Notice2024-02161
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 7, Section 9
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Published
February 5, 2024
Issuing agencies
Securities and Exchange Commission
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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 7759-7762]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02161]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99450; File No. SR-Phlx-2024-02]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 7,
Section 9
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 PHLX LLC (``Phlx'' 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 9,
Other Member Fees.\3\
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\3\ The Exchange initially filed the proposed pricing changes on
November 28, 2023 (SR-Phlx-2023-52) to be effective on December 1,
2023. On December 5, 2023, the Exchange withdrew SR-Phlx-2023-52 and
replaced it with SR-Phlx-2023-56. On January 16, 2023, the Exchange
withdrew SR-Phlx-2023-56 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/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/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 9, B, Port Fees,
to increase the SQF Port \4\ Fee cap.
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\4\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Lead Market Makers, Streaming Quote Traders (``SQTs'') and
Remote Streaming Quote Traders (``RSQTs'') to connect, send, and
receive messages related to quotes, Immediate-or-Cancel Orders, and
auction responses into and from the Exchange. Features include the
following: (1) options symbol directory messages (e.g., underlying
and complex 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 Lead Market Maker, SQT or RSQT. Lead Market Makers, SQTs
and RSQTs 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, the Market Order Spread Protection,
or Size Limitation in Options 3, Section 15(a)(1), (a)(2) and
(b)(2), respectively. See Options 3, Section 7(a)(i)(B).
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Today, Phlx assesses $1,250 per port, per month up to a maximum of
$42,000 per month for an SQF Port that receives inbound quotes at any
time within that month.\5\ Today, member organizations are not assessed
an active SQF Port Fee for additional ports acquired for ten business
days for the purpose of transitioning technology.\6\ The Exchange
proposes to add the words ``active port'' in parenthesis at the end of
the description of SQF Port Fee to tie the
[[Page 7760]]
definition of an active port to the description for the port.\7\
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\5\ An active port shall mean that the port was utilized to
submit a quote to the System during a given month. See Options 7,
Section 9, B.
\6\ The member organization is required to provide the Exchange
with written notification of the transition and all additional
ports, provided at no cost, will be removed at the end of the ten
business days. See Options 7, Section 9, B.
\7\ The Exchange also proposes a technical amendment to add a
comma between ``per port'' and ``per month'' for the SQF Port Fee in
Options 7, Section 9, B.
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At this time, the Exchange proposes to increase the maximum SQF
Port Fee of $42,000 per month to $50,000 per month.\8\ The Exchange is
not amending the $1,250 per port, per month fee. As is the case today,
the Exchange would not assess a member organization an SQF Port Fee
beyond the monthly cap once the member organization has exceeded the
monthly cap for the respective month. Despite increasing the maximum
SQF Port Fee from $42,000 per month to $50,000 per month, the Exchange
will continue to offer member organizations the opportunity to cap
their SQF Port Fees so that they would not be assessed these fees
beyond the cap. A Phlx Market Maker requires only one SQF Port to
submit quotes in its assigned options series into Phlx. A Phlx Market
Maker may submit all quotes through one SQF Port. While a Phlx Market
Maker may elect to obtain multiple SQF Ports to organize its
business,\9\ only one SQF Port is necessary for a Phlx Market Maker to
fulfill its regulatory quoting obligations.\10\
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\8\ Currently, 29% of Phlx Market Makers cap their SQF Port
Fees. Of those Market Makers, there is a mix of small, medium and
large Market Makers.
\9\ For example, a Phlx 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 organization.
\10\ Phlx Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, Phlx 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 Phlx and only
Market Makers may utilize SQF Ports.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\11\ in general, and furthers the objectives of
sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4) and (5).
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The proposed pricing change to increase the maximum SQF Port Fee 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'. . . .'' \13\
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\13\ 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.'' \14\
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\14\ 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 maximum SQF Port Fee
from $42,000 to $50,000 per month is reasonable because despite the
increase in the maximum SQF Port Fee, the Exchange will continue to
offer member organizations the opportunity to cap their SQF Port Fees
so that they would not be assessed SQF Port Fees beyond the cap.
Additionally, a Phlx Market Maker requires only one SQF Port to submit
quotes in its assigned options series into Phlx. A Phlx Market Maker
may submit all quotes through one SQF Port. While a Phlx Market Maker
may elect to obtain multiple SQF Ports to organize its business,\15\
only one SQF Port is necessary for a Phlx Market Maker to fulfill its
regulatory quoting obligations.\16\ Additionally, the Exchange believes
that the caps are reasonable for two reasons.
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\15\ For example, a Phlx 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 organization.
\16\ Phlx Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, Phlx 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 Phlx 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. Phlx 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 Phlx has led the Exchange to select
$50,000 as the amended monthly cap for SQF 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 $50,000
per month. Phlx 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, Phlx Market Makers may pay
more to obtain multiple ports on Phlx.
The proposed pricing change to increase the maximum SQF Port Fee
from $42,000 to $50,000 per month is equitable and not unfairly
discriminatory because the Exchange would uniformly not assess any
Market Makers that exceeded the maximum SQF Port Fee any SQF Port Fees
beyond the maximum amount. Market Makers are the only market
participants that are assessed an SQF Port Fee because they are the
only market participants that are permitted to quote on the Exchange.
[[Page 7761]]
Unlike other market participants, Market Makers are subject to market
making and quoting obligations.\17\ These liquidity providers are
critical market participants in that they are the only market
participants that provide liquidity to Phlx 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.\18\
Market Makers are subject to a number of fees, unlike other market
participants. Market Makers pay separate permit fees,\19\ and Streaming
Quote Trader Fees,\20\ 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 at no
cost beyond a certain dollar amount enables these market participants
to provide the necessary liquidity to Phlx at lower costs.
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\17\ See Options 2, Sections 4 and 5.
\18\ See Options 3, Section 8.
\19\ See Options 7, Section 8, A.
\20\ See Options 7, Section 8, B.
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In 2022, NYSE Arca, Inc. (``NYSE Arca'') proposed to restructure
fees relating to OTPs for Market Makers.\21\ In that rule change,\22\
NYSE Arca argued that,
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\21\ 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.
\22\ 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,\23\
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\23\ 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 Ports
fees is constrained by competitive forces and that its proposed
modifications to the SQF Port 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.\24\ Further, in 2022, MRX
proposed a monthly cap for SQF Ports and SQF Purge Ports of 17,500.\25\
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.'' \26\
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\24\ See Securities Exchange Act Release No. 95412 (June 23,
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36).
\25\ 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).
\26\ 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 Phlx's ability
to compete among other options markets.
Intramarket Competition
The proposed pricing change to increase the maximum SQF Port Fee
from $42,000 to $50,000 per month does not impose an undue burden on
competition because the Exchange would uniformly not assess any Market
Makers that exceeded the maximum SQF Port Fee any SQF Port Fees beyond
the maximum amount. Market Makers are the only market participants that
are assessed an SQF Port Fee 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.\27\ These liquidity providers are critical market
participants in that they are the only market participants that provide
liquidity to Phlx 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.\28\ Market Makers are
subject to a number of fees, unlike other market participants. Market
Makers pay separate permit fees,\29\ and Streaming Quote Trader
Fees,\30\ in
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\27\ See Options 2, Sections 4 and 5.
\28\ See Options 3, Section 8.
\29\ See Options 7, Section 8, A.
\30\ See Options 7, Section 8, B.
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[[Page 7762]]
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 at no cost beyond a certain
dollar amount enables these market participants to provide the
necessary liquidity to Phlx 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 Fee cap is designed to
continue to incent Market Makers to quote on Phlx, thereby promoting
liquidity, quote competition, and trading opportunities.
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.\31\
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\31\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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.
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#6d1f180108400e0200000803191e2d1e080e430a021b"><span class="__cf_email__" data-cfemail="5725223b327a34383a3a323923241724323479303821">[email protected]</span></a>. Please include
file number SR-Phlx-2024-02 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-Phlx-2024-02. 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-Phlx-2024-02 and should be
submitted on or before February 26, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02161 Filed 2-2-24; 8:45 am]
BILLING CODE 8011-01-P
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