targeted at
or expected to be limited in its applicability to a specific segment(s)
of market participants nor will it apply differently to different types
of market participants.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\4\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\5\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility, and is
not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers. The proposal is also consistent with
Section 11A of the Act relating to the establishment of the national
market system for securities.
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\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal is Reasonable
The Exchange's proposed change to its schedule of credits is
reasonable in several respects. As a threshold matter, the Exchange is
subject to significant competitive forces in the market for equity
securities transaction services that constrain its pricing
determinations in that market. The fact that this market is competitive
has long been recognized by the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C. Circuit stated as follows: ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \6\
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\6\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \7\
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\7\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
equity security transaction services. The Exchange is only one of
several equity venues to which market participants may direct their
order flow, and it represents a small percentage of the overall market.
It is also only one of several taker-maker exchanges. Competing equity
exchanges offer similar tiered pricing structures to that of the
Exchange, including schedules of rebates and fees that apply based upon
[[Page 51520]]
members achieving certain volume thresholds.\8\
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\8\ See CBOE EDGA Fee Schedule, at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; NYSE National Fee Schedule,
at https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf.
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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.\9\
Separately, the Exchange has provided the SEC staff with multiple
examples of instances where pricing changes by BX and other exchanges
have resulted in shifts in exchange market share. Within the foregoing
context, the proposal represents a reasonable attempt by the Exchange
to increase its liquidity and market share relative to its competitors.
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\9\ The Exchange perceives no regulatory, structural, or cost
impediments to market participants shifting order flow away from it.
In particular, the Exchange notes that these examples of shifts in
liquidity and market share, along with many others, have occurred
within the context of market participants' existing duties of Best
Execution and obligations under the Order Protection Rule under
Regulation NMS.
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The Exchange has designed its proposed schedule of credits to
provide increased overall incentives to members to increase their
liquidity removal activity on the Exchange. An increase in liquidity
removal activity on the Exchange will, in turn, improve the quality of
the Nasdaq BX market and increase its attractiveness to existing and
prospective participants. Generally, the proposed new credit will be
comparable to, if not favorable to, those that its competitors
provide.\10\
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\10\ See n. 8, supra.
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The Exchange notes that those participants that are dissatisfied
with the proposed credit are free to shift their order flow to
competing venues that offer them higher credits.
The Proposal is an Equitable Allocation of Credits
The Exchange believes its proposal will allocate its proposed new
credit fairly among its market participants. It is equitable for the
Exchange to increase its credits to participants whose orders remove
liquidity from the Exchange as a means of incentivizing increased
liquidity removal activity on the Exchange as well as to tie the
receipt of the credits to the member engaging in a threshold volume of
combined liquidity removal activity on the Exchange. Furthermore, it is
equitable for the Exchange to propose higher credits for participants
with orders in securities in Tapes A and B than it proposes for
participants with orders in Tape C due to the Exchange's desire to
specifically promote increased liquidity removal activity in securities
in Tapes A and B. An increase in overall liquidity removal activity on
the Exchange will improve the quality of the Nasdaq BX market and
increase its attractiveness to existing and prospective participants.
Any participant that is dissatisfied with the proposed new credit
is free to shift their order flow to competing venues that provide more
favorable pricing or less stringent qualifying criteria.
The Proposed Credit is not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory. As an initial matter, the Exchange believes that
nothing about its volume-based tiered pricing model is inherently
unfair; instead, it is a rational pricing model that is well-
established and ubiquitous in today's economy among firms in various
industries--from co-branded credit cards to grocery stores to cellular
telephone data plans--that use it to reward the loyalty of their best
customers that provide high levels of business activity and incent
other customers to increase the extent of their business activity. It
is also a pricing model that the Exchange and its competitors have long
employed with the assent of the Commission. It is fair because it
incentivizes customer activity that increases liquidity, enhances price
discovery, and improves the overall quality of the equity markets.
The Exchange intends for its proposal to improve market quality for
all members on the Exchange and by extension attract more liquidity to
the market, improving market wide quality and price discovery. Both net
removers and net adders of liquidity to the Exchange stand to benefit
directly from the proposed change. That is, to the extent that the
proposed changes increase liquidity a removal activity on the Exchange,
this will improve market quality and the attractiveness of the Nasdaq
BX market, to the benefit of all existing and prospective participants.
Furthermore, it is not unfairly discriminatory for the Exchange to
propose a higher credit for participants with orders in securities in
Tapes A and B than it proposes for participants with orders in Tape C
because the Exchange seeks to promote increased liquidity removal
activity specifically in securities in Tapes A and B.
Moreover, any participant that is dissatisfied with the proposed
new credit is free to shift their order flow to competing venues that
provide more favorable pricing or less stringent qualifying criteria.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule 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. As
noted above, all members of the Exchange will benefit from any increase
in market activity that the proposal effectuates. Members may grow or
modify their businesses so that they can receive the higher credit.
Moreover, members are free to trade on other venues to the extent they
believe that the credit provided 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. The Exchange
notes that the tier structure is consistent with broker-dealer fee
practices as well as the other industries, as described above.
Intermarket Competition
Addressing whether the proposal could impose a burden on
competition on other SROs that is not necessary or appropriate, the
Exchange believes that its proposed modifications to its schedule of
credits will not impose a burden on competition because the Exchange's
execution services are completely voluntary and subject to extensive
competition both from the other 12 live exchanges and from off-exchange
venues, which include 34 alternative trading systems. 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 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
in response, and because market participants may readily adjust their
order routing practices, the Exchange believes that the degree to which
credits changes in this market may impose any
[[Page 51521]]
burden on competition is extremely limited.
The proposed restated schedule of credits is reflective of this
competition because, as a threshold issue, the Exchange is a relatively
small market so its ability to burden intermarket competition is
limited. In this regard, even the largest U.S. equities exchange by
volume has less than 17-18% 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 presently comprises approximately 40% of industry volume.
The Exchange intends for the proposed change to its schedule of
credits to increase member incentives to engage in the removal of
liquidity from the Exchange. These changes are procompetitive and
reflective of the Exchange's efforts to make it an attractive and
vibrant venue to market participants.
In sum, if the changes 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
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.\11\
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\11\ 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
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-BX-2020-018 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-BX-2020-018. 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 the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2020-018, and should be submitted on
or before September 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
J. Matthew DeLesDernier,
Assistant Secretary.
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\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2020-18202 Filed 8-19-20; 8:45 am]
BILLING CODE 8011-01-P