FR 2024-28113

Nasdaq BX, Inc. recently proposed a modification to its operations, specifically by introducing a new order entry protocol called Ouch to Trade Options (OTTO). This addition is intended to provide a faster and more efficient method for handling trades in financial options markets, potentially enhancing competitive standing. This commentary will examine the essence of this proposal, explore any significant concerns, and discuss the ramifications for both the public and specific stakeholders.

Overview of the Proposal

The document under consideration details a rule change filed by Nasdaq BX with the Securities and Exchange Commission (SEC). The central feature of this proposal is the implementation of the OTTO protocol. OTTO is designed to offer traders an alternative to existing systems with advanced features including faster communications for order management and robust risk protection mechanisms. The expected date of implementation for this new protocol is by December 2025. In conjunction with this protocol, Nasdaq BX is amending related rules and introducing a specific pricing model.

Key Issues and Concerns

One of the primary issues is the document's complexity, which could pose challenges to individuals without specialized expertise in financial exchanges and trading protocols. The text is dense with technical jargon and numerous cross-references that can be difficult to follow. Additionally, the document outlines a new pricing structure for the use of OTTO that requires clarification. The reasoning behind the free offering of the first FIX Port, while others incur a charge, is not thoroughly explained, potentially leading to perceptions of arbitrariness.

Further, there is limited analysis on how these changes may affect smaller or less resourceful participants in the market. This raises questions about equitable access and the potential for competitive fairness to be compromised. Finally, while the overall impact on market competition is addressed, the discussion is broad; more specific analysis on potential ramifications and strategies to mitigate any negative effects would provide a clearer picture.

Impact on the Public

Broadly, the implementation of OTTO could influence the general investment landscape by possibly offering more efficient trading opportunities, which might ultimately benefit individual investors through better prices and faster trades. However, understanding how these efficiency gains translate into tangible benefits for the average investor is crucial and somewhat lacking in detail.

Impact on Specific Stakeholders

For large trading entities and institutional investors, the introduction of OTTO may offer an attractive option for improving their trading operations through enhanced speed and reduced latency. This could lead to a more competitive atmosphere among major players. Conversely, smaller traders or firms might find themselves at a disadvantage if they are unable to leverage the benefits of OTTO due to cost implications or lack of resources.

Additionally, there could be indirect effects on market dynamics, such as changes in trading volumes and liquidity depending on how widely the new protocol is adopted. Potential disparities in the accessibility of OTTO among different market participants could raise concerns over market fairness and inclusivity.

In conclusion, while Nasdaq BX's proposal for the OTTO protocol represents a step toward technological advancement in trading efficiency, the document presents several areas that need further clarification and analysis. Ensuring that these changes foster an equitable trading environment will be crucial to addressing stakeholder concerns and achieving the broader goals of transparency and competitiveness in financial markets.

The document discusses the proposed adoption of a new protocol by Nasdaq BX, Inc., known as the "Ouch to Trade Options" or OTTO protocol. This involves establishing a pricing structure, which is central to understanding the financial implications of the proposal.

The OTTO protocol port fee is set at $650 per port, per month, per account number. This fee structure is comparable to other exchanges, with similar charges noted, such as $650 per port on MRX and GEMX for identical protocols. Additionally, there is a monthly cap of $7,500 for OTTO Ports, FIX Ports, and several other data ports. If a participant exceeds this monthly cap in expenditures, extra charges for FIX or OTTO Ports will not be applied beyond the cap. This financial strategy ensures that costs are capped, which can provide predictability and potential savings for high-volume users.

In contrast, some exchanges have different pricing strategies. For example, MEMX charges $450 per port, which is less than the OTTO protocol fee, while BatsEDGX charges $750 per port, per month for its entry protocol, indicating that the pricing for OTTO is neither the highest nor the lowest among competitors. The pricing decisions could impact perceptions of fairness and competitiveness among the exchanges, as some participants might benefit from lower costs while others may view the charges as burdensome.

The proposal offers the first FIX Port at no cost, a decision not mirrored by exchanges like GEMX, which does not offer any port for free. This strategy could be seen as a way to attract and retain participants by lowering entry costs, particularly beneficial for new or smaller market participants. However, the document does not explain why only the first FIX Port is free, while subsequent ports incur a fee, which could appear arbitrary without further context.

The document's pricing structure may lead to concerns about equitable access. Smaller or less resourced participants may find the costs of additional ports prohibitive, which might limit their ability to compete on equal terms with larger, more financially robust participants. The emphasis on technology innovation, such as offering low-latency options through the OTTO protocol, suggests a focus on attracting high-frequency traders who might benefit most from the cost structure.

In conclusion, while the OTTO protocol introduces a standard fee that aligns with industry norms, its implications for market access and fairness merit further clarification. The rationale behind offering the first FIX Port at no cost, while others are not, should be elucidated to avoid perceptions of arbitrariness. Additionally, more detailed explanations of how these financial strategies might affect smaller entities could enhance transparency and understanding.