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Notice2024-10946

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 7, Section 3

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Published

May 20, 2024

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 89 Issue 98 (Monday, May 20, 2024)</title>
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[Federal Register Volume 89, Number 98 (Monday, May 20, 2024)]
[Notices]
[Pages 43950-43954]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-10946]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100130; File No. SR-NASDAQ-2024-021]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Options 7, Section 3

May 14, 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 May 1, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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 Nasdaq Options Market LLC's
(``NOM'') Rules at Options 7, Section 3, Nasdaq Options Market--Ports
and Other Services.\3\
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\3\ The Exchange initially filed the proposed pricing changes on
November 28, 2023 (SR-NASDAQ-2023-050) to be effective on December
1, 2023. On December 5, 2023, the Exchange withdrew SR-NASDAQ-2023-
050 and placed it with SR-NASDAQ-2023-054. On January 16, 2023, the
Exchange withdrew SR-NASDAQ-2023-054 and submitted SR-NASDAQ-2024-
003. On March 7, 2024, the Exchange withdrew SR-NASDAQ-2024-003 and
submitted SR-NASDAQ-2024-012. On May 1, 2024, the Exchange withdrew
SR-NASDAQ-2024-012 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/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/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

[[Page 43951]]

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 3, Nasdaq Options
Market--Ports and Other Services.
Today, NOM assesses SQF Ports and SQF Purge Ports a per port, per
month fee based on a tiered fee schedule. Specifically, NOM assesses an
SQF Port and an SQF Purge Port fee of $1,500 per port, per month for
the first 5 ports (1-5), a $1,000 per port, per month fee for the next
15 ports (6-20), and a $500 per port, per month fee for all ports over
20 ports (21 and above).
At this time, the Exchange proposes to establish an increased fee
for SQF Ports and SQF Ports above 20 ports (21 and above) that do not
provide a minimum amount of liquidity on NOM. This increased fee is
intended to incentivize Market Makers to add liquidity on NOM for the
benefit of other market participants. Specifically, NOM proposes an SQF
Port Fee and an SQF Purge Port Fee of $750 per port for all ports above
20 ports if a Market Maker did not transact 1.50% of Total Customer
Volume in electronic simple orders that adds liquidity in a month.\4\
Market Makers who transact 1.50% of Total Customer Volume that adds
liquidity in a month will continue to be assessed a $500 per port fee
for SQF Ports and SQF Purge Ports for over 20 ports. The Exchange
believes that Market Makers will add liquidity to NOM in order to
decrease their costs of doing business on the Exchange by achieving the
lower SQF Port Fee and SQF Purge Port Fee for more than 20 ports.
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\4\ For purposes of this cap, ``Total Customer Volume'' shall be
defined as a percentage of all cleared customer volume at The
Options Clearing Corporation in Multiply Listed Equity Options and
Exchange-Traded Products (``TCV'').
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Pursuant to Options 3, Section 7(e)(1)(B), NOM Market Makers may
only enter quotes into SQF in their assigned options series. Pursuant
to Options 3, Section 7(e)(1)(B), the SQF interface allows NOM Market
Makers to connect, send, and receive messages related to quotes,
Immediate-or-Cancel Orders, and auction responses to the Exchange. An
SQF Purge is a specific port for the SQF interface that only receives
and notifies of purge requests from the Market Maker. A NOM Market
Maker may submit all quotes through one SQF Port and utilize one SQF
Purge Port to view its purge requests. While a NOM Market Maker may
elect to obtain multiple SQF Ports and SQF Purge Ports to organize its
business,\5\ only one SQF Port and SQF Purge Port is necessary for a
NOM Market Maker to fulfill its regulatory quoting obligations.\6\
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\5\ For example, a NOM 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 NOM Participant. The Exchange notes that 78% of NOM Market
Makers pay the $1,000 per port, per month fee for 6-20 ports and 39%
pay the proposed $750 per port, per month fee for over 20 ports.
\6\ NOM Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, NOM Market
Makers have certain quoting requirements with respect to their
assigned options series as provided in Options 2, Section 5. The
Exchange notes that SQF Ports are the only quoting protocol
available on NOM and only NOM 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,\7\ in general, and furthers the objectives of sections
6(b)(4) and 6(b)(5) of the Act,\8\ 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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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(4) and (5).
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The proposed pricing change to increase the SQF Port Fee and SQF
Purge Port Fee for above 20 ports to $750 per port if a Market Maker
does not transact 1.50% of Total Customer Volume that adds liquidity in
a month is reasonable because it will incentivize Market Makers to add
liquidity on NOM to lower their costs. Further, 1.50% of Total Customer
Volume that adds liquidity in a month is an achievable number for
Market Makers who currently add volume to the Exchange. The Exchange
believes that increasing the SQF Port Fee and SQF Purge Port Fee for
above 20 ports from $500 to $750 per port is reasonable because Market
Makers are obligated, among other things, to maintain a two-sided
market in those options in which the Market Maker is registered to
trade, in a manner that enhances the depth, liquidity and
competitiveness of the market and compete with other Market Makers in
all options in all capacities in which the Market Maker is registered
to trade.\9\ The Exchange believes that it is reasonable to increase
the SQF Port Fee and SQF Purge Port Fee for above 20 ports from $500 to
$750 per port for Market Makers that do not transact 1.50% of Total
Customer Volume that adds liquidity in a month because the Exchange
believes that Market Makers that do not contribute a minimum amount of
liquidity on NOM should not be subject to the same opportunities to
lower their costs as those Market Makers that do contribute to
liquidity and therefore provide the ability for other market
participants to engage with that order flow. The Exchange believes that
the increase is modest and would serve to encourage Market Makers to
submit order flow to NOM in order to lower their cost and would result
in additional order competition. The Exchange believes this proposal
promotes liquidity, quote competition, and trading opportunities.
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\9\ See Options 2, Section 4(a)(1) and (3).
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A NOM Market Maker requires only one SQF Port to submit quotes in
its assigned options series into NOM. A NOM Market Maker may submit all
quotes through one SQF Port and utilize one SQF Purge Port to view its
purge requests. While a NOM Market Maker may elect to obtain multiple
SQF Ports and SQF Purge Ports to organize its business,\10\ only one
SQF Port and SQF Purge Port is necessary for a NOM Market Maker to
fulfill its regulatory quoting obligations. For those Market Makers
that elect to organize themselves by obtaining a greater number of SQF
Ports and SQF Purge Ports they will be able to reduce their fees.\11\
Participants may choose a greater number of SQF Ports or SQF Purge
Ports, beyond one port, depending on that Participant's particular
business model.
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\10\ For example, a NOM 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 Participant.
\11\ The number of ports that member organizations choose to
purchase varies widely. Today, on Phlx, 2 Market Makers have 1 SQF
Port, 5 Market Makers have 2-5 SQF Ports, 4 Market Makers have
between 6-10 SQF Ports, and 11 Market Makers have more than 10 SQF
Ports. Additionally, today, on Nasdaq GEMX, LLC no Market Makers
have 1 SQF Port/SQF Purge Port, 1 Market Maker has 2-5 SQF Ports/SQF
Purge Ports, 4 Market Makers have between 6-10 SQF Ports/SQF Purge
Ports, and 8 Market Makers have more than 10 SQF Ports/SQF Purge
Ports. Finally, on Nasdaq MRX LLC (``MRX''), 2 Market Makers have 1
SQF Ports/SQF Purge Ports, no Market Makers have 2-5 SQF Ports/SQF
Purge Ports, 2 Market Makers have between 6-10 SQF Ports/SQF Purge
Ports, and 6 Market Makers have more than 10 SQF Ports/SQF Purge
Ports.
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[[Page 43952]]

uniformly apply the criteria when assessing fees. The Exchange notes
that unlike other market participants, Market Makers are required to
quote intra-day.\12\ Further, unlike other market participants, Market
Makers have obligations to the market to maintain a two-sided market in
those options in which the Market Maker is registered to trade, in a
manner that enhances the depth, liquidity and competitiveness of the
market and compete with other Market Makers in all options in all
capacities in which the Market Maker is registered to trade, among
other obligations.\13\ These liquidity providers are critical market
participants in that they are the only market participants that provide
liquidity to NOM. Allowing Market Makers to manage their costs by
lowering the SQF Port and SQF Purge Port Fees for above 20 ports
enables these essential market participants to manage their business
model more effectively and better allocate resources to other
technologies that are necessary to manage risk and capacity to ensure
that these market participants continue to compete effectively on NOM.
The following chart represents the classification of NOM members and
the percentage of Market Makers.
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\12\ See Options 2, Section 5(d).
\13\ See Options 2, Section 4(a)(1) and (3).
[GRAPHIC] [TIFF OMITTED] TN20MY24.308

The Exchange believes that Market Makers should be eligible for
certain incentives because they fulfill a unique role on the Exchange
and are the only market participants required to submit quotes to the
Exchange. The proposed reduced fee for above 20 ports is designed to
ensure that Market Makers that add a certain amount of liquidity on NOM
could obtain lower fees for above 20 ports to reduce costs. The
Exchange desires to reward Market Makers provided they are adding a
certain amount of liquidity to NOM and would apply the criteria
uniformly.
Finally, the reduced SQF Port and SQF Purge Port fees for above 20
ports is constrained by competitive forces and reasonably designed in
consideration of the competitive environment in which the Exchange
operates. This fee structure incents 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. The chart below shows the
February 2024 market share for multiply listed options by exchange. Of
the 17 operating options exchanges, none currently has more than a
17.6% market share. Customers widely distribute their transactions
across exchanges according to their business needs and the ability of
each exchange to meet those needs through technology, liquidity and
functionality.

[[Page 43953]]

[GRAPHIC] [TIFF OMITTED] TN20MY24.309

Market share is the percentage of volume on a particular exchange
relative to the total volume across all exchanges, and indicates the
amount of order flow directed to that exchange. High levels of market
share enhance the value of trading and ports.
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.
Intramarket Competition
The proposed pricing change to increase the SQF Port Fee and SQF
Purge Port Fee for above 20 ports to $750 per port if a Market Maker
does not transact 1.50% of Total Customer Volume that adds liquidity in
a month does not impose an undue burden on competition as the Exchange
would uniformly apply the criteria when assessing fees. The Exchange
notes that unlike other market participants, Market Makers are required
to quote intra-day.\14\ Further, unlike other market participants,
Market Makers have obligations to the market to maintain a two-sided
market in those options in which the Market Maker is registered to
trade, in a manner that enhances the depth, liquidity and
competitiveness of the market and compete with other Market Makers in
all options in all capacities in which the Market Maker is registered
to trade, among other obligations.\15\ These liquidity providers are
critical market participants in that they are the only market
participants that provide liquidity to NOM. Allowing Market Makers to
manage their costs by lowering the SQF Port and SQF Purge Port Fees for
above 20 ports enables these essential market participants to manage
their business model more effectively and better allocate resources to
other technologies that are necessary to manage risk and capacity to
ensure that these market participants continue to compete effectively
on NOM. The Exchange believes that Market Makers should be eligible for
certain incentives because they fulfill a unique role on the Exchange
and are the only market participants required to submit quotes to the
Exchange. The proposed reduced fee for above 20 ports is designed to
ensure that Market Makers that add a certain amount of liquidity on NOM
could obtain lower fees for above 20 ports to reduce costs. The
Exchange desires to reward Market Makers provided they are adding a
certain amount of liquidity to NOM and would apply the criteria
uniformly.
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\14\ See Options 2, Section 5(d).
\15\ See Options 2, Section 4(a)(1) and (3).
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Finally, the reduced SQF Port and SQF Purge Port fees for above 20
ports is constrained by competitive forces and reasonably designed in
consideration of the competitive environment in which the Exchange
operates. This fee structure incents Market Makers to support increased
liquidity, quote competition, and trading opportunities on the
Exchange, for the benefit of all market participants.

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.\16\
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\16\ 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:

[[Page 43954]]

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#c9bbbca5ace4aaa6a4a4aca7bdba89baacaae7aea6bf"><span class="__cf_email__" data-cfemail="8efcfbe2eba3ede1e3e3ebe0fafdcefdebeda0e9e1f8">[email&#160;protected]</span></a>. Please include
file number SR-NASDAQ-2024-021 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-NASDAQ-2024-021. 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-NASDAQ-2024-021 and should
be submitted on or before June 10, 2024.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10946 Filed 5-17-24; 8:45 am]
BILLING CODE 8011-01-P

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