Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Approach to the Options Regulatory Fee (ORF) in 2025, 90180-90188 [2024-26419]
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Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices
and Broker-Dealer Members.47 While
not large in number, when compared to
the overall number of Exchange rules
that are surveilled by GEMX for onExchange activity, the Away ORF that
would be assessed to Firm Proprietary
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-GEMX exchanges does not impose
a burden on intra-market competition,
rather it avoids overlapping ORFs that
would otherwise be assessed by GEMX
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 Proprietary 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 Members of the Exchange in
light of the volume different Members
transact on the Exchange.
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.
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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 48 and Rule
19b–4(f)(2) 49 thereunder.
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.
47 GEMX conducts surveillances and enforces
GEMX Rules, however only a subset of those rules
is subject to cross-market surveillance, such as
margin and position limits. Of note, some GEMX
trading rules are automatically enforced by GEMX’s
System.
48 15 U.S.C. 78s(b)(3)(A)(ii).
49 17 CFR 240.19b–4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
GEMX–2024–37 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–GEMX–2024–37. 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–GEMX–2024–37 and should be
submitted on or before December 5,
2024.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
PO 00000
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Sherry R. Haywood,
Assistant Secretary.
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[Release No. 34–101560; File No. SR–MRX–
2024–39]
Self-Regulatory Organizations; Nasdaq
MRX, LLC; 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 November
5, 2024, Nasdaq MRX, LLC (‘‘MRX’’ 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
MRX’s Pricing Schedule at Options 7,
Section 5C, 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
https://listingcenter.nasdaq.com/
rulebook/mrx/rules, 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
50 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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
MRX proposes to amend its current
ORF in several respects. MRX 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, MRX will assess a
different rate for trades executed on
MRX (‘‘Local ORF Rate’’) and trades
executed on non-MRX exchanges
(‘‘Away ORF Rate’’).
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Background on Current ORF
Today, MRX assesses its ORF for each
Customer 3 option transaction that is
either: (1) executed by a Member 4 on
MRX; or (2) cleared by an MRX Member
at OCC in the Customer range,5 even if
the transaction was executed by a nonMember of MRX, regardless of the
exchange on which the transaction
occurs.6 If the OCC clearing member is
an MRX Member, 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 an MRX Member, ORF is
collected only on the cleared Customer
contracts executed at MRX, taking into
account any CMTA instructions which
may result in collecting the ORF from a
non-Member.8 The current MRX ORF is
$0.0004 per contract side.
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 Priority Customers and Professional
Customers.
4 The term ‘‘Member’’ means an organization that
has been approved to exercise trading rights
associated with Exchange Rights. See General 1,
Section 1(a)(14).
5 Market 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 members
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, an MRX
Member, 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
MRX from Broker A’s clearing account at OCC via
direct debit. While this transaction was executed on
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Today, in the case where a Member
both executes a transaction and clears
the transaction, the ORF will be
assessed to and collected from that
Member. Today, in the case where a
Member executes a transaction and a
different Member clears the transaction,
the ORF will be assessed to and
collected from the Member who clears
the transaction and not the Member who
executes the transaction. Today, in the
case where a non-Member executes a
transaction at an away market and a
Member clears the transaction, the ORF
will be assessed to and collected from
the Member who clears the transaction.
Today, in the case where a Member
executes a transaction on MRX and a
non-Member clears the transaction, the
ORF will be assessed to the Member that
executed the transaction on MRX and
collected from the non-Member who
cleared the transaction. Today, in the
case where a Member executes a
transaction at an away market and a
non-Member ultimately clears the
transaction, the ORF will not be
assessed to the Member 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 Member
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.
ORF Regulatory Revenue, when
combined with all of the Exchange’s
other regulatory fees and fines, is
designed to recover a material portion of
a market other than MRX, it was cleared by an MRX
Member in the member’s OCC clearing account in
the Customer range, therefore there is a regulatory
nexus between MRX and the transaction. If Broker
A was not an MRX Member, then no ORF should
be assessed and collected because there is no nexus;
the transaction did not execute on MRX nor was it
cleared by an MRX Member.
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 Members’
options activity (‘‘Options Regulatory Cost’’).
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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
The ORF is designed to recover a
material portion of the Options
Regulatory Costs to the Exchange of the
supervision and regulation of its
Members, including performing routine
surveillances, investigations,
examinations, financial monitoring, and
policy, rulemaking, interpretive, and
enforcement activities.
Proposal for January 1, 2025
MRX has been reviewing it
methodologies for the assessment and
collection of ORF. As a result of this
review, MRX proposes to revamp the
current process of assessing and
collecting ORF in various ways. Below
MRX 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, MRX
proposes to assess ORF to each MRX
Member 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 MRX or (2) the
execution occurs on another exchange
and is cleared by an MRX Member. With
this change, MRX proposes to amend its
current ORF to assess ORF on Priority
10 Direct and indirect expenses are based on the
Exchange’s 2024 Regulatory Budget.
11 Proprietary products are products with
intellectual property rights that are not multi-listed.
MRX has no proprietary products.
12 Capacity ‘‘M’’ covers Market Makers registered
on MRX and market makers registered at non-MRX
exchanges.
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Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices
Customer,13 Professional Customer,14
and Firm Proprietary 15 and BrokerDealer 16 transactions. All market
participants, except Market Makers,
would be subject to ORF.
The ORF would be collected by OCC
on behalf of MRX from (1) MRX clearing
members for all Priority Customer,
Professional Customer, Firm Proprietary
and Broker-Dealer transactions they
clear or (2) non-members for all Priority
Customer, Professional Customer, Firm
Proprietary and Broker-Dealer
transactions they clear that were
executed on MRX. This model collects
ORF where there is a nexus with MRX
and does not collect ORF from a nonMember 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
MRX (‘‘Local ORF Rate’’) and trades
executed on non-MRX exchanges
(‘‘Away ORF Rate’’) by market
participants. For Priority Customer,
Professional Customer, and brokerdealer (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 $0.01612 per
contract and an Away ORF Rate of $0.00
per contract. For Firm Proprietary and
Broker-Dealer transactions that clear in
the ‘‘F’’ range at OCC (collectively
‘‘Firm Proprietary and Broker-Dealer
Transactions’’) the Exchange proposes
to assess a Local ORF Rate of $0.000092
per contract and an Away ORF Rate of
$0.000092 per contract. The combined
amount of Local ORF and Away ORF
collected may not exceed 88% of
Options Regulatory Cost. MRX will
ensure that ORF Regulatory Revenue
does not exceed Options Regulatory
Cost. As is the case today, the Exchange
will notify Members 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∧2 (‘‘R-Squared’’) 19
results came from a standard y = Mx +B
format for regulatory expense. The RSquared 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.
Customer Volume vs Reg. Exp.
6,000,000.00
5,000,000.00
ci. 4,000,000.00
X
~ 3,000,000.00
t\l)
(])
c::: 2,000,000.00
1,000,000.00
0.00
0
50,000,000
100,000,000 150,000,000 200,000,000 250,000,000 300,000,000
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 Proprietary and Broker-Dealer
Transaction volume. Of note, through
analysis of the results of this regression
model, there was no positive correlation
that could be established between
13 A ‘‘Priority Customer’’ is a person or entity that
is not a broker/dealer in securities and does not
place more than 390 orders in listed options per day
on average during a calendar month for its own
beneficial account(s), as defined in Nasdaq MRX
Options 1, Section 1(a)(36). Unless otherwise noted,
when used in this Pricing Schedule the term
‘‘Priority Customer’’ includes ‘‘Retail’’ as defined
below. See Options 7, Section 1(c).
14 A ‘‘Professional Customer’’ is a person or entity
that is not a broker/dealer and is not a Priority
Customer. See Options 7, Section 1(c). The ‘‘C’’
range at OCC includes both Priority Customer and
Professional Customer transactions.
15 A ‘‘Firm Proprietary’’ order is an order
submitted by a Member for its own proprietary
account. See Options 7, Section 1(c).
16 A ‘‘Broker-Dealer’’ order is an order submitted
by a Member for a broker-dealer account that is not
its own proprietary account. See Options 7, Section
1(c). A Broker-Dealer clears in the ‘‘F’’ range at
OCC.
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 Rsquared is: R2=1¥Unexplained Variation/Total
Variation.
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Cust Volume
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Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices
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 Proprietary and
Broker-Dealer Transaction Local and
Away ORF, typically increased the RSquared (goodness of fit) to >97% across
multiple historical periods.20
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
Proprietary 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 Proprietary 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 Proprietary 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
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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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.
Members 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 Members’ 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
Finally, the Exchange notes that this
proposal will sunset on July 1, 2025, at
which point the Exchange would revert
back to the ORF methodology and rate
($0.0004 per contract side) that was in
effect prior to this rule change.23
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
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.
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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90183
‘‘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.
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 MRX Member or cleared
by an MRX Member. With this
amendment, MRX would begin to assess
Firm Proprietary and Broker-Dealer
Transactions an ORF, provided the
transactions were executed by an MRX
Member or cleared by an MRX Member,
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 Firm Proprietary 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 Members, except
Market Makers, would be assessed ORF.
The Exchange believes that assessing
all Members, 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.
Primary Market Makers are obligated to
quote in the Opening Process and intra24 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
26 15 U.S.C. 78f(b)(5).
25 15
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day.27 Additionally, Market Makers may
enter quotes in the Opening Process to
open an option series and they are
required to quote intra-day.28 Further,
unlike other market participants,
Primary 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 Also, Primary
Market Makers and Market Makers incur
other costs imposed by the Exchange
related to their quoting obligations in
addition to other fees paid by other
market participants. Market Makers are
subject to a number of fees, unlike other
market participants. Market Makers pay
CMM Trading Right Fees 30 in addition
to other fees paid by other market
participants. These liquidity providers
are critical market participants in that
they are the only market participants
that are required to provide liquidity to
MRX 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 MRX 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 31 and therefore de minimis.
The Exchange believes excluding
options transactions in proprietary
products is reasonable, equitable and
not unfairly discriminatory because
MRX 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. MRX
notes that there are a small number of
proprietary products transacted as
compared to multi-list options. MRX’s
focus is on surveillance related to multilisted options. Should MRX list a
proprietary product in the future, MRX
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 Proprietary
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 MRX’s Options
Regulatory Cost.32 Customer
transactions in combination with Firm
Proprietary 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 Proprietary and BrokerDealer Transactions.33 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
Members of the Exchange and is not
readily available to MRX.34 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 MRX’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.
In contrast, the Options Regulatory
Cost of regulating Firm Proprietary 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.
27 See MRX Options 3, Section 8 and Options 2,
Section 5.
28 Id.
29 See MRX Options 2, Section 4(b)(1) and (3).
30 See MRX Options 7, Section 6, B.
31 See MRX Options 2, Section 6. The total
number of contracts executed during a quarter by
a Market Maker in options classes to which it is not
appointed may not exceed twenty-five percent
(25%) of the total number of contracts traded. In the
Exchange’s experience, Market Maker’s are
generally below the 25% cap.
32 The Exchange notes that the regulatory costs
relating to monitoring Members with respect to
Customer trading activity are generally higher than
the regulatory costs associated with Members that
do not engage in customer trading activity, which
tends to be more automated and less laborintensive. By contrast, regulating Members 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
Member’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 nonCustomer component of the regulatory program.
33 See MRX Options 10 Rules.
34 The Know Your Customer or ‘‘KYC’’ provision
is the obligation of the broker-dealer.
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Industry Capacity Market Share% January 2, 2019 to September 30, 2024
55%
50%
45%
40%
35%
30%
!%\!
■
25%
Cust
Firm•
20%
15%·····
10%
5%
2020
With this model, the addition of Firm
Proprietary 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 Proprietary and BrokerDealer Transactions as compared to
Customer transactions. Therefore, with
the proposed model, the regulation of
Firm Proprietary 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
Proprietary and Broker-Dealer
Transactions occurs both on the
Exchange and across options markets.
To that end, the Exchange proposes to
assess Firm Proprietary and BrokerDealer 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
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2021
2022
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
Proprietary and Broker-Dealer
Transactions an Away ORF. With this
model, while the regulation of Firm
Proprietary and Broker-Dealer
Transactions is less resource intensive
than the regulation of Customer
transactions, it occurs both on the
Exchange and across options markets.35
The Exchange believes that assessing
the Firm Proprietary and Broker-Dealer
Transactions the same rate for Local
ORF and Away ORF is appropriate
given the lower volume that is
attributed to these Members 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
Proprietary and Broker-Dealer
Members.36 While not large in number,
35 MRX pays the Financial Industry Regulatory
Authority (‘‘FINRA’’) to perform certain crossmarket 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.
36 MRX conducts surveillances and enforces MRX
Rules, however only a subset of those rules is
PO 00000
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2023
2024
when compared to the overall number
of Exchange rules that are surveilled by
MRX for on-Exchange activity, the
Away ORF that would be assessed to
Firm Proprietary 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-MRX exchanges avoids overlapping
ORFs that would otherwise be assessed
by MRX 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.
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.37
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
subject to cross-market surveillance, such as margin
and position limits. Of note, some MRX trading
rules are automatically enforced by MRX’s System.
37 MRX would submit a rule change to the
Commission to amend ORF rates.
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ddrumheller on DSK120RN23PROD with NOTICES1
not necessary or appropriate in
furtherance of the purposes of the Act.
The proposed changes to ORF do not
impose an undue burden on intermarket 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 intramarket 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.
Primary Market Makers are obligated to
quote in the Opening Process and intraday.38 Additionally, Market Makers may
enter quotes in the Opening Process to
open an option series and they are
required to quote intra-day.39 Further,
unlike other market participants,
Primary 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.40 Also, Primary
Market Makers and Market Makers incur
other costs imposed by the Exchange
related to their quoting obligations in
addition to other fees paid by other
market participants. Market Makers are
subject to a number of fees, unlike other
market participants. Market Makers pay
CMM Trading Right Fees 41 in addition
to other fees paid by other market
participants. These liquidity providers
are critical market participants in that
they are the only market participants
that are required to provide liquidity to
MRX 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
38 See MRX Options 3, Section 8 and Options 2,
Section 5.
39 Id.
40 See MRX Options 2, Section 4(b)(1) and (3).
41 See MRX Options 7, Section 6, B.
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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 MRX 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 42 and
therefore de minimis.
Uniformly excluding options
transactions in proprietary products
from ORF for all MRX Members does
not impose an undue burden on intramarket 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
MRX were to list a proprietary product.
MRX’s focus is on surveillance related
to multi-listed options. Should MRX list
a proprietary product in the future,
MRX would amend its ORF to collect a
Local ORF on that proprietary product.
42 See MRX Options 2, Section 6(b)(1) and (2).
The total number of contracts executed during a
quarter by a Competitive Market Maker in options
classes to which it is not appointed may not exceed
twenty-five percent (25%) of the total number of
contracts traded by such Competitive Market Maker
in classes to which it is appointed and with respect
to which it was quoting pursuant to Options 2,
Section 5(e)(1). The total number of contracts
executed during a quarter by a Primary Market
Maker in options classes to which it is not
appointed may not exceed twenty-five percent
(25%) of the total number of contracts traded per
each Primary Market Maker Membership.
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The Exchange’s proposal to expand
the clearing ranges to specifically
include Firm Proprietary and BrokerDealer Transactions, in addition to
Priority Customer and Professional
Customer 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 MRX’s Options
Regulatory Cost.43 Customer
transactions in combination with Firm
Proprietary 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 Proprietary and BrokerDealer Transactions.44 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
Members of the Exchange and is not
readily available to MRX.45 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,
43 The Exchange notes that the regulatory costs
relating to monitoring Members with respect to
customer trading activity are generally higher than
the regulatory costs associated with Members that
do not engage in customer trading activity, which
tends to be more automated and less laborintensive. By contrast, regulating Members 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
Member’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 noncustomer component of the regulatory program.
44 See MRX Options 10 Rules.
45 The Know Your Customer or ‘‘KYC’’ provision
is the obligation of the broker-dealer.
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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
MRX’s Customer regulation occurs to a
large extent on Exchange.
The Exchange believes that assessing
Firm Proprietary 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 burden on intramarket competition because the
regulation of Firm Proprietary and
Broker-Dealer Transactions is less
resource intensive than the regulation of
Customer transactions. With this model,
the addition of Firm Proprietary 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
Proprietary and Broker-Dealer
Transactions occurs both on the
Exchange and across options markets.
To that end, the Exchange proposes to
assess Firm Proprietary and BrokerDealer 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 MRX Members,
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 MRX
Member. 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
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well as activity that may occur across
options markets.
The Exchange believes that assessing
only Firm Proprietary and Broker-Dealer
Transactions an Away ORF does not
create an undue burden on intra-market
competition because while the
regulation of Firm Proprietary and
Broker-Dealer Transactions is less
resource intensive than the regulation of
Customer transactions, the regulation of
Firm Proprietary and Broker-Dealer
Transactions occurs both on the
Exchange and across options markets.46
The Exchange believes that assessing
Firm Proprietary and Broker-Dealer
Transactions the same rate for Local
ORF and Away ORF is appropriate
given the lower volume that is
attributed to these Members 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 Proprietary
and Broker-Dealer Members.47 While
not large in number, when compared to
the overall number of Exchange rules
that are surveilled by MRX for onExchange activity, the Away ORF that
would be assessed to Firm Proprietary
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-MRX exchanges does not impose a
burden on intra-market competition,
rather it avoids overlapping ORFs that
would otherwise be assessed by MRX
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 Proprietary 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 Members of the Exchange in
light of the volume different Members
transact on the Exchange.
46 MRX pays the Financial Industry Regulatory
Authority (‘‘FINRA’’) to perform certain crossmarket 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.
47 MRX conducts surveillances and enforces MRX
Rules, however only a subset of those rules is
subject to cross-market surveillance, such as margin
and position limits. Of note, some MRX trading
rules are automatically enforced by MRX’s System.
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90187
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 48 and Rule
19b–4(f)(2) 49 thereunder.
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
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
MRX–2024–39 on the subject line.
Paper Comments
• 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–MRX–2024–39. 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 (https://www.sec.gov/
rules/sro.shtml). 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
48 15
49 17
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U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
14NON1
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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–MRX–2024–39 and should be
submitted on or before December 5,
2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–26419 Filed 11–13–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Lower the
Current Options Regulatory Fee (ORF)
and Adopt a New Approach to ORF in
2025
November 7, 2024.
ddrumheller on DSK120RN23PROD with NOTICES1
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
[Release No. 34–101537; File No. SR–
NASDAQ–2024–058]
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, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ 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.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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 (‘‘NOM’’)
Pricing Schedule at Options 7, Section
5, Options Regulatory Fee.
While the changes proposed herein
are effective upon filing, the Exchange
has designated certain amendments to
be operative on November 1, 2024, and
other amendments to be operative on
January 1, 2025, as noted in the Exhibit
5 and herein.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
1. Purpose
NOM proposes to amend its current
ORF in several respects. In summary,
first, NOM proposes to reduce its ORF
from $0.0016 to $0.0014 per contract
side from November 1, 2024, through
December 31, 2024. Second, as of
January 1, 2025, NOM 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, NOM will assess a
different rate for trades executed on
NOM (‘‘Local ORF Rate’’) and trades
executed on non-NOM exchanges
(‘‘Away ORF Rate’’). Each change will
be described below in greater detail.
Background on Current ORF
Today, NOM assesses its ORF for each
Customer 3 option transaction that is
50 17
1 15
VerDate Sep<11>2014
20:16 Nov 13, 2024
3 Today, ORF is collected from Customers,
Professionals and broker-dealers that are not
Jkt 265001
PO 00000
Frm 00242
Fmt 4703
Sfmt 4703
either: (1) executed by a Participant 4 on
NOM; or (2) cleared by a NOM
Participant at OCC in the Customer
range,5 even if the transaction was
executed by a non-member of NOM,
regardless of the exchange on which the
transaction occurs.6 If the OCC clearing
member is a NOM 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 NOM
Participant, ORF is collected only on the
cleared Customer contracts executed at
NOM, taking into account any CMTA
instructions which may result in
collecting the ORF from a non-member.8
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 NOM and a
non-member clears the transaction, the
ORF will be assessed to the Participant
that executed the transaction on NOM
affiliated with a clearing member that clear in the
‘‘C’’ range at OCC. See supra notes 18 and 19 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
NOM as a ‘‘Nasdaq Options Order Entry Firm’’ or
‘‘Nasdaq Options Market Maker’’. See Options 1,
Section 1(a)(39).
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 NOM
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 NOM from Broker A’s clearing account
at OCC via direct debit. While this transaction was
executed on a market other than NOM, it was
cleared by a NOM Participant in the member’s OCC
clearing account in the Customer range, therefore
there is a regulatory nexus between NOM and the
transaction. If Broker A was not a NOM Participant,
then no ORF should be assessed and collected
because there is no nexus; the transaction did not
execute on NOM nor was it cleared by a NOM
Participant.
E:\FR\FM\14NON1.SGM
14NON1
]]>Agencies
[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90180-90188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26419]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101560; File No. SR-MRX-2024-39]
Self-Regulatory Organizations; Nasdaq MRX, LLC; 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 November 5, 2024, Nasdaq MRX, LLC (``MRX'' 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend MRX's Pricing Schedule at Options 7,
Section 5C, 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 https://listingcenter.nasdaq.com/rulebook/mrx/rules, 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
[[Page 90181]]
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
MRX proposes to amend its current ORF in several respects. MRX
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, MRX will assess a
different rate for trades executed on MRX (``Local ORF Rate'') and
trades executed on non-MRX exchanges (``Away ORF Rate'').
Background on Current ORF
Today, MRX assesses its ORF for each Customer \3\ option
transaction that is either: (1) executed by a Member \4\ on MRX; or (2)
cleared by an MRX Member at OCC in the Customer range,\5\ even if the
transaction was executed by a non-Member of MRX, regardless of the
exchange on which the transaction occurs.\6\ If the OCC clearing member
is an MRX Member, 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 an MRX Member, ORF is collected only on
the cleared Customer contracts executed at MRX, taking into account any
CMTA instructions which may result in collecting the ORF from a non-
Member.\8\ The current MRX ORF is $0.0004 per contract side.
---------------------------------------------------------------------------
\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 Priority Customers and Professional Customers.
\4\ The term ``Member'' means an organization that has been
approved to exercise trading rights associated with Exchange Rights.
See General 1, Section 1(a)(14).
\5\ Market 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 members 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, an MRX Member, 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
MRX from Broker A's clearing account at OCC via direct debit. While
this transaction was executed on a market other than MRX, it was
cleared by an MRX Member in the member's OCC clearing account in the
Customer range, therefore there is a regulatory nexus between MRX
and the transaction. If Broker A was not an MRX Member, then no ORF
should be assessed and collected because there is no nexus; the
transaction did not execute on MRX nor was it cleared by an MRX
Member.
---------------------------------------------------------------------------
Today, in the case where a Member both executes a transaction and
clears the transaction, the ORF will be assessed to and collected from
that Member. Today, in the case where a Member executes a transaction
and a different Member clears the transaction, the ORF will be assessed
to and collected from the Member who clears the transaction and not the
Member who executes the transaction. Today, in the case where a non-
Member executes a transaction at an away market and a Member clears the
transaction, the ORF will be assessed to and collected from the Member
who clears the transaction. Today, in the case where a Member executes
a transaction on MRX and a non-Member clears the transaction, the ORF
will be assessed to the Member that executed the transaction on MRX and
collected from the non-Member who cleared the transaction. Today, in
the case where a Member executes a transaction at an away market and a
non-Member ultimately clears the transaction, the ORF will not be
assessed to the Member 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
Member 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.
---------------------------------------------------------------------------
\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
Members' options activity (``Options Regulatory Cost'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\10\ Direct and indirect expenses are based on the Exchange's
2024 Regulatory Budget.
---------------------------------------------------------------------------
The ORF is designed to recover a material portion of the Options
Regulatory Costs to the Exchange of the supervision and regulation of
its Members, including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities.
Proposal for January 1, 2025
MRX has been reviewing it methodologies for the assessment and
collection of ORF. As a result of this review, MRX proposes to revamp
the current process of assessing and collecting ORF in various ways.
Below MRX 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, MRX proposes to assess ORF to each MRX
Member 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 MRX or (2)
the execution occurs on another exchange and is cleared by an MRX
Member. With this change, MRX proposes to amend its current ORF to
assess ORF on Priority
[[Page 90182]]
Customer,\13\ Professional Customer,\14\ and Firm Proprietary \15\ and
Broker-Dealer \16\ transactions. All market participants, except Market
Makers, would be subject to ORF.
---------------------------------------------------------------------------
\11\ Proprietary products are products with intellectual
property rights that are not multi-listed. MRX has no proprietary
products.
\12\ Capacity ``M'' covers Market Makers registered on MRX and
market makers registered at non-MRX exchanges.
\13\ A ``Priority Customer'' is a person or entity that is not a
broker/dealer in securities and does not place more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s), as defined in Nasdaq MRX Options 1,
Section 1(a)(36). Unless otherwise noted, when used in this Pricing
Schedule the term ``Priority Customer'' includes ``Retail'' as
defined below. See Options 7, Section 1(c).
\14\ A ``Professional Customer'' is a person or entity that is
not a broker/dealer and is not a Priority Customer. See Options 7,
Section 1(c). The ``C'' range at OCC includes both Priority Customer
and Professional Customer transactions.
\15\ A ``Firm Proprietary'' order is an order submitted by a
Member for its own proprietary account. See Options 7, Section 1(c).
\16\ A ``Broker-Dealer'' order is an order submitted by a Member
for a broker-dealer account that is not its own proprietary account.
See Options 7, Section 1(c). A Broker-Dealer clears in the ``F''
range at OCC.
---------------------------------------------------------------------------
The ORF would be collected by OCC on behalf of MRX from (1) MRX
clearing members for all Priority Customer, Professional Customer, Firm
Proprietary and Broker-Dealer transactions they clear or (2) non-
members for all Priority Customer, Professional Customer, Firm
Proprietary and Broker-Dealer transactions they clear that were
executed on MRX. This model collects ORF where there is a nexus with
MRX 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 MRX (``Local ORF
Rate'') and trades executed on non-MRX exchanges (``Away ORF Rate'') by
market participants. For Priority Customer, Professional Customer, 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 $0.01612 per contract
and an Away ORF Rate of $0.00 per contract. For Firm Proprietary and
Broker-Dealer transactions that clear in the ``F'' range at OCC
(collectively ``Firm Proprietary and Broker-Dealer Transactions'') the
Exchange proposes to assess a Local ORF Rate of $0.000092 per contract
and an Away ORF Rate of $0.000092 per contract. The combined amount of
Local ORF and Away ORF collected may not exceed 88% of Options
Regulatory Cost. MRX will ensure that ORF Regulatory Revenue does not
exceed Options Regulatory Cost. As is the case today, the Exchange will
notify Members 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.
---------------------------------------------------------------------------
\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] TN14NO24.002
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 Proprietary and Broker-Dealer Transaction volume. Of
note, through analysis of the results of this regression model, there
was no positive correlation that could be established between
[[Page 90183]]
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 Proprietary and Broker-Dealer Transaction Local and Away ORF,
typically increased the R-Squared (goodness of fit) to >97% across
multiple historical periods.\20\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 Proprietary 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 Proprietary 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
Proprietary 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. Members 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 Members' 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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
Finally, the Exchange notes that this proposal will sunset on July
1, 2025, at which point the Exchange would revert back to the ORF
methodology and rate ($0.0004 per contract side) that was in effect
prior to this rule change.\23\
---------------------------------------------------------------------------
\23\ The Exchange proposes to reconsider the sunset date in 2025
and determine whether to proceed with the proposed ORF structure at
that time.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(4).
\26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 MRX Member or
cleared by an MRX Member. With this amendment, MRX would begin to
assess Firm Proprietary and Broker-Dealer Transactions an ORF, provided
the transactions were executed by an MRX Member or cleared by an MRX
Member, 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
Firm Proprietary 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 Members, except Market
Makers, would be assessed ORF.
The Exchange believes that assessing all Members, 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. Primary Market Makers are
obligated to quote in the Opening Process and intra-
[[Page 90184]]
day.\27\ Additionally, Market Makers may enter quotes in the Opening
Process to open an option series and they are required to quote intra-
day.\28\ Further, unlike other market participants, Primary 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\ Also, Primary Market Makers
and Market Makers incur other costs imposed by the Exchange related to
their quoting obligations in addition to other fees paid by other
market participants. Market Makers are subject to a number of fees,
unlike other market participants. Market Makers pay CMM Trading Right
Fees \30\ in addition to other fees paid by other market participants.
These liquidity providers are critical market participants in that they
are the only market participants that are required to provide liquidity
to MRX 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 MRX 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
\31\ and therefore de minimis.
---------------------------------------------------------------------------
\27\ See MRX Options 3, Section 8 and Options 2, Section 5.
\28\ Id.
\29\ See MRX Options 2, Section 4(b)(1) and (3).
\30\ See MRX Options 7, Section 6, B.
\31\ See MRX Options 2, Section 6. The total number of contracts
executed during a quarter by a Market Maker in options classes to
which it is not appointed may not exceed twenty-five percent (25%)
of the total number of contracts traded. In the Exchange's
experience, Market Maker's are generally below the 25% cap.
---------------------------------------------------------------------------
The Exchange believes excluding options transactions in proprietary
products is reasonable, equitable and not unfairly discriminatory
because MRX 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. MRX notes that there
are a small number of proprietary products transacted as compared to
multi-list options. MRX's focus is on surveillance related to multi-
listed options. Should MRX list a proprietary product in the future,
MRX 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 Proprietary 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 MRX's Options Regulatory Cost.\32\ Customer transactions in
combination with Firm Proprietary 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 Proprietary and Broker-Dealer Transactions.\33\ 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 Members of the Exchange and
is not readily available to MRX.\34\ 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 MRX'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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\32\ The Exchange notes that the regulatory costs relating to
monitoring Members with respect to Customer trading activity are
generally higher than the regulatory costs associated with Members
that do not engage in customer trading activity, which tends to be
more automated and less labor-intensive. By contrast, regulating
Members 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 Member'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.
\33\ See MRX Options 10 Rules.
\34\ 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
Proprietary 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 90185]]
[GRAPHIC] [TIFF OMITTED] TN14NO24.003
With this model, the addition of Firm Proprietary 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 Proprietary and Broker-
Dealer Transactions as compared to Customer transactions. Therefore,
with the proposed model, the regulation of Firm Proprietary 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 Proprietary and Broker-
Dealer Transactions occurs both on the Exchange and across options
markets. To that end, the Exchange proposes to assess Firm Proprietary
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 Proprietary and Broker-Dealer
Transactions an Away ORF. With this model, while the regulation of Firm
Proprietary and Broker-Dealer Transactions is less resource intensive
than the regulation of Customer transactions, it occurs both on the
Exchange and across options markets.\35\ The Exchange believes that
assessing the Firm Proprietary and Broker-Dealer Transactions the same
rate for Local ORF and Away ORF is appropriate given the lower volume
that is attributed to these Members 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
Proprietary and Broker-Dealer Members.\36\ While not large in number,
when compared to the overall number of Exchange rules that are
surveilled by MRX for on-Exchange activity, the Away ORF that would be
assessed to Firm Proprietary 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-MRX exchanges
avoids overlapping ORFs that would otherwise be assessed by MRX 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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\35\ MRX 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.
\36\ MRX conducts surveillances and enforces MRX Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some MRX
trading rules are automatically enforced by MRX'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.\37\
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\37\ MRX 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
[[Page 90186]]
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-
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. Primary Market Makers are
obligated to quote in the Opening Process and intra-day.\38\
Additionally, Market Makers may enter quotes in the Opening Process to
open an option series and they are required to quote intra-day.\39\
Further, unlike other market participants, Primary 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.\40\ Also, Primary Market Makers and Market
Makers incur other costs imposed by the Exchange related to their
quoting obligations in addition to other fees paid by other market
participants. Market Makers are subject to a number of fees, unlike
other market participants. Market Makers pay CMM Trading Right Fees
\41\ in addition to other fees paid by other market participants. These
liquidity providers are critical market participants in that they are
the only market participants that are required to provide liquidity to
MRX 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 MRX 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 \42\ and therefore de minimis.
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\38\ See MRX Options 3, Section 8 and Options 2, Section 5.
\39\ Id.
\40\ See MRX Options 2, Section 4(b)(1) and (3).
\41\ See MRX Options 7, Section 6, B.
\42\ See MRX Options 2, Section 6(b)(1) and (2). The total
number of contracts executed during a quarter by a Competitive
Market Maker in options classes to which it is not appointed may not
exceed twenty-five percent (25%) of the total number of contracts
traded by such Competitive Market Maker in classes to which it is
appointed and with respect to which it was quoting pursuant to
Options 2, Section 5(e)(1). The total number of contracts executed
during a quarter by a Primary Market Maker in options classes to
which it is not appointed may not exceed twenty-five percent (25%)
of the total number of contracts traded per each Primary Market
Maker Membership.
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Uniformly excluding options transactions in proprietary products
from ORF for all MRX Members 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 MRX were to list a proprietary product. MRX's focus is on
surveillance related to multi-listed options. Should MRX list a
proprietary product in the future, MRX 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 Proprietary and Broker-Dealer Transactions,
in addition to Priority Customer and Professional Customer
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 MRX's Options Regulatory Cost.\43\ Customer
transactions in combination with Firm Proprietary 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 Proprietary and
Broker-Dealer Transactions.\44\ 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 Members of the Exchange and is not readily available to
MRX.\45\ 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,
[[Page 90187]]
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 MRX's Customer
regulation occurs to a large extent on Exchange.
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\43\ The Exchange notes that the regulatory costs relating to
monitoring Members with respect to customer trading activity are
generally higher than the regulatory costs associated with Members
that do not engage in customer trading activity, which tends to be
more automated and less labor-intensive. By contrast, regulating
Members 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 Member'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.
\44\ See MRX Options 10 Rules.
\45\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
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The Exchange believes that assessing Firm Proprietary 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 burden on
intra-market competition because the regulation of Firm Proprietary and
Broker-Dealer Transactions is less resource intensive than the
regulation of Customer transactions. With this model, the addition of
Firm Proprietary 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
Proprietary and Broker-Dealer Transactions occurs both on the Exchange
and across options markets. To that end, the Exchange proposes to
assess Firm Proprietary 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 MRX Members, 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 MRX Member. 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 Proprietary and
Broker-Dealer Transactions an Away ORF does not create an undue burden
on intra-market competition because while the regulation of Firm
Proprietary and Broker-Dealer Transactions is less resource intensive
than the regulation of Customer transactions, the regulation of Firm
Proprietary and Broker-Dealer Transactions occurs both on the Exchange
and across options markets.\46\ The Exchange believes that assessing
Firm Proprietary and Broker-Dealer Transactions the same rate for Local
ORF and Away ORF is appropriate given the lower volume that is
attributed to these Members 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 Proprietary and Broker-Dealer
Members.\47\ While not large in number, when compared to the overall
number of Exchange rules that are surveilled by MRX for on-Exchange
activity, the Away ORF that would be assessed to Firm Proprietary 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-MRX exchanges does not
impose a burden on intra-market competition, rather it avoids
overlapping ORFs that would otherwise be assessed by MRX 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 Proprietary 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 Members
of the Exchange in light of the volume different Members transact on
the Exchange.
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\46\ MRX 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.
\47\ MRX conducts surveillances and enforces MRX Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some MRX
trading rules are automatically enforced by MRX's System.
---------------------------------------------------------------------------
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 \48\ and Rule 19b-4(f)(2) \49\ thereunder.
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\48\ 15 U.S.C. 78s(b)(3)(A)(ii).
\49\ 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
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MRX-2024-39 on the subject line.
Paper Comments
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-MRX-2024-39. 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 (https://www.sec.gov/rules/sro.shtml). 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
[[Page 90188]]
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-MRX-2024-39 and should be submitted on or before December 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26419 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
