[Federal Register Volume 89, Number 25 (Tuesday, February 6, 2024)]
[Notices]
[Pages 8256-8259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02270]



[[Page 8256]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99452; File No. SR-NASDAQ-2024-003]


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

January 31, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 16, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend The Nasdaq Options Market LLC's 
(``NOM'') Rules at Options 7, Section 3, Nasdaq Options Market--Ports 
and Other Services.\3\
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    \3\ The Exchange initially filed the proposed pricing changes on 
November 28, 2023 (SR-NASDAQ-2023-050) to be effective on December 
1, 2023. On December 5, 2023, the Exchange withdrew SR-NASDAQ-2023-
050 and placed it with SR-NASDAQ-2023-054. On January 16, 2023, the 
Exchange withdrew SR-NASDAQ-2023-054 and submitted this filing.
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    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.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Options 7, Section 3, Nasdaq Options 
Market--Ports and Other Services. Specifically, the Exchange proposes 
to amend Options 7, Section 3(i) to increase the per port, per month 
SQF Port \4\ and SQF Purge \5\ Port Fees for all ports over 20 ports 
(21 and above) from $500 to $750.\6\
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    \4\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes and Immediate-or- Cancel Orders into and from the 
Exchange. Features include the following: (1) options symbol 
directory messages (e.g., underlying instruments); (2) system event 
messages (e.g., start of trading hours messages and start of 
opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) quote messages; (6) Immediate-or-Cancel 
Order messages; (7) risk protection triggers and purge 
notifications; and (8) opening imbalance messages. The SQF Purge 
Interface only receives and notifies of purge requests from the 
Market Maker. Market Makers may only enter interest into SQF in 
their assigned options series. Immediate-or-Cancel Orders entered 
into SQF are not subject to the Order Price Protection, Market Order 
Spread Protection, or Size Limitation in Options 3, Section 15(a)(1) 
and (a)(2), and (b)(2), respectively. See Options 3, Section 
7(e)(1)(B).
    \5\ SQF Purge is a specific port for the SQF interface that only 
receives and notifies of purge requests from the NOM Market Maker.
    \6\ The Exchange also proposes a technical amendment to remove 
an extraneous period in Options 7, Section 3 in the second 
paragraph.
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    Today, NOM assesses SQF Ports and SQF Purge Ports a per port, per 
month fee based on a tiered fee schedule. Specifically, NOM assesses an 
SQF Port and an SQF Purge Port fee of $1,500 per port, per month for 
the first 5 ports (1-5), a $1,000 per port, per month fee for the next 
15 ports (6-20), and a $750 per port, per month fee for all ports over 
20 ports (21 and above).
    The Exchange proposes to amend the per port, per month fee for SQF 
Ports and SQF Ports above 20 ports (21 and above) from $500 to $750 per 
port, per month. The Exchange is not amending the SQF Port and SQF 
Purge Port fees for ports below 20 ports. SQF Ports and SQF Purge Ports 
over 20 ports are unnecessary for a NOM Market Maker to fulfill its 
regulatory requirements.\7\ A NOM Market Maker requires only one SQF 
Port to submit quotes in its assigned options series into NOM. A NOM 
Market Maker may submit all quotes through one SQF Port and utilize one 
SQF Purge Port to view its purge requests. While a NOM Market Maker may 
elect to obtain multiple SQF Ports and SQF Purge Ports to organize its 
business,\8\ only one SQF Port and SQF Purge Port is necessary for a 
NOM Market Maker to fulfill its regulatory quoting obligations.\9\
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    \7\ See NOM Options 2, Sections 4 and 5.
    \8\ For example, a NOM Market Maker may desire to utilize 
multiple SQF Ports for accounting purposes, to measure performance, 
for regulatory reasons or other determinations that are specific to 
that NOM Participant. The Exchange notes that 78% of NOM Market 
Makers pay the $1,000 per port, per month fee for 6-20 ports and 39% 
pay the proposed $750 per port, per month fee for over 20 ports.
    \9\ NOM Market Makers have various regulatory requirements as 
provided for in Options 2, Section 4. Additionally, NOM Market 
Makers have certain quoting requirements with respect to their 
assigned options series as provided in Options 2, Section 5. The 
Exchange notes that SQF Ports are the only quoting protocol 
available on NOM and only NOM Market Makers may utilize SQF Ports. 
The same is true for SQF Purge Ports.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\11\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4) and (5).
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    The proposed pricing change to increase the maximum SQF Port and 
SQF Purge Port Fees is reasonable in several respects. As a threshold 
matter, the Exchange is subject to significant competitive forces in 
the market for options securities transaction services that constrain 
its pricing determinations in that market. The fact that this market is 
competitive has long been recognized by the courts. In NetCoalition v. 
Securities and Exchange Commission, the D.C. Circuit stated as follows: 
``[n]o one disputes that competition for order flow is `fierce.' . . . 
As the SEC explained, `[i]n the U.S. national market system, buyers and 
sellers of securities, and the broker-dealers that act as their order-
routing agents, have a wide range of choices of where to route orders 
for execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers'. . . .'' \12\
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    \12\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory

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intervention in determining prices, products, and services in the 
securities markets. In Regulation NMS, while adopting a series of steps 
to improve the current market model, the Commission highlighted the 
importance of market forces in determining prices and SRO revenues and, 
also, recognized that current regulation of the market system ``has 
been remarkably successful in promoting market competition in its 
broader forms that are most important to investors and listed 
companies.'' \13\
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    \13\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Numerous indicia demonstrate the competitive nature of this market. 
Within this environment, market participants can freely and often do 
shift their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules.
    The Exchange believes that increasing the fee for SQF Ports and SQF 
Purge Ports over 20 ports (21 and above) from $500 to $750 per port, 
per month is reasonable because SQF Ports and SQF Purge Ports over 20 
ports are unnecessary for a NOM Market Maker to fulfill its regulatory 
requirements.\14\ A NOM Market Maker requires only one SQF Port to 
submit quotes in its assigned options series into NOM. A NOM Market 
Maker may submit all quotes through one SQF Port and utilize one SQF 
Purge Port to view its purge requests. While a NOM Market Maker may 
elect to obtain multiple SQF Ports and SQF Purge Ports to organize its 
business,\15\ only one SQF Port and SQF Purge Port is necessary for a 
NOM Market Maker to fulfill its regulatory quoting obligations. 
Additionally, the Exchange believes the proposed SQF Port and SQF Purge 
Port fee increases are reasonable for two reasons.
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    \14\ See NOM Options 2, Sections 4 and 5.
    \15\ For example, a NOM Market Maker may desire to utilize 
multiple SQF Ports for accounting purposes, to measure performance, 
for regulatory reasons or other determinations that are specific to 
that Participant.
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    First, SQF Ports are a secure method for Market Makers to submit 
quotes into the Exchange's match engine and for the Exchange to send 
messages related to those quotes to Market Makers. NOM must manage the 
security and message traffic, among other things, for each port. 
Amending the SQF Port and SQF Purge Port tiered fees to manage a Market 
Maker's costs while also managing the quantity of SQF Ports and SQF 
Purge Ports issued on NOM has led the Exchange to increase the tier for 
all ports over 20 ports to $750 per port, per month. Lowering the fee 
for SQF Ports and SQF Purge Ports over 20 ports allows the Exchange to 
manage message traffic and message rates associated with the current 
number of outstanding SQF Port and SQF Purge Ports and consider the 
Exchange's ability to process messages. The ability to manage ports 
through pricing permits the Exchange to scale its needs with respect to 
processing messages in an efficient manner.
    Second, the Exchange notes that multiple ports are not necessary, 
however, to the extent that some Market Makers elect to obtain multiple 
ports, the Exchange is offering to lower their fees for SQF Ports and 
SQF Purge Ports over 20 ports, per month. NOM believes that lowering 
costs for ports beyond 20 ports allows for efficiencies and permits 
Market Makers to increase their number of ports beyond the 20 ports. 
Lowering the SQF Port and SQF Purge Port fees, per month, beyond 20 
ports allows those Market Makers that want to obtain a larger number of 
SQF Port and SQF Purge ports to do so at a lower cost. In this case, 
the Exchange is raising the current SQF Port and SQF Purge Port Fee for 
over 20 ports from $500 to $750 per port, per month. Despite the 
increase, Market Makers will continue to pay less for over 20 SQF Port 
and SQF Purge Ports per month if they desire to obtain multiple ports 
on NOM.
    The Exchange believes that increasing the fee for SQF Ports and SQF 
Purge Ports over 20 ports (21 and above) from $500 to $750 per port, 
per month is equitable and not unfairly discriminatory because all NOM 
Market Makers would be assessed the same fees for SQF Ports and SQF 
Purge Ports to the extent that these NOM Market Makers have subscribed 
to more than 20 SQF Ports or SQF Purge Ports. NOM Market Makers are the 
only market participants that are assessed SQF Port and SQF Purge Port 
fees because they are the only market participants that are permitted 
to quote on the Exchange. Unlike other market participants, Market 
Makers are subject to market making and quoting obligations.\16\ These 
liquidity providers are critical market participants in that they are 
the only market participants that provide liquidity to NOM on a 
continuous basis. Providing Market Makers a means to cap their cost 
related to quoting and enabling all Market Makers to acquire SQF Ports 
and SQF Purge Ports at a lower cost beyond 20 ports enables these 
market participants to provide the necessary liquidity to NOM at lower 
costs.
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    \16\ See Options 2, Sections 4 and 5.
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    In 2022, NYSE Arca, Inc. (``NYSE Arca'') proposed to restructure 
fees relating to OTPs for Market Makers.\17\ In that rule change,\18\ 
NYSE Arca argued that,
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    \17\ See Securities Exchange Act Release No. 95412 (June 23, 
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36). NYSE Arca 
proposed to increase both the monthly fee per Market Maker OTP and 
the number of issues covered by each additional OTP because, among 
other reasons, the number of issues traded on the Exchange has 
increased significantly in recent years.
    \18\ Id at 38788.

    Market Makers serve a unique and important function on the 
Exchange (and other options exchanges) given the quote-driven nature 
of options markets. Because options exchanges rely on actively 
quoting Market Makers to facilitate a robust marketplace that 
attracts order flow, options exchanges must attract and retain 
Market Makers, including by setting competitive Market Maker permit 
fees. Stated otherwise, changes to Market Maker permit fees can have 
a direct effect on the ability of an exchange to compete for order 
flow. The Exchange also believes that the number of options 
exchanges on which Market Makers can effect option transactions also 
ensures competition in the marketplace and constrains the ability of 
exchanges to charge supracompetitive fees for access to its market 
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by Market Makers.

    Further, NYSE ARCA noted that,\19\
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    \19\ Id at 38790.

    The Exchange further believes that its ability to set Market 
Maker permit fees is constrained by competitive forces based on the 
fact that Market Makers can, and have, chosen to terminate their 
status as a Market Maker if they deem Market Maker permit fees to be 
unreasonable or excessive. Specifically, the Exchange notes that a 
BOX participant modified its access to BOX in connection with the 
implementation of a proposed change to BOX's Market Maker permit 
fees. The Exchange has also observed that another options exchange 
group experienced decreases in market share following its proposed 
modifications of its access fees (including Market Maker trading 
permit fees), suggesting that market participants (including Market 
Makers) are sensitive to changes in exchanges' access fees and may 
respond by shifting their order flow elsewhere if they deem the fees 
to be unreasonable or excessive.
    There is no requirement, regulatory or otherwise, that any 
Market Maker connect to and access any (or all of) the available 
options exchanges. The Exchange also is not aware of any reason why 
a Market Maker could not cease being a permit holder in response to 
unreasonable price increases. The Exchange does not assess any 
termination fee for a Market Maker to drop its OTP, nor is the 
Exchange aware of any other costs that would be incurred by a Market 
Maker to do so.

    The Exchange likewise believes that its lower SQF Ports and SQF 
Purge Port monthly fees beyond 20 ports is

[[Page 8258]]

constrained by competitive forces and that its proposed modifications 
to the SQF Port and SQF Purge Fees is reasonably designed in 
consideration of the competitive environment in which the Exchange 
operates, by balancing the value of the enhanced benefits available to 
Market Makers due to the current level of activity on the Exchange with 
a fee structure that will continue to incent Market Makers to support 
increased liquidity, quote competition, and trading opportunities on 
the Exchange, for the benefit of all market participants.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intermarket Competition
    The proposal does not impose an undue burden on intermarket 
competition. The Exchange believes its proposal remains competitive 
with other options markets who also offer order entry protocols. The 
Exchange notes that it operates in a highly competitive market in which 
market participants can readily favor competing venues if they deem fee 
levels at a particular venue to be excessive. In such an environment, 
the Exchange must continually adjust its fees to remain competitive 
with other exchanges. Because competitors are free to modify their own 
fees in response, and because market participants may readily adjust 
their order routing practices, the Exchange believes that the degree to 
which fee changes in this market may impose any burden on competition 
is extremely limited. Other exchanges have been permitted to amend 
certain costs attributed to Market Makers.\20\ Further, in 2022, MRX 
proposed a monthly cap for SQF Ports and SQF Purge Ports of 17,500.\21\ 
MRX noted in its rule change that, ``Only one SQF quote protocol is 
required for an MRX Market Maker to submit quotes into MRX and to meet 
its regulatory requirements.'' \22\
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    \20\ See Securities Exchange Act Release No. 95412 (June 23, 
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36).
    \21\ See Securities Exchange Act No. 96824(February 7, 2023), 88 
FR 8975 (February 10, 2023) (SR-MRX-2023-05) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Amend MRX Options 
7, Section 6).
    \22\ Id at 8976.
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    If the Commission were to apply a different standard of review this 
proposal than it applied to other exchange fee filings, where Market 
Maker fees were increased and port fee caps were established, it would 
create a burden on competition such that it would impair NOM's ability 
to compete among other options markets.
Intramarket Competition
    The Exchange believes that increasing the fee for SQF Ports and SQF 
Purge Ports over 20 ports (21 and above) from $500 to $750 per port, 
per month does not impose an undue burden on competition because all 
NOM Market Makers would be assessed the same fees for SQF Ports and SQF 
Purge Ports to the extent that these NOM Market Makers have subscribed 
to more than 20 SQF Ports or SQF Purge Ports. NOM Market Makers are the 
only market participants that are assessed SQF Port and SQF Purge Port 
fees because they are the only market participants that are permitted 
to quote on the Exchange. Unlike other market participants, Market 
Makers are subject to market making and quoting obligations.\23\ These 
liquidity providers are critical market participants in that they are 
the only market participants that provide liquidity to NOM on a 
continuous basis. Providing Market Makers a means to cap their cost 
related to quoting and enabling all Market Makers to acquire SQF Ports 
and SQF Purge Ports at a lower cost beyond 20 ports enables these 
market participants to provide the necessary liquidity to NOM at lower 
costs. Therefore, because Market Makers fulfill a unique role on the 
Exchange, are the only market participant required to submit quotes as 
part of their obligations to operate on the Exchange, and, in light of 
that role, they are eligible for certain incentives. The proposed lower 
monthly SQF Fee and SQF Purge Port fee is designed to continue to 
incent Market Makers to quote on NOM, thereby promoting liquidity, 
quote competition, and trading opportunities.
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    \23\ See Options 2, Sections 4 and 5.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\24\
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    \24\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     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-NASDAQ-2024-003 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-NASDAQ-2024-003. 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

[[Page 8259]]

submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-NASDAQ-2024-003 and 
should be submitted on or before February 27, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02270 Filed 2-5-24; 8:45 am]
BILLING CODE 8011-01-P