Document ID: SEC-2023-0859-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq GEMX, LLC
Posted Date: 2023-08-10T04:00Z

[Federal Register Volume 88, Number 153 (Thursday, August 10, 2023)]
[Notices]
[Pages 54381-54384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17103]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98056; File No. SR-GEMX-2023-09]

Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Reduce GEMX's 
Options Regulatory Fee

August 4, 2023.
    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 July 25, 2023, 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 amend GEMX's Pricing Schedule at Options 
7, Section 5 to reduce the GEMX Options Regulatory Fee or ``ORF.''
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on August 1, 
2023.
    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
    GEMX proposes to lower its ORF from $0.0013 to $0.0012 per contract 
side on August 1, 2023. Previously, GEMX lowered or waived its ORF in 
2019, 2021, 2022 and 2023.\3\ After a review of its regulatory revenues 
and regulatory costs, the Exchange proposes to reduce the ORF to ensure 
that revenue collected from the ORF, in combination with other 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs.
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    \3\ See Securities Exchange Act Release No. 85140 (February 14, 
2019), 84 FR 5511 (February 21, 2019) (SR-GEMX-2019-01) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend the Options Regulatory Fee); 92698 (August 18, 2021), 86 FR 
47355 (August 24, 2021) (SR-GEMX-2021-08) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change to Amend GEMX's 
Options Regulatory Fee); 94069 (January 26, 2022), 87 FR 5545 
(February 1, 2022) (SR-GEMX-2022-03) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Reduce GEMX's Options 
Regulatory Fee); and 96598 (January 3, 2023), 88 FR 1308 (January 9, 
2023) (SR-GEMX-2022-14) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Reduce GEMX's Options 
Regulatory Fee).
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    Volumes in the options industry went over 900,000,000 in 2023. GEMX 
has taken measures this year as well as in prior years to lower and 
waive its ORF to ensure that revenue collected from the ORF, in 
combination with other regulatory fees and fines, does not exceed the 
Exchange's total regulatory costs. Despite those prior measures, GEMX 
will need to reduce its ORF again to account for trading volumes in the 
first half of 2023 that were higher than the Exchange forecast for ORF 
assessment purposes, which resulted in the collection of more ORF 
revenues than anticipated in the first half of 2023. At this time, GEMX 
believes that the options volume it experienced in the first half of 
2023 is likely to persist. The anticipated options volume would 
continue to impact GEMX's ORF collection which, in turn, has caused 
GEMX to propose reducing the ORF to ensure that revenue collected from 
the ORF, in combination with other regulatory fees and fines, would not 
exceed the Exchange's total regulatory costs.
Collection of ORF
    GEMX will continue to assess its ORF for each customer option 
transaction that is either: (1) executed by a Member on GEMX; or (2) 
cleared by an GEMX Member at The Options Clearing Corporation (``OCC'') 
in the customer range,\4\ even if the transaction was executed by a 
non-Member of GEMX, regardless of the exchange on which the transaction 
occurs.\5\ If the OCC clearing member is a GEMX Member, ORF is assessed 
and collected on all cleared customer contracts (after adjustment for 
CMTA \6\); and (2) if the OCC clearing member is not a GEMX Member, ORF 
is collected only on the cleared customer contracts executed at GEMX, 
taking into account any CMTA instructions which may result in 
collecting the ORF from a non-Member.\7\
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    \4\ 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 members 
mark orders with the correct account origin code.
    \5\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \6\ 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.
    \7\ By way of example, if Broker A, a GEMX Member, 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 
GEMX from Broker A's clearing account at OCC via direct debit. While 
this transaction was executed on a market other than GEMX, it was 
cleared by a GEMX Member in the member's OCC clearing account in the 
customer range, therefore there is a regulatory nexus between GEMX 
and the transaction. If Broker A was not a GEMX Member, then no ORF 
should be assessed and collected because there is no nexus; the 
transaction did not execute on GEMX nor was it cleared by a GEMX 
Member.
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    In the case where a Member both executes a transaction and clears 
the transaction, the ORF will be assessed to and collected from that 
Member. In the case where a Member executes a transaction and a 
different Member clears the transaction, the ORF will be assessed to 
and collected from the Member who clears the transaction and not the 
Member who executes the transaction. In the case where a non-Member 
executes a transaction at an away market and a Member clears the 
transaction, the ORF will be assessed to and collected from the Member 
who clears the transaction. In the case where a Member executes a 
transaction on GEMX and a non-Member clears the transaction, the ORF 
will be assessed to the Member that executed the transaction on GEMX 
and collected from the non-Member who cleared the transaction. In the 
case where a Member executes a transaction at an away market and a non-
Member clears the transaction, the ORF will not be

[[Page 54382]]

assessed to the Member 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 
Member executing the trade at an away market.
ORF Revenue and Monitoring of ORF
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a 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 ORF.
    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the 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. 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 include support from such areas as Office of the 
General Counsel, technology, and internal audit. Indirect expenses were 
approximately 39% of the total regulatory costs for 2023. Thus, direct 
expenses were approximately 61% of total regulatory costs for 2023.\8\
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    \8\ These numbers are taken from the Exchange's 2023 Regulatory 
Budget.
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    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its Members, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities.
Proposal
    Based on the Exchange's most recent review, the Exchange is 
proposing to reduce the amount of ORF that will be collected by the 
Exchange from $0.0013 per contract side to $0.0012 per contract side. 
The Exchange issued an Options Trader Alert on June 30, 2023 indicating 
the proposed rate change for August 1, 2023.\9\
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    \9\ See Options Trader Alert 2023-15.
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    The proposed reduction is based on current levels of options 
volume. The below table displays monthly total volume for 2023.\10\
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    \10\ Volume data in the table represents numbers of contracts; 
each contract has two sides.

------------------------------------------------------------------------
                  Month                    Total volume   Customer sides
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January 2023............................     919,299,330     802,712,235
February 2023...........................     883,234,837     780,284,838
March 2023..............................   1,052,984,722      915,674991
April 2023..............................     760,808,909     673,183,772
May 2023................................     944,534,205     826,490,407
June 2023 \11\..........................     909,616,267     801,688,960
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    Options volumes remained higher in 2023 with March 2023 exceeding 
1,000,000,000 total contracts, higher than any month in 2022. With 
respect to customer options volume, it also remains high in 2023. There 
can be no assurance that the Exchange's regulatory costs for the 
remainder of 2023 will not differ materially from the Exchange's 
budgeted amount, nor can the Exchange predict with certainty whether 
options volume will remain at the current level going forward. The 
Exchange notes however, that when combined with regulatory fees and 
fines, the revenue that may be generated utilizing an ORF rate of 
$0.0013 per contract side may result in revenue which exceeds the 
Exchange's estimated regulatory costs for 2023 if options volumes 
remain at levels higher than forecasted.
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    \11\ June numbers reflect volumes through June 29, 2023.
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    GEMX lowered its ORF in the beginning of 2023 to account for 
options volume in 2022. The Exchange proposes to reduce its ORF to 
$0.0012 per contract side to ensure that revenue does not exceed the 
Exchange's estimated regulatory costs in 2023. Particularly, the 
Exchange believes that reducing the ORF when combined with all of the 
Exchange's other regulatory fees and fines, would allow the Exchange to 
continue covering a material portion of its regulatory costs, while 
lessening the potential for generating excess revenue that may 
otherwise occur using the rate of $0.0013 per contract side.\12\
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    \12\ The Exchange notes that its regulatory responsibilities 
with respect to Member compliance with options sales practice rules 
have largely been allocated to FINRA under a 17d-2 agreement. The 
ORF is not designed to cover the cost of that options sales practice 
regulation.
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    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. If the 
Exchange determines regulatory revenues may exceed or are projected to 
exceed regulatory costs, the Exchange will adjust the ORF by submitting 
a fee change filing to the Commission and notifying \13\ its Members 
via an Options Trader Alert.\14\ The Exchange is also deleting obsolete 
text in the Exhibit 5 regarding prior ORF rates.
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    \13\ The Exchange provides Members with such notice at least 30 
calendar days prior to the operative date of the change. See Options 
Trader Alert 2023-15.
    \14\ The Exchange notes that in connection with this proposal, 
it provided the Commission confidential details regarding the 
Exchange's projected regulatory revenue, including projected revenue 
from ORF, along with projected regulatory expenses.
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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.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\16\ 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

[[Page 54383]]

facilities. Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) \17\ requirement that the 
rules of an exchange not be 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee as of August 
1, 2023 and the amount of the lower fee will fund a reasonable portion 
of the Exchange's regulatory costs. Moreover, the proposed reduction is 
necessary for the Exchange to avoid collecting revenue, in combination 
with other regulatory fees and fines, that would be in excess of its 
anticipated regulatory costs.
    The Exchange designed the ORF to generate revenues that would be 
less than the amount of the Exchange's regulatory costs to ensure that 
it, in combination with its other regulatory fees and fines, does not 
exceed regulatory costs, which is consistent with the view of the 
Commission that regulatory fees be used for regulatory purposes and not 
to support the Exchange's business operations. As discussed above, 
however, after review of its regulatory costs and regulatory revenues, 
which includes revenues from ORF and other regulatory fees and fines, 
the Exchange determined that absent a reduction in ORF, it may collect 
revenue which would exceed its regulatory costs. Indeed, the Exchange 
notes that when taking into account the potential that recent options 
volume persists, it estimates the ORF may generate revenues that would 
cover more than the approximated Exchange's projected regulatory costs. 
As such, the Exchange believes it's reasonable and appropriate to 
reduce the ORF amount from $0.0013 to $0.0012 per contract side on 
August 1, 2023.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all Members on all 
their transactions that clear in the customer range at OCC.\18\ The 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those Members that require more Exchange regulatory services based on 
the amount of customer options business they conduct. Regulating 
customer trading activity is much more labor intensive and requires 
greater expenditure of human and technical resources than regulating 
non-customer trading activity, which tends to be more automated and 
less labor-intensive. For example, there are costs associated with main 
office and branch office examinations (e.g., staff expenses), as well 
as investigations into customer complaints and the terminations of 
registered persons. As a result, the costs associated with 
administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Member proprietary 
transactions) of its regulatory program. Moreover, the Exchange notes 
that it has broad regulatory responsibilities with respect to 
activities of its Members, irrespective of where their transactions 
take place. Many of the Exchange's surveillance programs for customer 
trading activity may require the Exchange to look at activity across 
all markets, such as reviews related to position limit violations and 
manipulation. Indeed, the Exchange cannot effectively review for such 
conduct without looking at and evaluating activity regardless of where 
it transpires. In addition to its own surveillance programs, the 
Exchange also works with other SROs and exchanges on intermarket 
surveillance related issues. Through its participation in the 
Intermarket Surveillance Group (``ISG'') \19\ the Exchange shares 
information and coordinates inquiries and investigations with other 
exchanges designed to address potential intermarket manipulation and 
trading abuses. Accordingly, there is a strong nexus between the ORF 
and the Exchange's regulatory activities with respect to customer 
trading activity of its Members.
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    \18\ If the OCC clearing member is a GEMX member, ORF is 
assessed and collected on all cleared customer contracts (after 
adjustment for CMTA); and (2) if the OCC clearing member is not a 
GEMX member, ORF is collected only on the cleared customer contracts 
executed at GEMX, taking into account any CMTA instructions which 
may result in collecting the ORF from a non-member.
    \19\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
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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. This proposal does not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF applies to all customer activity, thereby raising 
regulatory revenue to offset regulatory expenses. It also supplements 
the regulatory revenue derived from non-customer activity. The Exchange 
notes, however, the proposed change is not designed to address any 
competitive issues. Indeed, this proposal does not create an 
unnecessary or inappropriate inter-market burden on competition because 
it is a regulatory fee that supports regulation in furtherance of the 
purposes of the Act. The Exchange is obligated to ensure that the 
amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

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 is effective upon filing pursuant to 
Section 19(b)(3)(A) \20\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \21\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \22\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

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

[[Page 54384]]

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-GEMX-2023-09 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-2023-09. 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-2023-09 and should be 
submitted on or before August 31, 2023.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17103 Filed 8-9-23; 8:45 am]
BILLING CODE 8011-01-P