FR 2021-01131

The document from the Federal Register announces a proposed rule change by Cboe BZX Exchange, Inc., focusing on updates to their fee schedule for an equity options platform, BZX Options. The aim is to restructure rebates awarded to members based on their trading activity to remain competitive in a diversified options market. The proposal introduces a new rebate tier, primarily targeting Lead Market Makers to incentivize increased trading activity by offering enhanced rebates when certain volume thresholds are met.

General Summary

The proposed rule change filed by Cboe BZX Exchange, Inc. with the Securities and Exchange Commission is designed to modify how rebates are granted to their members, particularly for those involved in the equity options trading platform. This modification intends to encourage increased participation and competitiveness among market participants, with a focus on lead market makers who play a significant role in ensuring liquidity and efficient market operations.

Significant Issues and Concerns

The document is mired in complex terminology, making it hard for general readers to parse the nuances contained within. Terms such as "Market Maker Penny Add Volume Tiers" or references to various financial and regulatory codes might alienate a more general audience unfamiliar with the intricacies of securities law and market operations. This intricate language could detract from the intended transparency and comprehension meant for public disclosure.

Furthermore, the text assumes a generally positive impact from the proposed changes, yet it lacks robust data to support these claims. Assertions regarding the rule changes leading to "deeper and more liquid markets" are made without presenting empirical evidence or comprehensive analysis that would backup the beneficial projections it describes.

The document also equates increased participation with increased benefits, yet it does not thoroughly evaluate if all market participants will indeed benefit equally. There are no clear delineations or explanations of potential impacts on different types of stakeholders, such as smaller trading firms versus their larger counterparts.

Impact on the Public

For the general public, the impact of this proposed rule change might be indirect. While it aims to promote a more robust and liquid market environment, the average investor may not immediately feel these changes. However, the long-term effects of increased market competition and liquidity can result in better pricing and trade execution, benefiting investors by lowering transaction costs.

Individuals dependent on the securities and trading markets for investment or professional reasons might consider these changes significant, as alterations in the fee structure of one exchange could potentially influence trading strategies and operational decisions.

Impact on Specific Stakeholders

Market participants, particularly those involved as market makers or significant consumers of the BZX Options platform, might experience a direct impact. The intended beneficiaries of these rebate structures are the lead market makers; thus, positively influencing their activity to enhance market stability and liquidity. These changes could promote a shift in order flow strategies, potentially favoring the Cboe BZX platform over competing exchanges.

There could be downsides for smaller market players. If the requisite criteria for rebate eligibility become overly challenging or if the revised fee structures incentivize primarily larger firms, the playing field could subtly tilt away from smaller firms that lack the resources to quickly adjust to new thresholds or competitive pressures.

The document encapsulates a technical regulatory adjustment with potentially significant market implications; however, it would benefit from greater clarity and elaboration on the broader impacts, backed by detailed economic analysis, accessible to a non-expert audience.

The Federal Register document from the Securities and Exchange Commission discusses proposed changes to the fee schedule of the Cboe BZX Exchange, specifically focusing on the incentives in place for Market Makers. It addresses how financial rebates are being utilized as an incentive mechanism, with the goal of increasing market activity and liquidity.

Financial Allocation and Spending

The document mentions several tiers of financial rebates that the Cboe BZX Exchange offers to Market Makers. Specifically, the current Market Maker Penny Add Volume Tiers provide additional rebates between $0.33 and $0.46 per contract for qualifying Market Maker orders, denoted by fee codes PM or XM. The discussion highlights a proposed change in these tiers, particularly the introduction of a new Tier 12 that offers a rebate of $0.44 per contract for orders that fulfill certain criteria. This is slightly lower than the existing Tier 13 (previously Tier 12) which offers a $0.46 rebate.

The purpose of these rebates is to incentivize Members of the exchange to increase their trading volume, specifically for Market Makers, by providing financial benefits for meeting certain order flow and liquidity criteria.

Relation to Identified Issues

The complexity of the language and technical jargon in the document might obscure the understanding of these financial allocations for the general public. There is a lack of detailed explanation on how the rebates compare across different tiers and what impact these financial incentives will have on varying sizes of market participants, such as small versus large firms. This could lead to misunderstandings regarding whether these rebates equally or disproportionately benefit certain groups over others.

Furthermore, while the document promises enhanced market quality and liquidity, it does not provide concrete data to support these claims. The assumption is made that increased rebates will naturally lead to improved market conditions; however, there is no detailed analysis on how these financial allocations will specifically affect market dynamics or competition. This lack of evidence can prevent stakeholders from fully understanding the potential risks or downsides associated with the rebate program.

Lastly, the document suggests a universal benefit from these financial changes without thoroughly exploring possible negative impacts, such as increased costs being passed on to smaller market participants who might not qualify for these rebates. The explanation of financial incentives mainly relies on pointing to similar structures at other exchanges, which may limit the appreciation of unique market-specific factors at play. This approach may reduce transparency regarding how financial allocations are expected to improve market outcomes.