2020-26402. Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Pricing Schedule at Options 7 for Orders Entered Into the Exchange's Price Improvement Mechanism

November 24, 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 November 13, 2020, Nasdaq MRX, LLC (“MRX” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit 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 its Pricing Schedule at Options 7 in connection with the pricing for orders entered into the Exchange's Price Improvement Mechanism (“PIM”).^[3]

The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/​rulebook/​mrx/​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

1. Purpose

The purpose of the proposed rule change is to amend the Exchange's Pricing Schedule at Options 7 in connection with the pricing for orders entered into the Exchange's PIM.

Today for both regular and complex PIM orders, the Exchange pays a PIM break-up rebate to an originating Priority Customer ^[4] PIM order that executes with a response (order or quote), other than the PIM contra-side order, of $0.40 per contract in Penny Symbols and $1.00 per contract in Non-Penny Symbols.^[5] The Exchange also offers a higher PIM break-up rebate in note 3 of Options 7, Section 3.A for Members that meet certain cumulative volume requirements. In particular, Members that execute an average daily volume (“ADV”) of 10,000 PIM originating contracts or greater within a month are currently eligible to receive a rebate of (i) $0.45 per contract in Penny Symbols (in lieu of $0.40 per contract) for complex PIM orders only, and (ii) $1.05 per contract in Non-Penny Symbols (in lieu of $1.00 per contract) for both regular and complex PIM orders.

The Exchange now proposes a number of changes to the break-up rebate structure. First, the Exchange proposes to lower the base rebates to $0.25 in Penny Symbols and $0.60 per contract in Non-Penny Symbols. Second, the Exchange proposes to replace the existing note 3 incentive described above with a new program. As amended, note 3 of Options 7, Section 3.A would provide:

Break-up Rebates are provided for an originating Priority Customer PIM Order that executes with any response (order or quote) other than the PIM contra-side order. Members that are not in an Affiliated Member or Affiliated Entity relationship and that execute 0.05% or greater of Customer Total Consolidated Volume in non-PIM Priority Customer contracts within a month will receive an additional rebate of: (i) $0.20 per contract in Penny Symbols for Complex PIM Orders only, (ii) $0.15 per contract in Penny Symbols for Regular PIM Orders only, and (iii) $0.45 per contract in Non-Penny Symbols for both Regular and Complex PIM Orders. Alternatively, Affiliated Members or Affiliated Entities will be eligible to receive the rebates in this note 3 without any additional volume requirements. The Exchange will provide the rebate to the OFP arm of an Affiliated Member relationship, or the Appointed OFP arm of an Affiliated Entity relationship.

The new program replaces the current cumulative ADV threshold with a total industry percentage threshold, specifically a Customer Total Consolidated Volume ^[6] percentage threshold. The Exchange notes that the proposed percentage threshold of 0.05% or greater of Customer Total Consolidated Volume is comparable in terms of requisite volume to the existing ADV threshold of 10,000 or greater contracts. The Exchange is proposing to replace the current cumulative volume thresholds with total industry volume percentages to align with increasing Member activity on MRX over time. The Exchange notes that total industry percentage thresholds are established concepts within its Pricing Schedule.^[7]

The Exchange is also modifying this qualification by requiring that Members execute 0.05% or greater of Customer Total Consolidated Volume in non-PIM Priority Customer contracts (instead of PIM originating contracts, as currently required). The Exchange believes this change will incentivize Members to bring a wider range of order flow for execution on the Exchange, which activity may result in tighter spreads making the Exchange a more attractive trading venue to the benefit of all market participants. As discussed in the following paragraph, this volume qualification only applies to Members that are not in affiliated relationships.

The new program will also offer a new, alternative basis, to qualify for the higher break-up rebates in amended note 3. Specifically, as proposed, Members may enter into certain affiliated relationships (i.e., Affiliated Members ^[8] or Affiliated Entities ^[9] ) to qualify for the higher break-up rebates. The Exchange recently filed to permit Members to enter into Affiliated Entities in order to aggregate volume and qualify for certain pricing incentives, provided they are not Affiliated Members.^[10] Accordingly, the proposed changes are intended to enhance participation in the Exchange's new Affiliated Entity program in order to encourage additional order flow to MRX. As described above, the rebates in note 3 will be provided to the OFP ^[11] arm of the Affiliated Member relationship, or the Appointed OFP in the Affiliated Entity relationship, without additional volume requirements. The Exchange believes that this will encourage Members who are not Affiliated Members to enter into Affiliated Entity relationships and submit any amount of Priority Customer PIM order flow in order to receive the note 3 rebates. The Exchange will also make clear in note 3 that the 0.05% or greater Customer Total Consolidated Volume requirement only applies to Members that are not in an Affiliated Member or Affiliated Entity relationship.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act,^[12] in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,^[13] 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 Exchange's proposed changes to its Pricing Schedule are reasonable in several respects. As a threshold matter, the Exchange is subject to significant competitive forces in the market for options 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'. . . .” ^[14]

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.” ^[15]

Numerous indicia demonstrate the competitive nature of this market. For example, clear substitutes to the Exchange exist in the market for options security transaction services. The Exchange is only one of sixteen options exchanges to which market participants may direct their order flow. 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. As such, the proposal represents a reasonable attempt by the Exchange to increase its liquidity and market share relative to its competitors.

In this context, the Exchange believes that its proposal for the PIM break-up rebates is reasonable. While the Exchange is proposing to lower the base break-up rebates to $0.25 in Penny Symbols and $0.60 per contract in Non-Penny Symbols, the Exchange believes that market participants will continue to be incentivized to send Priority Customer order flow to PIM to receive the base break-up rebate. Furthermore, the Exchange notes the proposed break-up rebates remain in line with similar rebates provided at other exchanges.^[16]

In addition, the Exchange believes that the amended note 3 incentive providing higher break-up rebates to qualifying Members, as described above, is reasonable in several respects. Regarding the change in the volume qualification to replace the current cumulative ADV threshold with a total industry percentage threshold, the Exchange notes that this is to align with increasing Member activity on MRX over time. The Exchange is proposing to base the volume qualification on a percentage of industry volume in recognition of the fact that the volume executed by a Member may rise or fall with industry volume. A percentage of industry volume calculation allows the note 3 qualification to be calibrated to current market volumes rather than requiring a static amount of volume regardless of market conditions. While the amount of volume required by the proposed qualification in note 3 may change in any given month due to increases or decreases in industry volume, the Exchange believes that the proposed threshold requirement is set at an appropriate level. As discussed above, the proposed threshold of 0.05% Customer Total Consolidated Volume is comparable to the existing ADV threshold of 10,000 contracts, so the Exchange anticipates minimal impact to Members as a result of replacing the current cumulative volume threshold with the new total industry percentage threshold. Furthermore, as noted above, total industry percentage thresholds are established concepts within its Pricing Schedule.^[17]

The Exchange also believes that modifying this qualification in note 3 to require Members that are not in an Affiliated Member or Affiliated Entity relationship to execute 0.05% or greater of Customer Total Consolidated Volume in non-PIM Priority Customer contracts (instead of PIM originating contracts, as currently required) is reasonable because this change will incentivize Members to bring a wider range of order flow for execution on the Exchange. This could ultimately result in increased trading opportunities, tighter spreads and greater price discovery, making the Exchange a more attractive trading venue to the benefit of all market participants.

Furthermore, the Exchange believes that the new, alternative basis, to qualify for the higher break-up rebates in amended note 3 is reasonable. In particular, the Exchange will permit Affiliated Members or Affiliated Entities to send any amount of Priority Customer PIM volume for purposes of qualifying for higher break-up rebates. The Exchange believes that this will attract additional Priority Customer PIM order flow to the Exchange and will fortify participation in the Exchange's Affiliated Entity program, as noted above. Permitting Members to enter into an Affiliated Entity relationship for purposes of qualifying the OFP arm of an Affiliated Member relationship, or the Appointed OFP of an Affiliated Entity relationship, for the higher break-up rebates in amended note 3 may also encourage the counterparties that comprise the Affiliated Members or Affiliated Entities to incentivize each other to attract and seek to execute more Priority Customer volume in PIM. In turn, market participants would benefit from the increased liquidity with which to interact and potentially tighter spreads on orders. Overall, incentivizing market participants with increased opportunities to earn higher break-up rebates may increase the quality of the liquidity available on MRX.

The Exchange believes that the PIM break-up rebate changes, as proposed, are equitable and not unfairly discriminatory because the proposed rebates will apply equally to all Priority Customer PIM originating orders that execute against PIM responses. The Exchange's proposal to permit Affiliated Members or Affiliated Entities to send any amount of Priority Customer PIM volume for purposes of qualifying the OFP arm or the Appointed OFP for the higher break-up rebates in note 3 is equitable and not unfairly discriminatory because all Members who are not Affiliated Members may elect to become an Affiliated Entity. While Priority Customer PIM orders will continue to receive the break-up rebate, as opposed to other market participant orders, the Exchange believes that this application of the rebate is equitable and not unfairly discriminatory because Priority Customer order flow enhances liquidity on the Exchange. This, in turn, provides more trading opportunities and attracts other market participants, thus facilitating tighter spreads, increased order flow and trading opportunities to the benefit of all market participants. Moreover, the Exchange has historically provided lower pricing or other incentives to Priority Customers in order to attract such order flow to MRX.

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.

In terms of intra-market competition, the Exchange does not believe that its proposal will place any category of Exchange market participant at a competitive disadvantage. The proposed changes to the Exchange's PIM break-up rebate program are designed to incentivize market participants to direct PIM order flow to the Exchange. While PIM break-up rebates apply directly to Priority Customer orders, the Exchange believes that the proposed changes benefit all market participants by fortifying and encouraging additional liquidity and order flow to MRX. Furthermore, the Exchange believes that encouraging additional activity by Affiliated Members and Affiliated Entities in the manner discussed above likewise benefits all market participants as it contributes to the Exchange's depth of book as well as to the top of book liquidity. To the extent that the proposal attracts more liquidity, this increased order flow would continue to make the Exchange a more competitive venue for order execution and all of the Exchange's market participants should benefit from the improved market quality. Enhanced market quality and increased transaction volume that results from the anticipated increase in order flow directed to the Exchange would benefit all market participants and improve competition on the Exchange.

In terms of inter-market competition, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive, or rebate opportunities available at other venues to be more favorable. In such an environment, the Exchange must continually adjust its fees to remain competitive with other options 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.

Moreover, as noted above, price competition between exchanges is fierce, with liquidity and market share moving freely between exchanges in reaction to fee and rebate changes. 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 ^[18] and Rule 19b-4(f)(2) ^[19] thereunder. 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-MRX-2020-18 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-MRX-2020-18. 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-MRX-2020-18 and should be submitted on or before December 22, 2020.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.²⁰

J. Matthew DeLesDernier,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  PIM is a process by which an Electronic Access Member (“EAM”) can provide price improvement opportunities for a transaction wherein the EAM seeks to facilitate an order it represents as agent, and/or a transaction wherein the EAM solicited interest to execute against an order it represents as agent. See Options 3, Section 13.

4.  A “Priority Customer” is a person or entity that is not a broker/dealer in securities, and does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s), as defined in Nasdaq MRX Options 1, Section 1(a)(36).

5.  Break-up rebates apply only to regular PIM orders of 500 or fewer contracts and to complex PIM orders where the largest leg is 500 or fewer contracts. See Options 7, Section 3.A.

6.  Customer Total Consolidated Volume means the total volume cleared at The Options Clearing Corporation in the Customer range in equity and ETF options in that month. See Options 7, Section 3, Table 3.

7.  Specifically, the qualifying tier thresholds for the Exchange's maker/taker pricing are based on Customer Total Consolidated Volume percentages. See Options 7, Section 3, Table 3.

8.  An “Affiliated Member” is a Member that shares at least 75% common ownership with a particular Member as reflected on the Member's Form BD, Schedule A. See Options 7, Section 1(c).

9.  An “Affiliated Entity” is a relationship between an Appointed Market Maker and an Appointed OFP for purposes of qualifying for certain pricing specified in the Pricing Schedule. Market Makers and OFPs are required to send an email to the Exchange to appoint their counterpart, at least 3 business days prior to the last day of the month to qualify for the next month. The Exchange will acknowledge receipt of the emails and specify the date the Affiliated Entity is eligible for applicable pricing, as specified in the Pricing Schedule. Each Affiliated Entity relationship will commence on the 1st of a month and may not be terminated prior to the end of any month. An Affiliated Entity relationship will terminate after a one (1) year period, unless either party terminates earlier in writing by sending an email to the Exchange at least 3 business days prior to the last day of the month to terminate for the next month. Affiliated Entity relationships must be renewed annually by each party sending an email to the Exchange. Affiliated Members may not qualify as a counterparty comprising an Affiliated Entity. Each Member may qualify for only one (1) Affiliated Entity relationship at any given time. See Options 7, Section 1(c).

10.  See SR-MRX-2020-21(not yet published).

11.  An “OFP” is any Member, other than a Market Maker, that submits orders, as agent or principal, to the Exchange. See Options 7, Section 1(c)

12.  15 U.S.C. 78 f(b).

13.  15 U.S.C. 78f(b)(4) and (5).

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

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

16.  See MIAX Options (“MIAX”) Fee Schedule, Sections 1(a)(v) and (vi), which set forth MIAX Price Improvement Mechanism (“PRIME”) and MIAX Complex PRIME (“cPRIME”) pricing. MIAX PRIME and cPRIME Break-up Credits are $0.25 per contract (Penny Classes) and $0.60 per contract (Non-Penny Classes). See also Cboe Exchange, Inc. (“Cboe”) Fee Schedule, Break-Up Credits, which provides Break-Up Credits of $0.25 per contract (Penny Classes) and $0.60 per contract (Non-Penny Classes) to orders executed in Cboe's Automated Improvement Mechanism.

17.  Specifically, the qualifying tier thresholds for the Exchange's maker/taker pricing are based on Customer Total Consolidated Volume percentages. See Options 7, Section 3, Table 3.

18.  15 U.S.C. 78s(b)(3)(A)(ii).

19.  17 CFR 240.19b-4(f)(2).

20.  17 CFR 200.30-3(a)(12).