Nasdaq Seeks Better Market Quality in Less-Liquid Securities

Nasdaq’s Proposal to Improve Market Quality for Thinly-Traded, Small and Medium Sized Companies

On February 5, 2020, Nasdaq submitted a detailed application to the U.S. Securities and Exchange Commission (SEC) to empower Nasdaq-listed thinly-traded securities with the ability to focus their trading to a specific exchange venue to consolidate liquidity. Our proposal responds directly to the SEC’s October 2019 call for proposals to reform the market structure for thinly-traded securities, including proposals to suspend or terminate Unlisted Trading Privileges (UTP) of such securities.

We hope this application will be a catalyst for introducing new reforms and innovations that will address the unique needs of thinly-traded securities, particularly those of small and medium sized enterprises (SMEs) listed on Nasdaq. Additionally, by helping to restore and strengthen the pipeline of SMEs that access the public capital markets, the proposal will increase opportunities for retail and other investors to share in the growth and development of these companies. The growth of these companies will also drive job growth and economic development.

We believe that giving lower-volume stocks the ability to list their thinly-traded securities on one exchange will promote efficiency, competition and capital formation, as well as improve the trading quality for these companies in the following ways:

• To promote economic and pricing efficiency by focusing the listing and trading of thinly-traded securities on one venue;
• To encourage national securities exchanges that are listing markets to compete more aggressively to list and trade the thinly-traded securities;
• To improve market structure and market quality for thinly-traded securities, incentivizing additional smaller companies to list on the public markets;
• To preserve competition for listings among exchanges and competition for order flow with off-exchange trading venues and between listing venues.

We intend to launch our proposed market tier as part of a mix of features that will provide meaningful benefits and attract a critical mass of issuers. Below are some of the market structure reforms and market experience innovations outlined in our application that would allow issuers to address investor concerns with utmost transparency.

• Intelligent Ticks: Nasdaq proposes to modernize the existing “one-size-fits-all” minimum quoting requirements and fee regimes through our Intelligent Ticks proposal to reflect the unique liquidity characteristics of thinly-traded securities. Nasdaq supports a more flexible and optimizable tick size regime that has the potential to increase liquidity, promote quote competition, and reduce trading costs for thinly-traded securities – all of which will serve to protect investors by improving market quality.
• Proxy Reforms: Nasdaq applauds the SEC’s recent actions and proposals to reform the proxy process. We concur with the Commission that such reforms are generally necessary to lower costs, reduce unnecessary burdens and improve the quality of investor engagement with public companies. We believe that if enacted, the positive effects of these reforms will be felt most acutely by issuers of thinly-traded securities, for which the costs and burdens of the existing process tend to be the highest.
• Streamlined Disclosure Obligations: Nasdaq envisions streamlining the periodic disclosure requirements for thinly-traded securities to make life in the public markets less onerous, expensive and hazardous for the issuers of such stocks – without compromising the investor protections that periodic disclosures provide.
• Shareholder Identification Reforms: Nasdaq envisions an environment in which issuers of thinly-traded securities would have greater transparency about the identity and posture of their shareholders.

We have advocated for these efforts as part of our blueprint to revitalize the U.S. capital markets, which was expanded through our TotalMarkets initiative focused on market structure supporting the trading of public companies.

In a world where liquidity is more effectively nurtured, Nasdaq remains committed to developing innovative solutions designed to consolidate liquidity and improve the trading experience for investors to incentivize small and medium sized companies to list on public markets.