Notice2022-15222
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 7, Section 5 To Add Membership Fees
Primary source
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Published
July 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 136 (Monday, July 18, 2022)</title>
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[Federal Register Volume 87, Number 136 (Monday, July 18, 2022)]
[Notices]
[Pages 42767-42775]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95264; File No. SR-MRX-2022-07]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 7,
Section 5 To Add Membership Fees
July 12, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 29, 2022, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend MRX's Pricing Schedule at Options 7,
Section 5, Other Options Fees and Rebates, to assess membership fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/mrx/rules">https://listingcenter.nasdaq.com/rulebook/mrx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
MRX proposes to amend its Pricing Schedule at Options 7, Section 5,
Other Options Fees and Rebates, to assess membership fees, which are
not assessed today, and which have not been assessed since MRX's
inception in 2016.\3\ The proposed changes are designed to update fees
for MRX's services to reflect their current value--rather than their
value when it was a new exchange six years ago--based on MRX's ability
to deliver value to its customers through technology, liquidity and
functionality. Newly-opened exchanges often charge no fees for certain
services such as membership, in order to attract order flow to an
exchange, and later amend their fees to reflect the true value of those
services.\4\ Allowing newly-opened exchanges time to build and sustain
market share before charging non-transactional fees encourages market
entry and promotes competition. The proposed changes to membership fees
within Options 7, Section 5; Other Options Fees and Rebates, are
described below.
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\3\ The Exchange initially filed the proposed pricing changes on
May 2, 2022 (SR-MRX-2022-04) instituting fees for membership, ports
and market data. On June 29, 2022, the Exchange withdrew that
filing, and submitted separate filings for membership, ports and
market data. The instant filing replaces the membership fees set
forth in SR-MRX-2022-04.
\4\ See also Securities Exchange Act Release No. 93927 (January
7, 2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19)
(introduction of membership fees by MEMX).
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This proposal reflects MRX's assessment that it has gained
sufficient market share to compete effectively against the other 15
options exchanges without waiving fees for membership. These types of
fees are assessed by options exchanges that compete with MRX in the
sale of exchange services--indeed, MRX is the only options exchange
(out of the 16 current options exchanges) not assessing membership fees
today. New exchanges commonly waive membership fees to attract market
participants, facilitating their entry into the market and, once there
is sufficient depth and breadth of liquidity, ``graduate'' to compete
against established exchanges and charge fees that reflect the value of
their services.\5\ If MRX is incorrect in this assessment, that error
will be reflected in MRX's ability to compete with other options
exchanges.\6\
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\5\ For example, MIAX Emerald commenced operations as a national
securities exchange registered on March 1, 2019. See Securities
Exchange Act Release No. 84891 (December 20, 2018), 83 FR 67421
(December 28, 2018) (File No. 10-233) (order approving application
of MIAX Emerald, LLC for registration as a national securities
exchange). MIAX Emerald filed to adopt its transaction fees and
certain of its non-transaction fees in its filing SR-EMERALD-2019-
15. See Securities Exchange Act Release No. 85393 (March 21, 2019),
84 FR 11599 (March 27, 2019) (SR-EMERALD-2019-15) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Establish
the MIAX Emerald Fee Schedule). MIAX Emerald waived its one-time
application fee and monthly Trading Permit Fees assessable to EEMs
and Market Makers among other fees within SR-EMERALD-2019-15.
\6\ Nasdaq recently announced that, beginning in 2022, Nasdaq
plans to migrate its North American markets to Amazon Web Services
in a phased approach, starting with Nasdaq MRX, a U.S. options
market. The proposed fee changes are entirely unrelated to this
effort.
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As noted above, MRX Members are not assessed fees for membership
today. Under the proposed fee change, MRX Members will be required to
pay a monthly Access Fee, which entitles MRX Members to trade on the
Exchange based on their membership type. Specifically, MRX proposes to
assess Electronic Access Members \7\ an Access Fee of $200 per month,
per membership. The Exchange proposes to assess Market Makers \8\
Access Fees depending on whether they are a Primary Market Maker
(``PMM'') or a Competitive Market Maker (``CMM''). A PMM would be
assessed an Access Fee of $200 per month, per membership. A CMM would
be assessed an Access Fee of $100 per month, per membership.\9\ The
proposed fees are identical to access fees on Nasdaq GEMX, LLC
(``GEMX'').\10\
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\7\ The term ``Electronic Access Member'' or ``EAM'' means a
Member that is approved to exercise trading privileges associated
with EAM Rights. See General 1, Section 1(a)(6).
\8\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(21). The term ``Competitive Market Maker'' means a
Member that is approved to exercise trading privileges associated
with CMM Rights. See Options 1, Section 1(a)(12). The term ``Primary
Market Maker'' means a Member that is approved to exercise trading
privileges associated with PMM Rights. See Options 1, Section
1(a)(35).
\9\ In the case where a single Member has multiple MRX
memberships, the monthly access fee is charged for each membership.
For example, if a single member firm is both an EAM and a CMM, or
owns multiple CMM memberships, the firm is subject to the access fee
for each of those memberships.
\10\ See GEMX Options 7, Section 6.A. (Access Fees).
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In order to receive market making appointments to quote in any
options class, CMMs will also be assessed a CMM Trading Right Fee
identical to GEMX.\11\ CMM trading rights entitle a
[[Page 42768]]
CMM to enter quotes in options symbols that comprise a certain
percentage of industry volume. On a quarterly basis, the Exchange
assigns points to each options class equal to its percentage of overall
industry volume (not including exclusively traded index options),
rounded down to the nearest one hundredth of a percentage with a
maximum of 15 points. A new listing is assigned a point value of zero
for the remainder of the quarter in which it was listed. CMMs may seek
appointments to options classes that total 20 points for the first CMM
Right it holds, and 10 points for the second and each subsequent CMM
Right it holds.\12\ In order to encourage CMMs to quote on the
Exchange, MRX launched CMM trading rights without any fees, allowing
CMMs to freely quote in all options classes.
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\11\ See GEMX Options 7, Section 6.B. (CMM Trading Rights Fees).
\12\ A CMM may request changes to its appointments at any time
upon advance notification to the Exchange in a form and manner
prescribed by the Exchange. See MRX Options 2, Section 3(c)(3).
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The Exchange is now proposing to adopt a monthly CMM Trading Rights
Fee. Under the proposed fee structure, CMMs will be assessed a Trading
Rights Fee of $850 per month for the first trading right, which will
entitle the CMM to quote in 20 percent of industry volume.\13\ Each
additional CMM Right will cost $500 per month, and will entitle the CMM
to quote an additional 10 percent of volume. Similar to GEMX's trading
rights fee,\14\ a new CMM would pay $850 for the first trading right
and all CMMs would thereafter pay $500 for each additional trading
right. The Exchange is proposing this pricing model because each
subsequent CMM Right costs less than the first trading right. All CMMs
have the opportunity to purchase additional CMM Rights beyond the
initial trading right in order to quote in additional options series.
The Exchange notes that it is not proposing trading right fees for
PMMs, as the Exchange wishes to encourage Members to act as PMMs, which
will benefit the market through, for example, more robust quoting
requirements. PMMs have additional obligations on MRX as compared to
CMMs.\15\ The Exchange is proposing only to charge the $200 access fee
to EAMs, and no trading rights fee, as the technical, regulatory, and
administrative services associated with an EAM's use of the Exchange
are not as comprehensive as those associated with Market Makers'
use.\16\
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\13\ These trading rights are referred to as CMM Rights. See MRX
Options 2, Section 3.
\14\ See GEMX Options 7, Section 6.B.
\15\ PMMs are required to provide two-sided quotations in 90% of
cumulative number of seconds, or such higher percentage as the
Exchange may announce in advance. In contrast, a CMM is not required
to enter quotations in the options classes to which it is appointed;
however, if a CMM initiates quoting in an options class, the CMM is
required to provide two-sided quotations in 60% of the cumulative
number of seconds, or such higher percentage as the Exchange may
announce in advance. See Options 2, Section 5(e)(2). Additionally,
PMMs are required to submit a Valid Width Quote to open their
assigned options series. See Options 3, Section 8(c)(1) and 8(c)(3).
\16\ The Exchange notes that all MRX Members may submit orders;
however, only Market Makers may submit quotes. The Exchange surveils
Market Makers quotes in addition to any orders transacted on MRX and
conducts surveillance on Market Maker quotes to ensure these
participants have met their quoting and other market making
obligations. The regulatory oversight for Market Makers is in
addition to the regulatory oversight which is administered for all
EAMs.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\18\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\17\ See 15 U.S.C. 78f(b).
\18\ See 15 U.S.C. 78f(b)(4) and (5).
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The proposed changes to the Pricing Schedule are reasonable in
several respects. As a threshold matter, the Exchange is subject to
significant competitive forces in the market for order flow, which
constrains its pricing determinations. The fact that the market for
order flow is competitive has long been recognized by the courts. In
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit
stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers' . . . .'' \19\
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\19\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention to determine
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues, and also recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \20\
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\20\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Congress directed the Commission to ``rely on `competition,
whenever possible, in meeting its regulatory responsibilities for
overseeing the SROs and the national market system.'' \21\ As a result,
the Commission has historically relied on competitive forces to
determine whether a fee proposal is equitable, fair, reasonable, and
not unreasonably or unfairly discriminatory. ``If competitive forces
are operative, the self-interest of the exchanges themselves will work
powerfully to constrain unreasonable or unfair behavior.'' \22\
Accordingly, ``the existence of significant competition provides a
substantial basis for finding that the terms of an exchange's fee
proposal are equitable, fair, reasonable, and not unreasonably or
unfairly discriminatory.'' \23\ In its 2019 guidance on fee proposals,
Commission staff indicated that they would look at factors beyond the
competitive environment, such as cost, only if a ``proposal lacks
persuasive evidence that the proposed fee is constrained by significant
competitive forces.'' \24\
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\21\ See NetCoalition, 615 F.3d at 534-35; see also H.R. Rep.
No. 94-229 at 92 (1975) (``[I]t is the intent of the conferees that
the national market system evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are
removed.'').
\22\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\23\ Id.
\24\ See U.S. Securities and Exchange Commission, ``Staff
Guidance on SRO Rule filings Relating to Fees'' (May 21, 2019),
available at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a>.
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History of MRX Operations
Over the years, MRX has amended its transactional pricing to remain
competitive and attract order flow to the Exchange.\25\
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\25\ See e.g. Securities Exchange Act Release Nos. 77292 (March
4, 2016), 81 FR 12770 (March 10, 2016) (SR-ISEMercury-2016-02)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Establish the Schedule of Fees); 77409 (March 21, 2016),
81 FR 16240 (March 25, 2016) (SR-ISEMercury-2016-05) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
the Schedule of Fees); 81 FR 16238 (March 21, 2016), 81 FR 16238
(March 25, 2016) (SR-ISEMercury-2016-06) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend the
Schedule of Fees); 77841 (May 16, 2016), 81 FR 31986 (SR-ISEMercury-
2016-11) (Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Amend the Schedule of Fees); 82537 (January 19,
2018), 83 FR 3784 (January 26, 2018) (SR-MRX-2018-01) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
the Schedule of Fees To Introduce a New Pricing Model); 82990 (April
4, 2018), 83 FR 15434 (April 10, 2018) (SR-MRX-2018-10) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Chapter IV of the Exchange's Schedule of Fees); 28677 (June 14,
2018), 83 FR 28677 (June 20, 2018) (SR-MRX-2018-19) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To
Increase Certain Route-Out Fees Set Forth in Section II.A of the
Schedule of Fees); 84113 (September 13, 2018), 83 FR 47386
(September 19, 2018) (SR-MRX-2018-27) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Relocate the
Exchange's Schedule of Fees); 85143 (February 14, 2019), 84 FR 5508
(February 21, 2019) (SR-MRX-2019-02) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend the Pricing
Schedule at Options 7, Section 3); 85313 (March 14, 2019), 84 FR
10357 (March 20, 2019) (SR-MRX-2019-05) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change Relating to PIM
Fees and Rebates); 86326 (July 8, 2019), 84 FR 33300 (July 12, 2019)
(SR-MRX-2019-14) (Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt Complex Order Pricing); 88022 (January
23, 2020), 85 FR 5263 (January 29, 2020) (SR-MRX-2020-02) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
MRX Pricing Schedule); 89046 (June 11, 2020), 85 FR 36633 (June 17,
2020) (SR-MRX-2020-11) (Notice of Filing and Immediate Effectiveness
of Proposed Rule Change To Amend Its Pricing Schedule at Options 7);
89320 (July 15, 2020), 85 FR 44135 (July 21, 2020) (SR-MRX-2020-14)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend Its Pricing Schedule at Options 7, Section 5, Other
Options Fees and Rebates, in Connection With the Pricing for Orders
Entered Into the Exchanges Price Improvement Mechanism); 90503
(November 24, 2020), 85 FR 77317 (December 1, 2020) (SR-MRX-2020-18)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend Its Pricing Schedule at Options 7 for Orders Entered
Into the Exchange's Price Improvement Mechanism); 90434 (November
16, 2020), 85 FR 74473 (November 20, 2020) (SR-MRX-2020-19) (Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To the
Exchange's Pricing Schedule at Options 7 To Amend Taker Fees for
Regular Orders); 90455 (November 18, 2020), 85 FR 75064 (November
24, 2020) (SR-MRX-2020-21) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend the Pricing
Schedule); and 91687 (April 27, 2021), 86 FR 23478 (May 3, 2021)
(SR-MRX-2021-04) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Amend the Exchange's Pricing Schedule at
Options 7). Note that ISE Mercury is an earlier name for MRX.
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[[Page 42769]]
In June 2019, MRX commenced offering complex orders.\26\ With the
addition of complex order functionality, MRX offered Members certain
order types, an opening process, auction capabilities, and other
trading functionality that was nearly identical to functionality
available on ISE.\27\ By way of comparison, ISE, unlike MRX, assessed
membership fees in 2019 \28\ while offering the same suite of
functionality as MRX, with a limited exception.\29\
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\26\ See Securities Exchange Act Release No. 86326 (July 8,
2019), 84 FR 33300 (July 12, 2019) (SR-MRX-2019-14) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Adopt Complex Order Pricing).
\27\ One distinction is that ISE offered its Members access to
Nasdaq Precise in 2019 and since that time. MRX has never offered
Precise. ``Nasdaq Precise'' or ``Precise'' is a front-end interface
that allows EAMs and their Sponsored Customers to send orders to the
Exchange and perform other related functions. Features include the
following: (1) order and execution management: enter, modify, and
cancel orders on the Exchange, and manage executions (e.g., parent/
child orders, inactive orders, and post-trade allocations); (2)
market data: access to real-time market data (e.g., NBBO and
Exchange BBO); (3) risk management: set customizable risk parameters
(e.g., kill switch); and (4) book keeping and reporting:
comprehensive audit trail of orders and trades (e.g., order history
and done away trade reports). See ISE Supplementary Material .03(d)
of Options 3, Section 7. Precise is also available on GEMX.
\28\ In 2019, ISE assessed the following Access Fees: $500 per
month, per membership to an Electronic Access Member, $5,000 per
month, per membership to a Primary Market Maker and $2,500 per
month, per membership to a Competitive Market Maker. ISE does not
assess Trading Rights Fees to Competitive Market Makers. See
Securities Exchange Act Release No. 82446 (January 5, 2018), 83 FR
1446 (January 11, 2018) (SR-ISE-2017-112) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend Certain
Non-Transaction Fees in the Exchange's Schedule of Fees). Of note,
ISE assessed Access Fees prior to 2019 as well.
\29\ Unlike ISE, MRX does not offer Precise. See note 27, supra.
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Membership Is Subject to Significant Substitution-Based Competitive
Forces
An exchange can show that a product is ``subject to significant
substitution-based competitive forces'' by introducing evidence that
customers can substitute the product for products offered by other
exchanges.
Chart 1 below shows the January 2022 market share for multiply-
listed options by exchange. Of the 16 operating options exchanges, none
currently has more than a 13.1% market share, and MRX has the smallest
market share at 1.8%. Customers widely distribute their transactions
across exchanges according to their business needs and the ability of
each exchange to meet those needs through technology, liquidity and
functionality. Average market share for the 16 options exchanges is
6.26 percent, with the median at 5.8, and a range between 1.8 and 13.1
percent.
[[Page 42770]]
[GRAPHIC] [TIFF OMITTED] TN18JY22.007
Market share is the percentage of volume on a particular exchange
relative to the total volume across all exchanges, and indicates the
amount of order flow directed to that exchange. High levels of market
share enhance the value of trading and membership.
Chart 2 below compares the number of firms purchasing memberships
from MRX to the number of firms purchasing such services from the four
MRX-affiliated options exchanges, GEMX, ISE, The Nasdaq Stock Market
LLC (``NOM'') and Nasdaq PHLX, LLC (``Phlx'').
[GRAPHIC] [TIFF OMITTED] TN18JY22.008
Chart 2 also shows that MRX has the smallest number of Members
relative to its GEMX, ISE, NOM and Phlx affiliates, with approximately
40 members. This demonstrates that customers can and will choose where
to become members, need not become members of all exchanges, and do not
need to become Members of MRX and instead may utilize a third
party.\30\
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\30\ Of course, that third party must itself become a Member of
MRX, so at least some market participants must become Members of MRX
for any trading to take place at all. Nevertheless, because some
firms would be able to exercise the option of not becoming Members,
excessive membership fees would cause the Exchange to lose members.
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Further, BOX Exchange LLC (``BOX'') recently filed to establish a
new monthly Participant Fee.\31\ In that rule change BOX noted that it
responded to Market Maker feedback to the proposed fees in January 2022
and due to this valuable feedback, BOX lowered the proposed fees.\32\
BOX stated that, ``. . . this reduction demonstrates that competitive
constraints do not depend on showing that a Market Maker walked away,
or threatened to walk away, from
[[Page 42771]]
BOX due to a pricing change. Rather, the absence of negative feedback
(in and of itself, and particularly when coupled with valuable feedback
suggesting modifications or alternatives) is indicative that the
proposed fees are, in fact, reasonable and consistent with BOX being
subject to competitive forces in setting fees.'' \33\
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\31\ See Securities and Exchange Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees).
\32\ Id at 29990.
\33\ Id at 29990.
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MRX filed its membership fees on May 2, 2022 and has not received a
comment with respect to the proposed membership fee changes. MRX
Members may elect to cancel their membership on MRX. No MRX Member is
required by rule, regulation, or competitive forces to be a Member on
the Exchange.
Further, BOX noted in its rule change that one Market Maker
modified their access to BOX since the implementation of the proposed
fee change.\34\ After the Market Maker reviewed the notice the Exchange
issued describing the proposed fees, the Market Maker informed the
Exchange that it would terminate its Market Maker status on BOX as it
had no intention to provision itself for access.\35\ BOX argued in its
rule change that,
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\34\ BOX noted that this Market Maker was approved as an
electronic Market Maker in 2017 but never underwent the process of
provisioning itself to access the BOX systems. Id at 29991.
\35\ Id at 29991.
The Exchange believes this further demonstrates competition
within the market for exchange access, which as a result constrains
fees the Exchange may charge for that access. The Exchange believes
the fact that this Participant chose to terminate its Market Maker
status on BOX but retained its status as an Order Flow Provider on
BOX demonstrates that market participants can and do alter their
membership statuses at exchanges if the market participant deems any
fees as too high for its relevant marketplace. In BOX's case, the
Participant determined that the Exchange's proposed fees for
electronic Market Makers did not make business sense for itself,
however it retained its membership as a BOX Participant in a
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different capacity.
Yet another example of an exchange being subject to significant
competitive forces with respect to membership fees was noted in a
recent NYSE Arca, Inc. (``NYSE Arca'') rule change.\36\ Recently, NYSE
Arca filed a rule change to modify the number of option issues a Market
Maker may quote per OTP and modify the fees applicable to Market Maker
OTPs.\37\ In that rule change, NYSE Arca stated that,
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\36\ See Securities Exchange Act Release No. 95142 (June 23,
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
the NYSE Arca Options Fee Schedule).
\37\ Id.
The Exchange has also observed that another options exchange
group experienced decreases in market share following its proposed
modifications of its access fees (including Market Maker trading
permit fees), suggesting that market participants (including Market
Makers) are sensitive to changes in exchanges' access fees and may
respond by shifting their order flow elsewhere if they deem the fees
to be unreasonable or excessive.\38\
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\38\ Id at 38790.
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Moreover, NYSE Arca noted that it observed that,
. . .exchanges in the MIAX Group introduced multiple access fee
increases in July and August 2021. In June 2021, prior to these fee
increases, the aggregate MIAX Group share of multi-list options
volume was 15.45%. In the months after the introduction of higher
access fees, MIAX Group's market share declined: by September 2021,
the aggregate MIAX Group market share was 14.50%, and as of March
2022, market share was 13.75%.\39\
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\39\ Id at note 24.
Similar to MIAX, Chart 3 below demonstrates that since the
inception of its membership, port and market data fees, MRX volumes
declined.
[GRAPHIC] [TIFF OMITTED] TN18JY22.009
[[Page 42772]]
Specifically, since May 2, 2022, MRX saw a larger drop in its
average daily volume (-11%) than all other options exchanges (-5%)
since MRX's fees were added on May 2, 2022 when compared to their
respective year-to-date volumes through April 29, 2022. This pattern
indicates that the adoption of MRX membership, port, and market data
fees impacted MRX's volume negatively.
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\40\ The chart displays the log volume for MRX and all other
options exchanges combined. It is ``normalized'' by subtracting each
day's value from the first trading day of the year (January 3,
2022). The straight lines represent the average normalized log
volumes from January 3, 2022 through April 29, 2022 and from May 2,
2022 through June 23, 2022, respectively.
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In summary, MRX membership fees are subject to significant
substitution-based competitive forces due to its consistently low
percentage of market share, the relatively small number of purchasers
for each product, and the purchasers that are reviewing their
subscriptions. Implementation of the proposed fees is therefore
consistent with the Act.
Fees for Membership
The proposed membership fees described below are in line with those
of other markets. Setting a fee above competitors is likely to drive
away customers, so the most efficient price-setting strategy is to set
prices at the same level as other firms.
The Exchange's proposal to adopt membership fees is reasonable,
equitable and not unfairly discriminatory. As a self-regulatory
organization, MRX's membership department reviews applicants to ensure
that each application complies with the rules specified within MRX
General 3 \41\ as well as other requirements for membership.\42\
Applicants must meet the Exchange's qualification criteria prior to
approval. The membership review includes, but is not limited to, the
registration and qualification of associated persons, financial health,
the validity of the required clearing relationship, and the history of
disciplinary matters. Approved Members would be required to comply with
MRX's By-Laws and Rules and would be subject to regulation by MRX. The
proposed membership fees are identical to membership fees on GEMX,\43\
and are lower than similar fees assessed on other options markets.\44\
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\41\ MRX General 3, Membership and Access, incorporates by
reference Nasdaq General 3.
\42\ The Exchange's Membership Department must ensure, among
other things, that an applicant is not statutorily disqualified.
\43\ See GEMX Options 7, Section 6A (Access Fees).
\44\ See Cboe's Fees Schedule. Cboe assesses permit fees as
follows: Market-Maker Electronic Access Permit of $5,000 per month;
Electronic Access Permits of $3,000 per month; and Clearing TPH
Permit of $2,000 per month. See also Miami International Securities
Exchange, LLC's (``MIAX'') Fee Schedule. MIAX assesses an Electronic
Exchange Member Fee of $1,500 per month.
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The Exchange believes that there are many factors that may cause a
market participant to decide to become a member of a particular
exchange. Among various factors, the Exchange believes market
participants consider: (i) an exchange's available liquidity in options
series; (ii) trading functionality offered on a particular market;
(iii) product offerings; (iv) customer service on an exchange; and (v)
transactional pricing. The Exchange believes that the decision to
become a member of an exchange, particularly as a registered market
maker, is a complex one that is not solely based on non-transactional
costs assessed by an exchange. Market participants weigh the tradeoff
between where they choose to deploy liquidity versus where trading
opportunities exist. Of course, the cost of membership may factor into
a decision to become a member of a certain exchange, but the Exchange
believes it is by no means the only factor when comparing exchanges.
Market Makers
Market makers play an important role on options exchanges as they
provide liquidity. In options markets, registered market makers are
assigned options series \45\ and are required to quote in those options
series for a specified time period during the day.\46\ Typically, a
lead or primary market maker \47\ will be required to quote for a
longer period of time during the day as compared to other market makers
registered on an exchange.\48\ Additionally, market makers are
typically required to quote within a certain width on options
markets.\49\ Greater liquidity on options markets benefits all market
participants by providing more trading opportunities and attracting
greater participation by market makers. An increase in the activity of
market makers in turn facilitates tighter spreads. Market participants
are attracted to options markets that have ample liquidity and tighter
spreads in options series.
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\45\ See Phlx, ISE, GEMX, MRX, Nasdaq BX, Inc. (``BX'') and NOM
Options 2, Section 3; Cboe Exchange, Inc. (``Cboe'') Rule 5.50; BOX
Exchange LLC (``BOX'') Rule 8030; MIAX Rule 602; and NYSE Arca, Inc.
(``NYSE Arca'') Rule 6.35-O.
\46\ See ISE, GEMX and MRX, Phlx, BX and NOM Options 2, Section
5; Cboe Rule 5.52; BOX Rule 8050; MIAX Rule 604; and NYSE Arca Rule
6.37A-O.
\47\ Options markets refer to the primary market maker on an
exchange in several ways.
\48\ See BX Options 2, Section 4; ISE, GEMX and MRX, and Phlx
Options 2, Section 5; BOX Rule 8055; MIAX Rule 604; and NYSE Arca
Rule 6.37A-O.
\49\ See BX Options 2, Section 4; ISE, GEMX and MRX, Phlx and
NOM Options 2, Section 5; and Cboe Rule 5.52; BOX Rule 8040.
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Trading Functionality
An exchange's trading functionality attracts market participants
who may elect, for example, to submit an order into a price improving
auction,\50\ enter a complex order,\51\ or utilize a particular order
type.\52\ Different options exchanges offer different trading
functionality to their members. For example, with respect to priority
and allocation of an order book, some options exchanges have price/time
allocation,\53\ some have a size pro-rata allocation,\54\ while other
exchanges offer both allocation models.\55\ The allocation methodology
on a particular options exchange's order book may attract certain
market participants. Also, the manner in which some options markets
structure their solicitation auction,\56\ or opening process,\57\ may
be attractive to certain market participants. Finally, some exchanges
have trading floors \58\ which may accommodate trading for certain
market participants or trading firms.\59\
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\50\ See ISE, GEMX, MRX, Phlx and BX Options 3, Section 13; MIAX
Rule 515A; Cboe Rule 5.37; and BOX Rules 7150 and 7245.
\51\ See Phlx and ISE Options 3, Section 14; MIAX Rule 518; Cboe
Rule 5.33; BOX Rule 7240; and NYSE Arca Rule 6.91-O.
\52\ See ISE, GEMX, MRX, Phlx, BX and NOM Options 3, Section 7;
MIAX Rule 615; Cboe Rule 5.6; BOX Rule 7110; and NYSE Arca Rule
6.62-O.
\53\ See Cboe Rule 5.85; BOX Rule 7130; and NYSE Arca Rule 6.76-
O.
\54\ See Phlx, ISE, GEMX and MRX Options 3, Section 10; and BOX
Rule 7135.
\55\ See BX Options 3, Section 10. While BX's rule permits both
price/time and size pro-rata allocation, all symbols on BX are
currently designated as Price/Time. See also BOX Rules 7130 and
7135. MIAX's rule permits both Price-Time and Pro-Rata allocation.
See also MIAX Rule 514.
\56\ See ISE, GEMX and MRX Options 3, Section 11; NYSE American
Rules 971.1NY and 971.2NY; and Cboe Rule 5.39.
\57\ See ISE, GEMX, MRX, Phlx, BX and NOM Options 3, Section 8;
Cboe Rule 5.31, MIAX Rule 503, BOX Rule 7070, and NYSE Arca Rule
6.64-O.
\58\ Today, Phlx, Cboe, BOX, NYSE Arca, and NYSE American LLC
have a trading floor. Trading floors require an on-floor presence to
execute options transactions.
\59\ There are certain features of open outcry trading that are
difficult to replicate in an electronic trading environment. The
Exchange has observed, and understands from various market
participants, that they have had difficulty executing certain
orders, such as larger orders and high-risk and complicated
strategies, in an all-electronic trading configuration without the
element of human interaction to negotiate pricing for these orders.
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Product Offerings
Introducing new and innovative products to the marketplace designed
to meet customer demands may attract market participants to a
particular
[[Page 42773]]
options venue. New products in the options industry may allow market
participants greater trading and hedging opportunities, as well as new
avenues to manage risks. The listing of new options products enhances
competition among market participants by providing investors with
additional investment vehicles, as well as competitive alternatives, to
existing investment products. An exchange's proprietary product
offering may attract order flow to a particular exchange to trade a
particular options product.\60\
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\60\ See e.g., options on the Nasdaq-100 Index[supreg] available
on ISE, GEMX and Phlx and Cboe's Market Volatility Index[supreg].
Currently, MRX does not list any proprietary products.
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Transaction Pricing
The pricing available on a particular exchange may impact a market
participant's decision to submit order flow to a particular options
venue. The options industry is competitive. Clear substitutes to the
Exchange exist in the market for options security transaction services;
the Exchange is only one of sixteen options exchanges to which market
participants may direct their order flow. Within this environment,
market participants can freely, and often do, shift their order flow
among the Exchange and competing venues in response to changes in their
respective pricing schedules.
With respect to the CMM Trading Rights Fee, the proposed fees
compare favorably with those of other options exchanges. For example, a
market maker on MIAX is assessed a $3,000 one-time fee and then a
tiered monthly fee from $7,000 for up to 10 classes to $22,000 for over
100 classes.\61\ By comparison, under the proposed fee structure, a CMM
can be granted access on the Exchange for as little as $950 per month
(i.e., a $100 access fee and an $850 trading right), and could quote in
all options classes on the Exchange by paying the access fee and
obtaining nine CMM trading rights for a total of $4,950 per month. The
Exchange notes that its tiered model for CMM trading rights is
consistent with the pricing practices of other exchanges, such as NYSE
Arca, which charges $6,000 per month for the first market maker trading
permit, down to $1,000 per month for the fifth and additional trading
permits, with various tiers in-between. Like other options exchanges,
the Exchange is proposing a tiered pricing model because it may
encourage CMM firms to purchase additional trading rights and quote
more issues because subsequent trading rights are priced lower than the
initial trading right.
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\61\ See Miami International Securities Exchange, LLC Fee
Schedule at 20 and 21: <a href="https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_03012022.pdf">https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_03012022.pdf</a>.
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The Exchange does not believe that it is unfairly discriminatory to
assess different fees for PMMs, CMMs, and EAMs. For PMMs on MRX, the
fees required to access the Exchange are substantially lower than those
of competing exchanges. For example, a PMM could quote on the Exchange
for only $200 (i.e., the access fee), compared with the minimum $6,000
per month trading permit fee charged by NYSE Arca. The Exchange notes
that it is not proposing trading right fees for PMMs, as the Exchange
wishes to encourage Members to act as PMMs, which will benefit the
market through, for example, more robust quoting requirements.
Similarly, the Exchange is proposing only to charge the $200 access fee
to EAMs as the technical, regulatory, and administrative services
associated with an EAM's use of the Exchange are not as comprehensive
as those associated with Market Makers. The CMM Trading Right Fee is
identical to GEMX.\62\
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\62\ See GEMX Options 7, Section 6.B. (CMM Trading Rights Fees).
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Membership fees are charged by nearly all exchanges, and all
established exchanges with sufficient order flow. In 2022, MEMX LLC
(``MEMX'') established a monthly membership fee of $200.\63\ MEMX
reasoned in that rule change that there is value in becoming a member
of the exchange. MEMX stated that it believed that its proposed
membership fee ``is not unfairly discriminatory because no broker-
dealer is required to become a member of the Exchange.'' Moreover,
``neither the trade-through requirements under Regulation NMS nor
broker-dealers' best execution obligations require a broker-dealer to
become a member of every exchange.'' In this respect, MEMX is correct;
a monthly membership fee is reasonable, equitably allocated and not
unfairly discriminatory. Market participants may choose to become a
member of one or more options exchanges based on the market
participant's business model. A very small number of market
participants choose to become a member of all sixteen options
exchanges. It is not a requirement for market participants to become
members of all options exchanges, in fact, certain market participants
conduct an options business as a member of only one options market.
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\63\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19). The Monthly
Membership Fee is assessed to each active Member at the close of
business on the first day of each month.
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Most firms that actively trade on options markets are not currently
Members of MRX. Using options markets that Nasdaq operates as points of
comparison, less than a third of the firms that are members of at least
one of the options markets that Nasdaq operates are also Members of MRX
(approximately 29%). The Exchange notes that no firm is a Member of MRX
only. Few, if any, firms have become Members at MRX, notwithstanding
the fact that MRX membership is currently free, because MRX currently
has less liquidity than other options markets. As explained above, MRX
has the smallest market share of the 16 options exchanges, representing
only approximately 1.8% of the market, and, for certain market
participants, the current levels of liquidity may be insufficient to
justify the costs associated with becoming a Member and connecting to
the Exchange, notwithstanding the fact that membership is free.
The decision to become a member of an exchange, particularly for
registered market makers, is complex, and not solely based on the non-
transactional costs assessed by an exchange. As noted herein, specific
factors include, but are not limited to: (i) an exchange's available
liquidity in options series; (ii) trading functionality offered on a
particular market; (iii) product offerings; (iv) customer service on an
exchange; and (v) transactional pricing. Becoming a member of an
exchange does not ``lock'' a potential member into a market or diminish
the overall competition for exchange services. The decision to become a
member of an exchange is made at the beginning of the relationship, and
is no less subject to competition than trading fees.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at MRX.\64\ If MRX is not at the NBBO, MRX will route an order to any
away market that is at the NBBO to prevent a trade-through and also
ensure that the order was executed at a superior price.\65\
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\64\ See Options Order Protection and Locked/Crossed Market Plan
(August 14, 2009), available at <a href="https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf">https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf</a>.
\65\ MRX Members may elect to not route their orders by marking
an order as ``do-not-route.'' In this case, the order would not be
routed. See Options 3, Section 7(m).
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[[Page 42774]]
In lieu of joining an exchange, a third-party may be utilized to
execute an order on an exchange. For example, a third-party broker-
dealer Member of MRX may be utilized by a retail investor to submit
orders into an Exchange. An institutional investor may utilize a
broker-dealer, a service bureau,\66\ or request sponsored access \67\
through a member of an exchange in order to submit a trade directly to
an options exchange.\68\ A market participant may either pay the costs
associated with becoming a member of an exchange or, in the
alternative, a market participant may elect to pay commissions to a
broker-dealer, pay fees to a service bureau to submit trades, or pay a
member to sponsor the market participant in order to submit trades
directly to an exchange. Market participants may elect any of the above
models and weigh the varying costs when determining how to submit
trades to an exchange. Depending on the number of orders to be
submitted, technology, ability to control submission of orders, and
projected revenues, a market participant may determine one model is
more cost efficient as compared to the alternatives.
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\66\ Service bureaus provide access to market participants to
submit and execute orders on an exchange. On MRX, a Service Bureau
may be a Member. Some MRX Members utilize a Service Bureau for
connectivity and that Service Bureau may not be a Member. Some
market participants utilize a Service Bureau who is a Member to
submit orders. As noted herein only MRX Members may submit orders or
quotes through ports.
\67\ Sponsored Access is an arrangement whereby a member permits
its customers to enter orders into an exchange's system that bypass
the member's trading system and are routed directly to the Exchange,
including routing through a service bureau or other third-party
technology provider.
\68\ This may include utilizing a Floor Broker and submitting
the trade to one of the five options trading floors.
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After 6 years, MRX proposes to commence assessing membership fees,
just as all other options exchanges.\69\ The introduction of these fees
will not impede a Member's access to MRX, but rather will allow MRX to
continue to compete and grow its marketplace so that it may continue to
offer a robust trading architecture, a quality opening process, an
array of simple and complex order types and auctions, and competitive
transaction pricing. If MRX is incorrect in its assessment of the value
of its services, that assessment will be reflected in MRX's ability to
compete with other options exchanges.
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\69\ Today, MRX is the only options exchange that does not
assess membership fees.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
The Exchange believes its proposal remains competitive with other
options markets, and will offer market participants with another choice
of venue to transact options. The Exchange notes that it operates in a
highly competitive market in which market participants can readily
favor competing venues if they deem fee levels at a particular venue to
be excessive, or rebate opportunities available at other venues to be
more favorable. Because competitors are free to modify their own fees
in response, and because market participants may readily adjust their
order routing practices, the Exchange believes that the degree to which
fee changes in this market may impose any burden on competition is
extremely limited.
The proposed membership fees are identical to membership fees
assessed by GEMX.\70\ The proposed fees are designed to reflect the
benefits of the technical, regulatory, and administrative services
provided to a Member by the Exchange, and the fees remain competitive
with similar fees offered on other options exchanges. The Exchange does
not believe that assessing different fees for PMMs, CMMs, and EAMs
creates an undue burden on competition.
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\70\ See GEMX Options 7, Section 6.A. (Access Fees) and Section
6.B. (CMM Trading Rights Fees).
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With respect to the CMM Trading Rights Fee, the proposed fees
compare favorably with those of other options exchanges.\71\ Like other
options exchanges, the Exchange is proposing a tiered pricing model
because it may encourage CMM firms to purchase additional trading
rights and quote more issues because subsequent trading rights are
priced lower than the initial trading right. The Exchange notes that it
is not proposing trading right fees for PMMs as the Exchange wishes to
encourage Members to act as PMMs, which will benefit the market
through, for example, more robust quoting. Additionally, as noted
herein, PMMs have higher quoting obligations as compared to CMMs.\72\
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\71\ See NYSE Arca Fees and Charges, General Options and Trading
Permit (OTP) Fees (comparing CMM Trading Rights Fees to the Arca
Market Maker fees).
\72\ See MRX Options 2, Section 5. PMMs, associated with the
same Member, are collectively required to provide two-sided
quotations in 90% of the cumulative number of seconds, or such
higher percentage as the Exchange may announce. CMMs are not
required to enter quotations in the options classes to which it is
appointed, however if a CMM initiates quoting in an options class,
the CMM, associated with the same Member, is collectively required
to provide two-sided quotations in 60% of the cumulative number of
seconds, or such higher percentage as the Exchange may announce.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\73\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is: (i) necessary or appropriate in the public
interest; (ii) for the protection of investors; or (iii) otherwise in
furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\73\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ea989f868fc7898587878f849e99aa998f89c48d859c"><span class="__cf_email__" data-cfemail="4b393e272e66282426262e253f380b382e28652c243d">[email protected]</span></a>. Please include
File Number SR-MRX-2022-07 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MRX-2022-07. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent
[[Page 42775]]
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-MRX-
2022-07 and should be submitted on or before August 8, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
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\74\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15222 Filed 7-15-22; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.