Document ID: SEC-2017-1105-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq GEMX, LLC
Posted Date: 2017-06-30T04:00Z

[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Notices]
[Pages 29968-29970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13708]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81023; File No. SR-GEMX-2017-25]

Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to the 
Non-Priority Customer License Surcharge

June 26, 2017.
    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 June 12, 2017, 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 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 apply the Non-Priority Customer license 
surcharge set forth in Section I of the Schedule of Fees to orders that 
are routed to away markets.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, 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 apply the Non-
Priority Customer (i.e., Market Maker,\3\ Non-Nasdaq GEMX Market 
Maker,\4\ Firm Proprietary \5\/Broker-Dealer,\6\ and Professional 
Customer \7\) license surcharge set forth in Section I of the Schedule 
of Fees to NDX \8\ orders that are routed to one or more exchanges in 
connection with the Options Order Protection and Locked/Crossed Market 
Plan (the ``Plan''). The Exchange initially filed the proposed pricing 
changes on June 1, 2017 (SR-GEMX-2017-22). On June 12, 2017, the 
Exchange withdrew that filing and submitted this filing.
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    \3\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Rule 
100(a)(25).
    \4\ A ``Non-Nasdaq GEMX Market Maker'' is a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934, 
as amended, registered in the same options class on another options 
exchange.
    \5\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \6\ A ``Broker-Dealer'' order is an order submitted by a member 
for a broker-dealer account that is not its own proprietary account.
    \7\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer. A ``Priority 
Customer'' is a person or entity that is not a broker/dealer in 
securities, and does not place more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s), as defined in Nasdaq GEMX Rule 100(a)(37A).
    \8\ NDX represents options on the Nasdaq-100 Index traded under 
the symbol NDX (``NDX'').
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    Today, the Exchange charges Non-Priority Customers route-out fees 
for orders in Non-Penny Symbols \9\ that are routed to away markets in 
connection with the Plan. Specifically as set forth in Section II.A of 
the Schedule of Fees, Non-Priority Customer orders pay a route-out fee 
of $0.95 per contract in Non-Penny Symbols. The route-out fees offset 
costs incurred by the Exchange in connection with using unaffiliated 
broker-dealers to access other exchanges for linkage executions. Also 
as set forth in Section I of the Schedule of Fees, the Exchange 
presently charges a $0.25 license surcharge for all Non-Priority 
Customer orders in NDX (``NDX Surcharge''). The NDX Surcharge currently 
applies to all NDX orders executed on the Exchange, but is not applied 
when those orders are routed to away markets in connection with the 
Plan. The Exchange therefore proposes to apply the NDX Surcharge to 
such orders by adding language in note 9 of Section I of the Schedule 
of Fees to state that the NDX Surcharge applies to all NDX executions, 
including executions of NDX orders that are routed to one or more 
exchanges in connection with the Plan. As such, all Non-Priority 
Customer orders in NDX that are routed to away markets would be 
assessed a $0.25 per contract NDX Surcharge and a $0.95 per contract 
route-out fee.
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    \9\ ``Non-Penny Symbols'' are options overlying all symbols that 
are not in the Penny Pilot Program. NDX is a Non-Penny Symbol.
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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 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.'' \12\
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    \12\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\13\ (``NetCoalition'') the D.C. Circuit upheld

[[Page 29969]]

the Commission's use of a market-based approach in evaluating the 
fairness of market data fees against a challenge claiming that Congress 
mandated a cost-based approach.\14\ As the court emphasized, the 
Commission ``intended in Regulation NMS that `market forces, rather 
than regulatory requirements' play a role in determining the market 
data . . . to be made available to investors and at what cost.'' \15\
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    \13\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \14\ See NetCoalition, at 534-535.
    \15\ Id. at 537.
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    Further, ``[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'. . . .'' \16\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \16\ Id. at 539 (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 Exchange believes that its proposal to apply the NDX Surcharge 
to Non-Priority Customer orders in NDX that are routed to away markets 
in connection with the Plan is reasonable and equitable because it 
offsets both the costs associated with executing orders on away markets 
as well as the licensing costs associated with listing and trading NDX. 
The Exchange's route-out fees are presently not calculated to cover the 
licensing costs for NDX. The Exchange notes that a license agreement is 
required to trade NDX regardless of whether the NDX order is executed 
on the Exchange or routed to another exchange in connection with the 
Plan. As such, the Exchange believes that extending the NDX Surcharge 
to NDX orders routed to away markets (in addition to those orders 
executed on the Exchange) is a reasonable and equitable means of 
recovering the costs of the license. Furthermore, the Exchange must pay 
the actual transaction fees charged by the exchange the NDX order is 
routed to, which includes the license surcharge that such exchange 
assesses for NDX orders. The Exchange's route-out fees are currently 
not calculated to cover these license surcharges assessed by other 
exchanges and therefore seeks to recover these costs under this 
proposal. For example, an NDX order that is routed to the Chicago Board 
Options Exchange (``CBOE'') in connection with the Plan would be 
assessed a $0.25 license surcharge by CBOE on top of the actual 
transaction fees CBOE would charge for the NDX order.\17\ The 
Exchange's route-out fees are presently assessed as fixed fees, unlike 
other exchanges, which, in addition to a fixed route-out fee, assess 
the actual transaction fees charged by the exchange the order is routed 
to.\18\
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    \17\ See CBOE's fee schedule, at: https://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf.
    \18\ See, e.g., MIAX Options Fee Schedule, (1) Transaction Fees, 
(c) Fees and Rebates for Customer Orders Routed to Another Options 
Exchange, at: https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Options_Fee_Schedule_05012017.pdf.
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    The Exchange also believes that its proposal is reasonable and 
equitable because Non-Priority Customers would be able to avoid paying 
the NDX Surcharge by sending the Exchange NDX orders to be routed to 
another market and only pay the Exchange's route-out fee. The Exchange 
would, however, still be required to pay all of the actual transaction 
fees (including the license surcharge) charged by the exchange the 
order is routed to. For example, a Non-Priority Customer order in NDX 
that is routed to CBOE today would only be assessed the $0.95 per 
contract route-out fee while the Exchange would pay the $0.25 per 
contract license surcharge on top of the actual transaction fees CBOE 
would charge for the NDX order. The Exchange therefore believes that it 
is reasonable and equitable to assess the NDX Surcharge to NDX orders 
that are routed to other exchanges in order to avoid this scenario.
    Finally, the Exchange believes that the proposed fee change is 
equitable and not unfairly discriminatory because the Exchange will 
apply the same fee to all similarly situated members. In particular, 
the NDX Surcharge would be applied to all Non-Priority Customer orders 
routed to away markets in connection with the Plan. The Exchange 
believes it is equitable and not unfairly discriminatory to assess this 
surcharge on all participants other than Priority Customers because the 
Exchange seeks to encourage Priority Customer order flow and the 
liquidity such order flow brings to the marketplace, which in turn 
benefits 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. 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, or rebate opportunities available at 
other venues to be more favorable. 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.
    In this instance, the proposed application of the NDX Surcharge to 
NDX orders that are routed to one or more exchanges in connection with 
the Plan does not impose a burden on competition because the Exchange's 
execution services are completely voluntary and subject to extensive 
competition from other exchanges. If the changes proposed herein are 
unattractive to market participants, it is likely that the Exchange 
will lose market share as a result. Accordingly, the Exchange does not 
believe that its proposal will impair the ability of members to 
maintain their competitive standing in the financial markets.

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\ and Rule 19b-4(f)(2) \20\ thereunder. 
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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    \19\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \20\ 17 CFR 240.19b-4(f)(2).

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[[Page 29970]]

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-GEMX-2017-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-GEMX-2017-25. 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 Web site (http://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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-GEMX-2017-25 and should be 
submitted on or before July 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13708 Filed 6-29-17; 8:45 am]
 BILLING CODE 8011-01-P