```

[Federal Register Volume 89, Number 242 (Tuesday, December 17, 2024)]
[Notices]
[Pages 102199-102207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29625]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101878; File No. SR-BX-2024-054]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt a New 
Approach to the Options Regulatory Fee (ORF) in 2025

December 11, 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 December 9, 2024, Nasdaq BX, Inc. (``BX'' 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 its Pricing Schedule at Options 7, 
Section 5, Options Regulatory Fee.\3\
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    \3\ On October 31, 2024, SR-BX-2024-040 was filed to amend ORF. 
On December 9, 2024, SR-BX-2024-040 was withdrawn and this rule 
change was filed. The current proposal amends the ORF Rate for Local 
Customer ``C'' Origin Code transactions executed on BX, Local Firm 
``F'' Origin Code transactions executed on BX, and Away ORF Rate 
Firm ``F'' Origin Code multi-list transactions executed on non-BX 
exchanges.
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    While the changes proposed herein are effective upon filing, the 
Exchange has designated the 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/bx/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
    BX proposes to amend its current ORF in several respects. BX 
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, BX will assess a 
different rate for trades executed on BX (``Local ORF Rate'') and 
trades executed on non-BX exchanges (``Away ORF Rate'').
Background on Current ORF
    Today, BX assesses its ORF for each Customer \4\ option transaction 
that is

[[Page 102200]]

either: (1) executed by a Participant \5\ on BX; or (2) cleared by a BX 
Participant at OCC in the Customer range,\6\ even if the transaction 
was executed by a non-member of BX, regardless of the exchange on which 
the transaction occurs.\7\ If the OCC clearing member is a BX 
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 BX Participant, ORF is collected only on the 
cleared Customer contracts executed at BX, taking into account any CMTA 
instructions which may result in collecting the ORF from a non-
member.\9\ The current BX ORF is $0.0005 per contract side.
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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 13 and 14 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 BX Options as a ``BX Options Order Entry Firm'' 
or ``BX Options Market Maker.'' See Options 1, Section 1(a)(40).
    \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 BX 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 
BX from Broker A's clearing account at OCC via direct debit. While 
this transaction was executed on a market other than BX, it was 
cleared by a BX Participant in the member's OCC clearing account in 
the Customer range, therefore there is a regulatory nexus between BX 
and the transaction. If Broker A was not a BX Participant, then no 
ORF should be assessed and collected because there is no nexus; the 
transaction did not execute on BX nor was it cleared by a BX 
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 BX and a non-member clears the transaction, the ORF will 
be assessed to the Participant that executed the transaction on BX 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 January 1, 2025
    BX has been reviewing it methodologies for the assessment and 
collection of ORF. As a result of this review, BX proposes to revamp 
the current process of assessing and collecting ORF in various ways. 
Below BX will explain the modelling it performed and the outcomes of 
the modelling which have led the Exchange to propose the below changes.
    Effective January 1, 2025, BX proposes to assess ORF to each BX 
Participant for multi-listed options transactions, excluding options 
transactions in proprietary products,\12\ cleared by OCC in all 
clearing ranges except market makers who clear as ``M'' at OCC 
(``Market Makers'') \13\ where: (1) the execution occurs on BX or (2) 
the execution occurs on another exchange and is cleared by a BX 
Participant. With this change, BX proposes to amend its current ORF to 
assess ORF on Customer,\14\ Professional,\15\ Firm \16\ and Broker-
Dealer \17\ transactions. All market participants, except Market 
Makers, would be subject to ORF.
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    \12\ Proprietary products are products with intellectual 
property rights that are not multi-listed. BX has no proprietary 
products.
    \13\ Capacity ``M'' covers Market Makers registered on BX and 
market makers registered at non-BX exchanges.
    \14\ 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)(48)). See Options 7, Section 1(a).
    \15\ 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)(48). All Professional orders shall be 
appropriately marked by Participants. See Options 7, Section 1(a).
    \16\ 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).
    \17\ 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 BX from (1) BX 
clearing members for all Customer, Professional, Firm and Broker-Dealer 
transactions they clear or (2) non-members for all

[[Page 102201]]

Customer, Professional, Firm and Broker-Dealer transactions they clear 
that were executed on BX. This model collects ORF where there is a 
nexus with BX 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 BX (``Local ORF 
Rate'') and trades executed on non-BX exchanges (``Away ORF Rate'') by 
market participants. 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. BX 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.
    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.\18\ To that end, the Exchange plotted Customer volumes from 
each exchange \19\ 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.\20\ The Exchange considered using non-linear 
models, but concluded that the best R[supcaret]2 (``R-Squared'') \21\ 
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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    \18\ 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.
    \19\ The Exchange utilized data from all Nasdaq affiliated 
options exchanges to create this model from 2023 Q3 through 2024 Q2 
(``Time Period'').
    \20\ The Exchange utilized data from 2023 Q1 to 2024 Q3 to 
calculate the slope and intercept.
    \21\ 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] TN17DE24.076

    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.\22\
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    \22\ 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

[[Page 102202]]

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 \23\ 
and certain indirect expenses in support of the regulatory 
function.\24\
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    \23\ 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.
    \24\ 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 ($0.0005 per contract side) that was in effect 
prior to this rule change.\25\
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    \25\ 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.\26\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\27\ 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) \28\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(4).
    \28\ 15 U.S.C. 78f(b)(5).
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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 BX Participant or 
cleared by an BX Participant. With this amendment, BX would begin to 
assess Firm and Broker-Dealer Transactions an ORF, provided the 
transactions were executed by a BX Participant or cleared by a BX 
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. Lead Market Makers are 
obligated to quote intra-day.\29\ Additionally, Market Makers are 
required to quote intra-day.\30\ Further, unlike other market 
participants, Lead Market Makers and Market Makers have obligations to 
compete with other Market Makers to improve the market in all series of 
options classes to which the Market Maker is appointed and to update 
market quotations in response to changed market conditions in all 
series of options classes to which the Market Maker is appointed.\31\ 
Lead Market Makers and Market Makers are critical market participants 
in that they are the only market participants that are required to 
provide liquidity to BX 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 BX in providing tight displayed quotes which in turn benefits 
markets generally and market participants specifically. Finally, the 
Exchange notes that Market Makers may

[[Page 102203]]

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 \32\ and therefore de 
minimis.
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    \29\ See BX Options 2, Section 4(j).
    \30\ See BX Options 2, Section 5(d).
    \31\ See BX Options 2, Section 4(a)(3) and (5).
    \32\ See BX 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 BX 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. BX notes that there are 
a small number of proprietary products transacted as compared to multi-
list options. BX's focus is on surveillance related to multi-listed 
options. Should BX list a proprietary product in the future, BX 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 
BX's Options Regulatory Cost.\33\ 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.\34\ 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 BX.\35\ 
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 BX'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.
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    \33\ 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.
    \34\ See BX Options 10 Rules.
    \35\ 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.

[[Page 102204]]

[GRAPHIC] [TIFF OMITTED] TN17DE24.077

    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.\36\ 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.\37\ While not large in number, when compared to 
the overall number of Exchange rules that are surveilled by BX 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-BX exchanges avoids overlapping ORFs that 
would otherwise be assessed by BX 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.
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    \36\ BX 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.
    \37\ BX conducts surveillances and enforces BX Rules, however 
only a subset of those rules is subject to cross-market 
surveillance, such as margin and position limits. Of note, some BX 
trading rules are automatically enforced by BX's System.
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    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.\38\
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    \38\ BX would submit a rule change to the Commission to amend 
ORF rates.
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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-

[[Page 102205]]

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 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. Lead Market Makers are 
obligated to quote intra-day.\39\ Additionally, Market Makers are 
required to quote intra-day.\40\ Further, unlike other market 
participants, Lead Market Makers and Market Makers have obligations to 
compete with other Market Makers to improve the market in all series of 
options classes to which the Market Maker is appointed and to update 
market quotations in response to changed market conditions in all 
series of options classes to which the Market Maker is appointed.\41\ 
Lead Market Makers and Market Makers are critical market participants 
in that they are the only market participants that are required to 
provide liquidity to BX 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 BX 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 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 \42\ and therefore de 
minimis.
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    \39\ See BX Options 2, Section 4(j).
    \40\ See BX Options 2, Section 5(d).
    \41\ See BX Options 2, Section 4(a)(3) and (5).
    \42\ See BX 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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    Uniformly excluding options transactions in proprietary products 
from ORF for all BX 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 BX were to list a proprietary product. BX's 
focus is on surveillance related to multi-listed options. Should BX 
list a proprietary product in the future, BX 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 BX's Options Regulatory 
Cost.\43\ 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.\44\ 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 BX.\45\ 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 BX's Customer regulation occurs to a large extent on 
Exchange.
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    \43\ 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.
    \44\ See BX Options 10 Rules.
    \45\ The Know Your Customer or ``KYC'' provision is the 
obligation of the broker-dealer.
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    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

[[Page 102206]]

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 BX 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 BX 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.\46\ The Exchange believes that assessing 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. There are 
Exchange rules that involve cross market surveillances that relate to 
activities conducted by Firm and Broker-Dealer Participants.\47\ While 
not large in number, when compared to the overall number of Exchange 
rules that are surveilled by BX 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-BX exchanges does not impose a burden on intra-market 
competition, rather it avoids overlapping ORFs that would otherwise be 
assessed by BX 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.
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    \46\ BX 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.
    \47\ BX conducts surveillances and enforces BX Rules, however 
only a subset of those rules is subject to cross-market 
surveillance, such as margin and position limits. Of note, some BX 
trading rules are automatically enforced by BX's System.
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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 \48\ and Rule 19b-4(f)(2) \49\ thereunder.
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    \48\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \49\ 17 CFR 240.19b-4(f)(2).
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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 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-BX-2024-054 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-BX-2024-054. 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-BX-2024-054 and should be 
submitted on or before January 7, 2025.
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    \50\ 17 CFR 200.30-3(a)(12).

[[Page 102207]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29625 Filed 12-16-24; 8:45 am]
BILLING CODE 8011-01-P
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