[Federal Register Volume 89, Number 56 (Thursday, March 21, 2024)]
[Notices]
[Pages 20284-20287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05949]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99748; File No. SR-GEMX-2024-05]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its Fees 
for Connectivity and Co-Location Services

March 15, 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 March 1,

[[Page 20285]]

2024, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. 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 Exchange's fees for connectivity 
and co-location services, as described further below.
    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
    The purpose of the proposed rule change is to amend the Exchange's 
fees relating to connectivity and co-location services. Specifically, 
the Exchange proposes to raise its fees for connectivity and co-
location services in General 8 as well as certain fees related to its 
Testing Facilities in Options 7, Section 6 by 5.5%, with certain 
exceptions.
    General 8, Section 1 includes the Exchange's fees that relate to 
connectivity, including fees for cabinets, external telco/inter-cabinet 
connectivity fees, fees for connectivity to the Exchange, fees for 
connectivity to third party services, fees for market data 
connectivity, fees for cabinet power install, and fees for additional 
charges and services. General 8, Section 2 includes the Exchange's fees 
for direct connectivity services, including fees for direct circuit 
connection to the Exchange, fees for direct circuit connection to third 
party services, and fees for point of presence connectivity. With the 
exception of the Exchange's GPS Antenna fees,\3\ the Exchange proposes 
to increase its fees throughout General 8 by 5.5%.
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    \3\ The Exchange proposes to exclude the GPS Antenna fees from 
the proposed fee increase because, unlike the other fees in General 
8, the Exchange recently increased its GPS Antenna fees. See 
Securities Exchange Act Release No. 34-99129 (December 11, 2023), 88 
FR 87017 (December 15, 2023) (SR-GEMX-2023-17).
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    In addition to increasing fees in General 8, the Exchange also 
proposes to increase certain fees in Options 7, Section 6, which relate 
to the Testing Facility. Options 7, Section 6(H) provides that 
subscribers to the Testing Facility located in Carteret, New Jersey 
shall pay a fee of $1,000 per hand-off, per month for connection to the 
Testing Facility. The hand-off fee includes either a 1Gb or 10Gb switch 
port and a cross connect to the Testing Facility. In addition, Options 
7, Section 6(H) provides that subscribers shall also pay a one-time 
installation fee of $1,000 per hand-off. The Exchange proposes to 
increase these aforementioned fees by 5.5% to require that subscribers 
to the Testing Facility shall pay a fee of $1,055 per hand-off, per 
month for connection to the Testing Facility and a one-time 
installation fee of $1,055 per hand-off.
    The proposed increases in fees would enable the Exchange to 
maintain and improve its market technology and services. The Exchange 
has not increased any of the fees included in the proposal since 
2017.\4\ However, since 2017, there has been notable inflation. Between 
2017 and 2024, the dollar had an average inflation rate of 3.34% per 
year, producing a cumulative price increase of 25.82%.\5\ 
Notwithstanding inflation, the Exchange historically has not increased 
its fees every year.\6\ The proposed fees represent a 5.5% increase 
from the current fees, which is far below inflation since 2017, which 
exceeded 25%. The proposed 5.5% increase is comparable to recent 
inflation rates for one-year periods. For example, in 2023, the 
inflation rate was 4.12% and in 2022, the inflation rate was 8%.\7\ The 
Exchange notes that other exchanges have filed for comparable or higher 
increases in certain connectivity-related fees, based in part on 
similar rationale.\8\
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    \4\ See Securities Exchange Act Release No. 34-81902 (October 
19, 2017), 82 FR 49453 (October 25, 2017) (SR-GEMX-2017-48).
    \5\ See https://www.officialdata.org/us/inflation/2017?amount=1 
(Last updated February 27, 2024).
    \6\ Unregulated competitors providing connectivity and 
colocation services often have annual price increases written into 
their agreements with customers to account for inflation and rising 
costs.
    \7\ See https://www.officialdata.org/us/inflation/2022?endYear=2023&amount=1.
    \8\ See, e.g., Securities Exchange Act Release No. 34-99550 
(February 16, 2024), 89 FR 13763 (February 23, 2024) (SR-CboeBYX-
2024-006).
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    In offering connectivity and co-location services, the Exchange 
incurs certain costs, including costs related to the data center 
facility, hardware and equipment, and personnel. The Exchange's costs 
to offer such services have risen, in part because the Exchange is 
subject to annual escalation clauses that increase certain costs for 
the Exchange. The Exchange seeks to cover a portion of its increased 
costs by the proposed 5.5% increase in fees as described above. The 
Exchange does not seek to cover the full extent of its cost increases 
with this proposal. In addition, the Exchange continues to invest in 
improvements that enhance the value of its connectivity and co-location 
services, including by refreshing hardware and expanding the co-
location facility to offer customers additional space and power.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    This belief is based on a couple factors. First, the current fees 
do not properly reflect the value of the services and products, as fees 
for the services and products in question have been static in nominal 
terms, and therefore falling in real terms due to inflation. Second, 
exchange fees are constrained by the fact that market participants can 
choose among 17 different venues for options trading, and therefore no 
single venue can charge excessive fees for its products without losing 
customers and market share.
Real Exchange Fees Have Fallen
    As explained above, the Exchange has not increased any of the fees 
included in the proposal since 2017. This means that such fees have 
fallen in real terms due to inflation, which has been notable. Between 
2017 and 2024, the dollar had an average inflation rate of 3.34% per 
year, producing a cumulative

[[Page 20286]]

price increase of 25.82%.\11\ Notwithstanding inflation, the Exchange 
historically has not increased its fees every year.\12\ As noted above, 
the Exchange has not increased the fees in this proposal for over 6 
years. Accordingly, the Exchange believes that the proposed fees are 
reasonable as they represent a 5.5% increase from the current fees, 
which is far below inflation since 2017, which exceeded 25%. The 
proposed 5.5% increase is comparable to recent inflation rates for one-
year periods. For example, in 2023, the inflation rate was 4.12% and in 
2022, the inflation rate was 8%.\13\
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    \11\ See https://www.officialdata.org/us/inflation/2017?amount=1 
(Last updated February 27, 2024).
    \12\ As noted above, unregulated competitors providing 
connectivity and colocation services often have annual price 
increases written into their agreements with customers to account 
for inflation and rising costs.
    \13\ See https://www.officialdata.org/us/inflation/2022?endYear=2023&amount=1.
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    Not only have real exchange fees fallen, but the Exchange's costs 
to provide connectivity and co-location services have increased. As 
stated above, in offering connectivity and co-location services, the 
Exchange incurs certain costs, including costs related to the data 
center facility, hardware and equipment, and personnel. The Exchange's 
costs to offer such services have risen, in part because the Exchange 
is subject to annual escalation clauses that increase certain costs for 
the Exchange. The Exchange seeks to cover a portion of its increased 
costs by the proposed 5.5% increase in fees as described above. The 
Exchange does not seek to cover the full extent of its cost increases 
with this proposal. In addition, the Exchange continues to invest in 
improvements that enhance the value of its connectivity and co-location 
services, including by refreshing hardware and expanding the co-
location facility to offer customers additional space and power.
Customers Have a Choice in Trading Venue
    Customers face many choices in where to trade options. Market 
participants will continue to choose trading venues and the method of 
connectivity based on their specific needs. No broker-dealer is 
required to become a Member of the Exchange. There is no regulatory 
requirement that any market participant connect to any one exchange, 
nor that any market participant connect at a particular connection 
speed or act in a particular capacity on the Exchange, or trade any 
particular product offered on an exchange. Moreover, membership is not 
a requirement to participate on the Exchange. Indeed, the Exchange is 
unaware of any one exchange whose membership includes every registered 
broker-dealer. The Exchange also believes substitutable products and 
services are available to market participants, including, among other 
things, other options exchanges that a market participant may connect 
to in lieu of the Exchange, indirect connectivity to the Exchange via a 
third-party reseller of connectivity, and/or trading of options 
products within markets which do not require connectivity to the 
Exchange, such as the Over-the-Counter (OTC) markets.
    There are currently 17 exchanges offering options trading services. 
No single options exchange trades more than 14% of the options market 
by volume and only one of the 17 options exchanges has a market share 
over 10 percent.\14\ This broad dispersion of market share demonstrates 
that market participants can and do exercise choice in trading venues. 
Further, low barriers to entry mean that new exchanges may rapidly 
enter the market and offer additional substitute platforms to further 
compete with the Exchange and the products it offers.
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    \14\ See Nasdaq, Options Market Statistics (Last updated January 
11, 2024), available at https://www.nasdaqtrader.com/Trader.aspx?id=OptionsVolumeSummary.
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    As such, the Exchange must set its fees, including its fees for 
connectivity and co-location services and products, competitively. If 
not, customers may move to other venues or reduce use of the Exchange's 
services. ``If competitive forces are operative, the self-interest of 
the exchanges themselves will work powerfully to constrain unreasonable 
or unfair behavior.'' \15\ Accordingly, ``the existence of significant 
competition provides a substantial basis for finding that the terms of 
an exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \16\ Disincentivizing market 
participants from purchasing Exchange connectivity would only serve to 
discourage participation on the Exchange, which ultimately does not 
benefit the Exchange. Moreover, if the Exchange charges excessive fees, 
it may stand to lose not only connectivity revenues but also other 
revenues, including revenues associated with the execution of orders.
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    \15\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \16\ Id.
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    In summary, the proposal represents an equitable allocation of 
reasonable dues, fees and other charges because Exchange fees have 
fallen in real terms and customers have a choice in trading venue and 
will exercise that choice and trade at another venue if exchange fees 
are not set competitively.
No Unfair Discrimination
    The Exchange believes that the proposed fee changes are not 
unfairly discriminatory because the fees are assessed uniformly across 
all market participants that voluntarily subscribe to or purchase 
connectivity and co-location services or products, which are available 
to all customers.

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.
    Nothing in the proposal burdens inter-market competition (the 
competition among self-regulatory organizations) because approval of 
the proposal does not impose any burden on the ability of other 
exchanges to compete. The Exchange operates in a highly competitive 
market in which market participants can determine whether or not to 
connect to the Exchange based on the value received compared to the 
cost of doing so. Indeed, market participants have numerous alternative 
exchanges that they may participate on and direct their order flow, as 
well as off-exchange venues, where competitive products are available 
for trading.
    Nothing in the proposal burdens intra-market competition (the 
competition among consumers) because the Exchange's connectivity and 
co-location services are available to any customer under the same fee 
schedule as any other customer, and any market participant that wishes 
to purchase such services can do so on a non-discriminatory basis.

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.\17\ At any time within 60 days of the 
filing of the proposed rule change, the Commission

[[Page 20287]]

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.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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:

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-GEMX-2024-05 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-2024-05. 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-2024-05 and should be 
submitted on or before April 11, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05949 Filed 3-20-24; 8:45 am]
BILLING CODE 8011-01-P