The Long-Term Stock Exchange (LTSE) filed a proposed rule change with the Securities and Exchange Commission (SEC) on September 30, 2025, to introduce a Co-Lead Incentive program. This initiative amends the exchange's fee schedule to offer rebates to members who meet specific quoting standards at the national best bid or offer (NBBO). Set to take effect on October 1, 2025, the program targets enhanced market quality by incentivizing consistent liquidity provision across a broad range of securities. Published in the Federal Register on November 26, 2025, the notice invites public comments and underscores LTSE's effort to compete in a fragmented equity trading landscape. By rewarding displayed quotes that contribute to price discovery, the proposal addresses ongoing challenges in maintaining robust, transparent markets amid high competition from other venues.
Background and Purpose
The Co-Lead Incentive emerges from LTSE's strategy to deepen liquidity and improve execution quality. As a self-regulatory organization, LTSE operates under Section 19(b)(1) of the Securities Exchange Act of 1934, requiring it to file fee changes with the SEC. The program specifically aims to encourage members to quote at least one round lot on a displayed basis at the NBBO for at least 20% of the regular market session in an average of 2,000 securities priced at or above $1 per share each trading day. This threshold excludes LIP Enhanced Securities, a designated list used in LTSE's existing Liquidity Incentive Program.
LTSE justifies the incentive by noting that participants who consistently quote at the NBBO risk capital and promote narrower spreads, benefiting all market users. The exchange cites the program's potential to attract order flow and foster a more efficient national market system, aligning with Regulation NMS goals of enhancing competition and price formation. Similar programs exist at exchanges like MEMX, Nasdaq, and Cboe BZX, which offer rebates for meeting NBBO quoting standards in specified securities.
Key Qualification Criteria
To qualify, a member must achieve the 20% NBBO time requirement across at least 2,000 securities, averaged monthly. LTSE calculates this by aggregating daily securities where each of a member's market participant identifiers (MPIDs) meets the threshold, counting each security only once even if multiple MPIDs qualify in it. For instance, if a member meets the requirement in 2,020 securities on half the trading days and 1,999 on the other half in a 20-day month, the average would be 2,009.5, satisfying the standard.
Certain days are excluded to ensure fairness: those with system disruptions lasting over 60 minutes, scheduled early closes, and the Russell Reconstitution Day (typically the last Friday in June). These exclusions mirror those in LTSE's Liquidity Incentive Program and prevent atypical conditions from penalizing participants. The NBBO is defined per Regulation NMS Rule 600(b), and quoting must occur during the regular market session from 9:30 a.m. to 4:00 p.m. ET.
Rebate Structure and Scope
Qualifying members receive a $0.0040 per share rebate (40 mils) for all displayed liquidity-adding executions in securities priced at or above $1, excluding LIP Enhanced Securities. This applies across all of the member's MPIDs, not just the qualifying one, and covers executions in securities below $1 at the standard 0.15% of transaction value. LTSE emphasizes that this rebate rewards commitments to market quality, such as providing immediately executable liquidity that dampens volatility.
The structure draws from precedents like MEMX's Displayed Liquidity Incentive, which offers enhanced rebates for NBBO quoting in a set number of securities, and Nasdaq's Qualified Market Maker Program, requiring 25% NBBO time in at least 1,000 securities. Cboe BZX's Liquidity Management Program similarly incentivizes quoting in designated securities. LTSE argues this approach is equitable, as it uses objective criteria available to all members.
Statutory Basis and Competitive Implications
LTSE asserts the proposal complies with Sections 6(b)(4) and 6(b)(5) of the Exchange Act, ensuring equitable fee allocation and preventing unfair discrimination. It promotes just and equitable trade principles by incentivizing behavior that removes market impediments and protects investors. The exchange highlights that the program is voluntary and applies uniform standards, with no disparate impact on participant categories.
From a competition perspective, LTSE operates in a market where participants can redirect flow if fees are uncompetitive. The incentive is designed to draw liquidity without burdening intermarket or intramarket competition, as evidenced by similar programs elsewhere. Critics might argue such rebates could favor high-frequency traders, but LTSE counters that broader NBBO quoting benefits retail and institutional investors alike by narrowing spreads and increasing depth.
Potential Implications and Perspectives
Short-term, the program could increase LTSE's market share by attracting liquidity providers, potentially leading to more executions and tighter spreads. Long-term, it may contribute to a more resilient equity market, though success depends on adoption amid competition from larger exchanges.
Different stakeholders offer varied views. Proponents, including LTSE, see it as a tool for innovation in long-term focused trading. Regulators like the SEC may scrutinize it for alignment with investor protection, while competitors might view it as a standard pricing tactic. Market participants could appreciate the rebates but question the 2,000-security threshold's attainability for smaller firms. Overall, the proposal reflects ongoing debates on how exchanges balance incentives with fair access.
In summary, LTSE's Co-Lead Incentive represents a targeted effort to enhance displayed liquidity through measurable quoting standards. Future steps may include SEC review of comments, potential modifications, or full approval. Ongoing challenges involve monitoring program efficacy and adapting to evolving market dynamics, such as technological advancements or regulatory shifts, which could influence similar incentives across exchanges.
