Notice2024-02158
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 7, Section 6
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Published
February 5, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 24 (Monday, February 5, 2024)</title>
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[Federal Register Volume 89, Number 24 (Monday, February 5, 2024)]
[Notices]
[Pages 7762-7765]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02158]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99446; File No. SR-GEMX-2024-03]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 7,
Section 6
January 30, 2024.
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 January 16, 2024, 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, 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 its Rules at Options 7, Section 6,
C, Ports and Other Services.\3\
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\3\ The Exchange initially filed the proposed pricing changes on
November 28, 2023 (SR-GEMX-2023-16) to be effective on December 1,
2023. On December 5, 2023, the Exchange withdrew SR-GEMX-2023-16 and
replaced it with SR-GEMX-2023-19. On January 16, 2023, the Exchange
withdrew SR-GEMX-2023-19 and submitted this filing.
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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
The Exchange proposes to amend Options 7, Section 6, C, Ports and
Other Services. Specifically, the Exchange
[[Page 7763]]
proposes to amend the monthly caps for SQF Ports \4\ and SQF Purge
Ports.\5\
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\4\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Market Makers to connect, send, and receive messages related
to quotes, Immediate-or-Cancel Orders, and auction responses to the
Exchange. Features include the following: (1) options symbol
directory messages (e.g., underlying instruments); (2) System event
messages (e.g., start of trading hours messages and start of
opening); (3) trading action messages (e.g., halts and resumes); (4)
execution messages; (5) quote messages; (6) Immediate-or-Cancel
Order messages; (7) risk protection triggers and purge
notifications; (8) opening imbalance messages; (9) auction
notifications; and (10) auction responses. The SQF Purge Interface
only receives and notifies of purge requests from the Market Maker.
Market Makers may only enter interest into SQF in their assigned
options series. Immediate-or-Cancel Orders entered into SQF are not
subject to the Order Price Protection, Market Order Spread
Protection, and Size Limitation Protection in Options 3, Section
15(a)(1)(A), (1)(B), and (2)(B) respectively. See Supplementary
Material .03(c) to Options 3, Section 7.
\5\ SQF Purge is a specific port for the SQF interface that only
receives and notifies of purge requests from the Market Maker.
Dedicated SQF Purge Ports enable Market Makers to seamlessly manage
their ability to remove their quotes in a swift manner. The SQF
Purge Port is designed to assist Market Makers in the management of,
and risk control over, their quotes. Market Makers may utilize a
purge port to reduce uncertainty and to manage risk by purging all
quotes in their assigned options series. Of note, Market Makers may
only enter interest into SQF in their assigned options series.
Additionally, the SQF Purge Port may be utilized by a Market Maker
in the event that the Member has a system issue and determines to
purge its quotes from the order book.
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Today, GEMX assesses $1,250 per port, per month for an SQF Port as
well as an SQF Purge Port.\6\ Also, today, SQF Ports and SQF Purge
Ports are subject to a monthly cap of $17,500, which cap is applicable
to Market Makers.
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\6\ The Exchange proposes to add a comma between ``per port''
and ``per month'' in the Options 7, Section 6, C, SQF Port and SQF
Purge Port Fee rule text. The Exchange also proposes to remove an
extraneous period in Options 7, Section 6, C, in the second
paragraph.
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At this time, the Exchange proposes to increase the SQF Port and
SQF Purge Port monthly cap fee of $17,500 per month to $27,500 per
month.\7\ The Exchange is not amending the $1,250 per port, per month
SQF Port and SQF Purge Port. As is the case today, the Exchange would
not assess a Member an SQF Port or SQF Purge Port fee beyond the
monthly cap once the Member has exceeded the monthly cap for the
respective month. Despite increasing the monthly cap for SQF Ports and
SQF Purge Ports from $17,500 per month to $27,500 per month, the
Exchange will continue to offer Members the opportunity to cap their
SQF Port and SQF Purge Port fees so that they would not be assessed
these fees beyond the cap. Further, a GEMX Market Maker requires only
one SQF Port to submit quotes in its assigned options series into GEMX.
A GEMX Market Maker may submit all quotes through one SQF Port and
utilize one SQF Purge Port to view its purge requests. While a Market
Maker may elect to obtain multiple SQF Ports and SQF Purge Ports to
organize its business,\8\ only one SQF Port and SQF Purge Port is
necessary for a Market Maker to fulfill its regulatory quoting
obligations.\9\
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\7\ Today, 62% of GEMX Market Makers have capped their SQF Ports
and SQF Purge Ports on GEMX. The Exchange notes that of the Market
Makers currently registered on GEMX, there is a mix of size of
Market Makers that cap.
\8\ For example, a Market Maker may desire to utilize multiple
SQF Ports for accounting purposes, to measure performance, for
regulatory reasons or other determinations that are specific to that
Member.
\9\ GEMX Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, GEMX Market
Makers have certain quoting requirements with respect to their
assigned options series as provided in Options 2, Section 5. SQF
Ports are the only quoting protocol available on GEMX and only
Market Makers may utilize SQF Ports. The same is true for SQF Purge
Ports.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\10\ in general, and furthers the objectives of
sections 6(b)(4) and 6(b)(5) of the Act,\11\ 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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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(4) and (5).
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The proposed pricing change to increase the monthly cap applicable
to SQF Ports and SQF Purge Ports is 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'. . . .'' \12\
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\12\ 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.'' \13\
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\13\ 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.
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.
The proposed pricing change to increase the SQF Port and SQF Purge
Port monthly cap from $17,500 per month to $27,500 per month is
reasonable because despite the increase in the monthly cap, the
Exchange will continue to offer Members the opportunity to cap their
SQF Port and SQF Purge Port fees so that they would not be assessed
these fees beyond the cap. Additionally, a GEMX Market Maker requires
only one SQF Port to submit quotes in its assigned options series into
GEMX. A GEMX Market Maker may submit all quotes through one SQF Port
and utilize one SQF Purge Port to view its purge requests. While a
Market Maker may elect to obtain multiple SQF Ports and SQF Purge Ports
to organize its business,\14\ only one SQF Port and SQF Purge Port is
necessary for a Market Maker to fulfill its regulatory quoting
obligations.\15\ Additionally, the
[[Page 7764]]
Exchange believes that the caps are reasonable for two reasons.
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\14\ For example, a Market Maker or may desire to utilize
multiple SQF Ports for accounting purposes, to measure performance,
for regulatory reasons or other determinations that are specific to
that Member.
\15\ GEMX Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, GEMX Market
Makers have certain quoting requirements with respect to their
assigned options series as provided in Options 2, Section 5. SQF
Ports are the only quoting protocol available on GEMX and only
Market Makers may utilize SQF Ports.
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First, SQF Ports are a secure method for Market Makers to submit
quotes into the Exchange's match engine and for the Exchange to send
messages related to those quotes to Market Makers. GEMX must manage the
security and message traffic, among other things, for each port.
Utilizing the cap to manage a Market Maker's costs while also managing
the quantity of SQF Ports issued on GEMX has led the Exchange to select
$27,500 as the amended monthly cap for SQF Ports and SQF Purge Ports.
By capping the ports at a different level, the Exchange is considering
the message traffic and message rates associated with the current
number of outstanding ports and its ability to process messages. The
ability to have a cap and amend that cap permits the Exchange to scale
its needs with respect to processing messages in an efficient manner.
Second, the Exchange notes that multiple ports are not necessary,
however, to the extent that some Market Makers elect to obtain multiple
ports, the Exchange is offering to cap their total port cost at $27,500
per month. GEMX believes the existence of a cap allows for efficiencies
and permits Market Makers to increase their number of ports beyond the
cap. The cap levels the playing field by allowing those Market Makers
that want to obtain a larger number of ports to do so with the
certainty of a fee cap. Without the cap, GEMX Market Makers may pay
more to obtain multiple ports on GEMX.
The Exchange's proposed pricing change to increase the SQF Port and
SQF Purge Port monthly cap from $17,500 per month to $27,500 per month
is equitable and not unfairly discriminatory because the Exchange would
uniformly not assess any Market Makers that exceeded the proposed
monthly cap any SQF Port and SQF Purge Port fees for that month beyond
the cap. Market Makers are the only market participants that are
assessed SQF Port and SQF Purge Port fees because they are the only
market participants that are permitted to quote on the Exchange. Unlike
other market participants, Market Makers are subject to market making
and quoting obligations.\16\ These liquidity providers are critical
market participants in that they are the only market participants that
provide liquidity to GEMX on a continuous basis. In addition, the
Exchange notes that Lead Market Makers are required to submit quotes in
the Opening Process to open an options series.\17\ Market Makers are
subject to a number of fees, unlike other market participants. Market
Makers pay separate Membership Fees,\18\ and CMM Trading Right
Fees,\19\ in addition to other fees paid by other market participants.
Providing Market Makers a means to cap their cost related to quoting
and enabling all Market Makers to acquire SQF Ports and SQF Purge Ports
at no cost beyond a certain dollar amount enables these market
participants to provide the necessary liquidity to GEMX at lower costs.
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\16\ See Options 2, Sections 4 and 5.
\17\ See Options 3, Section 8.
\18\ See Options 7, Section 6, A.
\19\ See Options 7, Section 6, B.
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In 2022, NYSE Arca, Inc. (``NYSE Arca'') proposed to restructure
fees relating to OTPs for Market Makers.\20\ In that rule change,\21\
NYSE Arca argued that,
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\20\ See Securities Exchange Act Release No. 95412 (June 23,
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36). NYSE Arca
proposed to increase both the monthly fee per Market Maker OTP and
the number of issues covered by each additional OTP because, among
other reasons, the number of issues traded on the Exchange has
increased significantly in recent years.
\21\ Id at 38788.
Market Makers serve a unique and important function on the
Exchange (and other options exchanges) given the quote-driven nature
of options markets. Because options exchanges rely on actively
quoting Market Makers to facilitate a robust marketplace that
attracts order flow, options exchanges must attract and retain
Market Makers, including by setting competitive Market Maker permit
fees. Stated otherwise, changes to Market Maker permit fees can have
a direct effect on the ability of an exchange to compete for order
flow. The Exchange also believes that the number of options
exchanges on which Market Makers can effect option transactions also
ensures competition in the marketplace and constrains the ability of
exchanges to charge supracompetitive fees for access to its market
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by Market Makers.
Further, NYSE ARCA noted that,\22\
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\22\ Id at 38790.
The Exchange further believes that its ability to set Market
Maker permit fees is constrained by competitive forces based on the
fact that Market Makers can, and have, chosen to terminate their
status as a Market Maker if they deem Market Maker permit fees to be
unreasonable or excessive. Specifically, the Exchange notes that a
BOX participant modified its access to BOX in connection with the
implementation of a proposed change to BOX's Market Maker permit
fees. The Exchange has also observed that another options exchange
group experienced decreases in market share following its proposed
modifications of its access fees (including Market Maker trading
permit fees), suggesting that market participants (including Market
Makers) are sensitive to changes in exchanges' access fees and may
respond by shifting their order flow elsewhere if they deem the fees
to be unreasonable or excessive.
There is no requirement, regulatory or otherwise, that any
Market Maker connect to and access any (or all of) the available
options exchanges. The Exchange also is not aware of any reason why
a Market Maker could not cease being a permit holder in response to
unreasonable price increases. The Exchange does not assess any
termination fee for a Market Maker to drop its OTP, nor is the
Exchange aware of any other costs that would be incurred by a Market
Maker to do so.
The Exchange likewise believes that its ability to cap SQF Port and
SQF Purge fees is constrained by competitive forces and that its
proposed modifications to the SQF Port and SQF Purge Fee cap is
reasonably designed in consideration of the competitive environment in
which the Exchange operates, by balancing the value of the enhanced
benefits available to Market Makers due to the current level of
activity on the Exchange with a fee structure that will continue to
incent Market Makers to support increased liquidity, quote competition,
and trading opportunities on the Exchange, for the benefit of all
market participants.
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.
Intermarket Competition
The proposal does not impose an undue burden on intermarket
competition. The Exchange believes its proposal remains competitive
with other options markets who also offer order entry protocols. 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. In such an environment,
the Exchange must continually adjust its fees to remain competitive
with other 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. Other exchanges have been permitted to amend
certain costs attributed to Market Makers.\23\ Further, in 2022, MRX
proposed a
[[Page 7765]]
monthly cap for SQF Ports and SQF Purge Ports of 17,500.\24\ MRX noted
in its rule change that, ``Only one SQF quote protocol is required for
an MRX Market Maker to submit quotes into MRX and to meet its
regulatory requirements.'' \25\
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\23\ See Securities Exchange Act Release No. 95412 (June 23,
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36).
\24\ See Securities Exchange Act No. 96824(February 7, 2023), 88
FR 8975 (February 10, 2023) (SR-MRX-2023-05) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend MRX Options
7, Section 6).
\25\ Id at 8976.
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If the Commission were to apply a different standard of review this
proposal than it applied to other exchange fee filings, where Market
Maker fees were increased and port fee caps were established, it would
create a burden on competition such that it would impair GEMX's ability
to compete among other options markets.
Intramarket Competition
The Exchange's proposed pricing change to increase the SQF Port and
SQF Purge Port monthly cap from $17,500 per month to $27,500 per month
does not impose an undue burden on competition because the Exchange
would uniformly not assess any Market Makers that exceeded the proposed
monthly cap any SQF Port and SQF Purge Port fees for that month beyond
the cap. Market Makers are the only market participants that are
assessed SQF Port and SQF Purge Port fees because they are the only
market participants that are permitted to quote on the Exchange. Unlike
other market participants, Market Makers are subject to market making
and quoting obligations.\26\ These liquidity providers are critical
market participants in that they are the only market participants that
provide liquidity to GEMX on a continuous basis. In addition, the
Exchange notes that Lead Market Makers are required to submit quotes in
the Opening Process to open an options series.\27\ Market Makers are
subject to a number of fees, unlike other market participants. Market
Makers pay separate permit fees,\28\ and Streaming Quote Trader
Fees,\29\ in addition to other fees paid by other market participants.
Providing Market Makers a means to cap their cost related to quoting
and enabling all Market Makers to acquire SQF Ports and SQF Purge Ports
at no cost beyond a certain dollar amount enables these market
participants to provide the necessary liquidity to GEMX at lower costs.
Therefore, because Market Makers fulfill a unique role on the Exchange,
are the only market participant required to submit quotes as part of
their obligations to operate on the Exchange, and, in light of that
role, they are eligible for certain incentives. The proposed SQF Port
and SQF Purge Fee cap is designed to continue to incent Market Makers
to quote on GEMX, thereby promoting liquidity, quote competition, and
trading opportunities.
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\26\ See Options 2, Sections 4 and 5.
\27\ See Options 3, Section 8.
\28\ See Options 7, Section 8, A.
\29\ See Options 7, Section 8, B.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A)(ii) of the Act.\30\ 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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\30\ 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d9abacb5bcf4bab6b4b4bcb7adaa99aabcbaf7beb6af"><span class="__cf_email__" data-cfemail="7e0c0b121b531d1113131b100a0d3e0d1b1d50191108">[email protected]</span></a>. Please include
file number SR-GEMX-2024-03 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-GEMX-2024-03. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-GEMX-2024-03 and should be
submitted on or before February 26, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02158 Filed 2-2-24; 8:45 am]
BILLING CODE 8011-01-P
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