[Federal Register Volume 89, Number 216 (Thursday, November 7, 2024)]
[Notices]
[Pages 88332-88335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25836]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101501; File No. SR-GEMX-2024-39]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Increase the 
Exchange's SQF Fees in Options 7, Section 6.C

November 1, 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 October 18, 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 increase the Exchange's port fees in 
Options 7, Section 6.C. While these amendments are effective upon 
filing, the Exchange has designated the proposed amendments to be 
operative on January 1, 2025.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/gemx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to increase the 
Exchange's connectivity fees in Options 7, Section 6.C for the 
Specialized Quote Feed (``SQF'') Ports \3\ and SQF Purge Ports \4\ by 
10%.
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    \3\ ``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. 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.
    \4\ The SQF Purge Interface only receives and notifies of purge 
requests from the Market Maker. See Supplementary Material .03(c) to 
Options 3, Section 7.
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    Options 7, Section 6.C(i) includes the Exchange's fees that relate 
to the SQF Ports and SQF Purge Ports that Market Makers \5\ use to 
connect to the Exchange. Today, the Exchange assesses all Market Makers 
an SQF Port fee of $1,250 per port per month and an SQF Purge Port Fee 
of $1,250 per port per month. In addition, the SQF and the SQF Purge 
Ports are currently subject to a monthly cap (``SQF Fee Cap'') of 
$17,500, which is applicable to Market Makers. The Exchange now 
proposes to increase the foregoing pricing by 10%. As amended, the SQF 
Port and SQF Purge Port fees would each become $1,375 per port per 
month. The amended SQF Fee Cap would likewise increase by 10% to 
$19,250.
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    \5\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Options 1, 
Section 1(a)(21).
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    The proposed pricing increases would enable the Exchange to 
maintain and improve its market technology and services to remain 
competitive with its peers. Over the years, customer demand for risk 
protections and capacity has increased. The Exchange continues to 
invest in maintaining, improving, and enhancing its protocols like SQF 
Ports and SQF Purge Ports for the benefit and often at the behest of 
its customers. Such enhancements include refreshing hardware, upgrading 
risk protections and information security, and offering customers 
additional capacity. Nevertheless, the Exchange has not increased the 
fees for SQF Ports and SQF Purge Ports, or the SQF Fee Cap, since 2017 
\6\ (where inflation has been roughly 15%, as measured using the metric 
described below).\7\ Nevertheless, the Exchange proposes to increase 
its SQF and SQF Purge Port fees by only 10%. Further, the Exchange 
proposes to increase the SQF Fee Cap by 10% to align with the foregoing 
fee increases.
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    \6\ See Securities Exchange Act Release No. 80808 (May 30, 
2017), 82 FR 25894 (June 5, 2017) (SR-GEMX-2017-20) (adopting the 
subject fees). The Exchange subsequently increased the monthly cap 
in October 2017. See Securities Exchange Act Release No. 81881 
(October 16, 2017), 82 FR 48869 (October 20, 2017) (SR-GEMX-2017-
44).
    \7\ In particular, the Exchange saw an increase of around 14.6%-
14.8% in inflation within the specified time periods discussed 
below.
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    As discussed below, the Exchange proposes to adjust its pricing by 
an industry- and product-specific inflationary measure. It is 
reasonable and consistent with the Act for the Exchange to recoup its 
investments, at least in part, by adjusting its pricing. Continuing to 
operate at pricing frozen at 2017 levels impacts the Exchange's ability 
to enhance its offerings and the interests of market participants and 
investors.
    The pricing increases the Exchange proposes are based on an 
industry-specific Producer Price Index (``PPI''), which is a tailored 
measure of inflation.\8\ As a general matter, the Producer Price Index 
is a family of indexes that measures the average change over time in 
selling prices received by domestic producers of goods and services. 
PPI measures price change from the perspective of the seller. This 
contrasts with other metrics, such as the Consumer Price Index 
(``CPI''), that measure price change from the purchaser's 
perspective.\9\ About 10,000 PPIs for individual products and groups of 
products are tracked and released each month.\10\ PPIs are available 
for the output of nearly all industries in the goods-producing sectors 
of the U.S. economy--mining, manufacturing, agriculture, fishing, and 
forestry--as well as natural gas,

[[Page 88333]]

electricity, and construction, among others. The PPI program covers 
approximately 69 percent of the service sector's output, as measured by 
revenue reported in the 2017 Economic Census.
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    \8\ See https://data.bls.gov/timeseries/PCU5182105182105.
    \9\ See https://www.bls.gov/ppi/overview.htm.
    \10\ See id.
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    For purposes of this proposal, the relevant industry-specific PPI 
is the Hosting, Active Server Pages, and Other IT Infrastructure 
Provisioning Services (``Data PPI'') within the Data Processing and 
Related Services Industry, which is an industry net-output PPI that 
measures the average change in selling prices received by companies 
that provide data processing services.
    The Data Processing and Related Services Industry was introduced to 
the PPI in January 2002 by the Bureau of Labor Statistics (``BLS'') as 
part of an ongoing effort to expand Producer Price Index coverage of 
the services sector of the U.S. economy and is identified as NAICS--
518210 in the North American Industry Classification System.\11\ 
According to the BLS ``[t]he primary output of NAICS 518210 is the 
provision of electronic data processing services. In the broadest 
sense, computer services companies help their customers efficiently use 
technology. The processing services market consists of vendors who use 
their own computer systems--often utilizing proprietary software--to 
process customers' transactions and data. Companies that offer 
processing services collect, organize, and store a customer's 
transactions and other data for record-keeping purposes. Price 
movements for the NAICS 518210 index are based on changes in the 
revenue received by companies that provide data processing services. 
Each month, companies provide net transaction prices for a specified 
service. The transaction is an actual contract selected by probability, 
where the price-determining characteristics are held constant while the 
service is repriced. The prices used in index calculation are the 
actual prices billed for the selected service contract.'' \12\
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    \11\ See https://data.bls.gov/timeseries/PCU5182105182105.
    \12\ See https://www.bls.gov/ppi/factsheets/producer-price-index-for-the-data-processing-and-related-servicesindustry-naics-518210.htm.
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    The Exchange believes the Data PPI is the most appropriate subset 
of the Data Processing and Related Services Industry to be considered 
in the context of the proposed pricing changes because the Exchange 
uses its ``own computer systems'' and ``proprietary software,'' i.e., 
its own data center and proprietary matching engine software, 
respectively, to receive options quotes on the Exchange's proprietary 
trading platform.
    For purposes of this proposed rule change, the Exchange examined 
the Data PPI value for the period from May 2017 to August 2024 (when 
the subject pricing was first adopted), and from October 2017 to August 
2024 (when the Exchange increased the fee cap). The Data PPI had a 
starting value of 101.4 in May 2017 and an ending value of 116.445 in 
August 2024, a 14.8% increase. Further, the Data PPI had a starting 
value of 101.6 in October 2017 and an ending value of 116.445 in August 
2024, a 14.6% increase. This data indicates that companies who are also 
in the data storage and processing business have generally increased 
prices for a specified service covered under NAICS 518210 by an average 
of 14.6% (during the period from October 2017 to August 2024) and 14.8% 
(during the period from May 2017 to August 2024). Based on that 
percentage change, the Exchange proposes to make a one-time fee 
increase of only 10%, which reflects an increase covering roughly the 
entire period since the last price adjustments were made to the SQF 
Port fee, the SQF Purge Port fee, and the related SQF Fee Cap.
    The Exchange further believes the Data PPI is an appropriate 
measure for purposes of the proposed rule change on the basis that it 
is a stable metric with limited volatility, unlike other consumer-side 
inflation metrics. In fact, the Data PPI has not experienced a greater 
than 2.16% increase for any one calendar year period since Data PPI was 
introduced into the PPI in January 2002. The average calendar year 
change from January 2002 to December 2023 was .62%, with a cumulative 
increase of 15.67% over this 21-year period. The Exchange believes the 
Data PPI is considerably less volatile than other inflation metrics 
such as CPI, which has had individual calendar-year increases of more 
than 6.5%, and a cumulative increase of over 73% over the same 
period.\13\
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    \13\ See https://www.usinflationcalculator.com/.
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    The Exchange believes the Data PPI, and significant investments 
into, and enhanced performance of, the Exchange support the 
reasonableness of the proposed pricing increases.\14\
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    \14\ See supra discussion of SQF Port and SQF Purge Port 
enhancements. Additionally, other exchanges have filed for increases 
in certain fees, based in part on comparisons to inflation. See, 
e.g., Securities Exchange Act Release Nos. 34-100004 (April 22, 
2024), 89 FR 32465 (April 26, 2024) (SR-CboeBYX-2024-012); and 34-
100398 (June 21, 2024), 89 FR 53676 (June 27, 2024) (SR-BOX-2024-
16)l; Securities Exchange Act Release No. 34-100994 (September 10, 
2024), 89 FR 75612 (September 16, 2024) (SR-NYSEARCA-2024-79).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ 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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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4) and (5).
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    This belief is based on two factors. First, the current pricing 
does not properly reflect the quality of the SQF and SQF Purge Ports, 
as fees for these offerings have been static in nominal terms, and 
therefore falling in real terms due to inflation. Second, the Exchange 
believes that investments made in enhancing the risk protections and 
capacity of SQF and SQF Purge Ports has increased the performance of 
these offerings.
The Proposed Rule Change Is Reasonable
    As noted above, the Exchange has not increased any of the fees 
included in the proposal since 2017. However, in the years following 
the last fee increases, the Exchange has made significant investments 
in upgrades to its SQF Ports and SQF Purge Ports, enhancing the quality 
of its services, as measured by, among other things, increased 
capacity. In other words, Exchange customers have greatly benefitted, 
while the Exchange's ability to recoup its investments has been 
hampered. Between 2017 and 2024, the inflation rate is 3.66% per year, 
on average, producing a cumulative inflation rate of 28.63%.\17\ Using 
the more targeted inflation number of Data PPI, the cumulative 
inflation rate was roughly 15% (i.e., 14.6% during the period from 
October 2017 to August 2024 and 14.8% during the period from May 2017 
to August 2024). The Exchange believes the Data PPI is a reasonable 
metric to base this fee increase on because it is targeted to producer-
side increases in the data processing industry, which based on the 
definition adopted by BLS would include the Exchange's port offerings.
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    \17\ See https://www.officialdata.org/us/inflation/2017?amount=1.
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    Notwithstanding inflation, as noted above, the Exchange has not 
increased its fees at all for seven years for the SQF and SQF Purge 
Ports, or the corresponding SQF Fee Cap. The proposed pricing changes 
represent a

[[Page 88334]]

modest increase from the current fees and related cap. The Exchange 
believes the proposed fee increases are reasonable in light of the 
Exchange's continued expenditure in maintaining a robust technology 
ecosystem. Furthermore, the Exchange continues to invest in maintaining 
and enhancing its port products--for the benefit and often at the 
behest of its customers and global investors. Such enhancements include 
refreshing several aspects of the technology ecosystem including 
software, hardware, and network while introducing new and innovative 
products. The goal of the enhancements discussed above, among other 
things, is to provide more modern connectivity to the match engine. 
Accordingly, the Exchange continues to expend resources to innovate and 
modernize its technology so that it may benefit its members in offering 
SQF and SQF Purge Ports.
The Proposed Fees Are Equitably Allocated and Not Unfairly 
Discriminatory
    The Exchange believes that the proposal represents an equitable 
allocation of reasonable dues, fees and other charges because Exchange 
pricing has fallen in real terms during the relevant period. The 
Exchange also believes that the proposed pricing increases are 
equitably allocated and not unfairly discriminatory because they would 
apply uniformly to all Market Makers that subscribe to SQF and SQF 
Purge Ports to quote on the Exchange. Market Makers are the only market 
participants that are assessed SQF Port and SQF Purge Port fees (and 
subject to the related SQF Fee Cap) because they are the only market 
participants that are permitted to quote on the Exchange.\18\ These 
liquidity providers are critical market participants in that they are 
the only market participants that provide liquidity to the Exchange on 
a continuous basis. SQF Ports and SQF Purge Ports are only utilized in 
a Market Maker's assigned options series.
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    \18\ Unlike other market participants, Market Makers are subject 
to market making and quoting obligations. See Options 2, Sections 4 
and 5.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed pricing changes 
will impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes that the proposed pricing does not put any 
market participants at a relative disadvantage compared to other market 
participants. As noted above, the Exchange would apply the proposed 10% 
increase to the SQF Port and SQF Purge Port fees (and related SQF Fee 
Cap) to all Market Makers uniformly. Market Makers are the only market 
participants that are assessed SQF Port and SQF Purge Port fees (and 
subject to the related SQF Fee Cap) because they are the only market 
participants that are permitted to quote on the Exchange. These 
liquidity providers are critical market participants in that they are 
the only market participants that provide liquidity to the Exchange on 
a continuous basis. SQF Ports and SQF Purge Ports are only utilized in 
a Market Maker's assigned options series.
Intermarket Competition
    The Exchange believes that the proposed pricing does not impose an 
undue burden on intermarket competition or on other SROs that is not 
necessary or appropriate. In determining the proposed pricing, the 
Exchange utilized an objective and stable metric with limited 
volatility. Utilizing Data PPI over a specified period of time is a 
reasonable means of recouping the Exchange's investment in maintaining 
and enhancing its port offerings such as the SQF and SQF Purge Ports. 
The Exchange believes utilizing Data PPI, a tailored measure of 
inflation, to increase the fees for the SQF Port and SQF Purge Port 
(and the related SQF Fee Cap) to recoup the Exchange's investment in 
maintaining and enhancing such offerings would not impose a burden on 
intermarket competition.

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

IV. Solicitation of Comments

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

Electronic Comments

    <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#146661787139777b7979717a6067546771773a737b62"><span class="__cf_email__" data-cfemail="6a181f060f47090507070f041e192a190f09440d051c">[email protected]</span></a>. Please include 
file number SR-GEMX-2024-39 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-2024-39. 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-2024-39 and should be 
submitted on or before November 29, 2024.


[[Page 88335]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25836 Filed 11-6-24; 8:45 am]
BILLING CODE 8011-01-P


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