The Long-Term Stock Exchange filed a proposed rule change with the Securities and Exchange Commission on January 22, 2026, to amend its Fee Schedule and modify the Liquidity Incentive Program. This filing, effective immediately under Section 19(b)(3)(A)(ii) of the Securities Exchange Act of 1934, seeks to boost participation by increasing revenue-sharing percentages, reducing quoting size requirements, and making administrative clarifications. Published in the Federal Register on February 2, 2026, the notice invites public comments until February 23, 2026. The changes reflect LTSE's efforts to enhance displayed liquidity and market quality in a competitive exchange landscape, building on the program's launch in July 2025.
Background and Program Evolution
The Liquidity Incentive Program was introduced by LTSE in July 2025 to encourage members to provide liquidity in designated securities. It targets LIP Enhanced Securities, a curated list of stocks where participants can earn incentives for quoting at or better than the National Best Bid and Offer during regular market hours. The program also extends to LIP Standard Securities, encompassing all other traded securities on LTSE. Initially adopted via filing SR-LTSE-2025-16, the program has undergone adjustments, including a reduction in quoting thresholds from 60 percent to 30 percent in August 2025, as detailed in SR-LTSE-2025-18.
This latest proposal withdraws and replaces a prior filing, SR-LTSE-2025-24, to refine specific elements. LTSE, a self-regulatory organization focused on long-term oriented companies, operates under SEC oversight. Key players include LTSE members, typically broker-dealers acting as liquidity providers, and the SEC, which solicits comments to ensure compliance with the Act's goals of fair competition and investor protection. The program's structure draws from broader market practices, where exchanges like NYSE and Nasdaq use tiered incentives to attract order flow, though LTSE emphasizes long-term market quality over high-frequency trading.
Key Proposed Changes
The filing outlines several modifications to the Fee Schedule. First, it increases the revenue-sharing allocation for LIP Standard Securities under Incentive #3 from 20 percent to 50 percent of LTSE's SIP Quote Revenue. This revenue derives from Securities Information Processors, which distribute fees based on quarterly calculations of trading and quoting activity across Tapes A, B, and C. As stated in the filing, 'The proposed increase more closely aligns the economic rewards distributed under the LTSE LIP with the value of displayed liquidity that Members contribute to the Exchange's market data revenue.' This adjustment aims to reward consistent quoting, potentially drawing more participants and improving overall market depth.
Second, the proposal reduces the Minimum Quoted Size for LIP Enhanced Securities to one round lot, eliminating a prior table that set sizes from 200 to 700 shares based on share price. The filing notes this reverts to levels used at the program's launch, addressing barriers observed after higher thresholds were implemented in the second quarter of 2025. LTSE will now update the MQS monthly, publishing it on its website alongside the list of LIP Enhanced Securities, without requiring separate SEC filings. This flexibility allows adaptation to market conditions, as explained: 'Allowing the Exchange to update the MQS monthly without a rule filing will allow the Exchange to respond more nimbly to changes in market conditions, participation trends and liquidity characteristics.'
Administrative updates include removing obsolete transitional language from the program's initial rollout and the third quarter of 2025, which temporarily adjusted thresholds. The filing also clarifies that only 'displayed' quotes count toward the Percent Time at NBBO calculation, ensuring consistency in terminology. Additionally, it extends the expiration of optional $25 monthly credits under Incentive #3 to one year from earning, providing members greater flexibility.
Legal and Regulatory Context
These changes align with Section 6(b) of the Securities Exchange Act, emphasizing equitable fee allocation and the promotion of just and equitable principles of trade. The filing asserts consistency with Section 6(b)(4) for reasonable dues and Section 6(b)(5) for removing impediments to a free and open market. LTSE argues the amendments do not burden competition, instead enhancing it by lowering entry barriers and encouraging displayed liquidity.
Precedents include similar incentive programs on other exchanges, such as Nasdaq's Market Quality Incentive Program, which offers rebates for quoting activity. However, LTSE's focus on long-term securities differentiates it. Perspectives vary: liquidity providers may view the increased revenue share as a boon for profitability, while critics could argue it favors larger firms capable of sustained quoting. Investor advocates might appreciate improved market quality, but some economists question whether such incentives distort natural order flow, referencing debates in SEC rulemaking on market data infrastructure.
Implications and Perspectives
Short-term implications include potential increases in quoting activity on LTSE, as the reduced MQS lowers operational hurdles for smaller members. This could lead to tighter spreads and better execution for investors. Long-term, the changes support LTSE's mission to foster sustainable capital markets, possibly attracting more issuers focused on long-term growth. However, success depends on member adoption amid competition from established exchanges.
Different viewpoints emerge. From a regulatory perspective, the SEC's comment period allows input on whether the proposal adequately protects investors. Market participants might see it as a competitive edge for LTSE, while academics could analyze its impact on market fragmentation. Without endorsing any stance, these amendments highlight ongoing tensions between innovation in exchange models and the need for transparent, non-discriminatory incentives.
In summary, LTSE's proposed rule change refines the Liquidity Incentive Program to encourage broader participation and better align incentives with market contributions. Potential next steps include SEC review of public comments, which could lead to temporary suspension if concerns arise. Ongoing debates may center on balancing incentive programs with equitable market access, while challenges involve monitoring participation trends and adjusting parameters to sustain liquidity improvements. These developments underscore the evolving nature of exchange competition in the national market system.
