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January 13, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ,
and Rule 19b-4 thereunder,
notice is hereby given that on January 4, 2021, Nasdaq PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend the Exchange's pricing schedule at Equity 7, Section 3, as described further below.
The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
The Exchange proposes to amend its pricing schedule, at Equity 7, Section 3, to make several changes to its Qualified Market Maker (“QMM”) Program. The QMM Program provides supplemental incentives to member organizations that meet certain quality standards in acting as market makers for securities on the Exchange.
Specifically, the Exchange proposes to adjust upward the average number of securities for which a member organization that qualifies as a QMM must quote at the national best bid and offer (“NBBO”) during a month to receive a supplemental credit of $0.0002 per share executed, as set forth in Equity 7, Section 3(c)(3). Currently, a member organization must quote at the NBBO at least 10% of the time for an average of at least 500 securities per day to qualify for the $0.0002 per share executed supplemental credit. The Exchange proposes to increase this number to 650 securities.
The Exchange proposes to increase the threshold number of securities in which a member organization must quote at the NBBO during a month to qualify for this supplemental credit as a means of encouraging QMMs to broaden the scope of their quoting activities on the Exchange. The Exchange believes that QMM activity on the Exchange is already robust enough to accommodate the establishment of a higher qualification threshold without compromising the ability of existing QMMs to maintain their current statuses in the program.
Second, the Exchange proposes to adjust downward the average number of securities for which a member organization must quote at the NBBO at least 10% of the time during market hours during a month to receive a supplemental credit of $0.0003 per share executed in Tape A securities or $0.0002 per share executed in Tape B and Tape C securities, as set forth in Equity 7, Section 3(c)(4). Currently, a member organization must quote at the NBBO at least 10% of the time for an average of at least 850 securities per day, and provide 0.12% or more of total Consolidated Volume during a month, to qualify for this supplemental credit. The Exchange proposes to reduce the threshold number of securities that must be quoted to 800 securities.
The Exchange proposes to lower the number of securities in which a member organization must quote at the NBBO during a month to qualify for this supplemental credit so as to render this credit more readily attainable for QMMs. The Exchange hopes that the proposal will lead to additional member organizations qualifying for the credit, which in turn would entail more QMMs quoting at the NBBO at least 10% of the time during the trading day in more securities than they do now, to the benefit of market quality.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,
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 Reasonable
The Exchange's proposed changes to its schedule of credits and QMM Program are reasonable in several respects. As a threshold matter, the Exchange is subject to significant competitive forces in the market for equity securities transaction services that constrain its pricing determinations in that market. The fact that this market is competitive has long been recognized by the courts. In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit stated as follows: “[n]o one disputes that competition for order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market system, buyers and sellers of securities, and the broker-dealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution'; [and] `no exchange can afford to take its market share percentages for granted' because `no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers'. . . .” 
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 Start Printed Page 6384broader forms that are most important to investors and listed companies.” 
Numerous indicia demonstrate the competitive nature of this market. For example, clear substitutes to the Exchange exist in the market for equity security transaction services. The Exchange is only one of several equity venues to which market participants may direct their order flow. Competing equity exchanges offer similar tiered pricing structures to that of the Exchange, including schedules of rebates and fees that apply based upon members achieving certain volume thresholds.
Within this environment, market participants can freely and often do shift their order flow among the Exchange and competing venues in response to changes in their respective pricing schedules.
Within the foregoing context, the proposal represents a reasonable attempt by the Exchange to increase its market share relative to its competitors.
The Exchange's proposal to increase the threshold numbers of securities in which QMMs must quote at the NBBO during a month to qualify for the supplemental credit at Equity 7, Section 3(c)(2) [sic] will encourage QMMs to broaden the scope of their quoting activities on the Exchange. The Exchange believes that it is appropriate to periodically reassess and recalibrate the baselines for its pricing tiers when participant activity is adequate to support doing so. In this instance, QMM activity on the Exchange is robust enough to accommodate the establishment of a higher qualification threshold without compromising the ability of existing QMMs to maintain their current statuses in the program.
Additionally, the Exchange's proposal to ease one of its qualifications for the $0.0003/$0.0002 per share executed supplemental credit set forth in Equity 7, Section 3(c)(4) is also a reasonable attempt to improve the accessibility of that supplemental credit and will encourage member organizations to try to qualify for it.
The Proposals Are an Equitable Allocation of Credits
The Exchange believes its proposals will allocate its proposed credits fairly among its market participants.
The Exchange believes its proposal to raise the qualification criteria applicable its QMM supplemental credit, at Equity 7, Section 3(c)(2) [sic], is equitable because the proposal will encourage member organizations to quote significantly at the NBBO for a larger number of securities, which in turn will contribute to market quality in a meaningful way. At the same time, the proposed recalibrated qualification threshold will not compromise the ability of QMMs that currently qualify for this supplemental credit to continue to do so.
The Exchange also believes that it is equitable to lower a qualification threshold for its highest supplemental credit, at Equity 7, Section 3(c)(4), because the proposal will render the credit more readily attainable to member organizations. It is equitable for the Exchange to make it easier for member organizations to qualify for this supplemental credit because doing so may encourage member organizations to broaden the extent to which they quote securities at the NBBO, which in turn stands to improve the quality of the Exchange's equity market and increase its attractiveness to existing and prospective participants.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that the proposals are 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 proposals to increase participation and the extent of participation in its QMM program, which in turn would improve market quality for all member organizations on the Exchange.
The Exchange's proposal to raise the qualification requirements for its supplemental QMM credit, at Equity 7, Section 3(c)(2) [sic], is not unfairly discriminatory because no member organization that presently qualifies for this supplemental credit will fail to qualify for it upon raising the requirements. Although any member organization that newly qualifies for this credit will need to quote at the NBBO for a larger number of securities than they would need to do now, this is fair because meeting the heightened requirement will improve market quality. Meanwhile, the proposal to lower the qualification criteria for the highest supplemental QMM credit, at Equity 7, Section 3(c)(4), will improve the accessibility of that credit to member organizations. Again, if this proposal results in more member organizations meeting the requirements for this supplemental credit, then market quality will improve.
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.
The Exchange does not believe that its proposals will place any category of Exchange participants at a competitive disadvantage. As noted above, all members of the Exchange will benefit from an increase in the addition of liquidity by those that choose to meet the criteria. Members may grow their businesses so that they have the capacity to receive credits for providing liquidity. Moreover, members are free to trade on other venues to the extent they believe that the credits provided are 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.
Moreover, the Exchange's proposal to modify its QMM program will not burden intramarket competition because the QMM Program, as modified, will continue to provide all member organizations with an opportunity to obtain supplemental credits for transactions if they improve the market by providing significant quoting at the Start Printed Page 6385NBBO in a large number of securities which the Exchange believes will improve market quality. By relaxing the qualification criteria, the modifications will make the Program more accessible to new member organizations and easier for existing QMMs to remain in the Program.
Addressing whether the proposed fee 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 and charges 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 live exchanges and from off-exchange venues, which include alternative trading systems that trade national market system stock. 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 fees to remain competitive with other exchanges and with alternative trading systems that have been exempted from compliance with the statutory standards applicable to exchanges. Because competitors are free to modify their own fees in response, and because market participants may readily adjust their order routing practices, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited.
The proposed credit for adding liquidity and the proposed modifications to the QMM Program are 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 only has 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 comprises more than 40% of industry volume in recent months.
In sum, the Exchange intends for the modified QMM Program to increase member organizations incentives to quote more securities at the NBBO for at least 10 percent of the day, which stands to improve the quality of the Exchange's market and its attractiveness to participants; however, if the proposals are unattractive to market participants, it is likely that the Exchange will either fail to increase its market share or even lose market share as a result. Accordingly, the Exchange does not believe that the proposed amended credits 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.
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:
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2021-01. 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 (http://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-Phlx-2021-01 and should be submitted on or before February 9, 2021.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
J. Matthew DeLesDernier,
[FR Doc. 2021-01136 Filed 1-19-21; 8:45 am]
BILLING CODE 8011-01-P