FR 2024-29623

Summary of the Document

The document under consideration is a proposal by Nasdaq GEMX, LLC to modify its Options Regulatory Fee (ORF) structure, effective from January 1, 2025. These changes involve a new approach to assessing fees for options transactions conducted on GEMX and those executed on non-GEMX exchanges. The goal is to distribute the regulatory costs more equitably among different market participants while ensuring that the collected fees do not exceed 88% of the Exchange's overall regulatory costs. However, the document states that these revisions are temporary, with the potential to revert to previous rates on July 1, 2025, unless GEMX takes further action.

Significant Issues or Concerns

One significant area of concern is the potential favoritism suggested by the new ORF structure, which might benefit GEMX Members over non-members. While the ORF will be collected from GEMX Members even if executed elsewhere, non-members only pay the ORF if the transaction occurs on the GEMX. This could lead to competitive imbalances where GEMX Members might have certain financial advantages compared to non-members.

Another contentious point is the exclusion of Market Makers from the ORF. The Exchange argues that Market Makers have various regulatory quoting obligations and incur other fees that justify this exclusion. However, the document does not offer detailed evidence to support this point, potentially raising concerns about fairness and transparency.

The complexity of the language is also noteworthy, especially the use of statistical terms like regression models and R-Squared values. Such technical jargon might obscure understanding for individuals who lack a statistical background, limiting broader public insight into how the rates were determined.

Impact on the Public

For the general public, particularly those involved in trading within GEMX or considering engaging in such activities, this document could have significant implications. The changes propose adjustments that affect the costs associated with trading options, potentially altering the economic landscape for individual traders and smaller firms. If adopted, the changes may lead to higher costs for some market participants, depending on their membership status and the nature of their transactions.

The sunset clause, scheduled for July 1, 2025, suggests that these changes might not be long-lasting and are subject to review. This proviso adds a layer of uncertainty for market participants who may need to prepare for further modifications.

Impact on Specific Stakeholders

Specific stakeholders, such as GEMX Members, might experience both positive and negative impacts. On the one hand, they may benefit from a potentially favorable ORF collection structure relative to non-members. On the other hand, precise details regarding the differential rates for local and away transactions could lead to increased costs and operational complexity.

For Market Makers, the exclusion from ORF might seem beneficial but could also raise concerns among other stakeholders regarding competitive fairness. Non-member entities and traders operating primarily on non-GEMX exchanges might face disadvantages due to the transfer of ORF responsibilities that could discourage participation from outside the GEMX framework.

In conclusion, while the proposal aims to create a fairer ORF structure for 2025, several uncertainties and potential biases in implementation exist, affecting the perception and practical impact on market equity among stakeholders. The temporary nature of the changes indicates an ongoing evaluation, which stakeholders should monitor closely to understand their long-term impacts.

The document outlines changes to the Options Regulatory Fee (ORF) by Nasdaq GEMX, LLC, detailing how these changes impact financial transactions related to options contracts.

The primary financial reference in this document is the change in the Options Regulatory Fee (ORF) structure. The current ORF is $0.0012 per contract side. With the proposed changes, the Exchange plans to implement a differentiated fee structure. This involves assessing a Local ORF Rate of $0.0170 per contract for Priority Customer, Professional Customer, and broker-dealer transactions clearing in the “C” range at OCC, while the Away ORF Rate for these transactions will be $0.00 per contract.

For Firm Proprietary and Broker-Dealer transactions clearing in the “F” range, the proposal sets both the Local and Away ORF Rates at $0.00020 per contract. These adjustments indicate a targeted approach to collecting fees based on where and by whom the transactions are cleared, focusing more on a customer's proximity to the GEMX exchange.

An important aspect of these financial references is their relation to identified issues. For instance, the differentiated ORF structure could affect competition, as it might disproportionately favor GEMX Members. Members executing trades elsewhere are still liable for the ORF if they clear through the GEMX, which might disadvantage non-members unless the trade is executed directly on GEMX. This raises concerns about whether the new ORF structure favors insiders, potentially creating a bias in the competitive balance between members and non-members.

Furthermore, the decision to exclude Market Makers from this fee—with reasoning tied to their regulatory roles—may also be financially significant. Market Makers have obligations that potentially justify this exclusion, yet the financial impact of not assessing them an ORF might be viewed as favoritism, highlighting an underlying issue of equity among different market participant categories.

Finally, it's notable that the proposed system will sunset on July 1, 2025, reverting back to the original ORF rate of $0.0012 per contract side. This temporary nature of changes raises questions about the long-term financial implications and stability of the regulatory funding model, as well as the effectiveness of the new rates designed to cover regulatory costs. The sunset clause suggests a trial period that could be indicative of cautious financial planning or uncertainty about the new structure's sufficiency in covering regulatory expenses.

In conclusion, while the changes to the ORF introduce a significant shift in how regulatory fees are calculated and collected, the financial impacts highlight several equity and competitiveness issues that warrant close consideration during this interim period. The outlined financial allocations and structure underscore the complexities of balancing regulatory costs and competitive fairness among exchange participants.