FR 2021-03212

The document is a formal notice detailing a proposal from The Nasdaq Stock Market LLC to amend its transaction credits, which primarily affects the financial incentives available to Qualified Market Makers (QMMs) on the exchange. Currently, QMMs earn rebates based on the volume of trades they execute, and this proposal aims to adjust how these volumes are calculated by excluding certain sub-dollar trades. This intended modification addresses challenges market participants face due to a recent surge in sub-dollar trading, which has complicated the process of qualifying for rebates.

Summary of the Proposal

Nasdaq has proposed new rules to alter how transaction credits, which act like bonuses for executing trades, are calculated. Historically, market makers have received rebates when they meet certain trade volume criteria. However, a recent rise in sub-dollar trading has made it difficult for QMMs, who add liquidity to the market, to qualify for these rebates. To address these challenges, Nasdaq now suggests including or excluding sub-dollar trades in the calculation, picking whichever method benefits market makers the most.

Issues and Concerns

A significant concern regarding the proposal is its complexity and reliance on industry-specific language, which may be difficult for the general public to understand. This complexity may prevent the broader public from appreciating the nuances of the proposed changes, which cater to specialized participants in the financial sector.

The decision to exclude sub-dollar trade volumes in certain calculations may appear to favor market makers engaged in particular pricing programs over those who are not, raising questions about equity and fairness. This preferential treatment might not be apparent to those outside the industry, potentially leading to concerns about bias and unequal conditions among market participants.

Moreover, the document lacks a detailed financial impact analysis regarding how these changes could affect the overall market or individual investors. While the proposal seeks to maintain liquidity and incentives, it does not provide extensive insights into the possible economic consequences on sector-wide operations.

Broad Public Impact

For the general public, this document may seem dense and inaccessible, providing little immediate implication regarding day-to-day financial activities. However, the proposed changes might indirectly influence market conditions, possibly affecting stock prices and investment returns over time, even if its primary impact is on financial professionals.

On a broader scale, ensuring that market makers can continue to operate effectively by receiving appropriate incentives could facilitate market stability and efficiency. Such conditions are generally favorable for investors who rely on smooth market operations to buy and sell shares.

Impact on Specific Stakeholders

The proposed rule changes have direct implications for Nasdaq's member firms, especially QMMs who play a crucial role in providing liquidity and improving market quality. By potentially excluding sub-dollar trades from rebate calculations, Nasdaq aims to ensure these key players remain incentivized to contribute to a healthy trading environment despite market fluctuations.

However, stakeholders not engaged in significant trading activity or those who might not benefit directly from these changes could question the equity of the revised eligibility criteria. Stakeholders that engage more with sub-dollar securities could view these changes as disadvantageous, as they are seemingly excluded from certain financial incentives.

In summary, while the Nasdaq proposal seeks to address anomalies brought about by increased sub-dollar trading, it carries complexities and implications that warrant close consideration both from insiders within the financial industry and from those observing the broader financial ecosystem.

The document in question provides an overview of proposed changes to certain financial allocations and credits related to market makers on the Nasdaq Stock Market. Specifically, it outlines adjustments to transaction credits and rebates intended to maintain market liquidity and incentivize market participants. These changes are tailored to address challenges posed by a rise in trading volumes of securities priced under $1.

Proposed Financial Adjustments

The Nasdaq Stock Market proposes several financial adjustments related to transaction credits and rebates for its members. The document mentions that members participating in certain pricing programs can receive credits. The exchange currently offers various special pricing programs linked to activities in securities priced at or above $1. One such adjustment involves rebates offered to Qualified Market Makers (QMMs), where they can earn a Tier 1 rebate of $0.0001 per executed share if their traded volume meets certain thresholds. Similarly, a Tier 2 rebate of $0.0002 per executed share is available for higher thresholds of activity.

Additionally, there are changes proposed to existing transaction credits. For instance, the document mentions amending a credit program from the current $0.00295 per share executed by lowering the volume threshold required for eligibility. Similarly, another amendment involves adjusting a $0.0029 per executed share credit by reducing its eligibility threshold, making it easier for members to qualify. These revisions aim to incentivize increased market activity and liquidity.

Exclusion of Sub-Dollar Volume

One of the key financial changes discussed is the exclusion of trading volumes in securities priced at less than $1, referred to as "sub-dollar volume," from certain qualification calculations. This action is proposed to prevent a detrimental impact on members' ability to achieve rebate tiers due to an increase in sub-dollar trading by non-QMMs. By excluding sub-dollar volumes from some calculations while adjusting qualification thresholds, the Nasdaq aims to ensure that current rebate criteria remain challenging but attainable given the trading environment.

Financial Incentives and Market Competition

The financial references in the document reflect an attempt to maintain a balance between incentivizing market participation and ensuring fair competition among trading members. The recalibration of rebate criteria and the exclusion of certain volumes are intended to maintain a competitive market environment where QMMs can continue to add liquidity effectively.

However, these changes may raise concerns identified in the document's issues, such as the perceived fairness of adjusting criteria in a manner that might benefit specific participants over others. Ensuring that financial incentives do not unfairly disadvantage certain market categories or create unequal conditions remains a central theme.

By aligning financial incentives with market conditions, the Nasdaq Stock Market seeks to support its broader goals of liquidity and efficiency. However, the complexity of these financial plans, their potential impacts, and their role in the competitive landscape highlight the importance of clarity and fairness in financial structuring within financial markets.