2022-06189. Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Qualifications for the Market Maker Plus Program in Options 7, Section 3

March 18, 2022.

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 March 4, 2022, Nasdaq ISE, LLC (“ISE” 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 the qualifications for the Exchange's Market Maker Plus program in its Pricing Schedule at Options 7, Section 3.

The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/​rulebook/​ise/​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 qualifications for the Exchange's Market Maker Plus program in its Pricing Schedule at Options 7, Section 3. The Exchange initially filed the proposed pricing changes on February 23, 2022 (SR-ISE-2022-05). On March 4, 2022, the Exchange withdrew that filing and submitted this filing.

Today, the Exchange operates a Market Maker Plus program for regular orders in Select Symbols ^[3] and Non-Select Symbols ^[4] that provides the below tiered incentives to Market Makers ^[5] based on time spent quoting at the National Best Bid or National Best Offer (“NBBO”). This program is designed to reward Market Makers that contribute to market quality by maintaining tight markets in Select and Non-Select Symbols.

Select Symbols Other Than SPY, QQQ, IWM, AMZN, FB, and NVDA

Market Maker Plus tier (specified percentage)	Maker rebate
Tier 1 (80% to less than 85%)	($0.15)
Tier 2 (85% to less than 95%)	(0.18)
Tier 3 (95% or greater)	(0.22)

SPY, QQQ, and IWM

Market Maker Plus tier (specified percentage)	Regular Maker rebate	Linked Maker rebate
Tier 1a (50% to less than 65%)	($0.00)	N/A
Tier 1b (65% to less than 80%) or (over 50% and adds liquidity in the qualifying symbol that is executed at a volume of greater than 0.10% of Customer Total Consolidated Volume)	(0.05)	N/A
Tier 2 (80% to less than 85%) or (over 50% and adds liquidity in the qualifying symbol that is executed at a volume of greater than 0.20% of Customer Total Consolidated Volume)	(0.18)	($0.15)
Tier 3 (85% to less than 90%) or (over 50% and adds liquidity in the qualifying symbol that is executed at a volume of greater than 0.25% of Customer Total Consolidated Volume)	(0.22)	(0.19)
Tier 4 (90% or greater) or (over 50% and adds liquidity in the qualifying symbol that is executed at a volume of greater than 0.50% of Customer Total Consolidated Volume)	(0.26)	(0.23)

AMZN, FB, and NVDA

Market Maker Plus tier (specified percentage)	Maker rebate
Tier 1 (70% to less than 85%)	($0.15)
Tier 2 (85% to less than 95%)	(0.18)
Tier 3 (95% or greater)	(0.22)

Non-Select Symbols (Excluding Index Options)

Market Maker Plus tier (specified percentage)	Maker fee/ rebate
Tier 1 (80% to less than 90%)	$0.50
Tier 2 (90% to less than 98%)	0.30
Tier 3 (98% or greater)	(0.40)

Market Makers are evaluated each trading day for the percentage of time spent on the NBBO for qualifying series that expire in two successive thirty calendar day periods beginning on that trading day. A Market Maker Plus is a Market Maker who is on the NBBO a specified percentage of the time on average for the month based on daily performance in the qualifying series for each of the two successive periods described above.^[6] A Market Maker's worst quoting day each month for each of the two successive periods described above, on a per symbol basis, is excluded in calculating whether a Market Maker qualifies for this fee or rebate. In addition, a Market Maker who qualifies for Market Maker Plus Tiers 2 or higher in at least four of the previous six months are eligible to receive a reduced Tier 2 incentive in a given month where the Market Maker does not qualify for any Market Maker Plus tiers. For Select Symbols, this rebate is the applicable Tier 2 rebate reduced by $0.08 per contract. For Non-Select Symbols, this fee is the Tier 2 fee increased by $0.08 per contract.

The Exchange now proposes to amend existing language around the reduced Tier 2 incentive to provide that a Market Maker who qualifies for Market Maker Plus Tier 2 or higher in at least four of the previous six months will be eligible to receive a reduced Tier 2 incentive in a given month where the Market Maker does not qualify for Market Maker Plus Tier 2 or higher. The Exchange also proposes to add that for the avoidance of doubt, if a Market Maker has achieved Tier 2 or higher in at least four of the previous six months, but does not achieve Tier 2 or higher in the current month, that Market Maker will receive the better of the reduced Tier 2 incentive or any applicable Tier 1 incentive the Market Maker qualified for in the current month. The Exchange is proposing this language to avoid inadvertently penalizing Market Makers that qualify for a Market Maker Plus Tier 1 incentive in a given month, yet receive a lower incentive than if that Market Maker achieved no Market Maker Plus tier in the same time frame. Specifically, a Market Maker that qualifies for the SPY, QQQ, and IWM Market Maker Plus Tier 1b incentive in a given month would receive a rebate of $0.05 per contract today. If that Market Maker did not qualify for any tier in the same month, but had qualified for SPY, QQQ, and IWM Market Maker Plus Tiers 2 or higher in four of the prior six months, the Market Maker would receive a reduced Tier 2 incentive of $0.10 ( i.e., $0.18 Tier 2 rebate minus $0.08).^[7] The Exchange believes that providing a lower rebate in such instances where the Market Maker had better performance by percentage of time spent at the NBBO versus paying a higher rebate solely due to the four month lookback protection is contrary to the intent of the Market Maker Plus program, which is to reward Market Makers that contribute to market quality by maintaining tight markets in symbols traded on the Exchange. The proposed language will therefore make clear that in the foregoing instance, the Exchange would provide the qualifying Market Maker with the higher incentive of $0.10 versus the $0.05 incentive.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act,^[8] in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,^[9] 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'. . . .” ^[10]

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.” ^[11]

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.

As discussed above, the Exchange's proposal is intended to avoid inadvertently penalizing Market Makers that qualify for the SPY, QQQ, and IWM Market Maker Plus Tier 1b incentive in a given month, yet receive a lower incentive than if that Market Maker achieved no Market Maker Plus tier in the same time frame ( i.e., $0.05 versus $0.10 per contract rebate). The Exchange believes that providing a lower rebate in such instances where the Market Maker had better performance by percentage of time spent at the NBBO versus paying a higher rebate solely due to the four month lookback protection is contrary to the intent of the Market Maker Plus program to reward Market Makers that maintain tight markets in symbols traded on the Exchange. The Exchange believes that the proposed language reasonably addresses this unintended gap and will continue to encourage Market Makers to post tight markets by rewarding Market Makers with higher incentives to achieve better performance.

The Exchange believes that the proposed language is equitable and not unfairly discriminatory as all Market Makers are subject to the same qualification criteria for Market Maker Plus. The Exchange also believes that it is not unfairly discriminatory to offer this program's incentives to Market Makers only. Market Makers, and in particular, those Market Makers that participate in and qualify for the Market Maker Plus program, add value through continuous quoting, and are subject to additional requirements and obligations (such as quoting obligations) that other market participants are not. Lastly, the proposed language will continue to encourage Market Makers to post tight markets in symbols traded on the Exchange, thereby increasing liquidity and attracting additional order flow to the Exchange, which benefits all market participants in the quality of order interaction.

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, while the proposed language would apply directly to Market Makers that participate in the Market Maker Plus program, the Exchange believes that the proposed changes will continue to fortify participation in the program, ultimately to the benefit of all market participants. As discussed above, continuing to encourage participation in the Market Maker Plus program will improve market quality by incentivizing Market Makers to provide significant quoting at the NBBO. This, in turn, improves trading conditions for all market participants through narrower bid-ask spreads and increased depth of liquidity available at the inside market, thereby attracting additional order flow to 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 and rebates to remain competitive with other 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.

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 ^[12] and Rule 19b-4(f)(2) ^[13] 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-ISE-2022-07 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-ISE-2022-07. 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-ISE-2022-07 and should be submitted on or before April 14, 2022.

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

J. Matthew DeLesDernier,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  “Select Symbols” are options overlying all symbols listed on the Exchange that are in the Penny Interval Program.

4.  “Non-Select Symbols” are options overlying all symbols excluding Select Symbols.

5.  The term “Market Makers” refers to Competitive Market Makers and Primary Market Makers, collectively.

6.  Qualifying series are series trading between $0.03 and $3.00 (for options whose underlying stock's previous trading day's last sale price was less than or equal to $100) and between $0.10 and $3.00 (for options whose underlying stock's previous trading day's last sale price was greater than $100) in premium.

7.  The Exchange has found an instance where a Market Maker fell into this category.

8.  15 U.S.C. 78f(b).

9.  15 U.S.C. 78f(b)(4) and (5).

10.   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)).

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

12.  15 U.S.C. 78s(b)(3)(A)(ii).

13.  17 CFR 240.19b-4(f)(2).

14.  17 CFR 200.30-3(a)(12).