Notice2023-00118
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Reduce GEMX's Options Regulatory Fee
Primary source
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Published
January 9, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 5 (Monday, January 9, 2023)</title>
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[Federal Register Volume 88, Number 5 (Monday, January 9, 2023)]
[Notices]
[Pages 1308-1312]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96598; File No. SR-GEMX-2022-14]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Reduce GEMX's
Options Regulatory Fee
January 3, 2023.
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 December 22, 2022, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II 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 GEMX's Pricing Schedule at Options
7, Section 5 to reduce the GEMX Options Regulatory Fee or ``ORF''.
While the changes proposed herein are effective upon filing, the
Exchange has designated the amendments become operative on February 1,
2023.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/gemx/rules">https://listingcenter.nasdaq.com/rulebook/gemx/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
GEMX proposes to lower its ORF from $0.0014 to $0.0013 per contract
side on February 1, 2023. Previously, GEMX has filed to lower or waive
its ORF in 2019, 2021 and 2022.\3\ After a review of its regulatory
revenues and regulatory costs, the Exchange proposes to reduce the ORF
to ensure that revenue collected from the ORF, in combination with
other regulatory fees and fines, does not exceed the Exchange's total
regulatory costs.
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\3\ See Securities Exchange Act Release No. 85140 (February 14,
2019), 84 FR 5511 (February 21, 2019) (SR-GEMX-2019-01) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend the Options Regulatory Fee); 92698 (August 18, 2021), 86 FR
47355 (August 24, 2021) (SR-GEMX-2021-08) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend GEMX's
Options Regulatory Fee); and 94069 (January 26, 2022), 87 FR 5545
(February 1, 2022) (SR-GEMX-2022-03) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Reduce GEMX's Options
Regulatory Fee).
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Volumes in the options industry went over 900,000,000 total
contracts as of August 2022 and remained over that threshold through
November 2022. GEMX has taken measures in prior years to lower and
waive its ORF to ensure that revenue collected from the ORF, in
combination with other regulatory fees and fines, does not exceed the
Exchange's total regulatory costs. Despite those prior measures, GEMX
will need to reduce its ORF again to account for trading volumes in
2022. At this time, GEMX believes that the options volume it
experienced in the second half of 2022 is likely to persist in 2023.
The anticipated options volume would continue to impact GEMX's ORF
collection which, in turn, has caused GEMX to propose reducing the ORF
to ensure that revenue collected from the ORF, in combination with
other regulatory fees and fines, would not exceed the Exchange's total
regulatory costs.
Collection of ORF
GEMX will continue to assess its ORF for each customer option
transaction that is either: (1) executed by a Member on GEMX; or (2)
cleared by an GEMX Member at The Options Clearing Corporation (``OCC'')
in the customer range,\4\ even if the transaction was executed by a
non-Member of GEMX, regardless of the exchange on which the transaction
occurs.\5\ If the OCC clearing member is a GEMX Member, ORF is assessed
and collected on all cleared customer contracts (after adjustment for
CMTA \6\); and (2) if the OCC clearing member is not a GEMX Member, ORF
is collected only on the cleared customer contracts executed at GEMX,
taking into
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\4\ Participants must record the appropriate account origin code
on all orders at the time of entry of the order. The Exchange
represents that it has surveillances in place to verify that members
mark orders with the correct account origin code.
\5\ The Exchange uses reports from OCC when assessing and
collecting the ORF.
\6\ CMTA or Clearing Member Trade Assignment is a form of
``give-up'' whereby the position will be assigned to a specific
clearing firm at OCC.
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[[Page 1309]]
account any CMTA instructions which may result in collecting the ORF
from a non-Member.\7\
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\7\ By way of example, if Broker A, a GEMX Member, routes a
customer order to CBOE and the transaction executes on CBOE and
clears in Broker A's OCC Clearing account, ORF will be collected by
GEMX from Broker A's clearing account at OCC via direct debit. While
this transaction was executed on a market other than GEMX, it was
cleared by a GEMX Member in the member's OCC clearing account in the
customer range, therefore there is a regulatory nexus between GEMX
and the transaction. If Broker A was not a GEMX Member, then no ORF
should be assessed and collected because there is no nexus; the
transaction did not execute on GEMX nor was it cleared by a GEMX
Member.
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In the case where a Member both executes a transaction and clears
the transaction, the ORF will be assessed to and collected from that
Member. In the case where a Member executes a transaction and a
different Member clears the transaction, the ORF will be assessed to
and collected from the Member who clears the transaction and not the
Member who executes the transaction. In the case where a non-Member
executes a transaction at an away market and a Member clears the
transaction, the ORF will be assessed to and collected from the Member
who clears the transaction. In the case where a Member executes a
transaction on GEMX and a non-Member clears the transaction, the ORF
will be assessed to the Member that executed the transaction on GEMX
and collected from the non-Member who cleared the transaction. In the
case where a Member executes a transaction at an away market and a non-
Member clears the transaction, the ORF will not be assessed to the
Member who executed the transaction or collected from the non-Member
who cleared the transaction because the Exchange does not have access
to the data to make absolutely certain that ORF should apply. Further,
the data does not allow the Exchange to identify the Member executing
the trade at an away market.
ORF Revenue and Monitoring of ORF
The Exchange monitors the amount of revenue collected from the ORF
to ensure that it, in combination with other regulatory fees and fines,
does not exceed regulatory costs. In determining whether an expense is
considered a regulatory cost, the Exchange reviews all costs and makes
determinations if there is a nexus between the expense and a regulatory
function. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset ORF.
Revenue generated from ORF, when combined with all of the
Exchange's other regulatory fees and fines, is designed to recover a
material portion of the regulatory costs to the Exchange of the
supervision and regulation of member customer options business
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. Regulatory costs include
direct regulatory expenses and certain indirect expenses in support of
the regulatory function. The direct expenses include in-house and
third-party service provider costs to support the day-to-day regulatory
work such as surveillances, investigations and examinations. The
indirect expenses include support from such areas as Office of the
General Counsel, technology, and internal audit. Indirect expenses were
approximately 39% of the total regulatory costs for 2022. Thus, direct
expenses were approximately 61% of total regulatory costs for 2022.\8\
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\8\ The Exchange will finalize its 2023 Regulatory Budget in the
first quarter of 2023.
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The ORF is designed to recover a material portion of the costs to
the Exchange of the supervision and regulation of its Members,
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities.
Proposal
Based on the Exchange's most recent review, the Exchange is
proposing to reduce the amount of ORF that will be collected by the
Exchange from $0.0014 per contract side to $0.0013 per contract side.
The Exchange issued an Options Trader Alert on December 20, 2022
indicating the proposed rate change for February 1, 2023.\9\
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\9\ See Options Trader Alert 2022-44.
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The proposed reduction is based on current levels of options
volume. The below table displays monthly volume from 2021.\10\
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\10\ The OCC data from December 2021 numbers reflect only 13
trading days as this information is through December 17, 2021.
Volume data in the table represents numbers of contracts; each
contract has two sides.
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The Exchange compared the options volume in 2022 to the options
volume in 2021. The below table displays monthly volume for 2022 to
date.\11\
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\11\ The OCC data reflects data from January through November
2022. Volume data in the table represents numbers of contracts; each
contract has two sides.
[GRAPHIC] [TIFF OMITTED] TN09JA23.001
BILLING CODE 8011-01-C
Comparing 2021 to 2022, the options volumes in 2022 remained higher
in a majority of the months in 2022.\12\ November volume for 2022,
while lower than November volume for 2021, remains higher than most
months in 2021. With respect to customer options volume across the
industry, total customer options contract average daily volume, to
date, in 2022 is 36,509,256 as compared to total customer options
contract average daily volume in 2021 which was 36,308,323.\13\
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\12\ February, June, July and November 2022 volumes are lower as
compared to 2021 volumes in those same months.
\13\ See data from OCC at: <a href="https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type">https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type</a>.
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There can be no assurance that the Exchange's costs for 2023 will
not differ materially from these expectations and prior practice, nor
can the Exchange predict with certainty whether options volume will
remain at the current level going forward. The Exchange notes however,
that when combined with regulatory fees and fines, the revenue that may
be generated utilizing an ORF rate of $0.0014 per contract side may
result in revenue which exceeds the Exchange's estimated regulatory
costs for 2023 if options volumes remain the same. The options volume
for 2022 remains high when compared to 2021 volumes. GEMX lowered ORF
in the beginning of 2022 to account for the options volume in 2021. The
Exchange therefore proposes to reduce its ORF to $0.0013 per contract
side to ensure that revenue does not exceed the Exchange's estimated
regulatory costs in 2023. Particularly, the Exchange believes that
reducing the ORF when combined with all of the Exchange's other
regulatory fees and fines, would allow the Exchange to continue
covering a material portion of its regulatory costs, while lessening
the potential for generating excess revenue that may otherwise occur
using the rate of $0.0014 per contract side.\14\
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\14\ The Exchange notes that its regulatory responsibilities
with respect to Member compliance with options sales practice rules
have largely been allocated to FINRA under a 17d-2 agreement. The
ORF is not designed to cover the cost of that options sales practice
regulation.
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The Exchange will continue to monitor the amount of revenue
collected from the ORF to ensure that it, in combination with its other
regulatory fees and fines, does not exceed regulatory costs. If the
Exchange determines regulatory revenues may exceed or are projected to
exceed regulatory costs, the Exchange will adjust the ORF by submitting
a fee change filing to the Commission and notifying \15\ its Members
via an Options Trader Alert.\16\
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\15\ The Exchange will provide Members with such notice at least
30 calendar days prior to the effective date of the change.
\16\ The Exchange notes that in connection with this proposal,
it provided the Commission confidential details regarding the
Exchange's projected regulatory revenue, including projected revenue
from ORF, along with a projected regulatory expenses.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act,\18\ which provides that Exchange rules may provide
for the equitable allocation of reasonable dues, fees, and other
charges among its members, and other persons using its facilities.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \19\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(4).
\19\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed fee change is reasonable because
customer transactions will be subject to a lower ORF fee than the rate
that would otherwise be in effect on February 1, 2023. Moreover, the
proposed reduction is necessary for the Exchange to avoid collecting
revenue, in combination with other regulatory fees and fines, that
would be in excess of its anticipated regulatory costs which is
consistent with the Exchange's practices.
The Exchange designed the ORF to generate revenues that would be
less than the amount of the Exchange's regulatory costs to ensure that
it, in combination with its other regulatory fees and fines, does not
exceed regulatory costs, which is consistent with the view of the
Commission that regulatory fees be used for regulatory purposes and not
to support the Exchange's business operations. As discussed above,
however, after review of its regulatory costs and regulatory revenues,
which includes revenues from ORF and other regulatory fees and fines,
the Exchange determined that absent a reduction in ORF, it may collect
revenue which would exceed its regulatory costs. Indeed, the Exchange
notes that when taking into account the potential that recent options
volume persists, it estimates the ORF may
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generate revenues that would cover more than the approximated
Exchange's projected regulatory costs. As such, the Exchange believes
it's reasonable and appropriate to reduce the ORF amount from $0.0014
to $0.0013 per contract side.
The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory in that it is charged to all Members on all
their transactions that clear in the customer range at OCC.\20\ The
Exchange believes the ORF ensures fairness by assessing higher fees to
those Members that require more Exchange regulatory services based on
the amount of customer options business they conduct. Regulating
customer trading activity is much more labor intensive and requires
greater expenditure of human and technical resources than regulating
non-customer trading activity, which tends to be more automated and
less labor-intensive. For example, there are costs associated with main
office and branch office examinations (e.g., staff expenses), as well
as investigations into customer complaints and the terminations of
registered persons. As a result, the costs associated with
administering the customer component of the Exchange's overall
regulatory program are materially higher than the costs associated with
administering the non-customer component (e.g., Member proprietary
transactions) of its regulatory program. Moreover, the Exchange notes
that it has broad regulatory responsibilities with respect to
activities of its Members, irrespective of where their transactions
take place. Many of the Exchange's surveillance programs for customer
trading activity may require the Exchange to look at activity across
all markets, such as reviews related to position limit violations and
manipulation. Indeed, the Exchange cannot effectively review for such
conduct without looking at and evaluating activity regardless of where
it transpires. In addition to its own surveillance programs, the
Exchange also works with other SROs and exchanges on intermarket
surveillance related issues. Through its participation in the
Intermarket Surveillance Group (``ISG'') \21\ the Exchange shares
information and coordinates inquiries and investigations with other
exchanges designed to address potential intermarket manipulation and
trading abuses. Accordingly, there is a strong nexus between the ORF
and the Exchange's regulatory activities with respect to customer
trading activity of its Members.
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\20\ If the OCC clearing member is a GEMX member, ORF is
assessed and collected on all cleared customer contracts (after
adjustment for CMTA); and (2) if the OCC clearing member is not a
GEMX member, ORF is collected only on the cleared customer contracts
executed at GEMX, taking into account any CMTA instructions which
may result in collecting the ORF from a non-member.
\21\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
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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. This proposal does not create
an unnecessary or inappropriate intra-market burden on competition
because the ORF applies to all customer activity, thereby raising
regulatory revenue to offset regulatory expenses. It also supplements
the regulatory revenue derived from non-customer activity. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. Indeed, this proposal does not create an
unnecessary or inappropriate inter-market burden on competition because
it is a regulatory fee that supports regulation in furtherance of the
purposes of the Act. The Exchange is obligated to ensure that the
amount of regulatory revenue collected from the ORF, in combination
with its other regulatory fees and fines, does not exceed regulatory
costs.
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) of the Act \22\ and paragraph (f) of Rule 19b-4 \23\
thereunder. 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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f).
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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#80f2f5ece5ade3efedede5eef4f3c0f3e5e3aee7eff6"><span class="__cf_email__" data-cfemail="4c3e392029612f2321212922383f0c3f292f622b233a">[email protected]</span></a>. Please include
File No. SR-GEMX-2022-14 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 No. SR-GEMX-2022-14. 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 No. SR-GEMX-2022-14, and should be submitted on or
before January 30, 2023.
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00118 Filed 1-6-23; 8:45 am]
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