Notice2023-03485
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend ISE Pricing Schedule at Options 7, Section 6 To Modify the Crossing Fee Cap
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Published
February 21, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 34 (Tuesday, February 21, 2023)</title>
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[Federal Register Volume 88, Number 34 (Tuesday, February 21, 2023)]
[Notices]
[Pages 10588-10590]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-03485]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96926; File No. SR-ISE-2023-05]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend ISE
Pricing Schedule at Options 7, Section 6 To Modify the Crossing Fee Cap
February 14, 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 February 1, 2023, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the ISE Pricing Schedule at Options
7, Section 6 to modify the Crossing Fee Cap.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules">https://listingcenter.nasdaq.com/rulebook/ise/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
The purpose of the proposed rule change is to amend the Exchange's
Pricing Schedule at Options 7, Section 6.H to increase the Crossing Fee
Cap.
As set forth in Options 7, Section 6.H, the Exchange presently
offers a Crossing Fee Cap of $150,000 per month, per Member, on all
Firm Proprietary \3\ transactions that are part of the originating or
contra-side of a Crossing Order.\4\ Fees charged by the Exchange for
Responses to Crossing Orders \5\ are not included in the calculation of
the monthly fee cap. Surcharge fees charged by the Exchange for
licensed products and the fees for index options as set forth in
Section 5 are not included in the calculation of the monthly fee
cap.\6\ For purposes of the Crossing Fee Cap, the Exchange will
attribute eligible volume to the Member on whose behalf the Crossing
Order was executed.
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\3\ A Firm Proprietary order is an order submitted by a member
for its own proprietary account.
\4\ Crossing Orders are contracts that are submitted as part of
a Facilitation, Solicitation, PIM, Block or QCC order. All eligible
volume from affiliated Members is aggregated for purposes of the
Crossing Fee Cap, provided there is at least 75% common ownership
between the Members as reflected on each Member's Form BD, Schedule
A.
\5\ ``Responses to Crossing Order'' is any contra-side interest
submitted after the commencement of an auction in the Exchange's
Facilitation Mechanism, Solicited Order Mechanism, Block Order
Mechanism or PIM. See Options 7, Section 1(c).
\6\ In addition, a service fee of $0.00 per side currently
applies to all order types that are eligible for the fee cap. The
service fee would apply once a Member reaches the fee cap level and
would apply to every contract side above the fee cap. A Member who
does not reach the monthly fee cap is not charged the service fee.
Once the fee cap is reached, the service fee shall apply to eligible
Firm Proprietary orders in all Nasdaq ISE products. The service fee
is not calculated in reaching the cap.
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At this time, the Exchange proposes to increase the Crossing Fee
Cap from $150,000 to $200,000. The Exchange also proposes that once a
Member exceeds the fee cap level, the Member will be subject to a
reduced transaction fee of $0.02 per capped contract. Thus, if a Member
exceeds the $200,000 Crossing Fee Cap in a given month, the Member
would be charged a reduced fee of $0.02 per contract for their Crossing
Orders instead of $0.20 (for Crossing Orders except orders submitted in
the Price Improvement Mechanism (``PIM'')) \7\ or $0.10 (for PIM
orders). The Exchange notes that Members may also currently qualify for
discounted fees (or qualify for free executions) on their Firm
Proprietary PIM orders if they meet certain PIM volume requirements.\8\
[[Page 10589]]
The Exchange therefore proposes to stipulate that the Member will be
subject to a reduced transaction fee of $0.02 per capped contract,
unless the Member also qualifies for free executions. The Exchange
further proposes to delete all references to the service fee in this
Section 6.H. As noted above, the Exchange currently does not charge any
service fees in relation to the Crossing Fee Cap as this fee is set to
$0.00, and the Exchange therefore proposes to delete this obsolete fee.
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\7\ As described in Options 3, Section 13, PIM is a process by
which an EAM can provide price improvement opportunities for a
``Crossing Transaction,'' which is comprised of the order the EAM
represents as agent (the ``Agency Order'') and a counter-side order
for the full size of the Agency Order (the ``Counter-Side Order'').
Upon the entry of a Crossing Transaction into the PIM, PIM responses
(i.e., ``Improvement Orders'') may be entered during the auction
exposure period.
\8\ See Options 7, Section 3 (note 13) (providing that other
than for Priority Customer orders, the $0.10 PIM fee is $0.05 per
contract for orders executed by Members that execute an ADV of 7,500
or more contracts in the PIM in a given month. Members that execute
an ADV of 12,500 or more contracts in the PIM will be charged $0.02
per contract. The discounted fees are applied retroactively to all
eligible PIM volume in that month once the threshold has been
reached); and Options 7, Section 4 (note 9) (providing that other
than for Priority Customer orders, the $0.10 PIM fee is $0.05 per
contract for orders executed by Members that execute an ADV of 7,500
or more contracts in the PIM in a given month. Members that execute
an ADV of 12,500 or more contracts in the PIM will not be charged a
fee. The discounted fees are applied retroactively to all eligible
PIM volume in that month once the threshold has been reached). As
emphasized in the foregoing, a Member could potentially qualify for
free executions on their PIM orders and also exceed the Crossing Fee
Cap in a given month.
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While the Crossing Fee Cap will increase under this proposal and
Members will be charged a nominal transaction fee of $0.02 per capped
contract once the fee cap level is exceeded, the Exchange believes that
Members will continue to be incentivized to bring Firm Proprietary
Crossing Order flow to ISE to achieve the benefits of the cap on their
Crossing Order transactions fees.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\10\ 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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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange's proposed changes to its Pricing Schedule are
reasonable in several respects. As a threshold matter, the Exchange is
subject to significant competitive forces in the market for options
securities transaction services that constrain its pricing
determinations in that market. The fact that this market is competitive
has long been recognized by the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C. Circuit stated as follows: ``[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' . . . .'' \11\
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\11\ NetCoalition v. SEC, 615 F.3d 525, 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 in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \12\
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\12\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
options security transaction services. The Exchange is only one of
sixteen options exchanges to which market participants may direct their
order flow. Within this environment, market participants can freely and
often do shift their order flow among the Exchange and competing venues
in response to changes in their respective pricing schedules. As such,
the proposal represents a reasonable attempt by the Exchange to
increase its liquidity and market share relative to its competitors.
The Exchange believes that its proposal to increase the Crossing
Fee Cap from $150,000 to $200,000 is reasonable. The Crossing Fee Cap
was established to reward Members for executing a higher volume of Firm
Proprietary Crossing Orders on the Exchange by capping the associated
fees. The Exchange believes that the increased fee cap will be set at a
level that continues to appropriately reward Members for executing high
volumes of such Crossing Orders. Despite the proposed increase, the
Exchange believes that Members will continue to be incentivized to
bring Firm Proprietary Crossing Order flow to ISE to receive the
benefits of capped fees for their Crossing Order transactions. In that
vein, the Exchange believes that its proposal to begin charging a
transaction fee of $0.02 per capped contract once the Member has
exceeded the Crossing Fee Cap level is reasonable because it is a
nominal amount compared to the $0.20 fee for Crossing Orders (except
PIM orders) and the $0.10 fee for PIM orders normally assessed to
Members for their Firm Proprietary orders. As such, the Exchange
believes that the Crossing Fee Cap, as amended, still serves to lower
fees for Members that transact certain qualifying Firm Proprietary
Crossing Order volume on ISE, thus enabling these Members the ability
to lower costs. The Exchange further believes that it is reasonable to
assess no fees instead of assessing the reduced $0.02 transaction fee
for capped contracts in the event the Member exceeds the Crossing Fee
Cap level in a given month and also qualifies for free executions under
a separate incentive program. Given the interactions of various
incentive programs that apply to Crossing Orders (and in this case, PIM
orders) as noted above, the Exchange wants to ensure that Members get
the most favorable incentive they qualify for under its Pricing
Schedule. The Exchange also believes that the proposed changes to
remove all references to the service fee in the Crossing Fee Cap is
reasonable. As noted above, the Exchange currently does not charge any
service fees in relation to the Crossing Fee Cap as this fee is set to
$0.00. The Exchange therefore proposes to delete this fee to avoid
potential confusion by market participants.
The Exchange believes that the proposed changes described above to
the Crossing Fee Cap are equitable and not unfairly discriminatory
because the changes will apply uniformly to all Members engaged in Firm
Proprietary trading in options classes traded on the Exchange. The
Exchange does not believe that it is unfairly discriminatory to offer
the Crossing Fee Cap to Firm Proprietary transactions as differentiated
pricing already exists on the Exchange's Pricing Schedule to encourage
different segments of order flow. For instance, the Exchange generally
provides Priority Customer \13\ orders more favorable pricing through
lower or no transaction fees, including Priority Customer Crossing
Orders that are presently assessed no fees, and through rebate
opportunities like the Priority Customer rebate currently provided for
adding liquidity in Non-Select Symbols.\14\ Professional Customer \15\
orders are presently charged a lower transaction fee for executed QCC
orders and for orders
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executed in the Solicited Order Mechanism ($0.10 for Professional
Customers versus $0.20 for all other non-Priority Customers).\16\
Broker-Dealer \17\ and Firm Proprietary orders are incentivized in the
Exchange's PIM and Facilitation Rebate program.\18\ Market Makers \19\
are offered rebates through the Exchange's Market Maker Plus
program.\20\ The Exchange further believes there is nothing
impermissible about offering the Crossing Fee Cap solely to Firm
Proprietary transactions given that this practice is consistent with
firm fee caps in place on other options exchanges.\21\ To the extent
the amended Crossing Fee Cap continues to encourage additional Firm
Proprietary Crossing Order flow to ISE, such increased order flow
brings increased liquidity and additional opportunities for interaction
with this order flow, which ultimately benefits all market
participants.
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\13\ A ``Priority Customer'' is a person or entity that is not a
broker/dealer in securities, and does not place more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s), as defined in Nasdaq ISE Options 1,
Section 1(a)(37).
\14\ See Options 7, Sections 3 and 4. Non-Select Symbols are
options overlying all symbols that are not included in the Penny
Interval Program.
\15\ A ``Professional Customer'' is a person or entity that is
not a broker/dealer and is not a Priority Customer.
\16\ See Options 7, Sections 3 (note 16) and Section 4 (note
14).
\17\ A ``Broker-Dealer'' order is an order submitted by a member
for a broker-dealer account that is not its own proprietary account.
\18\ See Options 7, Sections 6.C.
\19\ The term ``Market Makers'' refers to Competitive Market
Makers and Primary Market Makers, collectively. See Options 1,
Section 1(a)(21).
\20\ See Options 7, Sections 3 (note 5).
\21\ See, e.g., Monthly Firm Fee Cap in Nasdaq Phlx Options 7,
Section 4; and Firm and Broker Dealer Monthly Fee Cap in NYSE Arca
Options Fees and Charges at <a href="https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf</a>.
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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. In terms of intra-market
competition, the Exchange does not believe that this proposal will
place any category of market participant at a competitive disadvantage.
As discussed above, the proposed changes to the Crossing Fee Cap will
apply uniformly to all Members engaged in Firm Proprietary trading in
options classes traded on the Exchange. To the extent the amended
Crossing Fee Cap continues to provide an incentive for Members to bring
additional Firm Proprietary Crossing Order flow to the Exchange, such
order flow brings increased liquidity to the benefit of all market
participants.
In terms of inter-market competition, 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. In such an environment, the Exchange
must continually adjust its fees to remain competitive with other
exchanges and with alternative trading systems that have been exempted
from compliance with the statutory standards applicable to exchanges.
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. In sum, if the changes proposed herein are unattractive to
market participants, it is likely that the Exchange will lose market
share as a result. Accordingly, the Exchange does not believe that the
proposed changes will impair the ability of members or competing order
execution venues to maintain their competitive standing in the
financial markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\22\ 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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\22\ 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#5022253c357d333f3d3d353e2423102335337e373f26"><span class="__cf_email__" data-cfemail="6614130a034b05090b0b030812152615030548010910">[email protected]</span></a>. Please include
File Number SR-ISE-2023-05 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-ISE-2023-05. 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 such 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-ISE-2023-05 and should be submitted on
or before March 14, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03485 Filed 2-17-23; 8:45 am]
BILLING CODE 8011-01-P
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