FR 2021-00949

Summary

The document in question comes from the Federal Register and outlines a proposal by MIAX PEARL, an SEC-regulated options exchange, to amend its fee schedule. This proposal primarily introduces changes to the volume thresholds required for market makers to receive rebates and lower fees on their trading activities. Specifically, the proposal intends to increase the volume threshold in Tier 2 from 0.45% to 0.75% of the overall national monthly trading volume for certain stock options like SPY, QQQ, and IWM. Additionally, a new Tier 3 category is introduced, potentially offering higher rebates based on trading activity in SPY options. These changes took effect on January 4, 2021, with the goal of improving market liquidity and competitiveness and encouraging market makers to increase their trading volume on the exchange.

Significant Issues and Concerns

Some complexities present in the document could pose challenges for those unfamiliar with financial jargon and specialized terms. Terms such as "Add/Remove Tiered Rebates/Fees," "alternative Volume Criteria," and the "Penny Interval Program" could be perplexing for a layperson. Similarly, numerous acronyms like SPY, TCV, and ABBO are scattered throughout the text, which may not be properly defined or are unclear to the average reader.

Additionally, there could be potential concerns about fairness and inclusivity in the proposed changes. By modifying the fee structure heavily in favor of market makers, there could be a risk of disadvantaging non-market maker participants on the exchange. This could potentially lead to imbalances in market participation.

Moreover, the focus on specific stock symbols such as SPY, QQQ, and IWM for volume criteria adjustments raises questions around preferential treatment or strategic emphasis that might not be evident to outside investors or participants.

Impact on the Public

The document signifies a significant shift in how market makers engage with the MIAX PEARL exchange. Broadly, the changes aim to increase liquidity and create tighter markets, potentially benefiting all investors by reducing costs associated with wider bid-ask spreads. However, for an average individual not directly involved in the markets or high-frequency trading, these changes may not have an immediate or direct impact.

For institutional investors or those engaging with options trading, these adjustments could foster a more competitive and potentially more rewarding environment. By increasing liquidity, market efficiency may improve, but the direct impact might be felt only by those actively trading in these high-volume options.

Stakeholder Impact

Market makers stand to benefit the most from these adjustments, as the proposition is designed to enhance their trading incentives on the MIAX PEARL exchange. With reduced fees and higher rebates, market makers might be encouraged to increase their activity, thereby increasing the liquidity on the exchange and potentially leading to tighter price spreads in the market.

Conversely, non-market maker participants might feel the impacts of these changes differently. While deeper liquidity might benefit retail investors indirectly by fostering more competitive pricing, there's a chance that increased market maker activity could overshadow smaller players, who might not be able to meet the higher volume thresholds or capitalize on the rebate incentives in the same way.

For MIAX PEARL, the proposal represents an effort to retain and attract market makers amidst a competitive landscape of options exchanges. This move might help the platform maintain or even increase its market share in the trading of options, marking a strategic effort to enhance its competitive edge. Nonetheless, the exchange must be cautious of perceptions of unfair advantages conferred to specific participants, striving to maintain an equitable trading environment for all.

In the Federal Register document concerning the proposed rule change by MIAX PEARL, LLC, financial references are primarily centered around the incentives offered to market makers in the form of rebates. The document outlines specific financial allocations designed to stimulate trading activity in the options market.

Financial Incentives and Rebates

The document specifies that market makers can qualify for rebates of ($0.44) per contract in SPY, QQQ, and IWM options when trading against Origins that are not Priority Customers. Additionally, they are eligible for rebates of ($0.42) per contract when trading against Priority Customer Origins, provided they achieve a monthly trading volume threshold of 1.10% in SPY options by adding liquidity. These financial incentives are structured to reward specific behaviors, such as increasing liquidity in the market, which potentially leads to narrower bid-ask spreads and an overall enhanced trading environment.

Relation to Issues

One noted issue is the complexity of financial terminology used throughout the document. Terms like "Add/Remove Tiered Rebates/Fees" and "alternative Volume Criteria" accompany these financial rebates, and their intricate nature might not be easily understood by non-experts. For example, the difference in rebate amounts contingent on trading against different types of customer origins adds a layer of complexity that could be challenging for outsiders to fully grasp.

Another issue involves the use of specific symbols like SPY, QQQ, and IWM, which might give an impression of preferential treatment or focus. The financial allocations tied to these symbols could be seen as benefiting market makers who meet certain volume criteria in these particular options. This aspect may lead to concerns about equity and fairness in how financial incentives are awarded.

Speculation and Predictability

The document also acknowledges the speculative nature of competitive advantage provided by these financial allocations. The proposed volume thresholds for rebates are justified on competitive grounds; however, the document admits that MIAX PEARL "cannot predict with certainty" how many market makers will meet these criteria under the changed rules. This uncertainty could potentially weaken the rationale behind these financial incentives, as there is no assured benefit or market share increase that they will bring.

In summary, the financial references in the document are tied to targeted rebates intended to promote certain trading behaviors among market makers. While these rebates serve as a financial tool to enhance market liquidity, the complexity of their criteria and the focus on specific symbols may pose questions about comprehension and fairness. The speculative justification adds an element of uncertainty about the effectiveness and impact of these financial changes.