[Federal Register Volume 89, Number 98 (Monday, May 20, 2024)]
[Notices]
[Pages 43903-43907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10955]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100139; File No. SR-GEMX-2024-10]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 7,
Section 6
May 14, 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 May 1, 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 Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its Rules at Options 7, Section
6.\3\
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\3\ The Exchange initially filed the proposed pricing changes on
November 28, 2023 (SR-GEMX-2023-16) to be effective on December 1,
2023. On December 5, 2023, the Exchange withdrew SR-GEMX-2023-16 and
replaced it with SR-GEMX-2023-19. On January 16, 2023, the Exchange
withdrew SR-GEMX-2023-19 and submitted SR-GEMX-2024-03. On March 7,
2024, the Exchange withdrew SR-GEMX-2024-03 and submitted SR-GEMX-
2024-07. On May 1, 2024, the Exchange withdrew SR-GEMX-2024-07 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/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 Exchange proposes to amend Options 7, Section 6, C, Ports and
Other Services. Specifically, the Exchange proposes to amend the
monthly caps for SQF Ports \4\ and SQF Purge Ports.\5\
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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, Immediate-or-Cancel Orders, and auction responses to 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; (8) opening imbalance messages; (9) auction
notifications; and (10) auction responses. 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, and Size Limitation Protection in Options 3, Section
15(a)(1)(A), (1)(B), and (2)(B) respectively. See Supplementary
Material .03(c) to Options 3, Section 7.
\5\ SQF Purge is a specific port for the SQF interface that only
receives and notifies of purge requests from the Market Maker.
Dedicated SQF Purge Ports enable Market Makers to seamlessly manage
their ability to remove their quotes in a swift manner. The SQF
Purge Port is designed to assist Market Makers in the management of,
and risk control over, their quotes. Market Makers may utilize a
purge port to reduce uncertainty and to manage risk by purging all
quotes in their assigned options series. Of note, Market Makers may
only enter interest into SQF in their assigned options series.
Additionally, the SQF Purge Port may be utilized by a Market Maker
in the event that the Member has a system issue and determines to
purge its quotes from the order book.
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Today, GEMX assesses $1,250 per port, per month for an SQF Port as
well as an SQF Purge Port.\6\ Also, today, SQF Ports and SQF Purge
Ports are subject to a monthly cap of $17,500, which cap is applicable
to Market Makers.
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\6\ The Exchange proposes to add a comma between ``per port''
and ``per month'' in the Options 7, Section 6, C, SQF Port and SQF
Purge Port Fee rule text. The Exchange also proposes to remove an
extraneous period in Options 7, Section 6, C, in the second
paragraph.
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At this time, the Exchange proposes to establish an increased SQF
Fee and SQF Purge Port Cap to Primary Market Makers and Market Makers
that do not provide a minimum amount of liquidity on GEMX. This
proposed increased SQF Fee and SQF Purge Port Cap is intended to
incentivize Primary Market Makers and Market Makers to add liquidity on
GEMX for the benefit of other market participants in order to lower
their fees. GEMX proposes to increase the SQF Port and SQF Purge Port
Cap to $27,500 a month if a Primary Market Maker or Market Maker does
not transact 0.50% of Total Customer Volume in electronic simple orders
that adds liquidity in a month.\7\ Today, GEMX caps an SQF Port and SQF
Purge Port at $17,500 a month.\8\ With this proposal, the Exchange
would not assess Primary Market Makers and Market Makers an SQF Port
and SQF Purge Port Cap beyond the monthly cap of $27,500, instead of
$17,500, once the Member has exceeded the proposed port cap for the
respective month. Primary Market Makers and Market Makers who transact
0.50% of Total Customer Volume in electronic simple orders that adds
liquidity in a month will continue to be subject to the $17,500 SQF
Port and SQF Purge Port Cap.
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\7\ For purposes of this cap, ``Total Customer Volume'' shall be
defined as a percentage of all cleared customer volume at The
Options Clearing Corporation in Multiply Listed Equity Options and
Exchange-Traded Products (``TCV'').
\8\ The Exchange also proposes a technical amendment to remove
an extra period in Options 7, Section 6, C.
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Pursuant to Supplementary Material .03(c) to Options 3, Section 7,
Market Makers may only enter interest into SQF in their assigned
options series. Pursuant to Supplementary Material .03(c) to Options 3,
Section 7, the SQF interface allows Market Makers to connect, send, and
receive messages related to quotes, Immediate-or-Cancel Orders, and
auction responses to the Exchange. An SQF Purge is a specific port for
the SQF interface that only receives and notifies of purge requests
from the Market Maker. A GEMX Market Maker requires only one SQF Port
to
[[Page 43904]]
submit quotes in its assigned options series into GEMX. While a Market
Maker may elect to obtain multiple SQF Ports and SQF Purge Ports to
organize its business,\9\ only one SQF Port and SQF Purge Port is
necessary for a Market Maker to fulfill its regulatory quoting
obligations.\10\
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\9\ For example, a 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
Member.
\10\ GEMX Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, GEMX Market
Makers have certain quoting requirements with respect to their
assigned options series as provided in Options 2, Section 5. SQF
Ports are the only quoting protocol available on GEMX and only
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,\11\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4) and (5).
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The proposed pricing change to increase the SQF Port and SQF Purge
Port monthly cap from $17,500 per month to $27,500 per month if Primary
Market Makers or Market Makers do not transact 0.50% of Total Customer
Volume in electronic simple orders that adds liquidity in a month is
reasonable because it will incentivize Primary Market Makers and Market
Makers to add liquidity on GEMX to lower their costs. The Exchange
believes that the total volume required to achieve the cap is
reasonable as the Exchange has limited the volume to simple orders, as
not all Market Makers transact complex orders. Further, 0.50% of Total
Customer Volume in electronic simple orders that adds liquidity in a
month is an achievable number for Market Makers who currently add
volume to the Exchange. Additionally, the Exchange believes that an SQF
Fee and SQF Purge Port Cap of $27,500, in lieu of $17, 500, is
reasonable because Primary Market Makers and Market Makers are
obligated, among other things, 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.\13\ The Exchange believes that it is
reasonable to increase the SQF Port and SQF Purge Port Cap to $27,500
for Primary Market Makers and Market Makers that do not transact 0.50%
of Total Customer Volume in electronic simple orders that adds
liquidity in a month because the Exchange believes that Primary Market
Makers and Market Makers that do not contribute a minimum amount of
liquidity on GEMX should not be subject to the same opportunities to
lower their costs as those Primary Market Makers and Market Makers that
do contribute to liquidity and therefore provide the ability for other
market participants to engage with that order flow. The Exchange
believes that the increase is modest and would serve to encourage
Primary Market Makers and Market Makers to submit order flow to GEMX in
order to lower their cost and would result in additional order
competition, which also benefits market participants. The Exchange
believes this proposal promotes liquidity, quote competition, and
trading opportunities.
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\13\ See Options 2, Section 4(b)(1) and (3).
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SQF Ports and SQF Purge Ports are utilized by Primary Market Makers
and Market Makers to quote on GEMX. A Market Maker may submit all
quotes through one SQF Port and utilize one SQF Purge Port to view its
purge requests. While a Market Maker may elect to obtain multiple SQF
Ports to organize its business,\14\ only one SQF Port is necessary for
a Market Maker to fulfill its regulatory quoting obligations.\15\ For
those Market Makers that elect to organize themselves by obtaining a
greater number of SQF Ports or SQF Purge Ports, they will be subject to
a cap.\16\ For Market Makers that only take 1 SQF Port or only a few
SQF Ports or SQF Purge Ports, their costs would be far below the
$27,500 or $17,500 threshold for the cap.
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\14\ For example, a Market Maker may desire to utilize multiple
SQF Ports and SQF Purge Ports for accounting purposes, to measure
performance, for regulatory reasons or other determinations that are
specific to that member organization.
\15\ Market Makers have various regulatory requirements as
provided for in Options 2, Section 4. Additionally, Market Makers
have certain quoting requirements with respect to their assigned
options series as provided in Options 2, Section 5. SQF Ports are
the only quoting protocol available on GEMX.
\16\ The number of ports that members choose to purchase varies
widely. Today, on GEMX, no Market Makers have 1 SQF Port/SQF Purge
Port, 1 Market Maker had 2-5 SQF Ports/SQF Purge Ports, 4 Market
Makers have between 6-10 SQF Ports/SQF Purge Ports, and 8 Market
Makers have more than 11 SQF Ports/SQF Purge Ports.
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The proposed pricing change to increase the SQF Fee and SQF Purge
Cap for Primary Market Makers and Market Makers to $27,500 a month if
Primary Market Makers or Market Makers do not transact 0.50% of Total
Customer Volume in electronic simple orders that adds liquidity in a
month is equitable and not unfairly discriminatory as all Primary
Market Makers and Market Makers would be able to cap their SQF Port and
SQF Purge Port costs at $17,500, provided they transacted the requisite
volume, otherwise Primary Market Makers and Market Makers would be
uniformly subject to the $27,500 SQF Port and SQF Purge Port Cap. The
Exchange notes that unlike other market participants, Primary Market
Makers are obligated to quote in the Opening Process and intra-day.\17\
Additionally, Market Makers may enter quotes in the Opening Process to
open an option series and they are required to quote intra-day.\18\
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.\19\ Finally, unlike other market
participants, Primary Market Makers and Market Makers incur other costs
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 separate
Membership Fees,\20\ and CMM Trading Right Fees,\21\ 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 provide liquidity to GEMX and are necessary for
opening the market. Allowing Primary Market Makers and Market Makers to
manage their costs by capping SQF Ports and SQF Purge Ports in addition
to transaction fees enables these essential market participants to
manage their business model more effectively and 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 GEMX. The following chart represents the
[[Page 43905]]
classification of GEMX members and the percentage of Market Makers.
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\17\ See Options 3, Section 8 and Options 2, Section 5.
\18\ Id.
\19\ See Options 2, Section 4(b)(1) and (3).
\20\ See Options 7, Section 6, A.
\21\ See Options 7, Section 6, B.
[GRAPHIC] [TIFF OMITTED] TN20MY24.312
GEMX believes Primary Market Makers and Market Makers should be
eligible for certain incentives because they fulfill a unique role on
the Exchange and are the only market participants required to submit
quotes to the Exchange. The proposed SQF Port and SQF Purge Cap is
designed to ensure that Primary Market Makers and Market Makers add a
certain amount of liquidity on GEMX in order to be able to cap their
SQF Port and SQF Purge Port Fees at the lower cap of $17,500 as
compared to the increased cap of $27,500. The Exchange would apply the
criteria uniformly when applying the SQF Fee and SQF Purge Cap to
Primary Market Makers and Market Makers.
Finally, GEMX believes the proposed SQF Fee and SQF Purge Cap is
constrained by competitive forces and reasonably designed in
consideration of the competitive environment in which the Exchange
operates. This fee structure incents Primary Market Makers and 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. The chart below shows the
February 2024 market share for multiply listed options by exchange. Of
the 17 operating options exchanges, none currently has more than a
17.6% market share. Customers widely distribute their transactions
across exchanges according to their business needs and the ability of
each exchange to meet those needs through technology, liquidity and
functionality.
[[Page 43906]]
[GRAPHIC] [TIFF OMITTED] TN20MY24.313
Market share is the percentage of volume on a particular exchange
relative to the total volume across all exchanges, and indicates the
amount of order flow directed to that exchange. High levels of market
share enhance the value of trading and ports.
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.
Intramarket Competition
The proposed pricing change to increase the SQF Fee and SQF Purge
Cap for Primary Market Makers and Market Makers to $27,500 a month if
Primary Market Makers or Market Makers do not transact 0.50% of Total
Customer Volume in electronic simple orders that adds liquidity in a
month does not impose an undue burden on competition as all Primary
Market Makers and Market Makers would be able to cap their SQF Port and
SQF Purge Port costs at $17,500, provided they transacted the requisite
volume, otherwise Primary Market Makers and Market Makers would be
uniformly subject to the $27,500 SQF Port and SQF Purge Port Cap. The
Exchange notes that unlike other market participants, Primary Market
Makers are obligated to quote in the Opening Process and intra-day.\22\
Additionally, Market Makers may enter quotes in the Opening Process to
open an option series and they are required to quote intra-day.\23\
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.\24\ Finally, unlike other market
participants, Primary Market Makers and Market Makers incur other costs
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 separate
Membership Fees,\25\ and CMM Trading Right Fees,\26\ 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 provide liquidity to GEMX and are necessary for
opening the market. Allowing Primary Market Makers and Market Makers to
manage their costs by capping SQF Ports and SQF Purge Ports in addition
to transaction fees enables these essential market participants to
manage their business model more effectively and 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 GEMX. GEMX believes Primary Market Makers and Market
Makers should be eligible for certain incentives because they fulfill a
unique role on the Exchange and are the only market participants
required to submit quotes to the Exchange. The proposed SQF Port Cap is
designed to ensure that Primary Market Makers and Market Makers add a
certain amount of liquidity on GEMX in order to be able to cap their
SQF Port and SQF Purge Port Fees at the lower cap of $17,500 as
compared to the increased cap of $27,500. The Exchange would apply the
criteria uniformly when applying the SQF Fee and SQF Purge Cap to
Primary Market Makers and Market Makers.
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\22\ See Options 3, Section 8 and Options 2, Section 5.
\23\ Id.
\24\ See Options 2, Section 4(b)(1) and (3).
\25\ See Options 7, Section 6, A.
\26\ See Options 7, Section 6, B.
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Finally, GEMX believes the proposed SQF Fee and SQF Purge Cap is
constrained by competitive forces and reasonably designed in
consideration of the competitive environment in which the Exchange
operates. This fee structure incents Primary Market Makers and Market
Makers to support increased liquidity, quote competition, and trading
opportunities on the Exchange, for the benefit of all market
participants.
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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.\27\ 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.
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\27\ 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-2024-10 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-2024-10. 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-2024-10 and should be
submitted on or before June 10, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10955 Filed 5-17-24; 8:45 am]
BILLING CODE 8011-01-P