FR 2024-29624

Editorial Commentary on Proposed Changes to the Options Regulatory Fee

General Summary

The document presents a notice from Nasdaq ISE, LLC regarding proposed changes to the Options Regulatory Fee (ORF). These changes, scheduled to take effect on January 1, 2025, aim to revamp the way ORF is collected, expanding its applicability to a broader range of transactions while excluding Market Makers. The proposal also differentiates fees between transactions executed on ISE and those executed on other exchanges. The revised fee structure is designed to better align the ORF with the regulatory costs incurred by the exchange. Additionally, this proposed change is set to revert automatically to the previous fee structure by July 1, 2025, unless further action is taken.

Significant Issues and Concerns

The proposal contains numerous technical terms and regulatory jargon that might be difficult for those not deeply versed in securities regulations to fully grasp. The complexity of the new ORF fee structure, particularly the introduction of different rates for Local ORF and Away ORF, may lead to confusion. Simplified explanations or additional clarification might make the information more accessible to a broader audience.

The document details a regression model used to determine how costs are attributed to various transactions, explaining statistical concepts such as R-squared that may not be easily understood by a general audience. This could lead to a lack of clarity on how these fees are structured and justified.

Another potential issue arises from the way the proposal favors ISE proprietary products by including them in the Local ORF calculations, while excluding transactions by Market Makers. This might be perceived as having a bias towards benefiting ISE’s interests, potentially at the expense of fairness towards other participants in the market.

Additionally, the provision that ORF collection may not exceed 88% of Options Regulatory Cost could raise concerns about the adequacy of funding for regulatory obligations, potentially suggesting that revenue targets may be prioritized over comprehensive regulatory enforcement.

Broad Public Impact

For the general public, especially those with investments in options trading, these changes might impact transaction costs indirectly, as brokerage fees and other charges may be adjusted to reflect the new ORF structure. This proposal represents a shift in cost distribution that could trickle down to consumers, affecting the overall pricing environment in the market.

Impact on Specific Stakeholders

Exchanges and Members:

The proposal might pose challenges for non-ISE exchanges and their members, as it introduces new complexities in fee assessments based on transaction locations. This could potentially impose additional administrative burdens on non-ISE market participants to comply with varying ORF rates.

Market Makers:

The exclusion of Market Makers from the ORF assessment might help them manage their operational costs and maintain competitive quoting activities. However, other market participants who are not exempt may feel disadvantaged, perceiving the exemption as offering preferential treatment that could skew competitive balance in favor of Market Makers.

ISE Proprietary Products:

By including these products in the Local ORF, ISE might encourage more trading of its proprietary products, potentially enhancing its market position. However, this aspect might invite scrutiny regarding the equitable treatment of various market participants and the potential conflict of interest this creates.

Conclusion

The proposed changes to the Options Regulatory Fee by Nasdaq ISE reflect a substantial modification in the fee assessment landscape, with implications for market participants and potentially the broader public involved in the trading ecosystem. While the adjustments aim for alignment with regulatory costs, the complexity and perceived biases inherent in the proposal warrant careful consideration and possibly further clarification to ensure a fair and comprehensible fee structure.

The document discusses proposed changes by Nasdaq ISE, LLC regarding the Options Regulatory Fee (ORF) set to take effect in 2025. These changes are aimed at modifying how the fees are collected and what transactions they apply to, focusing especially on different categories of market participants and transaction types.

Current and Proposed ORF Rates

The document outlines the current and proposed ORF rates for various transactions. Presently, the ISE charges an ORF of $0.0013 per contract side. Effective January 1, 2025, the Exchange plans to introduce new rates: $0.0116 per contract for Priority Customer, Professional Customer, and broker-dealer (not affiliated with a clearing member) transactions executed on the ISE market, with a $0.00 rate for similar transactions executed off-ISE. For Firm Proprietary and Broker-Dealer transactions, the rate will be $0.00014 per contract for both local and away transactions.

These proposed changes reflect a significant increase for local Priority Customer and similar transactions, suggesting the Exchange is aiming to more closely align fee collection with the regulatory costs associated with directly overseeing these transactions. The new structure attempts to distribute regulatory costs more equitably among different types of transactions.

Financial Allocations and Related Issues

The decision to set the Away ORF Rate for customer-type transactions at $0.00 indicates an approach that might ensure the Exchange does not overlap fees with other exchanges when transactions are executed elsewhere. This could imply that regulatory costs and oversight are deemed less by the Exchange when the trading activity happens off-site, which could raise questions about revenue adequacy for off-market regulatory activities.

The changes target a collection that does not exceed 88% of the total Options Regulatory Costs. This percentage cap implies an effort to avoid over-collection from market participants, ensuring fees collected do not surpass the amounts needed to support regulatory obligations. However, capping revenue collection in this way could also be perceived as limiting funding availability for unforeseen regulatory needs, raising concerns about whether this constraint may impair extensive regulatory oversight.

Exclusions and Implications for Market Makers

Market Makers are excluded from the ORF, which is justified in the document by noting their role and obligations in providing liquidity and competing to improve market conditions. The financial strategy to exclude them from ORF could be seen as favoring Market Makers, allowing them to optimize resources for sustaining competitive quotes. This exclusion might be contentious, as other market participants are still required to pay the ORF, potentially leading to perceptions of uneven financial burden distribution across participant categories.

Sunset Clause and Future Considerations

Finally, the proposed changes contain a sunset clause set for July 1, 2025, at which point the ORF would revert to its original structure of $0.0013 per contract side. This planned reevaluation period suggests active monitoring of the financial outcomes of these changes, providing an opportunity to assess their impact on both revenue collection and market dynamics.

In summary, while the adjustments in ORF rates and allocations appear to be made in consideration of matching regulatory expenses with specific transaction activities, the proposals could attract scrutiny regarding fairness, especially in how different market participants are impacted financially. The strategic financial decisions appear to aim at both efficiency and equity, balancing these goals with the operational realities of the market structure.