Notice2022-22558
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend MRX's Pricing Schedule at Options 7, Section 5 Related to Membership Fees
Primary source
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Published
October 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 200 (Tuesday, October 18, 2022)</title>
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[Federal Register Volume 87, Number 200 (Tuesday, October 18, 2022)]
[Notices]
[Pages 63131-63140]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22558]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96047; File No. SR-MRX-2022-19)
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend MRX's
Pricing Schedule at Options 7, Section 5 Related to Membership Fees
October 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 October 5, 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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[[Page 63132]]
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 related to 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 were
not assessed until this year. Prior to this year, MRX did not assess
its Members any membership fees. MRX launched its options market in
2016 and Members did not pay any membership fees until 2022.\3\
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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. SR-MRX-2022-07 replaced the membership fees set forth
in SR-MRX-2022-04. Thereafter, SR-MRX-2022-13 replaced the
membership fees set forth in SR-MRX-2022-07. The instant filing
replaces SR-MRX-2022-13 which was withdrawn on October 5, 2022.
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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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\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, as of the date of the initial filing
of these membership fees, MRX was 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 announced that, beginning in 2022, it plans to
migrate its North American markets to Amazon Web Services in a
phased approach, starting with MRX. The MRX migration will take
place in November 2022. The proposed fee changes are entirely
unrelated to this effort.
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Access Fees
As noted above, MRX Members were not assessed fees for membership
until this year. Under the proposed fee change, MRX Members will 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\ Of note, a
Member would pay each applicable fee (an Electronic Access Fee or a
Market Maker Access Fee). For example, a Competitive Market Maker who
does not enter orders would only pay the $100 per month, per membership
Access Fee.
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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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CMM Trading Rights Fee
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 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
(``CMM Trading Right''). 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 Trading Right it holds, and 10 points for the second and each
subsequent CMM Trading Right it holds.\12\ In order to encourage CMMs
to
[[Page 63133]]
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 Right
Fee. Under the proposed fee structure, CMMs will be assessed a CMM
Trading Right Fee of $850 per month for the first trading right, which
will entitle the CMM to quote in 20 percent of industry volume. Each
additional CMM Trading 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,\13\ a new CMM would pay $850 for the first CMM
Trading Right and all CMMs would thereafter pay $500 for each
additional CMM Trading Right. For example, if a CMM desired to quote in
all options series listed on MRX, the CMM would need to obtain 9 CMM
Trading Rights at a cost of $4,850. The Exchange is proposing this
pricing model to encourage CMMs to obtain a greater number of CMM
Trading Rights in order that they may add more liquidity on MRX. With
this model, each subsequent CMM Trading Right of $500 per month costs
less than the initial CMM Trading Right of $850 per month. As noted,
the maximum expense would be $4,850 for a CMM to obtain the ability to
quote in all option series listed on MRX. All CMMs have the opportunity
to purchase additional CMM Trading Rights beyond the initial CMM
Trading Right in order to quote in some or all options series on MRX.
With this proposal, PMMs would not be assessed a Trading Rights Fee.
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\13\ See GEMX Options 7, Section 6.B.
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PMMs have additional obligations on MRX as compared to CMMs. PMMs
are required to open options series in which they are assigned each day
on MRX. Specifically, PMMs must submit a Valid Width Quote each day to
open their assigned options series.\14\ PMMs are integral to providing
liquidity during MRX's Opening Process.\15\ Intra-day, PMMs must
provide two-sided quotations in a certain percentage of their assigned
options series.\16\ 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 a certain of their assigned options
class, which percentage is less than that required of PMMs (60% for
CMMs compared to 90% for PMMs).\17\ While there can be multiple CMMs in
an options series, there is only one PMM assigned per options series.
The Exchange desires to encourage Market Makers to compete for
appointments as PMMs in an options series. The Exchange believes that
PMMs serve an important role on MRX in opening an option series and
ensuring liquidity in that option series throughout the trading day.
This liquidity benefits the market through, for example, more robust
quoting. Additionally, all market participants may interact with the
liquidity.
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\14\ See Options 3, Section 8(c)(1) and 8(c)(3).
\15\ The Exchange notes that most options markets do not require
their primary or lead market maker to open their assigned options
series.
\16\ See Options 2, Section 5(e)(2) which states, ``Primary
Market Makers, 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 in advance, for which that Member's assigned options class
is open for trading. Primary Market Makers shall be required to make
two-sided markets pursuant to this Rule in any Quarterly Options
Series, any Adjusted Options Series, and any option series with an
expiration of nine months or greater for options on equities and
ETFs or with an expiration of twelve months or greater for index
options.''
\17\ See Options 2, Section 5(e)(1) which states, that ``On any
given day, a Competitive Market Maker is not required to enter
quotations in the options classes to which it is appointed. A
Competitive Market Maker may initiate quoting in options classes to
which it is appointed intra-day. If a Competitive Market Maker
initiates quoting in an options class, the Competitive Market Maker,
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 in advance, for
which that Member's assigned options class is open for trading . .
.''.
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Finally, 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.\18\ As noted above, a Member would pay each applicable fee
(an Electronic Access Fee or a Market Maker Access Fee). A Competitive
Market Maker or Primary Market Maker who does not enter orders would
only pay the $100 or $200 per month, respectively, per membership
Access Fee.
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\18\ The Exchange notes that all MRX Members may submit orders;
however, only Market Makers may submit quotes. The Exchange surveils
Market Maker quoting to ensure these participants have met their
obligations. The regulatory oversight for Market Makers is in
addition to the regulatory oversight which is administered for all
EAMs.
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MRX believes that its membership fees, which have been in effect
since May 2, 2022, are in line with or less than those of other options
exchanges. The Exchange believes it is notable that during this time,
there have been no comment letters submitted to the Commission arguing
that the Exchange's new fees are unreasonable. The membership fees are
constrained by competition. For example, since the inception of the
membership fees on May 2, 2022, one firm cancelled nine CMM trading
rights as well as their membership on MRX.\19\ Also, another firm
decreased their CMM trading rights from nine to four CMM trading
rights.
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\19\ The Exchange notes that this Member was not active on MRX
prior to the cancellation.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\20\ in general, and furthers the objectives of
sections 6(b)(4) and 6(b)(5) of the Act,\21\ 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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\20\ See 15 U.S.C. 78f(b).
\21\ 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' . . . .'' \22\
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\22\ 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
[[Page 63134]]
``has been remarkably successful in promoting market competition in its
broader forms that are most important to investors and listed
companies.'' \23\
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\23\ 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.' '' \24\ 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.'' \25\
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.'' \26\ 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.'' \27\
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\24\ 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.'').
\25\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\26\ Id.
\27\ 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.\28\
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\28\ 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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In June 2019, MRX commenced offering complex orders.\29\ 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.\30\ By way of comparison, ISE, unlike MRX, assessed
membership fees in 2019 \31\ while offering the same suite of
functionality as MRX, with a limited exception.\32\
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\29\ 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).
\30\ 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.
\31\ 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.
\32\ Unlike ISE, MRX does not offer Precise. See note 30, 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 63135]]
[GRAPHIC] [TIFF OMITTED] TN18OC22.020
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. 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.\33\
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\33\ 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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The Exchange established these lower (when compared to other
options exchanges in the industry) membership fees in order to
encourage market participants to become MRX Members and register as MRX
Market Makers. As noted above, MRX has grown its market share since
inception and seeks to continue to grow its membership base. The
Exchange believes that there are many factors that may cause a market
participant to decide to become a member of a particular exchange in
addition to its pricing.
As noted herein, 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. Since
the inception of the membership fees on May 2, 2022, one firm cancelled
nine CMM trading rights as well as their membership on MRX. Also,
another firm decreased their CMM trading rights from nine to four CMM
trading rights. Also, no MRX Member is required by rule, regulation, or
competitive forces to be a Member on the Exchange.
Fees for Membership
The proposed membership fees described below are in line with or
less than 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 \34\
as well as other requirements for membership.\35\ 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,\36\ and are
in line with or lower than similar fees assessed on other options
markets.\37\
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\34\ MRX General 3, Membership and Access, incorporates by
reference Nasdaq General 3.
\35\ The Exchange's Membership Department must ensure, among
other things, that an applicant is not statutorily disqualified.
\36\ See GEMX Options 7, Section 6A (Access Fees).
\37\ 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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Access Fees
MRX's flat rate Access Fee to Electronic Access Members of $200 per
month, per membership is reasonable because the Exchange notes that 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.\38\ Any Member entering orders on MRX would pay the
same $200 per month Access Fee. MRX's flat rate Access Fee to
Electronic Access Members of $200 per month, per membership is
equitable and not unfairly discriminatory as all Members transacting
orders on MRX would be subject to this same fee. The Electronic
[[Page 63136]]
Access Member Feeis identical to GEMX.\39\
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\38\ The Exchange notes that all MRX Members may submit orders;
however, only Market Makers may submit quotes. The Exchange surveils
Market Maker quoting to ensure these participants have met their
obligations. The regulatory oversight for Market Makers is in
addition to the regulatory oversight which is administered for all
EAMs.
\39\ See GEMX Options 7, Section 6.B. (CMM Trading Rights Fees).
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With respect to Market Makers submitting quotes on MRX, the
Exchange's proposal to assess Primary Market Makers a slightly higher
flat rate Access Fee of $200 per month, per membership as compared to
Competitive Market Makers who would be assessed a flat rate Access Fee
of $100 per month, per membership is reasonable because Primary Market
Makers have higher regulatory obligations and require more technical,
regulatory, and administrative services as compared to Competitive
Market Makers. 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 does not believe that it is unfairly discriminatory to
assess different fees for EAMS, PMMs, and CMMs. While PMMs would pay
lower membership fees as compared to CMMs, PMMs have additional
obligations on MRX as compared to CMMs. PMMs are required to open
options series in which they are assigned each day on MRX.
Specifically, PMMs must submit a Valid Width Quote each day to open
their assigned options series.\40\ PMMs are integral to providing
liquidity during MRX's Opening Process.\41\ Intra-day, PMMs must
provide two-sided quotations in a certain percentage of their assigned
options series.\42\ 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 a certain of their assigned options
class, which percentage is less than that required of PMMs.\43\ While
there can be multiple CMMs in an options series, there is only one PMM
assigned per options series. The Exchange desires to encourage Members
to compete for appointments as PMMs in an options series. The Exchange
believes that PMMs serve an important role on MRX in opening an option
series and ensuring liquidity in that option series throughout the
trading day. This liquidity benefits the market through, for example,
more robust quoting.
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\40\ See Options 3, Section 8(c)(1) and 8(c)(3).
\41\ The Exchange notes that most options markets do not require
their primary or lead market maker to open their assigned options
series.
\42\ See Options 2, Section 5(e)(2) which states, ``Primary
Market Makers, 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 in advance, for which that Member's assigned options class
is open for trading. Primary Market Makers shall be required to make
two-sided markets pursuant to this Rule in any Quarterly Options
Series, any Adjusted Options Series, and any option series with an
expiration of nine months or greater for options on equities and
ETFs or with an expiration of twelve months or greater for index
options.''
\43\ See Options 2, Section 5(e)(1) which states, that ``On any
given day, a Competitive Market Maker is not required to enter
quotations in the options classes to which it is appointed. A
Competitive Market Maker may initiate quoting in options classes to
which it is appointed intra-day. If a Competitive Market Maker
initiates quoting in an options class, the Competitive Market Maker,
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 in advance, for
which that Member's assigned options class is open for trading . .
.''.
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Further, with respect to the higher fees for Market Makers
generally, MRX notes that Market Makers: (1) consume the most bandwidth
and resources of the network; (2) transact a majority of the volume on
the Exchange; and (3) require the high touch network support services
provided by the Exchange and its staff. Other non-Market Maker market
participants take up significantly less Exchange resources as discussed
further below. Further, the Exchange notes that Market Makers account
for greater than 99% of message traffic over the network, while other
non-Market Maker market participants account for less than 1% of
message traffic over the network. Most Members do not have a business
need for the high performance network solutions generally required by
Market Makers. The Exchange's high performance network solutions and
supporting infrastructure (including employee support), provides
unparalleled system throughput and the capacity to handle approximately
3 million quote messages per second. On an average day, MRX handles
over 6.10 billion total messages. Of those 6.10 billion daily messages,
Market Makers generate 6.08 billion of those messages, while other non-
Market Maker market participants generate approximately 20 million
messages. Additionally, in order to achieve consistent, premium network
performance, MRX must build out and maintain a network that has the
capacity to handle the message rate requirements beyond those 6.08
billion daily messages. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
expense for storage and network transport capabilities. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers are assessed different Access Fees as compared to EAMs.
MRX notes that while Market Makers continue to account for a vast
majority of resources placed on MRX and its System (as discussed
herein), Market Makers continue to be valuable market participants on
the exchanges as the options market is a quote driven industry. MRX
recognizes the value that Market Makers bring to the Exchange. For
certain transactions, MRX also assesses a lower fee for Market Makers
compared to other non-Priority Customer market participants to attract
liquidity to the Exchange.\44\ Finally, the Exchange notes that PMMs
are entitled to certain enhanced allocations as a result of providing
liquidity on MRX.\45\ The proposed membership fees are meant to strike
a balance between resources consumed by Market Makers on MRX and
continuing to incentivize Market Makers to access and make a market on
MRX.
---------------------------------------------------------------------------
\44\ See MRX's Pricing Schedule at Options 7.
\45\ See Options 3, Section 10.
---------------------------------------------------------------------------
Additionally, the Exchange believes that the proposed change will
better align MRX's membership fees with rates charged by competing
options exchanges. Further, the Exchange believes that the proposal is
reasonably designed to continue to compete with other options exchanges
by incentivizing market participants to register as Market Makers on
MRX in a manner than enables MRX to improve its overall competitiveness
and strengthen market quality for all market participants.
CMM Trading Right Fee
The Exchange believes that it is reasonable to assess CMMs a CMM
Trading Right Fee because these Market Makers are not required to enter
quotations in the options classes to which it is appointed unless the
CMM initiates quoting in an options class.\46\ 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.\47\ By
comparison,
[[Page 63137]]
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 options series because
subsequent CMM Trading Rights are priced lower than the initial CMM
Trading Right.
---------------------------------------------------------------------------
\46\ See Options 2, Section 5(e)(2).
\47\ 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>.
---------------------------------------------------------------------------
The Exchange believes that it is equitable and not unfairly
discriminatory to assess only CMMs a CMM Trading Right Fee. While there
can be multiple CMMs in an options series, there is only one PMM
assigned per options series. Unlike PMMs who must open each option
series to which they are assigned,\48\ CMMs have no opening
obligations. Intra-day, unlike PMMs, 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 a certain of their assigned options
class, which percentage is less than that required of PMMs.\49\
---------------------------------------------------------------------------
\48\ See Options 3, Section 8(c)(1) and 8(c)(3).
\49\ See Options 2, Section 5(e)(1) which states, that ``On any
given day, a Competitive Market Maker is not required to enter
quotations in the options classes to which it is appointed. A
Competitive Market Maker may initiate quoting in options classes to
which it is appointed intra-day. If a Competitive Market Maker
initiates quoting in an options class, the Competitive Market Maker,
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 in advance, for
which that Member's assigned options class is open for trading . . .
''.
---------------------------------------------------------------------------
Similar to recent proposal by BOX Exchange LLC (``BOX''),\50\ the
Exchange notes that there is no regulatory requirement that market
makers connect and access any one options exchange. Moreover, a Market
Maker membership is not a requirement to participate on the Exchange
and participation on an exchange is completely voluntary. BOX noted in
its rule change that it reviewed membership details at three options
exchanges and found that there are 62 market making firms across these
three exchanges.\51\ Further, BOX found that 42 of the 62 market making
firms access only one of the three exchanges.\52\ Additionally, BOX
identified numerous market makers that are members of other options
exchanges, but not BOX.\53\ Not only is there not an actual regulatory
requirement to connect to every options exchange, the Exchange believes
there is also no ``de facto'' or practical requirement as well, as
further evidenced by the market maker membership analysis by BOX of
three options exchanges discussed above. Indeed, Market Makers choose
if and how to access a particular exchange and because it is a choice,
MRX must set reasonable pricing, otherwise prospective market makers
would not connect and existing Market Makers would disconnect from the
Exchange.
---------------------------------------------------------------------------
\50\ 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). BOX amended its fees
on January 3, 2022 to adopt an electronic market maker trading
permit fee.
\51\ Id.
\52\ Id.
\53\ Id. For example, BOX identified 47 market makers that are
members of Cboe Exchange Inc. (an exchange that only lists options),
but not the Exchange (which also lists only options).
---------------------------------------------------------------------------
As noted above, one MRX Member cancelled their membership on MRX as
well as nine CMM Trading Rights.\54\ Also, another MRX Member decreased
their CMM Trading Rights from nine to four CMM Trading Rights. The
Exchange believes the Commission has a sufficient basis to determine
that MRX was subject to significant competitive forces in setting the
terms of its proposed fees. Moreover, the Commission has found that, if
an exchange meets the burden of demonstrating it was subject to
significant competitive forces in setting its fees, the Commission
``will find that its fee rule is consistent with the Act unless `there
is a substantial countervailing basis to find that the terms' of the
rule violate the Act or the rules thereunder.'' \55\ The Exchange is
not aware of, nor has the Commission articulated, a substantial
countervailing basis for finding the proposal violates the Act or the
rules thereunder.
---------------------------------------------------------------------------
\54\ The Exchange notes that this Member was not active on MRX
prior to the cancellation.
\55\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74781 (December 9, 2008) (``2008 ArcaBook
Approval Order'') (approving proposed rule change to establish fees
for a depth-of-book market data product).
---------------------------------------------------------------------------
Membership fees were charged by all options exchanges except MRX
until May 2, 2022. In 2022, similar to MRX, MEMX LLC (``MEMX'')
commenced assessing a monthly membership fee.\56\ MEMX reasoned in that
rule change that there is value in becoming a member of the
exchange.\57\ 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.'' \58\ 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.'' \59\ 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.
---------------------------------------------------------------------------
\56\ 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.
\57\ Id.
\58\ Id.
\59\ Id.
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MRX makes the same arguments herein as were proposed by MEMX in
similarly adopting membership fees. The Exchange notes that MRX's
ability to assess membership fees similar to MEMX and all other options
markets permits it to compete with other options markets on an equal
playing field. MRX is the only options market that does not have
membership fees. 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
[[Page 63138]]
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. 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.\60\ 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.\61\
---------------------------------------------------------------------------
\60\ 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>.
\61\ 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).
---------------------------------------------------------------------------
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,\62\ or request sponsored access \63\
through a member of an exchange in order to submit a trade directly to
an options exchange.\64\ 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.
---------------------------------------------------------------------------
\62\ 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.
\63\ 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.
\64\ This may include utilizing a Floor Broker and submitting
the trade to one of the five options trading floors.
---------------------------------------------------------------------------
After 6 years, MRX proposes to commence assessing membership fees,
just as all other options exchanges.\65\ 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.
---------------------------------------------------------------------------
\65\ Today, MRX is the only options exchange that does not
assess membership fees.
---------------------------------------------------------------------------
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 Exchange notes that other options markets have adopted
membership fees. MEMX recently reasoned that it should be permitted to
adopt membership fees because MEMX's proposed membership fees would be
lower than the cost of membership on other exchanges, and therefore,
. . . may stimulate intramarket competition by attracting additional
firms to become Members on the Exchange or at least should not deter
interested participants from joining the Exchange. In addition,
membership fees are subject to competition from other exchanges.
Accordingly, if the changes proposed herein are unattractive to
market participants, it is likely the Exchange will see a decline in
membership as a result. The proposed fee change will not impact
intermarket competition because it will apply to all Members
equally. The Exchange operates in a highly competitive market in
which market participants can determine whether or not to join the
Exchange based on the value received compared to the cost of joining
and maintaining membership on the Exchange.'' \66\
---------------------------------------------------------------------------
\66\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
The Exchange also notes that Cboe Exchange, Inc. (``Cboe'') amended
access fees \67\ in a fee change that was filed subsequent to the D.C.
Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866 F.3d 442
(D.C. Cir. 2017), meaning that such fee filings were subject to the
same (and current) standard for SEC review and approval as the instant
filing. The Commission permitted Cboe to amend their trading permit
fees \68\ based on competitive arguments. Cboe stated in its proposal
that,
---------------------------------------------------------------------------
\67\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105).
\68\ Pre-migration, the Exchange issued the following three
types of Trading Permits: (1) Market-Maker Trading Permits, which
were assessed a monthly fee of $5,000 per permit; (2) Floor Broker
Trading Permits, which were assessed a monthly fee of $9,000 per
permit; and (3) Electronic Access Permits (``EAPs''), which were
assessed a monthly fee of $1,600 per permit. The Exchange also
offered separate Market-Maker and Electronic Access Permits for the
Global Trading Hours (``GTH'') session, which were assessed a
monthly fee of $1,000 per permit and $500 per permit respectively.
In connection with the migration, the Exchange adopted separate on-
floor and off-floor Trading Permits for Market-Makers and Floor
Brokers, adopted a new Clearing TPH Permit, and proposes to modify
the corresponding fees and discounts. Among other fees, Cboe amended
its Electronic Access Permit to a monthly fee of $3,000, and amended
its Clearing TPH Permit, for TPHs acting solely as a Clearing TPH,
to a monthly fee of $2,000. Also, Cboe adopted progressive monthly
fees for MM Appointment Units.
The rule structure for options exchanges are also fundamentally
different from those of equities exchanges. In particular, options
market participants are not forced to connect to (and purchase
market data from) all options exchanges. For example, there are many
order types that are available in the equities markets that are not
utilized in the options markets, which relate to mid-point pricing
and pegged pricing which require connection to the SIPs and each of
the
[[Page 63139]]
equities exchanges in order to properly execute those orders in
compliance with best execution obligations. Additionally, in the
options markets, the linkage routing and trade through protection
are handled by the exchanges, not by the individual members. Thus
not connecting to an options exchange or disconnecting from an
options exchange does not potentially subject a broker-dealer to
violate order protection requirements. Gone are the days when the
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were
members of the options exchanges--they are not members of the
Exchange or its affiliates, they do not purchase connectivity to the
Exchange, and they do not purchase market data from the Exchange.
Accordingly, not only is there not an actual regulatory requirement
to connect to every options exchange, the Exchange believes there is
also no ``de facto'' or practical requirement as well, as further
evidenced by the recent significant reduction in the number of
broker-dealers that are members of all options exchanges.\69\
---------------------------------------------------------------------------
\69\ Id. at 71677.
The Cboe proposal also referenced the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\70\ wherein
the Commission discussed the existence of competition in the
marketplace generally, and particularly for exchanges with unique
business models. In that filing, the Commission acknowledged that, even
if an exchange were to exit the marketplace due to its proposed fee-
related change, it would not significantly impact competition in the
market for exchange trading services because these markets are served
by multiple competitors.\71\ Further, the Commission explicitly stated
that ``[c]onsequently, demand for these services in the event of the
exit of a competitor is likely to be swiftly met by existing
competitors.'' \72\ Finally, the Commission recognized that while some
exchanges may have a unique business model that is not currently
offered by competitors, a competitor could create similar business
models if demand were adequate, and if a competitor did not do so, the
Commission believes it would be likely that new entrants would do so if
the exchange with that unique business model was otherwise
profitable.\73\
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\70\ See Securities Exchange Act Release No. 86901 (September 9,
2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\71\ Id.
\72\ Id.
\73\ Id.
---------------------------------------------------------------------------
Cboe concluded in its fee filing that the Exchange is subject to
significant substitution-based competitive forces in pricing its
connectivity and access fees.\74\ Cboe stressed that the proof of
competitive constraints does not depend on showing that members walked
away, or threatened to walk away, from a product due to a pricing
change. Rather, the very absence of such negative feedback (in and of
itself, and particularly when coupled with positive feedback) is
indicative that the proposed fees are, in fact, reasonable and
consistent with the Exchange being subject to competitive forces in
setting fees.\75\
---------------------------------------------------------------------------
\74\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 at 71669 (November 10, 2020) (SR-CBOE-2020-105).
\75\ Id. at 71680.
---------------------------------------------------------------------------
MRX requests the Commission apply the same standard of review to
its proposed fee change that was applied to the Cboe fee filing which
permitted Cboe to amend its membership fees. If the Commission were to
apply a different standard of review to MRX's membership fee filing
than it applied to other exchange fee filings it would create a burden
on competition such that it would impair MRX's ability to compete among
other options markets. MRX's ability to assess membership fees, similar
to MEMX, Cboe and all other options markets, would permit it to compete
with other options markets on an equal playing field. As noted herein,
MRX is the only options market that does not have membership fees until
May 2, 2022.
Further, the proposed membership fees are identical to membership
fees assessed by GEMX.\76\ 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 EAMs, PMMs, and CMMs,
creates an undue burden on competition.
---------------------------------------------------------------------------
\76\ See GEMX Options 7, Section 6.A. (Access Fees) and Section
6.B. (CMM Trading Rights Fees).
---------------------------------------------------------------------------
With respect to the CMM Trading Rights Fee, the proposed fees
compare favorably with those of other options exchanges.\77\ 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 compared to CMMs, PMMs
have additional obligations on MRX. PMMs are required to open options
series in which they are assigned each day on MRX. Specifically, PMMs
must submit a Valid Width Quote each day to open their assigned options
series.\78\ PMMs are integral to providing liquidity during MRX's
Opening Process.\79\ Intra-day, PMMs must provide two-sided quotations
in a certain percentage of their assigned options series.\80\ 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 a certain of their assigned options class, which
percentage is less than that required of PMMs.\81\ While there can be
multiple CMMs in an options series, there is only one PMM assigned per
options series. The Exchange desires to encourage Members to compete
for appointments as PMMs in an options series. The Exchange believes
that PMMs serve an important role on MRX in opening an option series
and ensuring liquidity in that option series throughout the trading
day. This liquidity benefits the market through, for example, more
robust quoting.
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\77\ See NYSE Arca Fees and Charges, General Options and Trading
Permit (OTP) Fees (comparing CMM Trading Rights Fees to the Arca
Market Maker fees).
\78\ See Options 3, Section 8(c)(1) and 8(c)(3).
\79\ The Exchange notes that most options markets do not require
their primary or lead market maker to open their assigned options
series.
\80\ See Options 2, Section 5(e)(2) which states, ``Primary
Market Makers, 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 in advance, for which that Member's assigned options class
is open for trading. Primary Market Makers shall be required to make
two-sided markets pursuant to this Rule in any Quarterly Options
Series, any Adjusted Options Series, and any option series with an
expiration of nine months or greater for options on equities and
ETFs or with an expiration of twelve months or greater for index
options.''
\81\ See Options 2, Section 5(e)(1) which states, that ``On any
given day, a Competitive Market Maker is not required to enter
quotations in the options classes to which it is appointed. A
Competitive Market Maker may initiate quoting in options classes to
which it is appointed intra-day. If a Competitive Market Maker
initiates quoting in an options class, the Competitive Market Maker,
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 in advance, for
which that Member's assigned options class is open for trading . .
.''.
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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
[[Page 63140]]
19(b)(3)(A)(ii) of the Act.\82\ 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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\82\ 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#d2a0a7beb7ffb1bdbfbfb7bca6a192a1b7b1fcb5bda4"><span class="__cf_email__" data-cfemail="e193948d84cc828e8c8c848f9592a1928482cf868e97">[email protected]</span></a>. Please include
File Number SR-MRX-2022-19 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-2022-19. 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 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-2022-19 and should be submitted on
or before November 8, 2022.
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\83\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\83\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22558 Filed 10-17-22; 8:45 am]
BILLING CODE 8011-01-P
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