[Federal Register Volume 89, Number 24 (Monday, February 5, 2024)]
[Notices]
[Pages 7762-7765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02158]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99446; File No. SR-GEMX-2024-03]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Options 7, 
Section 6

January 30, 2024.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 16, 2024, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, 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, 
C, Ports and Other Services.\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 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

[[Page 7763]]

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 increase the SQF Port and 
SQF Purge Port monthly cap fee of $17,500 per month to $27,500 per 
month.\7\ The Exchange is not amending the $1,250 per port, per month 
SQF Port and SQF Purge Port. As is the case today, the Exchange would 
not assess a Member an SQF Port or SQF Purge Port fee beyond the 
monthly cap once the Member has exceeded the monthly cap for the 
respective month. Despite increasing the monthly cap for SQF Ports and 
SQF Purge Ports from $17,500 per month to $27,500 per month, the 
Exchange will continue to offer Members the opportunity to cap their 
SQF Port and SQF Purge Port fees so that they would not be assessed 
these fees beyond the cap. Further, a GEMX Market Maker requires only 
one SQF Port to submit quotes in its assigned options series into GEMX. 
A GEMX 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 and SQF Purge Ports to 
organize its business,\8\ only one SQF Port and SQF Purge Port is 
necessary for a Market Maker to fulfill its regulatory quoting 
obligations.\9\
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    \7\ Today, 62% of GEMX Market Makers have capped their SQF Ports 
and SQF Purge Ports on GEMX. The Exchange notes that of the Market 
Makers currently registered on GEMX, there is a mix of size of 
Market Makers that cap.
    \8\ 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.
    \9\ 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,\10\ in general, and furthers the objectives of 
sections 6(b)(4) and 6(b)(5) of the Act,\11\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4) and (5).
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    The proposed pricing change to increase the monthly cap applicable 
to SQF Ports and SQF Purge Ports is reasonable in several respects. As 
a threshold matter, the Exchange is subject to significant competitive 
forces in the market for options securities transaction services that 
constrain its pricing determinations in that market. The fact that this 
market is competitive has long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \12\
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    \12\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \13\
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    \13\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Numerous indicia demonstrate the competitive nature of this market. 
Within this environment, market participants can freely and often do 
shift their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules.
    The proposed pricing change to increase the SQF Port and SQF Purge 
Port monthly cap from $17,500 per month to $27,500 per month is 
reasonable because despite the increase in the monthly cap, the 
Exchange will continue to offer Members the opportunity to cap their 
SQF Port and SQF Purge Port fees so that they would not be assessed 
these fees beyond the cap. Additionally, a GEMX Market Maker requires 
only one SQF Port to submit quotes in its assigned options series into 
GEMX. A GEMX 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 and SQF Purge Ports 
to organize its business,\14\ only one SQF Port and SQF Purge Port is 
necessary for a Market Maker to fulfill its regulatory quoting 
obligations.\15\ Additionally, the

[[Page 7764]]

Exchange believes that the caps are reasonable for two reasons.
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    \14\ For example, a Market Maker or 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.
    \15\ 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.
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    First, SQF Ports are a secure method for Market Makers to submit 
quotes into the Exchange's match engine and for the Exchange to send 
messages related to those quotes to Market Makers. GEMX must manage the 
security and message traffic, among other things, for each port. 
Utilizing the cap to manage a Market Maker's costs while also managing 
the quantity of SQF Ports issued on GEMX has led the Exchange to select 
$27,500 as the amended monthly cap for SQF Ports and SQF Purge Ports. 
By capping the ports at a different level, the Exchange is considering 
the message traffic and message rates associated with the current 
number of outstanding ports and its ability to process messages. The 
ability to have a cap and amend that cap permits the Exchange to scale 
its needs with respect to processing messages in an efficient manner.
    Second, the Exchange notes that multiple ports are not necessary, 
however, to the extent that some Market Makers elect to obtain multiple 
ports, the Exchange is offering to cap their total port cost at $27,500 
per month. GEMX believes the existence of a cap allows for efficiencies 
and permits Market Makers to increase their number of ports beyond the 
cap. The cap levels the playing field by allowing those Market Makers 
that want to obtain a larger number of ports to do so with the 
certainty of a fee cap. Without the cap, GEMX Market Makers may pay 
more to obtain multiple ports on GEMX.
    The Exchange's proposed pricing change to increase the SQF Port and 
SQF Purge Port monthly cap from $17,500 per month to $27,500 per month 
is equitable and not unfairly discriminatory because the Exchange would 
uniformly not assess any Market Makers that exceeded the proposed 
monthly cap any SQF Port and SQF Purge Port fees for that month beyond 
the cap. Market Makers are the only market participants that are 
assessed SQF Port and SQF Purge Port fees because they are the only 
market participants that are permitted to quote on the Exchange. Unlike 
other market participants, Market Makers are subject to market making 
and quoting obligations.\16\ These liquidity providers are critical 
market participants in that they are the only market participants that 
provide liquidity to GEMX on a continuous basis. In addition, the 
Exchange notes that Lead Market Makers are required to submit quotes in 
the Opening Process to open an options series.\17\ Market Makers are 
subject to a number of fees, unlike other market participants. Market 
Makers pay separate Membership Fees,\18\ and CMM Trading Right 
Fees,\19\ in addition to other fees paid by other market participants. 
Providing Market Makers a means to cap their cost related to quoting 
and enabling all Market Makers to acquire SQF Ports and SQF Purge Ports 
at no cost beyond a certain dollar amount enables these market 
participants to provide the necessary liquidity to GEMX at lower costs.
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    \16\ See Options 2, Sections 4 and 5.
    \17\ See Options 3, Section 8.
    \18\ See Options 7, Section 6, A.
    \19\ See Options 7, Section 6, B.
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    In 2022, NYSE Arca, Inc. (``NYSE Arca'') proposed to restructure 
fees relating to OTPs for Market Makers.\20\ In that rule change,\21\ 
NYSE Arca argued that,
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    \20\ See Securities Exchange Act Release No. 95412 (June 23, 
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36). NYSE Arca 
proposed to increase both the monthly fee per Market Maker OTP and 
the number of issues covered by each additional OTP because, among 
other reasons, the number of issues traded on the Exchange has 
increased significantly in recent years.
    \21\ Id at 38788.

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

    Further, NYSE ARCA noted that,\22\
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    \22\ Id at 38790.

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

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

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intermarket Competition
    The proposal does not impose an undue burden on intermarket 
competition. The Exchange believes its proposal remains competitive 
with other options markets who also offer order entry protocols. The 
Exchange notes that it operates in a highly competitive market in which 
market participants can readily favor competing venues if they deem fee 
levels at a particular venue to be excessive. In such an environment, 
the Exchange must continually adjust its fees to remain competitive 
with other exchanges. Because competitors are free to modify their own 
fees in response, and because market participants may readily adjust 
their order routing practices, the Exchange believes that the degree to 
which fee changes in this market may impose any burden on competition 
is extremely limited. Other exchanges have been permitted to amend 
certain costs attributed to Market Makers.\23\ Further, in 2022, MRX 
proposed a

[[Page 7765]]

monthly cap for SQF Ports and SQF Purge Ports of 17,500.\24\ MRX noted 
in its rule change that, ``Only one SQF quote protocol is required for 
an MRX Market Maker to submit quotes into MRX and to meet its 
regulatory requirements.'' \25\
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    \23\ See Securities Exchange Act Release No. 95412 (June 23, 
2022), 87 FR 38786 (June 29, 2022) (SR-NYSEArca-2022-36).
    \24\ See Securities Exchange Act No. 96824(February 7, 2023), 88 
FR 8975 (February 10, 2023) (SR-MRX-2023-05) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Amend MRX Options 
7, Section 6).
    \25\ Id at 8976.
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    If the Commission were to apply a different standard of review this 
proposal than it applied to other exchange fee filings, where Market 
Maker fees were increased and port fee caps were established, it would 
create a burden on competition such that it would impair GEMX's ability 
to compete among other options markets.
Intramarket Competition
    The Exchange's proposed pricing change to increase the SQF Port and 
SQF Purge Port monthly cap from $17,500 per month to $27,500 per month 
does not impose an undue burden on competition because the Exchange 
would uniformly not assess any Market Makers that exceeded the proposed 
monthly cap any SQF Port and SQF Purge Port fees for that month beyond 
the cap. Market Makers are the only market participants that are 
assessed SQF Port and SQF Purge Port fees because they are the only 
market participants that are permitted to quote on the Exchange. Unlike 
other market participants, Market Makers are subject to market making 
and quoting obligations.\26\ These liquidity providers are critical 
market participants in that they are the only market participants that 
provide liquidity to GEMX on a continuous basis. In addition, the 
Exchange notes that Lead Market Makers are required to submit quotes in 
the Opening Process to open an options series.\27\ Market Makers are 
subject to a number of fees, unlike other market participants. Market 
Makers pay separate permit fees,\28\ and Streaming Quote Trader 
Fees,\29\ in addition to other fees paid by other market participants. 
Providing Market Makers a means to cap their cost related to quoting 
and enabling all Market Makers to acquire SQF Ports and SQF Purge Ports 
at no cost beyond a certain dollar amount enables these market 
participants to provide the necessary liquidity to GEMX at lower costs. 
Therefore, because Market Makers fulfill a unique role on the Exchange, 
are the only market participant required to submit quotes as part of 
their obligations to operate on the Exchange, and, in light of that 
role, they are eligible for certain incentives. The proposed SQF Port 
and SQF Purge Fee cap is designed to continue to incent Market Makers 
to quote on GEMX, thereby promoting liquidity, quote competition, and 
trading opportunities.
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    \26\ See Options 2, Sections 4 and 5.
    \27\ See Options 3, Section 8.
    \28\ See Options 7, Section 8, A.
    \29\ See Options 7, Section 8, B.
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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.\30\ 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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    \30\ 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

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d9abacb5bcf4bab6b4b4bcb7adaa99aabcbaf7beb6af"><span class="__cf_email__" data-cfemail="7e0c0b121b531d1113131b100a0d3e0d1b1d50191108">[email protected]</span></a>. Please include 
file number SR-GEMX-2024-03 on the subject line.

Paper Comments

    <bullet> 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-2024-03. 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-2024-03 and should be 
submitted on or before February 26, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02158 Filed 2-2-24; 8:45 am]
BILLING CODE 8011-01-P


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