Notice2024-26412
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Approach to the Options Regulatory Fee (ORF) in 2025
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 14, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 220 (Thursday, November 14, 2024)</title>
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[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90165-90173]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101550; File No. SR-BX-2024-040]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt a New
Approach to the Options Regulatory Fee (ORF) in 2025
November 7, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 31, 2024, Nasdaq BX, Inc. (``BX'' or ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I and II below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its Pricing Schedule at Options 7,
Section 5, Options Regulatory Fee.
While the changes proposed herein are effective upon filing, the
Exchange has designated the amendments to be operative on January 1,
2025.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/bx/rules">https://listingcenter.nasdaq.com/rulebook/bx/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.
[[Page 90166]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
BX proposes to amend its current ORF in several respects. BX
proposes to amend its methodology of collection to: (1) exclude options
transactions in proprietary products; and (2) assess ORF in all
clearing ranges except market makers who clear as ``M'' at The Options
Clearing Corporation (``OCC''). Additionally, BX will assess a
different rate for trades executed on BX (``Local ORF Rate'') and
trades executed on non-BX exchanges (``Away ORF Rate'').
Background on Current ORF
Today, BX assesses its ORF for each Customer \3\ option transaction
that is either: (1) executed by a Participant \4\ on BX; or (2) cleared
by a BX Participant at OCC in the Customer range,\5\ even if the
transaction was executed by a non-member of BX, regardless of the
exchange on which the transaction occurs.\6\ If the OCC clearing member
is a BX Participant, ORF is assessed and collected on all ultimately
cleared Customer contracts (after adjustment for CMTA \7\); and (2) if
the OCC clearing member is not a BX Participant, ORF is collected only
on the cleared Customer contracts executed at BX, taking into account
any CMTA instructions which may result in collecting the ORF from a
non-member.\8\ The current BX ORF is $0.0005 per contract side.
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\3\ Today, ORF is collected from Customers, Professionals and
broker-dealers that are not affiliated with a clearing member that
clear in the ``C'' range at OCC. See supra notes 13 and 14 for
descriptions of Customers and Professionals.
\4\ The term ``Options Participant'' or ``Participant'' mean a
firm, or organization that is registered with the Exchange pursuant
to Options 2A of these Rules for purposes of participating in
options trading on BX Options as a ``BX Options Order Entry Firm''
or ``BX Options Market Maker.'' See Options 1, Section 1(a)(40).
\5\ Participants must record the appropriate account origin code
on all orders at the time of entry of the order. The Exchange
represents that it has surveillances in place to verify that
Participants mark orders with the correct account origin code.
\6\ The Exchange uses reports from OCC when assessing and
collecting the ORF.
\7\ CMTA or Clearing Member Trade Assignment is a form of
``give-up'' whereby the position will be assigned to a specific
clearing firm at OCC.
\8\ By way of example, if Broker A, a BX Participant, routes a
Customer order to CBOE and the transaction executes on CBOE and
clears in Broker A's OCC Clearing account, ORF will be collected by
BX from Broker A's clearing account at OCC via direct debit. While
this transaction was executed on a market other than BX, it was
cleared by a BX Participant in the member's OCC clearing account in
the Customer range, therefore there is a regulatory nexus between BX
and the transaction. If Broker A was not a BX Participant, then no
ORF should be assessed and collected because there is no nexus; the
transaction did not execute on BX nor was it cleared by a BX
Participant.
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Today, in the case where a Participant both executes a transaction
and clears the transaction, the ORF will be assessed to and collected
from that Participant. Today, in the case where a Participant executes
a transaction and a different Participant clears the transaction, the
ORF will be assessed to and collected from the Participant who clears
the transaction and not the Participant who executes the transaction.
Today, in the case where a non-member executes a transaction at an away
market and a Participant clears the transaction, the ORF will be
assessed to and collected from the Participant who clears the
transaction. Today, in the case where a Participant executes a
transaction on BX and a non-member clears the transaction, the ORF will
be assessed to the Participant that executed the transaction on BX and
collected from the non-member who cleared the transaction. Today, in
the case where a Participant executes a transaction at an away market
and a non-member ultimately clears the transaction, the ORF will not be
assessed to the Participant who executed the transaction or collected
from the non-member who cleared the transaction because the Exchange
does not have access to the data to make absolutely certain that ORF
should apply. Further, the data does not allow the Exchange to identify
the Participant executing the trade at an away market.
ORF Revenue and Monitoring of ORF
Today, the Exchange monitors the amount of revenue collected from
the ORF (``ORF Regulatory Revenue'') to ensure that it, in combination
with other regulatory fees and fines, does not exceed Options
Regulatory Costs.\9\ In determining whether an expense is considered an
Options Regulatory Cost, the Exchange reviews all costs and makes
determinations if there is a nexus between the expense and a regulatory
function. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset Options Regulatory Cost.
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\9\ The regulatory costs for options comprise a subset of the
Exchange's regulatory budget that is specifically related to options
regulatory expenses and encompasses the cost to regulate all
Participants' options activity (``Options Regulatory Cost'').
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ORF Regulatory Revenue, when combined with all of the Exchange's
other regulatory fees and fines, is designed to recover a material
portion of the Options Regulatory Costs to the Exchange of the
supervision and regulation of member Customer options business
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. Options Regulatory Costs
include direct regulatory expenses and certain indirect expenses in
support of the regulatory function. The direct expenses include in-
house and third-party service provider costs to support the day-to-day
regulatory work such as surveillances, investigations and examinations.
The indirect expenses are only those expenses that are in support of
the regulatory functions, such areas include Office of the General
Counsel, technology, finance, and internal audit. Indirect expenses
will not exceed 35% of the total Options Regulatory Costs. Thus, direct
expenses would be 65% of total Options Regulatory Costs for 2024.\10\
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\10\ Direct and indirect expenses are based on the Exchange's
2024 Regulatory Budget.
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The ORF is designed to recover a material portion of the Options
Regulatory Costs to the Exchange of the supervision and regulation of
its Participants, including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities.
Proposal for January 1, 2025
BX has been reviewing it methodologies for the assessment and
collection of ORF. As a result of this review, BX proposes to revamp
the current process of assessing and collecting ORF in various ways.
Below BX will explain the modelling it performed and the outcomes of
the modelling which have led the Exchange to propose the below changes.
Effective January 1, 2025, BX proposes to assess ORF to each BX
Participant for multi-listed options transactions, excluding options
transactions in proprietary products,\11\ cleared by OCC in all
clearing ranges except market makers who clear as ``M'' at OCC
(``Market Makers'') \12\ where: (1) the execution occurs on BX or (2)
the execution occurs on another exchange and is cleared by a BX
Participant. With this change, BX proposes to amend its current ORF to
assess ORF on
[[Page 90167]]
Customer,\13\ Professional,\14\ Firm \15\ and Broker-Dealer \16\
transactions. All market participants, except Market Makers, would be
subject to ORF.
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\11\ Proprietary products are products with intellectual
property rights that are not multi-listed. BX has no proprietary
products.
\12\ Capacity ``M'' covers Market Makers registered on BX and
market makers registered at non-BX exchanges.
\13\ The term ``Customer'' or (``C'') applies to any transaction
that is identified by a Participant for clearing in the Customer
range at The Options Clearing Corporation (``OCC'') which is not for
the account of broker or dealer or for the account of a
``Professional'' (as that term is defined in Options 1, Section
1(a)(48)). See Options 7, Section 1(a).
\14\ The term ``Professional'' or (``P'') means any person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s) pursuant
to Options 1, Section 1(a)(48). All Professional orders shall be
appropriately marked by Participants. See Options 7, Section 1(a).
\15\ The term ``Firm'' or (``F'') applies to any transaction
that is identified by a Participant for clearing in the Firm range
at OCC. See Options 7, Section 1(A).
\16\ The term ``Broker-Dealer'' or (``B'') applies to any
transaction which is not subject to any of the other transaction
fees applicable within a particular category. See Options 7, Section
1(a). A Broker-Dealer clears in the ``F'' range at OCC.
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The ORF would be collected by OCC on behalf of BX from (1) BX
clearing members for all Customer, Professional, Firm and Broker-Dealer
transactions they clear or (2) non-members for all Customer,
Professional, Firm and Broker-Dealer transactions they clear that were
executed on BX. This model collects ORF where there is a nexus with BX
and does not collect ORF from a non-member where the transaction takes
place away from the Exchange.
Further, effective January 1, 2025, the Exchange proposes to
establish a different ORF for trades executed on BX (``Local ORF
Rate'') and trades executed on non-BX exchanges (``Away ORF Rate'') by
market participants. For Customer, Professional, and broker-dealer (not
affiliated with a clearing member) transactions that clear in the ``C''
range at OCC (collectively ``Customers'') the Exchange proposes to
assess a Local ORF Rate of $0.0198 per contract and an Away ORF Rate of
$0.00 per contract. For Firm and Broker-Dealer transactions that clear
in the ``F'' range at OCC (collectively ``Firm and Broker-Dealer
Transactions'') the Exchange proposes to assess a Local ORF Rate of
$0.000113 per contract and an Away ORF Rate of $0.000113 per contract.
The combined amount of Local ORF and Away ORF collected may not exceed
88% of Options Regulatory Cost. BX will ensure that ORF Regulatory
Revenue does not exceed Options Regulatory Cost. As is the case today,
the Exchange will notify Participants via an Options Trader Alert of
these changes at least 30 calendar days prior to January 1, 2025.
The Exchange utilized historical and current data from its
affiliated options exchanges to create a new regression model that
would tie expenses attributable to regulation to a respective
source.\17\ To that end, the Exchange plotted Customer volumes from
each exchange \18\ against Options Regulatory Cost from each exchange
for the Time Period. Specifically, the Exchange utilized standard
charting functionality to create a linear regression. The charting
functionality yields a ``slope'' of the line, representing the marginal
cost of regulation, as well as an ``intercept,'' representing the fixed
cost of regulation. The Exchange considered using non-linear models,
but concluded that the best R[supcaret]2 (``R-Squared'') \19\ results
came from a standard y = Mx +B format for regulatory expense. The R-
Squared for the below charting method ranged from 85% to 95%
historically. As noted, the plots below represent the Time Period. The
X-axis reflects Customer volumes by exchange, by quarter and the Y-axis
reflects regulatory expense by exchange.
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\17\ This new model seeks to provide a new approach to
attributing Options Regulatory Cost to Options Regulatory Expense.
In creating this model, the exchange did not rely on data from a
single SRO as it had in the past.
\18\ The Exchange utilized data from all Nasdaq affiliated
options exchanges to create this model from 2023 Q3 through 2024Q2
(``Time Period'').
\19\ R-Squared is a statistical measure that indicates how much
of the variation of a dependent variable is explained by an
independent variable in a regression model. The formula for
calculating R-squared is: R2 = 1-Unexplained Variation/Total
Variation.
[GRAPHIC] [TIFF OMITTED] TN14NO24.008
The results of this modelling indicated a high correlation and
intercept for the baseline cost of regulating the options market as a
whole. Specifically, the regression model indicated that (1) the
marginal cost of regulation is easily measurable, and significantly
attributable to Customer activity; and (2) the fixed cost of setting up
a regulatory regime should arguably be dispersed across the industry so
that all options exchanges have substantially similar revenue streams
to satisfy the ``intercept'' element of cost. When seeking to offset
the ``set-up'' cost of regulation, the Exchange attempted several
levels of attribution. The most successful attribution was related to
industry wide Firm and Broker-Dealer Transaction volume. Of note,
through analysis of the
[[Page 90168]]
results of this regression model, there was no positive correlation
that could be established between Customer away volume and regulatory
expense. This led the Exchange to utilize a model with a two-factor
regression on a quarterly basis for the last four quarters of volumes
relative to the pool of expense data for the six Nasdaq affiliated
options exchanges. Once again, standard spreadsheet functionality
(including the Data Analysis Packet) was used to determine the
mathematics for this model. The results of this two-factor model, which
resulted in the attribution of Customer Local ORF and Firm and Broker-
Dealer Transaction Local and Away ORF, typically increased the R-
Squared (goodness of fit) to >97% across multiple historical
periods.\20\
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\20\ The Exchange notes that various exchanges negotiate their
respective contracts independently with FINRA creating some
variability. Additionally, an exchange with a floor component would
create some variability.
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Utilizing the new regression model, and assumptions in the
proposal, the model demonstrates that Customer volumes are directly
attributable to marginal cost, and also shows that Firm and Broker-
Dealer Transaction volumes industry-wide are a valid method (given the
goodness of fit) to offset the fixed cost of regulation. Applying the
regression coefficient values historically, the Exchange established a
``normalization'' by per options exchange. This ``normalization''
encompassed idiosyncratic exchange expense-volume relationships which
served to tighten the attributions further while not deviating by more
than 30% from the mean for any single options exchange in the model.
The primary driver of this need for ``normalization'' are negotiated
regulatory contracts that were negotiated at different points in time,
yielding some differences in per contract regulatory costs by exchange.
Normalization is therefore the average of a given exchange's historical
(prior 4 quarters) ratio of regulatory expense to revenue when using
the regressed values (for Customer Local ORF and Firm and Broker-Dealer
Transaction Local and Away ORF) that yields an effective rate by
exchange. The ``normalization'' was then multiplied to a ``targeted
collection rate'' of approximately 88% to arrive at ORF rates for
Customer, Firm and Broker-Dealer Transactions. Of note, when comparing
the ORF rates generated from this method, historically, there appears
to be a very tight relationship between the estimated modeled
collection and actual expense and the regulatory expenses for that same
period. In summary, the model does not appear to increase marginal
returns.
One other important aspect of this modeling is the input of Options
Regulatory Costs. The Exchange notes that in defining Options
Regulatory Costs it accounts for the nexus between the expense and
options regulation. By way of example, the Exchange excludes certain
indirect expenses such as payroll expenses, accounts receivable,
accounts payable, marketing, executive level expenses and corporate
systems.
The Exchange would continue to monitor the amount of Options
Regulatory Revenue collected from the ORF to ensure that it, in
combination with other regulatory fees and fines, does not exceed
Options Regulatory Costs. In determining whether an expense is
considered an Options Regulatory Cost, the Exchange would continue to
review all costs and makes determinations if there is a nexus between
the expense and a regulatory function. The Exchange notes that fines
collected by the Exchange in connection with a disciplinary matter will
continue to offset Options Regulatory Cost. Participants will continue
to be provided with 30 calendar day notice of any change to ORF.
As is the case today, ORF Regulatory Revenue, when combined with
all of the Exchange's other regulatory fees and fines, is designed to
recover a material portion of the Options Regulatory Costs to the
Exchange for the supervision and regulation of Participants'
transactions, including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities. As discussed
above, Options Regulatory Costs include direct regulatory expenses \21\
and certain indirect expenses in support of the regulatory
function.\22\
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\21\ The direct expenses include in-house and third-party
service provider costs to support the day-to-day regulatory work
such as surveillances, investigations and examinations.
\22\ The indirect expenses include support from such areas as
Office of the General Counsel, technology, finance and internal
audit.
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Finally, the Exchange notes that this proposal will be sunset on
July 1, 2025, at which point the Exchange would revert back to the ORF
methodology and rate ($0.0005 per contract side) that was in effect
prior to this rule change.\23\
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\23\ The Exchange proposes to reconsider the sunset date in 2025
and determine whether to proceed with the proposed ORF structure at
that time.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\24\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act,\25\ which provides that Exchange rules may provide
for the equitable allocation of reasonable dues, fees, and other
charges among its members, and other persons using its facilities.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \26\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(4).
\26\ 15 U.S.C. 78f(b)(5).
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Proposal for January 1, 2025
The Exchange believes the proposed ORF to be assessed on January 1,
2025, is reasonable, equitable and not unfairly discriminatory for
various reasons. First, as of January 1, 2025, the Exchange would
expand the collection of ORF to all clearing ranges, except Market
Makers, provided the transaction was executed by an BX Participant or
cleared by an BX Participant. With this amendment, BX would begin to
assess Firm and Broker-Dealer Transactions an ORF, provided the
transactions were executed by a BX Participant or cleared by a BX
Participant, except transactions in proprietary products. Second, as of
January 1, 2025, the Exchange would assess different rates to Customer
transactions for the Local ORF Rate and Away ORF Rate as compared to
Firms and Broker-Dealer Transactions. Third, as of January 1, 2025, the
combined amount of Local ORF and Away ORF collected would not exceed
88% of Options Regulatory Cost as all Participants, except Market
Makers, would be assessed ORF.
[[Page 90169]]
The Exchange believes that assessing all Participants, except
Market Makers, an ORF is reasonable, equitable and not unfairly
discriminatory. While the Exchange acknowledges that there is a cost to
regulate Market Makers, unlike other market participants, Market Makers
have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Lead Market Makers are
obligated to quote intra-day.\27\ Additionally, Market Makers are
required to quote intra-day.\28\ Further, unlike other market
participants, Lead Market Makers and Market Makers have obligations to
compete with other Market Makers to improve the market in all series of
options classes to which the Market Maker is appointed and to update
market quotations in response to changed market conditions in all
series of options classes to which the Market Maker is appointed.\29\
Lead Market Makers and Market Makers are critical market participants
in that they are the only market participants that are required to
provide liquidity to BX and are necessary for opening the market.
Excluding Market Maker transactions from ORF allows these market
participants to manage their costs and consequently their business
model more effectively thus enabling them to 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 BX in providing tight displayed quotes which in turn benefits
markets generally and market participants specifically. Finally, the
Exchange notes that Market Makers may transact orders in addition to
submitting quotes on the Exchange. This proposal would except orders
submitted by Market Makers, in addition to quotes, for purposes of ORF.
Market Makers utilize orders in their assigned options series to sweep
the order book. The Exchange believes the quantity of orders utilized
by Market Makers in their assigned series is de minimis. In their
unassigned options series, Market Makers utilize orders to hedge their
risk or respond to auction. The Exchange notes that the number of
orders submitted by Market Makers in their unassigned options series
are far below the cap \30\ and therefore de minimis.
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\27\ See BX Options 2, Section 4(j).
\28\ See BX Options 2, Section 5(d).
\29\ See BX Options 2, Section 4(a)(3) and (5).
\30\ See BX Options 2, Section 6(b). The total number of
contracts executed by a Market Maker in options in which it is not
registered as a Market Maker shall not exceed 25 percent of the
total number of all contracts executed by the Market Maker in any
calendar quarter.
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The Exchange believes excluding options transactions in proprietary
products is reasonable, equitable and not unfairly discriminatory
because BX does not list any proprietary products. The Exchange
believes that only exchanges that list proprietary products should be
able to collect a Local ORF for those products. BX notes that there are
a small number of proprietary products transacted as compared to multi-
list options. BX's focus is on surveillance related to multi-listed
options. Should BX list a proprietary product in the future, BX would
amend its ORF to collect a Local ORF on that proprietary product.
The Exchange believes that assessing different rates to Customer
transactions for the Local ORF Rate and Away ORF Rate as compared to
Firm and Broker-Dealer Transactions and collecting no more than 88% of
Options Regulatory Cost is reasonable, equitable and not unfairly
discriminatory. Customer transactions account for a material portion of
BX's Options Regulatory Cost.\31\ Customer transactions in combination
with Firm and Broker-Dealer Transactions account for a large portion of
the Exchange's surveillance expense. Therefore, the Exchange believes
that 88% of Options Regulatory Cost is appropriate and correlates to
the degree of regulatory responsibility and Options Regulatory Cost
borne by the Exchange. With respect to Customer transactions, options
volume continues to surpass volume from other options participants.
Additionally, there are rules in the Exchange's Rulebook that deal
exclusively with Customer transactions, such as rules involving doing
business with a Customer, which would not apply to Firm and Broker-
Dealer Transactions.\32\ For these reasons, regulating Customer trading
activity is ``much more labor-intensive'' and therefore, more costly.
The Exchange believes that a large portion of the Options Regulatory
Cost relates to Customer allocation because obtaining Customer
information may be more time intensive. For example, non-Customer
market participants are subject to various regulatory and reporting
requirements which provides the Exchange certain data with respect to
these market participants. In contrast, Customer information is known
by Participants of the Exchange and is not readily available to BX.\33\
The Exchange may have to take additional steps to understand the facts
surrounding particular trades involving a Customer which may require
requesting such information from a broker-dealer. Further, Customers
require more Exchange regulatory services based on the amount of
options business they conduct. For example, there are Options
Regulatory Costs associated with main office and branch office
examinations (e.g., staff expenses), as well as investigations into
Customer complaints and the terminations of registered persons. As a
result, the Options Regulatory Costs associated with administering the
Customer component of the Exchange's overall regulatory program are
materially higher than the Options Regulatory Costs associated with
administering the non-Customer component when coupled with the amount
of volume attributed to such Customer transactions. Utilizing the new
regression model, and assumptions in the proposal, it appears that BX's
Customer regulation occurs to a large extent on Exchange. Utilizing the
new regression model, and assumptions in the proposal, the Exchange
does not believe that significant Options Regulatory Costs should be
attributed to Customers for activity that may occur across options
markets. To that end, with this proposal, the Exchange would assess
Customers a Local ORF, but not an Away ORF rate.
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\31\ The Exchange notes that the regulatory costs relating to
monitoring Participants with respect to Customer trading activity
are generally higher than the regulatory costs associated with
Participants that do not engage in Customer trading activity, which
tends to be more automated and less labor-intensive. By contrast,
regulating Participants that engage in Customer trading activity is
generally more labor intensive and requires a greater expenditure of
human and technical resources as the Exchange needs to review not
only the trading activity on behalf of Customers, but also the
Participant's relationship with its Customers via more labor-
intensive exam-based programs. As a result, the costs associated
with administering the Customer component of the Exchange's overall
regulatory program are materially higher than the costs associated
with administering the non-Customer component of the regulatory
program.
\32\ See BX Options 10 Rules.
\33\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
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In contrast, the Options Regulatory Cost of regulating Firm and
Broker-Dealer Transactions is materially less than the Options
Regulatory Costs of regulating Customer transactions, as explained
above. The below chart derived from OCC data reflects the percentage of
transactions by market participant.
[[Page 90170]]
[GRAPHIC] [TIFF OMITTED] TN14NO24.009
With this model, the addition of Firm and Broker-Dealer
Transactions to the collection of ORF does not entail significant
volume when compared to Customer transactions. As these market
participants are more sophisticated, the Exchange notes that there are
not the same protections in place for Firm and Broker-Dealer
Transactions as compared to Customer transactions. Therefore, with the
proposed model, the regulation of Firm and Broker-Dealer Transactions
is less resource intensive than the regulation of Customer
transactions. However, the Exchange notes that it appears from the new
regression model and assumptions in the proposal, that unlike Customer
transactions, the regulation of Firm and Broker-Dealer Transactions
occurs both on the Exchange and across options markets. To that end,
the Exchange proposes to assess Firm and Broker-Dealer Transactions
both a Local ORF and an Away ORF in contrast to Customer transactions
that would only be assessed a Local ORF. The Exchange believes that not
assessing Market Maker transactions an ORF permits these market
participants to utilize their resources to quote tighter in the market.
Tighter quotes benefits Customers as well as other market participants
who interact with that liquidity.
The Exchange's proposal to establish both a Local ORF Rate and an
Away ORF Rate and allocate the portion of Options Regulatory Cost
differently between the two separate rates, by market participant,
ensures that the Local ORF Rate and Away ORF Rate reflect the amount of
Options Regulatory Costs associated with different types of
surveillances and are reasonable, equitable and not unfairly
discriminatory. The Exchange is responsible for regulating activity on
its market as well as activity that may occur across options markets.
The Exchange believes that it is reasonable, equitable and not unfairly
discriminatory to assess only Firm and Broker-Dealer Transactions an
Away ORF. With this model, while the regulation of Firm and Broker-
Dealer Transactions is less resource intensive than the regulation of
Customer transactions, it occurs both on the Exchange and across
options markets.\34\ The Exchange believes that assessing the Firm and
Broker-Dealer Transactions the same rate for Local ORF and Away ORF is
appropriate given the lower volume that is attributed to these
Participants combined with the activity that is required to be
regulated both on the Exchange and across options markets. The Exchange
notes that there are Exchange rules that involve cross market
surveillances that relate to activities conducted by Firm and Broker-
Dealer Participants.\35\ While not large in number, when compared to
the overall number of Exchange rules that are surveilled by BX for on-
Exchange activity, the Away ORF that would be assessed to Firm and
Broker-Dealer regulation would account for those costs. Additionally,
the Exchange believes that limiting the amount of ORF assessed for
activity that occurs on non-BX exchanges avoids overlapping ORFs that
would otherwise be assessed by BX and other options exchanges that also
assess an ORF. Also, the Exchange's proposal continues to ensure that
Options Regulatory Revenue, in combination with other regulatory fees
and fines, does not exceed Options Regulatory Costs. Fines collected by
the Exchange in connection with a disciplinary matter will continue to
offset Options Regulatory Cost.
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\34\ BX pays the Financial Industry Regulatory Authority
(``FINRA'') to perform certain cross-market surveillances on its
behalf. In order to perform cross-market surveillances, Consolidated
Audit Trail (``CAT'') data is utilized to match options transactions
to underlying equity transactions. This review is data intensive
given the volumes of information that are being reviewed and
analyzed.
\35\ BX conducts surveillances and enforces BX Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some BX
trading rules are automatically enforced by BX's System.
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Capping the combined amount of Local ORF and Away ORF collected at
88% of Options Regulatory Cost commencing January 1, 2025, is
reasonable, equitable and not unfairly discriminatory as given these
factors. The Exchange will review the ORF Regulatory Revenue at the end
of January 2025 and would amend the ORF if it finds that its ORF
Regulatory Revenue exceeds its projections.\36\
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\36\ BX would submit a rule change to the Commission to amend
ORF rates.
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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 intra-market competition not necessary or
appropriate in furtherance of the purposes of the Act.
The proposed changes to ORF do not impose an undue burden on inter-
[[Page 90171]]
market competition because ORF is a regulatory fee that supports
regulation in furtherance of the purposes of the Act. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. The Exchange is obligated to ensure that the amount
of ORF Regulatory Revenue, in combination with its other regulatory
fees and fines, does not exceed ORF Regulatory Cost.
Proposal for January 1, 2025
Excluding Market Makers does not impose an undue burden on intra-
market competition because, unlike other market participants, Market
Makers have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Lead Market Makers are
obligated to quote intra-day.\37\ Additionally, Market Makers are
required to quote intra-day.\38\ Further, unlike other market
participants, Lead Market Makers and Market Makers have obligations to
compete with other Market Makers to improve the market in all series of
options classes to which the Market Maker is appointed and to update
market quotations in response to changed market conditions in all
series of options classes to which the Market Maker is appointed.\39\
Lead Market Makers and Market Makers are critical market participants
in that they are the only market participants that are required to
provide liquidity to BX and are necessary for opening the market.
Excluding Market Maker transactions from ORF does not impose an intra-
market burden on competition, rather it allows these market
participants to manage their costs and consequently their business
model more effectively thus enabling them to 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 BX in providing tight displayed quotes which in turn benefits
markets generally and market participants specifically. Finally, the
Exchange notes that Market Makers may transact orders on the Exchange
in addition to submitting quotes. The Exchange's proposal to except
orders submitted by Market Makers, in addition to quotes, for purposes
of ORF does not impose an undue burden on intra-market competition
because Market Makers utilize orders in their assigned options series
to sweep the order book. Further, the Exchange believes the quantity of
orders utilized by Market Makers in their assigned series is de
minimis. In their unassigned options series, Market Makers utilize
orders to hedge their risk or respond to auction. The Exchange notes
that the number of orders submitted by Market Makers in their
unassigned options series are far below the cap \40\ and therefore de
minimis.
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\37\ See BX Options 2, Section 4(j).
\38\ See BX Options 2, Section 5(d).
\39\ See BX Options 2, Section 4(a)(3) and (5).
\40\ See BX Options 2, Section 6(b). The total number of
contracts executed by a Market Maker in options in which it is not
registered as a Market Maker shall not exceed 25 percent of the
total number of all contracts executed by the Market Maker in any
calendar quarter.
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Uniformly excluding options transactions in proprietary products
from ORF for all BX Participants does not impose an undue burden on
intra-market competition. The Exchange believes that only exchanges
that list proprietary products should be able to collect a Local ORF
for those products. There are a small number of proprietary products
transacted as compared to multi-list options. Also, proprietary
products are transacted on a limited number of options exchanges and
would require a de minimis amount of cross market surveillance, for
these reasons the Exchange believes that only a Local ORF should be
applied to the extent that BX were to list a proprietary product. BX's
focus is on surveillance related to multi-listed options. Should BX
list a proprietary product in the future, BX would amend its ORF to
collect a Local ORF on that proprietary product.
The Exchange's proposal to expand the clearing ranges to
specifically include Firm and Broker-Dealer Transactions, in addition
to Customer and Professional transactions, as of January 1, 2025, does
not impose an undue burden on intra-market competition as Customer
transactions account for a material portion of BX's Options Regulatory
Cost.\41\ Customer transactions in combination with Firm and Broker-
Dealer Transactions account for a large portion of the Exchange's
surveillance expense. With respect to Customer transactions, options
volume continues to surpass volume from other options participants.
Additionally, there are rules in the Exchange's Rulebook that deal
exclusively with Customer transactions, such as rules involving doing
business with a Customer, which would not apply to Firm and Broker-
Dealer Transactions.\42\ For these reasons, regulating Customer trading
activity is ``much more labor-intensive'' and therefore, more costly.
Further, the Exchange believes that a large portion of the Options
Regulatory Cost relates to Customer allocation because obtaining
Customer information may be more time intensive. For example, non-
Customer market participants are subject to various regulatory and
reporting requirements which provides the Exchange certain data with
respect to these market participants. In contrast, Customer information
is known by Participants of the Exchange and is not readily available
to BX.\43\ The Exchange may have to take additional steps to understand
the facts surrounding particular trades involving a Customer which may
require requesting such information from a broker-dealer. Further,
Customers require more Exchange regulatory services based on the amount
of options business they conduct. For example, there are Options
Regulatory Costs associated with main office and branch office
examinations (e.g., staff expenses), as well as investigations into
Customer complaints and the terminations of registered persons. As a
result, the Options Regulatory Costs associated with administering the
Customer component of the Exchange's overall regulatory program are
materially higher than the Options Regulatory Costs associated with
administering the non-Customer component when coupled with the amount
of volume attributed to such Customer transactions. Not attributing
significant Options Regulatory Costs to Customers for activity that may
occur across options markets does not impose an undue burden on intra-
market competition because the data in the regression model
demonstrates that BX's Customer regulation occurs to a large extent on
Exchange.
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\41\ The Exchange notes that the regulatory costs relating to
monitoring Participants with respect to Customer trading activity
are generally higher than the regulatory costs associated with
Participants that do not engage in Customer trading activity, which
tends to be more automated and less labor-intensive. By contrast,
regulating Participants that engage in Customer trading activity is
generally more labor intensive and requires a greater expenditure of
human and technical resources as the Exchange needs to review not
only the trading activity on behalf of Customers, but also the
Participant's relationship with its Customers via more labor-
intensive exam-based programs. As a result, the costs associated
with administering the Customer component of the Exchange's overall
regulatory program are materially higher than the costs associated
with administering the non-Customer component of the regulatory
program.
\42\ See BX Options 10 Rules.
\43\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
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The Exchange believes that assessing Firm and Broker-Dealer
Transactions a different ORF and assessing both a Local ORF and an Away
ORF to these transactions does not impose an undue
[[Page 90172]]
burden on intra-market competition because the regulation of Firm and
Broker-Dealer Transactions is less resource intensive than the
regulation of Customer transactions. With this model, the addition of
Firm and Broker-Dealer Transactions to the collection of ORF does not
entail significant volume when compared to Customer transactions.
Unlike Customer transactions, the regulation of Firm and Broker-Dealer
Transactions occurs both on the Exchange and across options markets. To
that end, the Exchange proposes to assess Firm and Broker-Dealer
Transactions both a Local ORF and an Away ORF.
The Exchange's proposal to allocate the portion of costs
differently between the Local ORF and Away ORF does not create an undue
burden on intra-market competition. The Exchange believes that each
rate reflects the amount of Options Regulatory Costs associated with
different types of surveillances and does not create an undue burden on
competition as BX Participants, excluding except Market Makers, would
be uniformly assessed either a Local ORF Rate or an Away ORF Rate
depending on where the transaction occurred and whether the transaction
was executed or cleared by an BX Participant. Also, the Exchange would
uniformly assess the Local ORF Rate and an Away ORF Rate by market
participant. The Exchange is responsible for regulating activity on its
market as well as activity that may occur across options markets.
The Exchange believes that assessing only Firm and Broker-Dealer
Transactions an Away ORF does not create an undue burden on intra-
market competition because while the regulation of Firm and Broker-
Dealer Transactions is less resource intensive than the regulation of
Customer transactions, the regulation of Firm and Broker-Dealer
Transactions occurs both on the Exchange and across options
markets.\44\ The Exchange believes that assessing Firm and Broker-
Dealer Transactions the same rate for Local ORF and Away ORF is
appropriate given the lower volume that is attributed to these
Participants combined with the activity that is required to be
regulated both on the Exchange and across options markets. There are
Exchange rules that involve cross market surveillances that relate to
activities conducted by Firm and Broker-Dealer Participants.\45\ While
not large in number, when compared to the overall number of Exchange
rules that are surveilled by BX for on-Exchange activity, the Away ORF
that would be assessed to Firm and Broker-Dealer Transactions would
account for those Options Regulatory Costs. Additionally, the Exchange
believes that limiting the amount of ORF assessed for activity that
occurs on non-BX exchanges does not impose a burden on intra-market
competition, rather it avoids overlapping ORFs that would otherwise be
assessed by BX and other options exchanges that also assess an ORF.
With this model, Customer transactions would be assessed a higher Local
ORF, while not being assessed an Away ORF as compared to Firm and
Broker-Dealer Transactions. The Exchange believes that this difference
in allocation is appropriate and correlates to the degree of regulatory
responsibility and Options Regulatory Costs borne by different
Participants of the Exchange in light of the volume different
Participants transact on the Exchange.
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\44\ BX pays the Financial Industry Regulatory Authority
(``FINRA'') to perform certain cross-market surveillances on its
behalf. In order to perform cross-market surveillances, Consolidated
Audit Trail (``CAT'') data is utilized to match options transactions
to underlying equity transactions. This review is data intensive
given the volumes of information that are being reviewed and
analyzed.
\45\ BX conducts surveillances and enforces BX Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some BX
trading rules are automatically enforced by BX's System.
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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 \46\ and Rule 19b-4(f)(2) \47\ thereunder.
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\46\ 15 U.S.C. 78s(b)(3)(A)(ii).
\47\ 17 CFR 240.19b-4(f)(2).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change 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#5b292e373e76383436363e352f281b283e38753c342d"><span class="__cf_email__" data-cfemail="443631282169272b2929212a3037043721276a232b32">[email protected]</span></a>. Please include
file number SR-BX-2024-040 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-BX-2024-040. 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-BX-2024-040 and should be
submitted on or before December 5, 2024.
[[Page 90173]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26412 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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