[Federal Register Volume 89, Number 243 (Wednesday, December 18, 2024)]
[Notices]
[Pages 102994-103002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29921]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101892; File No. SR-NASDAQ-2024-078]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Lower the Options Regulatory Fee (ORF) and Adopt a New Approach to ORF
in 2025
December 12, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 27, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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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
(``NOM'') Pricing Schedule at Options 7, Section 5, Options Regulatory
Fee.\3\
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\3\ On October 31, 2024, SR-NASDAQ-2024-058 was filed to amend
ORF. On November 27, 2024, SR-NASDAQ-2024-058 was withdrawn and this
rule change was filed. The current proposal amends the ORF Rate for
Local Customer ``C'' Origin Code transactions executed on NOM, Local
Firm ``F'' Origin Code transactions executed on NOM, and Away ORF
Rate Firm ``F'' Origin Code multi-list transactions executed on non-
NOM exchanges.
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While the changes proposed herein are effective upon filing, the
Exchange has designated certain amendments to be operative on November
1, 2024, and other amendments to be operative on January 1, 2025, as
noted in the Exhibit 5 and herein.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
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
NOM proposes to amend its current ORF in several respects. In
summary, first, NOM proposes to reduce its ORF from $0.0016 to $0.0014
per contract side from November 1, 2024, through December 31, 2024.
Second, as of January 1, 2025, NOM proposes to amend its methodology of
collection to: (1) exclude options transactions in proprietary
products; and (2) assess ORF in all clearing ranges except market
makers who clear as ``M'' at The Options Clearing Corporation
(``OCC''). Additionally, NOM will assess a different rate for trades
executed on NOM (``Local ORF Rate'') and trades executed on non-NOM
exchanges (``Away ORF Rate''). Each change will be described below in
greater detail.
Background on Current ORF
Today, NOM assesses its ORF for each Customer \4\ option
transaction that is either: (1) executed by a Participant \5\ on NOM;
or (2) cleared by a NOM Participant at OCC in the Customer range,\6\
even if the transaction was executed by a non-member of NOM, regardless
of the exchange on which the transaction occurs.\7\ If the OCC clearing
member is a NOM Participant, ORF is assessed and collected on all
ultimately cleared Customer contracts (after adjustment for CMTA \8\);
and (2) if the OCC clearing member is not a NOM Participant, ORF is
collected only on the cleared Customer contracts executed at
[[Page 102995]]
NOM, taking into account any CMTA instructions which may result in
collecting the ORF from a non-member.\9\
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\4\ Today, ORF is collected from Customers, Professionals and
broker-dealers that are not affiliated with a clearing member that
clear in the ``C'' range at OCC. See supra notes 18 and 19 for
descriptions of Customers and Professionals.
\5\ The term ``Options Participant'' or ``Participant'' mean a
firm, or organization that is registered with the Exchange pursuant
to Options 2A of these Rules for purposes of participating in
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or
``Nasdaq Options Market Maker''. See Options 1, Section 1(a)(39).
\6\ Participants must record the appropriate account origin code
on all orders at the time of entry of the order. The Exchange
represents that it has surveillances in place to verify that
Participants mark orders with the correct account origin code.
\7\ The Exchange uses reports from OCC when assessing and
collecting the ORF.
\8\ 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.
\9\ By way of example, if Broker A, a NOM Participant, routes a
Customer order to CBOE and the transaction executes on CBOE and
clears in Broker A's OCC Clearing account, ORF will be collected by
NOM from Broker A's clearing account at OCC via direct debit. While
this transaction was executed on a market other than NOM, it was
cleared by a NOM Participant in the member's OCC clearing account in
the Customer range, therefore there is a regulatory nexus between
NOM and the transaction. If Broker A was not a NOM Participant, then
no ORF should be assessed and collected because there is no nexus;
the transaction did not execute on NOM nor was it cleared by a NOM
Participant.
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Today, in the case where a Participant both executes a transaction
and clears the transaction, the ORF will be assessed to and collected
from that Participant. Today, in the case where a Participant executes
a transaction and a different Participant clears the transaction, the
ORF will be assessed to and collected from the Participant who clears
the transaction and not the Participant who executes the transaction.
Today, in the case where a non-member executes a transaction at an away
market and a Participant clears the transaction, the ORF will be
assessed to and collected from the Participant who clears the
transaction. Today, in the case where a Participant executes a
transaction on NOM and a non-member clears the transaction, the ORF
will be assessed to the Participant that executed the transaction on
NOM and collected from the non-member who cleared the transaction.
Today, in the case where a Participant executes a transaction at an
away market and a non-member ultimately clears the transaction, the ORF
will not be assessed to the Participant 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 Participant executing the trade at an away market.
ORF Revenue and Monitoring of ORF
Today, the Exchange monitors the amount of revenue collected from
the ORF (``ORF Regulatory Revenue'') to ensure that it, in combination
with other regulatory fees and fines, does not exceed Options
Regulatory Costs.\10\ In determining whether an expense is considered
an Options Regulatory Cost, the Exchange reviews all costs and makes
determinations if there is a nexus between the expense and a regulatory
function. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset Options Regulatory Cost.
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\10\ The regulatory costs for options comprise a subset of the
Exchange's regulatory budget that is specifically related to options
regulatory expenses and encompasses the cost to regulate all
Participants' options activity (``Options Regulatory Cost'').
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ORF Regulatory Revenue, when combined with all of the Exchange's
other regulatory fees and fines, is designed to recover a material
portion of the Options Regulatory Costs to the Exchange of the
supervision and regulation of member Customer options business
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. Options Regulatory Costs
include direct regulatory expenses and certain indirect expenses in
support of the regulatory function. The direct expenses include in-
house and third-party service provider costs to support the day-to-day
regulatory work such as surveillances, investigations and examinations.
The indirect expenses are only those expenses that are in support of
the regulatory functions, such areas include Office of the General
Counsel, technology, finance, and internal audit. Indirect expenses
will not exceed 35% of the total Options Regulatory Costs. Thus, direct
expenses would be 65% of total Options Regulatory Costs for 2024.\11\
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\11\ Direct and indirect expenses are based on the Exchange's
2024 Regulatory Budget.
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The ORF is designed to recover a material portion of the Options
Regulatory Costs to the Exchange of the supervision and regulation of
its Participants, including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities.
Proposal for November 1, 2024, Through December 31, 2024
Based on NOM's most recent review of its ORF Regulatory Revenues as
compared to its ORF Regulatory Costs in light of recent fines, NOM
proposes to reduce the amount of ORF that will be collected by the
Exchange from $0.0016 to $0.0014 per contract side from November 1,
2024, through December 31, 2024. The Exchange issued an Options Trader
Alert on September 16, 2024, that specified the proposed rate change
for November 1, 2024.\12\
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\12\ See https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-53. The Exchange plans on issuing a second Options Trader Alert
announcing changes for January 1, 2025.
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NOM notes that there can be no assurance that the Options
Regulatory Costs for the remainder of 2024 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 Options Regulatory Revenue
that may be generated utilizing an ORF rate of $0.0016 per contract
side may result in Options Regulatory Revenue which exceeds the
Exchange's estimated Options Regulatory Costs for 2024 as a result of
fines. The Exchange therefore proposes to reduce its ORF to $0.0014 per
contract side to ensure that Options Regulatory Revenue does not exceed
the Exchange's estimated Options Regulatory Costs in 2024.
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 Options
Regulatory Costs, while lessening the potential for generating excess
revenue that may otherwise occur using the rate of $0.0016 per contract
side.\13\
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\13\ The Exchange notes that its regulatory responsibilities
with respect to Participant 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.
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The Exchange will continue to monitor the amount of Options
Regulatory Revenue collected from the ORF to ensure that Options
Regulatory Revenue, in combination with its other regulatory fees and
fines, does not exceed Options Regulatory Costs. If the Exchange
determines Options Regulatory Revenue exceed Options Regulatory Costs,
the Exchange will adjust the ORF by submitting a fee change filing to
the Commission and notifying \14\ its Participants via an Options
Trader Alert.\15\
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\14\ The Exchange will provide Participants with such notice at
least 30 calendar days prior to the effective date of the change.
\15\ 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 expense.
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Proposal for January 1, 2025
NOM has been reviewing it methodologies for the assessment and
collection of ORF. As a result of this review, NOM proposes to revamp
the current process of assessing and collecting ORF in various
ways.\16\ Below NOM will explain the modelling it performed and the
outcomes of the
[[Page 102996]]
modelling which have led the Exchange to propose the below changes.
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\16\ The Exchange proposes to delete language in the Pricing
Schedule at Options 7, Section 5 that will be obsolete as of
November 1, 2024.
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Effective January 1, 2025, NOM proposes to assess ORF to each NOM
Participant for multi-listed options transactions, excluding options
transactions in proprietary products,\17\ cleared by OCC in all
clearing ranges except market makers who clear as ``M'' at OCC
(``Market Makers'') \18\ where: (1) the execution occurs on NOM or (2)
the execution occurs on another exchange and is cleared by a NOM
Participant. With this change, NOM proposes to amend its current ORF to
assess ORF on Customer,\19\ Professional,\20\ Firm \21\ and Broker-
Dealer \22\ transactions. All market participants, except Market
Makers, would be subject to ORF.
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\17\ Proprietary products are products with intellectual
property rights that are not multi-listed. NOM has no proprietary
products.
\18\ Capacity ``M'' covers Market Makers registered on NOM and
market makers registered at non-NOM exchanges.
\19\ The term ``Customer'' or (``C'') applies to any transaction
that is identified by a Participant for clearing in the Customer
range at The Options Clearing Corporation (``OCC'') which is not for
the account of broker or dealer or for the account of a
``Professional'' (as that term is defined in Options 1, Section
1(a)(47)). See Options 7, Section 1(a).
\20\ The term ``Professional'' or (``P'') means any person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s) pursuant
to Options 1, Section 1(a)(47). All Professional orders shall be
appropriately marked by Participants. See Options 7, Section 1(a).
\21\ The term ``Firm'' or (``F'') applies to any transaction
that is identified by a Participant for clearing in the Firm range
at OCC. See Options 7, Section 1(A).
\22\ The term ``Broker-Dealer'' or (``B'') applies to any
transaction which is not subject to any of the other transaction
fees applicable within a particular category. See Options 7, Section
1(a). A Broker-Dealer clears in the ``F'' range at OCC.
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The ORF would be collected by OCC on behalf of NOM from (1) NOM
clearing members for all Customer, Professional, Firm and Broker-Dealer
transactions they clear or (2) non-members for all Customer,
Professional, Firm and Broker-Dealer transactions they clear that were
executed on NOM. This model collects ORF where there is a nexus with
NOM and does not collect ORF from a non-member where the transaction
takes place away from the Exchange.
Further, effective January 1, 2025, the Exchange proposes to
establish a different ORF for trades executed on NOM (``Local ORF
Rate'') and trades executed on non-NOM exchanges (``Away ORF Rate'') by
market participants.\23\ For Customer, Professional, and broker-dealer
(not affiliated with a clearing member) transactions that clear in the
``C'' range at OCC (collectively ``Customers'') the Exchange proposes
to assess a Local ORF Rate of $0.0203 per contract and an Away ORF Rate
of $0.00 per contract. For Firm and Broker-Dealer transactions that
clear in the ``F'' range at OCC (collectively ``Firm and Broker-Dealer
Transactions'') the Exchange proposes to assess a Local ORF Rate of
$0.00024 per contract and an Away ORF Rate of $0.00024 per contract.
The combined amount of Local ORF and Away ORF collected may not exceed
88% of Options Regulatory Cost. NOM will ensure that ORF Regulatory
Revenue does not exceed Options Regulatory Cost. As is the case today,
the Exchange will notify Participants via an Options Trader Alert of
these changes at least 30 calendar days prior to January 1, 2025.
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\23\ The Exchange is continuing to permit NOM Participants who
do not transact an equities business on Nasdaq in a calendar year to
receive a refund of the fees specified in Equity 7, Section 30(b)
upon written notification to the Exchange along with documentation
evidencing that no equities business was conducted on Nasdaq for
that calendar year. The Exchange is replicating related rule text in
Options 7, Section 5 to retain the continuity of this refund
process.
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The Exchange utilized historical and current data from its
affiliated options exchanges to create a new regression model that
would tie expenses attributable to regulation to a respective
source.\24\ To that end, the Exchange plotted Customer volumes from
each exchange \25\ against Options Regulatory Cost from each exchange
for the Time Period. Specifically, the Exchange utilized standard
charting functionality to create a linear regression. The charting
functionality yields a ``slope'' of the line, representing the marginal
cost of regulation, as well as an ``intercept,'' representing the fixed
cost of regulation.\26\ The Exchange considered using non-linear
models, but concluded that the best R[supcaret]2 (``R-Squared'') \27\
results came from a standard y = Mx +B format for regulatory expense.
The R-Squared for the below charting method ranged from 85% to 95%
historically. As noted, the plots below represent the Time Period. The
X-axis reflects Customer volumes by exchange, by quarter and the Y-axis
reflects regulatory expense by exchange.
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\24\ This new model seeks to provide a new approach to
attributing Options Regulatory Cost to Options Regulatory Expense.
In creating this model, the exchange did not rely on data from a
single SRO as it had in the past.
\25\ The Exchange utilized data from all Nasdaq affiliated
options exchanges to create this model from 2023 Q3 through 2024 Q2
(``Time Period'').
\26\ The Exchange utilized data from 2023 Q1 to 2024 Q3 to
calculate the slope and intercept.
\27\ R-Squared is a statistical measure that indicates how much
of the variation of a dependent variable is explained by an
independent variable in a regression model. The formula for
calculating R-squared is: R2 = 1-Unexplained Variation/Total
Variation.
[GRAPHIC] [TIFF OMITTED] TN18DE24.071
[[Page 102997]]
The results of this modelling indicated a high correlation and
intercept for the baseline cost of regulating the options market as a
whole. Specifically, the regression model indicated that (1) the
marginal cost of regulation is easily measurable, and significantly
attributable to Customer activity; and (2) the fixed cost of setting up
a regulatory regime should arguably be dispersed across the industry so
that all options exchanges have substantially similar revenue streams
to satisfy the ``intercept'' element of cost. When seeking to offset
the ``set-up'' cost of regulation, the Exchange attempted several
levels of attribution. The most successful attribution was related to
industry wide Firm and Broker-Dealer Transaction volume. Of note,
through analysis of the results of this regression model, there was no
positive correlation that could be established between Customer away
volume and regulatory expense. This led the Exchange to utilize a model
with a two-factor regression on a quarterly basis for the last four
quarters of volumes relative to the pool of expense data for the six
Nasdaq affiliated options exchanges. Once again, standard spreadsheet
functionality (including the Data Analysis Packet) was used to
determine the mathematics for this model. The results of this two-
factor model, which resulted in the attribution of Customer Local ORF
and Firm and Broker-Dealer Transaction Local and Away ORF, typically
increased the R-Squared (goodness of fit) to >97% across multiple
historical periods.\28\
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\28\ The Exchange notes that various exchanges negotiate their
respective contracts independently with FINRA creating some
variability. Additionally, an exchange with a floor component would
create some variability.
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Utilizing the new regression model, and assumptions in the
proposal, the model demonstrates that Customer volumes are directly
attributable to marginal cost, and also shows that Firm and Broker-
Dealer Transaction volumes industry-wide are a valid method (given the
goodness of fit) to offset the fixed cost of regulation. Applying the
regression coefficient values historically, the Exchange established a
``normalization'' by per options exchange. This ``normalization''
encompassed idiosyncratic exchange expense-volume relationships which
served to tighten the attributions further while not deviating by more
than 30% from the mean for any single options exchange in the model.
The primary driver of this need for ``normalization'' are negotiated
regulatory contracts that were negotiated at different points in time,
yielding some differences in per contract regulatory costs by exchange.
Normalization is therefore the average of a given exchange's historical
(prior 4 quarters) ratio of regulatory expense to revenue when using
the regressed values (for Customer Local ORF and Firm and Broker-Dealer
Transaction Local and Away ORF) that yields an effective rate by
exchange. The ``normalization'' was then multiplied to a ``targeted
collection rate'' of approximately 88% to arrive at ORF rates for
Customer, Firm and Broker-Dealer Transactions. Of note, when comparing
the ORF rates generated from this method, historically, there appears
to be a very tight relationship between the estimated modeled
collection and actual expense and the regulatory expenses for that same
period. In summary, the model does not appear to increase marginal
returns.
One other important aspect of this modeling is the input of Options
Regulatory Costs. The Exchange notes that in defining Options
Regulatory Costs it accounts for the nexus between the expense and
options regulation. By way of example, the Exchange excludes certain
indirect expenses such as payroll expenses, accounts receivable,
accounts payable, marketing, executive level expenses and corporate
systems.
The Exchange would continue to monitor the amount of Options
Regulatory Revenue collected from the ORF to ensure that it, in
combination with other regulatory fees and fines, does not exceed
Options Regulatory Costs. In determining whether an expense is
considered an Options Regulatory Cost, the Exchange would continue to
review all costs and makes determinations if there is a nexus between
the expense and a regulatory function. The Exchange notes that fines
collected by the Exchange in connection with a disciplinary matter will
continue to offset Options Regulatory Cost. Participants will continue
to be provided with 30 calendar day notice of any change to ORF.
As is the case today, ORF Regulatory Revenue, when combined with
all of the Exchange's other regulatory fees and fines, is designed to
recover a material portion of the Options Regulatory Costs to the
Exchange for the supervision and regulation of Participants'
transactions, including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities. As discussed
above, Options Regulatory Costs include direct regulatory expenses \29\
and certain indirect expenses in support of the regulatory
function.\30\
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\29\ 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.
\30\ The indirect expenses include support from such areas as
Office of the General Counsel, technology, finance and internal
audit.
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Finally, the Exchange notes that this proposal will be sunset on
July 1, 2025, at which point the Exchange would revert back to the ORF
methodology and rate ($0.0016 per contract side) that was in effect
prior to this rule change.\31\
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\31\ The Exchange proposes to reconsider the sunset date in 2025
and determine whether to proceed with the proposed ORF structure at
that time.
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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.\32\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act,\33\ 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) \34\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(4).
\34\ 15 U.S.C. 78f(b)(5).
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Proposal for November 1, 2024, Through December 31, 2024
The Exchange believes the proposed reduction of ORF is reasonable
because it would help ensure that ORF Regulatory Revenue does not
exceed a material portion of the Exchange's ORF Regulatory Costs. As
noted above, the ORF is designed to recover a material portion, but not
all, of the Exchange's ORF Regulatory Costs. Further, the Exchange
believes the proposed fee change is reasonable because Customer
transactions will be subject to a lower ORF than the rate that would
otherwise be in effect on November 1, 2024.
The Exchange had designed the ORF to generate ORF Regulatory
Revenue that would be less than the amount of the Exchange's ORF
Regulatory Costs to ensure that it, in combination with its other
regulatory fees and fines, does not exceed ORF Regulatory Costs, which
is
[[Page 102998]]
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 ORF
Regulatory Costs and ORF Regulatory Revenue which includes revenues
from ORF and other regulatory fees and fines, the Exchange determined
that absent a reduction in ORF, it may collect ORF Regulatory Revenue
which would exceed its ORF Regulatory Costs. Indeed, the Exchange notes
that when taking into account the potential that recent options volume
persists, it estimates the ORF may generate ORF Regulatory Revenue that
would cover more than the approximated Exchange's projected ORF
Regulatory Costs due to fines. As such, the Exchange believes it's
reasonable and appropriate to reduce the ORF amount from $0.0016 to
$0.0014 per contract side.
The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory in that it is charged to all Participants
on all their transactions that clear in the Customer range at OCC.\35\
The Exchange believes the ORF ensures fairness by assessing higher fees
to those Participants 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 of its regulatory program.
Moreover, the Exchange notes that it has broad regulatory
responsibilities with respect to activities of its Participants, a
small portion of which takes place on away exchanges. 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'') \36\
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 Participants.
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\35\ If the OCC clearing member is a NOM Participant, ORF will
be assessed and collected on all cleared Customer contracts (after
adjustment for CMTA); and (2) if the OCC clearing member is not a
NOM Participant, ORF will be collected only on the cleared Customer
contracts executed at NOM, taking into account any CMTA instructions
which may result in collecting the ORF from a non-member.
\36\ 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.
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Proposal for January 1, 2025
The Exchange believes the proposed ORF to be assessed on January 1,
2025, is reasonable, equitable and not unfairly discriminatory for
various reasons. First, as of January 1, 2025, the Exchange would
expand the collection of ORF to all clearing ranges, except Market
Makers, provided the transaction was executed by an NOM Participant or
cleared by an NOM Participant. With this amendment, NOM would begin to
assess Firm and Broker-Dealer Transactions an ORF, provided the
transactions were executed by a NOM Participant or cleared by a NOM
Participant, except transactions in proprietary products. Second, as of
January 1, 2025, the Exchange would assess different rates to Customer
transactions for the Local ORF Rate and Away ORF Rate as compared to
Firms and Broker-Dealer Transactions. Third, as of January 1, 2025, the
combined amount of Local ORF and Away ORF collected would not exceed
88% of Options Regulatory Cost as all Participants, except Market
Makers, would be assessed ORF.
The Exchange believes that assessing all Participants, except
Market Makers, an ORF is reasonable, equitable and not unfairly
discriminatory. While the Exchange acknowledges that there is a cost to
regulate Market Makers, unlike other market participants, Market Makers
have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Market Makers are required
to quote intra-day.\37\ Further, unlike other market participants,
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.\38\ Market Makers are critical market
participants in that they are the only market participants that are
required to provide liquidity to NOM and are necessary for opening the
market. Excluding Market Maker transactions from ORF allows these
market participants to manage their costs and consequently their
business model more effectively thus enabling them to better allocate
resources to other technologies that are necessary to manage risk and
capacity to ensure that these market participants continue to compete
effectively on NOM in providing tight displayed quotes which in turn
benefits markets generally and market participants specifically.
Finally, the Exchange notes that Market Makers may transact orders in
addition to submitting quotes on the Exchange. This proposal would
except orders submitted by Market Makers, in addition to quotes, for
purposes of ORF. Market Makers utilize orders in their assigned options
series to sweep the order book. The Exchange believes the quantity of
orders utilized by Market Makers in their assigned series is de
minimis. In their unassigned options series, Market Makers utilize
orders to hedge their risk or respond to auction. The Exchange notes
that the number of orders submitted by Market Makers in their
unassigned options series are far below the cap \39\ and therefore de
minimis.
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\37\ See Options 2, Section 5(d).
\38\ See NOM Options 2, Section 4(a)(3) and (5).
\39\ See NOM Options 2, Section 6(b). The total number of
contracts executed by a Market Maker in options in which it is not
registered as a Market Maker shall not exceed 25 percent of the
total number of all contracts executed by the Market Maker in any
calendar quarter.
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The Exchange believes excluding options transactions in proprietary
products is reasonable, equitable and not unfairly discriminatory
because NOM does not list any proprietary products. The Exchange
believes that only exchanges that list proprietary products should be
able to collect a Local ORF for those products. NOM notes that there
are a small number of proprietary products transacted as compared to
multi-list options. NOM's focus is on surveillance related to multi-
[[Page 102999]]
listed options. Should NOM list a proprietary product in the future,
NOM would amend its ORF to collect a Local ORF on that proprietary
product.
The Exchange believes that assessing different rates to Customer
transactions for the Local ORF Rate and Away ORF Rate as compared to
Firm and Broker-Dealer Transactions and collecting no more than 88% of
Options Regulatory Cost is reasonable, equitable and not unfairly
discriminatory. Customer transactions account for a material portion of
NOM's Options Regulatory Cost.\40\ Customer transactions in combination
with Firm and Broker-Dealer Transactions account for a large portion of
the Exchange's surveillance expense. Therefore, the Exchange believes
that 88% of Options Regulatory Cost is appropriate and correlates to
the degree of regulatory responsibility and Options Regulatory Cost
borne by the Exchange. With respect to Customer transactions, options
volume continues to surpass volume from other options participants.
Additionally, there are rules in the Exchange's Rulebook that deal
exclusively with Customer transactions, such as rules involving doing
business with a Customer, which would not apply to Firm and Broker-
Dealer Transactions.\41\ For these reasons, regulating Customer trading
activity is ``much more labor-intensive'' and therefore, more costly.
The Exchange believes that a large portion of the Options Regulatory
Cost relates to Customer allocation because obtaining Customer
information may be more time intensive. For example, non-Customer
market participants are subject to various regulatory and reporting
requirements which provides the Exchange certain data with respect to
these market participants. In contrast, Customer information is known
by Participants of the Exchange and is not readily available to
NOM.\42\ The Exchange may have to take additional steps to understand
the facts surrounding particular trades involving a Customer which may
require requesting such information from a broker-dealer. Further,
Customers require more Exchange regulatory services based on the amount
of options business they conduct. For example, there are Options
Regulatory Costs associated with main office and branch office
examinations (e.g., staff expenses), as well as investigations into
Customer complaints and the terminations of registered persons. As a
result, the Options Regulatory Costs associated with administering the
Customer component of the Exchange's overall regulatory program are
materially higher than the Options Regulatory Costs associated with
administering the non-Customer component when coupled with the amount
of volume attributed to such Customer transactions. Utilizing the new
regression model, and assumptions in the proposal, it appears that
NOM's Customer regulation occurs to a large extent on Exchange.
Utilizing the new regression model, and assumptions in the proposal,
the Exchange does not believe that significant Options Regulatory Costs
should be attributed to Customers for activity that may occur across
options markets. To that end, with this proposal, the Exchange would
assess Customers a Local ORF, but not an Away ORF rate.
---------------------------------------------------------------------------
\40\ The Exchange notes that the regulatory costs relating to
monitoring Participants with respect to Customer trading activity
are generally higher than the regulatory costs associated with
Participants that do not engage in Customer trading activity, which
tends to be more automated and less labor-intensive. By contrast,
regulating Participants that engage in Customer trading activity is
generally more labor intensive and requires a greater expenditure of
human and technical resources as the Exchange needs to review not
only the trading activity on behalf of Customers, but also the
Participant's relationship with its Customers via more labor-
intensive exam-based programs. As a result, the costs associated
with administering the Customer component of the Exchange's overall
regulatory program are materially higher than the costs associated
with administering the non-Customer component of the regulatory
program.
\41\ See NOM Options 10 Rules.
\42\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
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In contrast, the Options Regulatory Cost of regulating Firm and
Broker-Dealer Transactions is materially less than the Options
Regulatory Costs of regulating Customer transactions, as explained
above. The below chart derived from OCC data reflects the percentage of
transactions by market participant.
[GRAPHIC] [TIFF OMITTED] TN18DE24.072
[[Page 103000]]
With this model, the addition of Firm and Broker-Dealer
Transactions to the collection of ORF does not entail significant
volume when compared to Customer transactions. As these market
participants are more sophisticated, the Exchange notes that there are
not the same protections in place for Firm and Broker-Dealer
Transactions as compared to Customer transactions. Therefore, with the
proposed model, the regulation of Firm and Broker-Dealer Transactions
is less resource intensive than the regulation of Customer
transactions. However, the Exchange notes that it appears from the new
regression model and assumptions in the proposal, that unlike Customer
transactions, the regulation of Firm and Broker-Dealer Transactions
occurs both on the Exchange and across options markets. To that end,
the Exchange proposes to assess Firm and Broker-Dealer Transactions
both a Local ORF and an Away ORF in contrast to Customer transactions
that would only be assessed a Local ORF. The Exchange believes that not
assessing Market Maker transactions an ORF permits these market
participants to utilize their resources to quote tighter in the market.
Tighter quotes benefits Customers as well as other market participants
who interact with that liquidity.
The Exchange's proposal to establish both a Local ORF Rate and an
Away ORF Rate and allocate the portion of Options Regulatory Cost
differently between the two separate rates, by market participant,
ensures that the Local ORF Rate and Away ORF Rate reflect the amount of
Options Regulatory Costs associated with different types of
surveillances and are reasonable, equitable and not unfairly
discriminatory. The Exchange is responsible for regulating activity on
its market as well as activity that may occur across options markets.
The Exchange believes that it is reasonable, equitable and not unfairly
discriminatory to assess only Firm and Broker-Dealer Transactions an
Away ORF. With this model, while the regulation of Firm and Broker-
Dealer Transactions is less resource intensive than the regulation of
Customer transactions, it occurs both on the Exchange and across
options markets.\43\ The Exchange believes that assessing the Firm and
Broker-Dealer Transactions the same rate for Local ORF and Away ORF is
appropriate given the lower volume that is attributed to these
Participants combined with the activity that is required to be
regulated both on the Exchange and across options markets. The Exchange
notes that there are Exchange rules that involve cross market
surveillances that relate to activities conducted by Firm and Broker-
Dealer Participants.\44\ While not large in number, when compared to
the overall number of Exchange rules that are surveilled by NOM for on-
Exchange activity, the Away ORF that would be assessed to Firm and
Broker-Dealer regulation would account for those costs. Additionally,
the Exchange believes that limiting the amount of ORF assessed for
activity that occurs on non-NOM exchanges avoids overlapping ORFs that
would otherwise be assessed by NOM and other options exchanges that
also assess an ORF. Also, the Exchange's proposal continues to ensure
that Options Regulatory Revenue, in combination with other regulatory
fees and fines, does not exceed Options Regulatory Costs. Fines
collected by the Exchange in connection with a disciplinary matter will
continue to offset Options Regulatory Cost.
---------------------------------------------------------------------------
\43\ NOM pays the Financial Industry Regulatory Authority
(``FINRA'') to perform certain cross-market surveillances on its
behalf. In order to perform cross-market surveillances, Consolidated
Audit Trail (``CAT'') data is utilized to match options transactions
to underlying equity transactions. This review is data intensive
given the volumes of information that are being reviewed and
analyzed.
\44\ NOM conducts surveillances and enforces NOM Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some NOM
trading rules are automatically enforced by NOM's System.
---------------------------------------------------------------------------
Capping the combined amount of Local ORF and Away ORF collected at
88% of Options Regulatory Cost commencing January 1, 2025, is
reasonable, equitable and not unfairly discriminatory as given these
factors. The Exchange will review the ORF Regulatory Revenue at the end
of January 2025 and would amend the ORF if it finds that its ORF
Regulatory Revenue exceeds its projections.\45\
---------------------------------------------------------------------------
\45\ NOM would submit a rule change to the Commission to amend
ORF rates.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on intra-market competition not necessary or
appropriate in furtherance of the purposes of the Act.
The proposed changes to ORF do not impose an undue burden on inter-
market competition because ORF is a regulatory fee that supports
regulation in furtherance of the purposes of the Act. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. The Exchange is obligated to ensure that the amount
of ORF Regulatory Revenue, in combination with its other regulatory
fees and fines, does not exceed ORF Regulatory Cost.
Proposal for November 1, 2024, Through December 31, 2024
The Exchange's proposal to reduce its ORF from $0.0016 to $0.0014
per contract side from November 1, 2024, through December 31, 2024,
does not create an unnecessary or inappropriate burden on intra-market
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.
Proposal for January 1, 2025
Excluding Market Makers does not impose an undue burden on intra-
market competition because, unlike other market participants, Market
Makers have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Market Makers are required
to quote intra-day.\46\ Further, unlike other market participants,
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.\47\ Market Makers are critical market
participants in that they are the only market participants that are
required to provide liquidity to NOM and are necessary for opening the
market. Excluding Market Maker transactions from ORF does not impose an
intra-market burden on competition, rather it allows these market
participants to manage their costs and consequently their business
model more effectively thus enabling them to better allocate resources
to other technologies that are necessary to manage risk and capacity to
ensure that these market participants continue to compete effectively
on NOM in providing tight displayed quotes which in turn benefits
markets generally and market participants specifically. Finally, the
Exchange notes that Market Makers may transact orders on the Exchange,
in addition to submitting quotes. The Exchange's proposal to except
orders
[[Page 103001]]
submitted by Market Makers, in addition to quotes, for purposes of ORF
does not impose an undue burden on intra-market competition because
Market Makers utilize orders in their assigned options series to sweep
the order book. Further, the Exchange believes the quantity of orders
utilized by Market Makers in their assigned series is de minimis. In
their unassigned options series, Market Makers utilize orders to hedge
their risk or respond to auction. The Exchange notes that the number of
orders submitted by Market Makers in their unassigned options series
are far below the cap \48\ and therefore de minimis.
---------------------------------------------------------------------------
\46\ See Options 2, Section 5(d).
\47\ See NOM Options 2, Section 4(a)(3) and (5).
\48\ See NOM Options 2, Section 6(b). The total number of
contracts executed by a Market Maker in options in which it is not
registered as a Market Maker shall not exceed 25 percent of the
total number of all contracts executed by the Market Maker in any
calendar quarter.
---------------------------------------------------------------------------
Uniformly excluding options transactions in proprietary products
from ORF for all NOM Participants does not impose an undue burden on
intra-market competition. The Exchange believes that only exchanges
that list proprietary products should be able to collect a Local ORF
for those products. There are a small number of proprietary products
transacted as compared to multi-list options. Also, proprietary
products are transacted on a limited number of options exchanges and
would require a de minimis amount of cross market surveillance, for
these reasons the Exchange believes that only a Local ORF should be
applied to the extent that NOM were to list a proprietary product.
NOM's focus is on surveillance related to multi-listed options. Should
NOM list a proprietary product in the future, NOM would amend its ORF
to collect a Local ORF on that proprietary product.
The Exchange's proposal to expand the clearing ranges to
specifically include Firm and Broker-Dealer Transactions, in addition
to Customer and Professional transactions, as of January 1, 2025, does
not impose an undue burden on intra-market competition as Customer
transactions account for a material portion of NOM's Options Regulatory
Cost.\49\ Customer transactions in combination with Firm and Broker-
Dealer Transactions account for a large portion of the Exchange's
surveillance expense. With respect to Customer transactions, options
volume continues to surpass volume from other options participants.
Additionally, there are rules in the Exchange's Rulebook that deal
exclusively with Customer transactions, such as rules involving doing
business with a Customer, which would not apply to Firm and Broker-
Dealer Transactions.\50\ For these reasons, regulating Customer trading
activity is ``much more labor-intensive'' and therefore, more costly.
Further, the Exchange believes that a large portion of the Options
Regulatory Cost relates to Customer allocation because obtaining
Customer information may be more time intensive. For example, non-
Customer market participants are subject to various regulatory and
reporting requirements which provides the Exchange certain data with
respect to these market participants. In contrast, Customer information
is known by Participants of the Exchange and is not readily available
to NOM.\51\ The Exchange may have to take additional steps to
understand the facts surrounding particular trades involving a Customer
which may require requesting such information from a broker-dealer.
Further, Customers require more Exchange regulatory services based on
the amount of options business they conduct. For example, there are
Options Regulatory Costs associated with main office and branch office
examinations (e.g., staff expenses), as well as investigations into
Customer complaints and the terminations of registered persons. As a
result, the Options Regulatory Costs associated with administering the
Customer component of the Exchange's overall regulatory program are
materially higher than the Options Regulatory Costs associated with
administering the non-Customer component when coupled with the amount
of volume attributed to such Customer transactions. Not attributing
significant Options Regulatory Costs to Customers for activity that may
occur across options markets does not impose an undue burden on intra-
market competition because the data in the regression model
demonstrates that NOM's Customer regulation occurs to a large extent on
Exchange.
---------------------------------------------------------------------------
\49\ The Exchange notes that the regulatory costs relating to
monitoring Participants with respect to Customer trading activity
are generally higher than the regulatory costs associated with
Participants that do not engage in Customer trading activity, which
tends to be more automated and less labor-intensive. By contrast,
regulating Participants that engage in Customer trading activity is
generally more labor intensive and requires a greater expenditure of
human and technical resources as the Exchange needs to review not
only the trading activity on behalf of Customers, but also the
Participant's relationship with its Customers via more labor-
intensive exam-based programs. As a result, the costs associated
with administering the Customer component of the Exchange's overall
regulatory program are materially higher than the costs associated
with administering the non-Customer component of the regulatory
program.
\50\ See NOM Options 10 Rules.
\51\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
---------------------------------------------------------------------------
The Exchange believes that assessing Firm and Broker-Dealer
Transactions a different ORF and assessing both a Local ORF and an Away
ORF to these transactions does not impose an undue burden on intra-
market competition because the regulation of Firm and Broker-Dealer
Transactions is less resource intensive than the regulation of Customer
transactions. With this model, the addition of Firm and Broker-Dealer
Transactions to the collection of ORF does not entail significant
volume when compared to Customer transactions. Unlike Customer
transactions, the regulation of Firm and Broker-Dealer Transactions
occurs both on the Exchange and across options markets. To that end,
the Exchange proposes to assess Firm and Broker-Dealer Transactions
both a Local ORF and an Away ORF.
The Exchange's proposal to allocate the portion of costs
differently between the Local ORF and Away ORF does not create an undue
burden on intra-market competition. The Exchange believes that each
rate reflects the amount of Options Regulatory Costs associated with
different types of surveillances and does not create an undue burden on
competition as NOM Participants, excluding except Market Makers, would
be uniformly assessed either a Local ORF Rate or an Away ORF Rate
depending on where the transaction occurred and whether the transaction
was executed or cleared by an NOM Participant. Also, the Exchange would
uniformly assess the Local ORF Rate and an Away ORF Rate by market
participant. The Exchange is responsible for regulating activity on its
market as well as activity that may occur across options markets.
The Exchange believes that assessing only Firm and Broker-Dealer
Transactions an Away ORF does not create an undue burden on intra-
market competition because while the regulation of Firm and Broker-
Dealer Transactions is less resource intensive than the regulation of
Customer transactions, the regulation of Firm and Broker-Dealer
Transactions occurs both on the Exchange and across options
markets.\52\ The Exchange believes that assessing Firm and Broker-
Dealer Transactions the same rate for Local ORF and Away ORF is
appropriate
[[Page 103002]]
given the lower volume that is attributed to these Participants
combined with the activity that is required to be regulated both on the
Exchange and across options markets. There are Exchange rules that
involve cross market surveillances that relate to activities conducted
by Firm and Broker-Dealer Participants.\53\ While not large in number,
when compared to the overall number of Exchange rules that are
surveilled by NOM for on-Exchange activity, the Away ORF that would be
assessed to Firm and Broker-Dealer Transactions would account for those
Options Regulatory Costs. Additionally, the Exchange believes that
limiting the amount of ORF assessed for activity that occurs on non-NOM
exchanges does not impose a burden on intra-market competition, rather
it avoids overlapping ORFs that would otherwise be assessed by NOM and
other options exchanges that also assess an ORF. With this model,
Customer transactions would be assessed a higher Local ORF, while not
being assessed an Away ORF as compared to Firm and Broker-Dealer
Transactions. The Exchange believes that this difference in allocation
is appropriate and correlates to the degree of regulatory
responsibility and Options Regulatory Costs borne by different
Participants of the Exchange in light of the volume different
Participants transact on the Exchange.
---------------------------------------------------------------------------
\52\ NOM pays the Financial Industry Regulatory Authority
(``FINRA'') to perform certain cross-market surveillances on its
behalf. In order to perform cross-market surveillances, Consolidated
Audit Trail (``CAT'') data is utilized to match options transactions
to underlying equity transactions. This review is data intensive
given the volumes of information that are being reviewed and
analyzed.
\53\ NOM conducts surveillances and enforces NOM Rules, however
only a subset of those rules is subject to cross-market
surveillance, such as margin and position limits. Of note, some NOM
trading rules are automatically enforced by NOM's System.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \54\ and Rule 19b-4(f)(2) \55\ thereunder.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78s(b)(3)(A)(ii).
\55\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NASDAQ-2024-078 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-2024-078. 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-NASDAQ-2024-078 and should
be submitted on or before January 8, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
---------------------------------------------------------------------------
\56\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29921 Filed 12-17-24; 8:45 am]
BILLING CODE 8011-01-P