FR 2021-01136

Nasdaq PHLX LLC, a self-regulatory organization, has filed a proposed rule change with the Securities and Exchange Commission (SEC) to adjust its pricing schedule for the Qualified Market Maker (QMM) Program. This program grants incentives to member organizations that actively partake in market-making activities. The planned amendments are intended to modify the criteria under which members qualify for certain financial benefits. These changes aim to enhance market quality but may also impact how organizations interact with Nasdaq PHLX's marketplace.

Summary of the Document

The proposal principally involves two alterations. Firstly, it seeks to raise the requirement for the average number of securities a QMM must quote at the national best bid and offer (NBBO) to be eligible for supplemental credits. Specifically, the current threshold of quoting at least 10% of the time for an average of 500 securities per day will increase to 650. Secondly, the plan includes reducing another qualification threshold from 850 to 800 securities, making certain higher-level credits more accessible. These shifts are framed as attempts to promote broader participation from member organizations, enhancing the overall quality and competitiveness of the market.

Significant Issues or Concerns

One noticeable issue with the document is its technical and legalistic language. The frequent use of specialized terms, such as "Qualified Market Maker" and references to specific regulatory sections, might present challenges for readers without a background in securities regulation. Moreover, while the document mentions increases and decreases in specific thresholds, there is a lack of clear explanation about the potential financial implications for member organizations, such as costs or savings stemming from these changes.

Another concern is the document's omission of how these proposed changes might uniquely affect smaller market participants or firms of different sizes. There may be unintended consequences on market fairness if smaller entities cannot adapt to these new requirements as easily as larger ones.

Potential Impact on the Public

Broadly, the changes are projected to impact market dynamics by potentially altering the behavior of organizations that qualify as QMMs. On the positive side, improved market quality through increased competition and liquidity might benefit investors with more efficient pricing and execution of trades. However, if the updated requirements prove too demanding for smaller players, there could be a negative impact on the diversity of market participants, potentially stifling innovation and inclusivity in the marketplace.

Impact on Specific Stakeholders

For larger member organizations, the proposed changes may offer new opportunities for financial incentives by increasing participation in the QMM program. These organizations might have the resources to adapt more easily to the new quoting requirements and thus maintain or even enhance their market positions.

Conversely, smaller firms may find these new thresholds challenging to meet, potentially excluding them from certain financial benefits. If the recalibrated criteria make it more difficult for such firms to remain competitive, there could be a reduction in the number of active market participants, possibly resulting in less robust market dynamics.

Conclusion

While the Nasdaq PHLX LLC's proposed rule changes are positioned as enhancements to market quality and competition, there are areas needing further clarification. These include the potential financial implications for member organizations, the potential impact on smaller market participants, and the means by which success from these changes will be measured. Broader engagement and clearer communication with stakeholders could help ensure that the modifications achieve their intended effects without unintentionally disadvantaging any specific groups within the market.

The Federal Register document discusses proposed changes to Nasdaq PHLX LLC's pricing schedule at Equity 7, Section 3, specifically targeting adjustments to financial incentives provided to Qualified Market Makers (QMMs). These adjustments are detailed in the document with references to supplemental credits based on the trading activities of member organizations.

One of the proposed financial allocations involves an upward adjustment in the criteria for earning a supplemental credit. Currently, member organizations that qualify as QMMs must quote at the national best bid and offer (NBBO) for at least 10% of the time for an average of at least 500 securities per day. The document proposes that this requirement be increased to 650 securities, while maintaining the supplemental credit of $0.0002 per share executed. This change aims to motivate QMMs to expand their quoting activities.

In contrast, another proposed change involves a downward adjustment in the threshold for a different supplemental credit. The requirement for quoting at the NBBO for an average of 850 securities per day during market hours will be reduced to 800 securities to qualify for 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. This adjustment is intended to make the supplemental credits more accessible, thereby encouraging more member organizations to meet these criteria.

These financial modifications are part of the larger adjustments to the QMM Program designed to influence market behavior. The adjustments are meant to stimulate more extensive quoting at the NBBO, which could potentially improve market quality. However, the document raises issues related to complexity and accessibility for participants who may not be familiar with the specific terminology or the mechanics of securities regulation.

One key issue concerns the potential financial implications these changes might have on member organizations, particularly small market participants. Without explicit mention of costs or savings, member organizations might find it challenging to gauge the financial impact of these changes on their operations. This lack of clarity could result in unequal effects across differently sized firms, particularly if the changes inadvertently favor larger participants with the resources to adapt quickly to new quoting requirements.

The document discusses the objective of increasing market share but lacks specific metrics for assessing success. This absence of benchmarks makes it difficult for readers to understand what financial impact these changes are expected to have overall or whether alternative financial strategies were considered.

The document invites public comments, yet it lacks a detailed outreach strategy to engage those potentially affected, potentially reducing the effectiveness of the feedback gathered and the understanding of the financial strategies proposed. The changes, though aimed at improving market quality, would benefit from clearer communication regarding their financial implications and impacts on different market participants.