2019-23277. Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule, at Equity 7, Section 118(a)

September 24, 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 September 12, 2019, 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 fees and credits at Equity 7, Section 118(a), as described further below. The text of the proposed rule change is available on the Exchange's website at http://nasdaqbx.cchwallstreet.com/​,, at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange 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 restate its pricing schedule, in large part, in a further attempt to improve the attractiveness of the market to new and existing participants.

Description of the Changes

Credits for Accessing Liquidity Through the Exchange

The Exchange proposes to eliminate its schedule of existing credits (except as described below) and replace it with a new schedule of credits for orders in securities that remove liquidity from the Exchange (the “New Credits”). Generally speaking, the proposed New Credits will be higher than the existing credits for orders in Tapes A and B and lower than the existing credits for orders in securities in Tape C.^[4] The Exchange believes that higher overall credits will incentivize members to increase their liquidity removal activity in securities in Tapes A and B. Although credits for removal orders for securities in Tape C will be lower generally than they are now, the availability of the proposed New Credits will be tied to the level of a member's liquidity taking activity for orders in securities in Tape C; this proposal is aligned with the Exchange's objective to encourage an increase in liquidity in securities in Tape C (together with lower charges for adding liquidity in securities in Tape C, as discussed below).

Specifically, the Exchange proposes to adopt the following New Credits:

• A $0.0031 per share executed credit for orders in securities in Tapes A and B and a $0.0017 per share executed credit for orders in securities in Tape C 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 liquidity equal to or exceeding 0.225% of total Consolidated Volume during a month; (ii) accesses liquidity in Securities in Tape C equal to or exceeding 0.045% of total Consolidated Volume during a month; and (iii) adds liquidity equal to or exceeding an average daily volume of 50,000 shares in a month.
• A $0.0028 per share executed credit for orders in securities in Tapes A and B and a $0.0015 per share executed credit for orders in securities in Tape C 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 liquidity equal to or exceeding 0.11% of total Consolidated Volume during a month; (ii) accesses liquidity in Securities in Tape C equal to or exceeding 0.025% of total Consolidated Volume during a month; and (iii) adds liquidity equal to or exceeding an average daily volume of 50,000 shares in a month.
• A $0.0026 per share executed credit for orders in securities in Tapes A and B and a $0.0010 per share executed credit for orders in securities in Tape C 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 liquidity equal to or exceeding 0.08% of total Consolidated Volume during a month; (ii) accesses liquidity in Securities in Tape C equal to or exceeding 0.020% of total Consolidated Volume during a month; and (iii) adds liquidity equal to or exceeding an average daily volume of 50,000 shares in a month.
• A $0.0018 per share executed credit for orders in securities in Tapes A and B and a $0.0005 per share executed credit for orders in securities in Tape C 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 adds liquidity equal to or exceeding an average daily volume of 50,000 shares in a month.

As noted above, the proposed New Credits will not supplant all of the existing credits. Instead, the Exchange proposes that the following existing credits will continue to apply to orders in securities in all Tapes:

• $0.0000 per share executed for an order that receives price improvement and executes against an order with a Non-displayed price; and
• $0.0000 per share executed for an order with Midpoint pegging that removes liquidity.

The Exchange also proposes to continue charging a fee for orders in securities in any Tape (excluding an order with midpoint pegging and excluding an order that receives price improvement and executes against an order with a non-displayed price) that removes liquidity from the Exchange and that is entered by a member that does not add at least an average daily volume of 50,000 shares to the Exchange during a month. However, the Exchange proposes to increase that fee, again for orders in securities in all Tapes, from $0.0003 to $0.0005 per share executed.

Charges for Adding Liquidity to the Exchange

Primarily as a means of encouraging the addition of liquidity in securities in Tape C, the Exchange proposes to largely replace its existing schedule of charges with a new schedule of charges for displayed and non-displayed orders in securities that add liquidity to the Exchange (the “New Charges”). Generally speaking, the range of the proposed New Charges will be the same as the existing charges for orders in Tapes A and B and lower for orders in Tape C (with new and different qualifying volume thresholds for each charge).^[5]

Specifically, the Exchange proposes to delete all of the existing charges for providing liquidity through the Exchange (except as provided below) and replace them with the following New Charges:

• A $0.0025 per share executed charge for displayed orders in securities in Tapes A and B that: Add liquidity entered by a member that (i) adds liquidity equal to or exceeding 0.17% of total Consolidated Volume and (ii) adds liquidity equal to or exceeding 0.025% of total Consolidated Volume in securities in Tape B during a month.
• A $0.0029 per share executed charge for displayed orders in securities in Tapes A and B that add liquidity entered by a member that (i) adds liquidity equal to or exceeding 0.08% of total Consolidated Volume and (ii) adds liquidity equal to or exceeding 0.020% of total Consolidated Volume in securities in Tape B during a month.
• A $0.0012 per share executed charge for displayed orders in securities in Tape C that add liquidity entered by a member that (i) adds liquidity equal to or exceeding 0.17% of total Consolidated Volume and (ii) adds liquidity equal to or exceeding 0.15% of total Consolidated Volume in securities in Tape C during a month.
• A $0.0014 per share executed charge for displayed orders in securities in Tape C that add liquidity entered by a member that (i) adds liquidity equal to or exceeding 0.12% of total Consolidated Volume and (ii) adds liquidity equal to or exceeding 0.07% of total Consolidated Volume in securities in Tape C during a month.
• A $0.0017 per share executed charge for displayed orders in securities in Tape C that add liquidity entered by a member that (i) adds liquidity equal to or exceeding 0.08% of total Consolidated Volume and (ii) adds liquidity equal to or exceeding 0.025% of total Consolidated Volume in securities in Tape C during a month.
• A $0.0030 per share executed charge for buy (sell) orders with Midpoint pegging in securities in all Tapes that receive an execution price that is lower (higher) than the midpoint of the NBBO.
• A $0.0030 per share executed charge for all other orders in securities in Tapes A and B.
• A $0.0020 per share executed charge for all other orders in securities in Tape C.

The Exchange proposes that following existing charges will continue to apply to orders in securities in all Tapes:

• A $0.0005 per share executed charge for orders with Midpoint pegging entered by a member that adds 0.02% of total Consolidated Volume of non-displayed liquidity excluding a buy (sell) order that receives an execution price that is lower (higher) than the midpoint of the NBBO.
• A $0.0015 per share executed charge for orders with Midpoint pegging entered by other member excluding a buy (sell) order that receives an execution price that is lower (higher) than the midpoint of the NBBO.
• A $0.0028 per share executed charge for non-displayed orders (other than orders with Midpoint pegging) entered by a member that adds liquidity equal to or exceeding 0.25% total Consolidated Volume during a month.
• A $0.0030 per share executed charge for all other non-displayed orders.
• Charges for entering BSTG, BSCN, BMOP, BTFY, BCRT, BDRK, BCST, and SCAR orders that execute in a venue other than the Nasdaq BX Equities System.

Applicability to and Impact on Participants

The proposed rule change is a broad restatement of the Exchange's schedule of credits and charges. The Exchange has designed the restated schedule to specifically increase liquidity removal activity on the Exchange for orders in securities in Tapes A and B, to increase liquidity adding activity in Tape C, and to thereby improve the overall quality and attractiveness of the Nasdaq BX market. The Exchange intends to accomplish this objective by providing overall higher credits to those participants that engage in large volumes of liquidity removal activity on the Exchange in securities in Tapes A and B and by charging lower overall fees to those participants that add liquidity to the Exchange in securities in Tape C.

Those participants that act as net removers of liquidity from the Exchange in securities in Tapes A and B will benefit directly from the proposed rule change through the receipts of higher credits. Those participants that act as net adders of liquidity to the Exchange in securities in Tape C will also benefit from lower charges and indirectly from any improvement in the overall quality of the market. However, net liquidity adders in securities in Tapes A and B and net removers of liquidity in securities in Tape C will bear the costs of these proposals. 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,^[6] in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,^[7] in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The proposal is also consistent with Section 11A of the Act relating to the establishment of the national market system for securities.

The Proposal Is Reasonable

The Exchange's proposed change to its schedule of credits and charges 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' . . . .” ^[8]

The Commission and the courts have repeatedly expressed their preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. In Regulation NMS, while adopting a series of steps to improve the current market model, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system “has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.” ^[9]

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 members achieving certain volume thresholds.^[10]

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.^[11] 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 and charges to provide increased overall incentives to members to increase their liquidity removal and adding activity on the Exchange in securities in the three Tapes. An increase in liquidity removal and adding 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 Credits and Charges will be comparable to, if not favorable to, those that its competitors provide.^[12]

The Exchange notes that those participants that are dissatisfied with the New Charges or New Credits are free to shift their order flow to competing venues that offer them lower charges.

The Proposal Is an Equitable Allocation of Credits and Charges

The Exchange believes its proposal will allocate its New Credits and New Charges 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. Likewise, it is equitable for the Exchange to reduce charges to participants whose orders add liquidity to the Exchange as a means of incentivizing liquidity adding activity. An increase in overall liquidity removal and addition activity on the Exchange will improve the quality of the Nasdaq BX market and increase its attractiveness to existing and prospective participants.

Likewise, it is equitable for the Exchange to specifically increase overall credits for orders that remove liquidity from the Exchange in Tapes A and B as a means of increasing liquidity removal activity in those Tapes, and to specifically lower overall charges for orders that add liquidity to the Exchange in Tape C as a means of increasing liquidity adding activity in Tape C. Again, the Exchange intends for these changes to improve the overall quality and attractiveness of the Nasdaq BX market.

Although under the proposal, certain participants will pay higher charges or attain lower credits than they do now, those participants will also benefit from any improvements in the quality and attractiveness of the market that the New Credits and New Charges provide. Moreover, any participant that wishes to avoid paying higher charges or receiving lower credits is free to shift their order flow to competing venues that provide more favorable pricing.

The Proposed Fee 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 the 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. Although net removers of liquidity in Tapes A and B and net adders of liquidity in Tape C will benefit most from the proposal, this result is fair insofar as increased activity in securities in these Tapes will help to improve market quality and the attractiveness of the Nasdaq BX market to all existing and prospective participants. And although certain participants will bear the costs of the proposed rule change through higher charges or lower credits, this too is fair because these participants will also benefit from improvements in market quality. Moreover, any participant that does not wish to pay higher charges or receive lower credits is free to shift its order flow to a competing venue.

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 credits or pay lower charges. Moreover, members are free to trade on other venues to the extent they believe that the fees assessed and 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.

Intermarket Competition

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 12 live exchanges and from off-exchange venues, which include 32 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 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 restated schedule of credits and charges 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 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 comprised more than 37% of industry volume for the month of July 2019.

The Exchange intends for the proposed changes, in the aggregate, to increase member incentives to engage in the removal and addition of liquidity on 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 are unattractive to market participants, it is likely that the Exchange will lose market share as a result. Accordingly, the Exchange does not believe that the proposed changes will impair the ability of members or competing order execution venues to maintain their competitive standing in the financial markets.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.^[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: (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 (http://www.sec.gov/​rules/​sro.shtml); or
• Send an email to [e-mail]. Please include File Number SR-BX-2019-031 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-2019-031. 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-BX-2019-031 and should be submitted on or before November 15, 2019.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.^[14]

Jill M. Peterson,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See 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).

4.  Whereas the highest credit under the existing schedule is $0.0027 per share executed for orders in securities in Tapes A, B, and C, the top credit in the proposed schedule for orders in securities in Tapes A and B is $0.0031 per share executed. Under the proposal, the highest credit available for orders in Tape C will be $0.0017 per share executed.

The Exchange notes that, whereas under the existing schedule, the Exchange provides a $0.0015 per share executed credit for orders in securities in all Tapes 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 members that add at least an average daily volume of 50,000 shares to the Exchange during a month, the proposed schedule will provide a higher credit of $0.0018 per share executed for orders in Tapes A and B and a lower credit of $0.005 per share executed for orders in Tape C.

5.  Whereas under the existing pricing schedule, other than for midpoint pegging orders, the Exchange charges between $0.0025 and $0.0030 per share executed for orders in securities in all Tapes, the proposed schedule will charge fees ranging from $0.0025 to $0.0030 per share executed for orders in securities in Tapes A and B and $0.0012 to $0.0020 for orders in securities in Tape C.

6.  15 U.S.C. 78f(b).

7.  15 U.S.C. 78f(b)(4) and (5).

8.  NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).

9.  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (“Regulation NMS Adopting Release”).

10.  CBOE EDGA provides a standard rebate for liquidity removers of $0.0024 per share executed (or $0.0026 per share executed if a member qualifies for a volume tier), and a standard charge of $0.0030 per share executed for liquidity adders (or between $0.0022 and $0.0026 if a member qualifies for a volume tier). NYSE National has a standard charge of $0.0005 per share executed for liquidity removers ($0.0025-$0.0030 rebate if a member qualifies for a volume tier) and a standard charge of $0.0028 per share executed for liquidity adders (and a range of charges from $0.0020-$0.0026 if a member qualifies for a volume tier).

11.  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.

12.  See n. 10, supra.

13.  15 U.S.C. 78s(b)(3)(A)(ii).

14.  17 CFR 200.30-3(a)(12).