[Federal Register Volume 88, Number 5 (Monday, January 9, 2023)]
[Notices]
[Pages 1308-1312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00118]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96598; File No. SR-GEMX-2022-14]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Reduce GEMX's 
Options Regulatory Fee

January 3, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 22, 2022, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I 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 GEMX's Pricing Schedule at Options 
7, Section 5 to reduce the GEMX Options Regulatory Fee or ``ORF''.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on February 1, 
2023.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/gemx/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 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
    GEMX proposes to lower its ORF from $0.0014 to $0.0013 per contract 
side on February 1, 2023. Previously, GEMX has filed to lower or waive 
its ORF in 2019, 2021 and 2022.\3\ After a review of its regulatory 
revenues and regulatory costs, the Exchange proposes to reduce the ORF 
to ensure that revenue collected from the ORF, in combination with 
other regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 85140 (February 14, 
2019), 84 FR 5511 (February 21, 2019) (SR-GEMX-2019-01) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend the Options Regulatory Fee); 92698 (August 18, 2021), 86 FR 
47355 (August 24, 2021) (SR-GEMX-2021-08) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change to Amend GEMX's 
Options Regulatory Fee); and 94069 (January 26, 2022), 87 FR 5545 
(February 1, 2022) (SR-GEMX-2022-03) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Reduce GEMX's Options 
Regulatory Fee).
---------------------------------------------------------------------------

    Volumes in the options industry went over 900,000,000 total 
contracts as of August 2022 and remained over that threshold through 
November 2022. GEMX has taken measures in prior years to lower and 
waive its ORF to ensure that revenue collected from the ORF, in 
combination with other regulatory fees and fines, does not exceed the 
Exchange's total regulatory costs. Despite those prior measures, GEMX 
will need to reduce its ORF again to account for trading volumes in 
2022. At this time, GEMX believes that the options volume it 
experienced in the second half of 2022 is likely to persist in 2023. 
The anticipated options volume would continue to impact GEMX's ORF 
collection which, in turn, has caused GEMX to propose reducing the ORF 
to ensure that revenue collected from the ORF, in combination with 
other regulatory fees and fines, would not exceed the Exchange's total 
regulatory costs.
Collection of ORF
    GEMX will continue to assess its ORF for each customer option 
transaction that is either: (1) executed by a Member on GEMX; or (2) 
cleared by an GEMX Member at The Options Clearing Corporation (``OCC'') 
in the customer range,\4\ even if the transaction was executed by a 
non-Member of GEMX, regardless of the exchange on which the transaction 
occurs.\5\ If the OCC clearing member is a GEMX Member, ORF is assessed 
and collected on all cleared customer contracts (after adjustment for 
CMTA \6\); and (2) if the OCC clearing member is not a GEMX Member, ORF 
is collected only on the cleared customer contracts executed at GEMX, 
taking into
---------------------------------------------------------------------------

    \4\ 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.
    \5\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \6\ 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.

---------------------------------------------------------------------------

[[Page 1309]]

account any CMTA instructions which may result in collecting the ORF 
from a non-Member.\7\
---------------------------------------------------------------------------

    \7\ By way of example, if Broker A, a GEMX 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 
GEMX from Broker A's clearing account at OCC via direct debit. While 
this transaction was executed on a market other than GEMX, it was 
cleared by a GEMX Member in the member's OCC clearing account in the 
customer range, therefore there is a regulatory nexus between GEMX 
and the transaction. If Broker A was not a GEMX Member, then no ORF 
should be assessed and collected because there is no nexus; the 
transaction did not execute on GEMX nor was it cleared by a GEMX 
Member.
---------------------------------------------------------------------------

    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. 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. 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. In the case where a Member executes a 
transaction on GEMX and a non-Member clears the transaction, the ORF 
will be assessed to the Member that executed the transaction on GEMX 
and collected from the non-Member who cleared the transaction. In the 
case where a Member executes a transaction at an away market and a non-
Member 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
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a 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 ORF.
    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the 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. 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 include support from such areas as Office of the 
General Counsel, technology, and internal audit. Indirect expenses were 
approximately 39% of the total regulatory costs for 2022. Thus, direct 
expenses were approximately 61% of total regulatory costs for 2022.\8\
---------------------------------------------------------------------------

    \8\ The Exchange will finalize its 2023 Regulatory Budget in the 
first quarter of 2023.
---------------------------------------------------------------------------

    The ORF is designed to recover a material portion of the 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
    Based on the Exchange's most recent review, the Exchange is 
proposing to reduce the amount of ORF that will be collected by the 
Exchange from $0.0014 per contract side to $0.0013 per contract side. 
The Exchange issued an Options Trader Alert on December 20, 2022 
indicating the proposed rate change for February 1, 2023.\9\
---------------------------------------------------------------------------

    \9\ See Options Trader Alert 2022-44.
---------------------------------------------------------------------------

    The proposed reduction is based on current levels of options 
volume. The below table displays monthly volume from 2021.\10\
---------------------------------------------------------------------------

    \10\ The OCC data from December 2021 numbers reflect only 13 
trading days as this information is through December 17, 2021. 
Volume data in the table represents numbers of contracts; each 
contract has two sides.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN09JA23.000


[[Page 1310]]


    The Exchange compared the options volume in 2022 to the options 
volume in 2021. The below table displays monthly volume for 2022 to 
date.\11\
---------------------------------------------------------------------------

    \11\ The OCC data reflects data from January through November 
2022. Volume data in the table represents numbers of contracts; each 
contract has two sides.
[GRAPHIC] [TIFF OMITTED] TN09JA23.001

BILLING CODE 8011-01-C
    Comparing 2021 to 2022, the options volumes in 2022 remained higher 
in a majority of the months in 2022.\12\ November volume for 2022, 
while lower than November volume for 2021, remains higher than most 
months in 2021. With respect to customer options volume across the 
industry, total customer options contract average daily volume, to 
date, in 2022 is 36,509,256 as compared to total customer options 
contract average daily volume in 2021 which was 36,308,323.\13\
---------------------------------------------------------------------------

    \12\ February, June, July and November 2022 volumes are lower as 
compared to 2021 volumes in those same months.
    \13\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
---------------------------------------------------------------------------

    There can be no assurance that the Exchange's costs for 2023 will 
not differ materially from these expectations and prior practice, nor 
can the Exchange predict with certainty whether options volume will 
remain at the current level going forward. The Exchange notes however, 
that when combined with regulatory fees and fines, the revenue that may 
be generated utilizing an ORF rate of $0.0014 per contract side may 
result in revenue which exceeds the Exchange's estimated regulatory 
costs for 2023 if options volumes remain the same. The options volume 
for 2022 remains high when compared to 2021 volumes. GEMX lowered ORF 
in the beginning of 2022 to account for the options volume in 2021. The 
Exchange therefore proposes to reduce its ORF to $0.0013 per contract 
side to ensure that revenue does not exceed the Exchange's estimated 
regulatory costs in 2023. Particularly, the Exchange believes that 
reducing the ORF when combined with all of the Exchange's other 
regulatory fees and fines, would allow the Exchange to continue 
covering a material portion of its regulatory costs, while lessening 
the potential for generating excess revenue that may otherwise occur 
using the rate of $0.0014 per contract side.\14\
---------------------------------------------------------------------------

    \14\ The Exchange notes that its regulatory responsibilities 
with respect to Member compliance with options sales practice rules 
have largely been allocated to FINRA under a 17d-2 agreement. The 
ORF is not designed to cover the cost of that options sales practice 
regulation.
---------------------------------------------------------------------------

    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. If the 
Exchange determines regulatory revenues may exceed or are projected to 
exceed regulatory costs, the Exchange will adjust the ORF by submitting 
a fee change filing to the Commission and notifying \15\ its Members 
via an Options Trader Alert.\16\
---------------------------------------------------------------------------

    \15\ The Exchange will provide Members with such notice at least 
30 calendar days prior to the effective date of the change.
    \16\ The Exchange notes that in connection with this proposal, 
it provided the Commission confidential details regarding the 
Exchange's projected regulatory revenue, including projected revenue 
from ORF, along with a projected regulatory expenses.
---------------------------------------------------------------------------

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.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\18\ 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) \19\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the rate 
that would otherwise be in effect on February 1, 2023. Moreover, the 
proposed reduction is necessary for the Exchange to avoid collecting 
revenue, in combination with other regulatory fees and fines, that 
would be in excess of its anticipated regulatory costs which is 
consistent with the Exchange's practices.
    The Exchange designed the ORF to generate revenues that would be 
less than the amount of the Exchange's regulatory costs to ensure that 
it, in combination with its other regulatory fees and fines, does not 
exceed regulatory costs, which is consistent with the view of the 
Commission that regulatory fees be used for regulatory purposes and not 
to support the Exchange's business operations. As discussed above, 
however, after review of its regulatory costs and regulatory revenues, 
which includes revenues from ORF and other regulatory fees and fines, 
the Exchange determined that absent a reduction in ORF, it may collect 
revenue which would exceed its regulatory costs. Indeed, the Exchange 
notes that when taking into account the potential that recent options 
volume persists, it estimates the ORF may

[[Page 1311]]

generate revenues that would cover more than the approximated 
Exchange's projected regulatory costs. As such, the Exchange believes 
it's reasonable and appropriate to reduce the ORF amount from $0.0014 
to $0.0013 per contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all Members on all 
their transactions that clear in the customer range at OCC.\20\ The 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those Members that require more Exchange regulatory services based on 
the amount of customer options business they conduct. Regulating 
customer trading activity is much more labor intensive and requires 
greater expenditure of human and technical resources than regulating 
non-customer trading activity, which tends to be more automated and 
less labor-intensive. For example, there are 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 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 (e.g., Member proprietary 
transactions) of its regulatory program. Moreover, the Exchange notes 
that it has broad regulatory responsibilities with respect to 
activities of its Members, irrespective of where their transactions 
take place. Many of the Exchange's surveillance programs for customer 
trading activity may require the Exchange to look at activity across 
all markets, such as reviews related to position limit violations and 
manipulation. Indeed, the Exchange cannot effectively review for such 
conduct without looking at and evaluating activity regardless of where 
it transpires. In addition to its own surveillance programs, the 
Exchange also works with other SROs and exchanges on intermarket 
surveillance related issues. Through its participation in the 
Intermarket Surveillance Group (``ISG'') \21\ the Exchange shares 
information and coordinates inquiries and investigations with other 
exchanges designed to address potential intermarket manipulation and 
trading abuses. Accordingly, there is a strong nexus between the ORF 
and the Exchange's regulatory activities with respect to customer 
trading activity of its Members.
---------------------------------------------------------------------------

    \20\ If the OCC clearing member is a GEMX member, ORF is 
assessed and collected on all cleared customer contracts (after 
adjustment for CMTA); and (2) if the OCC clearing member is not a 
GEMX member, ORF is collected only on the cleared customer contracts 
executed at GEMX, taking into account any CMTA instructions which 
may result in collecting the ORF from a non-member.
    \21\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. This proposal does not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF applies to all customer activity, thereby raising 
regulatory revenue to offset regulatory expenses. It also supplements 
the regulatory revenue derived from non-customer activity. The Exchange 
notes, however, the proposed change is not designed to address any 
competitive issues. Indeed, this proposal does not create an 
unnecessary or inappropriate inter-market burden on competition because 
it is a regulatory fee that supports regulation in furtherance of the 
purposes of the Act. The Exchange is obligated to ensure that the 
amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

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) of the Act \22\ and paragraph (f) of Rule 19b-4 \23\ 
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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-GEMX-2022-14 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 No. SR-GEMX-2022-14. 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 (http://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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-GEMX-2022-14, and should be submitted on or 
before January 30, 2023.


[[Page 1312]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00118 Filed 1-6-23; 8:45 am]
BILLING CODE 8011-01-P