FR 2024-29920

Nasdaq MRX, LLC has introduced a revised approach to calculating the Options Regulatory Fee (ORF), a fee collected to cover the costs of regulatory oversight in options trading. This change, effective January 1, 2025, will see a new differentiation in fees based on whether trades occur on MRX or other exchanges. Under the new framework, Market Makers will no longer be subject to the ORF. The idea is to refine the collection process to better align with actual regulatory costs and prevent overlapping fees with those from other exchanges. However, this new fee structure will only be temporary, expiring on July 1, 2025, at which point MRX will revert to its original way of calculating the fees.

Significant Issues and Concerns

The document contains a number of complex financial terminologies that could pose a challenge for readers without a background in finance or trading. Terms such as "Options Regulatory Fee," "Local ORF Rate," and "Away ORF Rate" are central to understanding the document's proposals but may not be easily digestible for the layperson. Additionally, the methodology described for calculating these rates, including the use of linear regression models, is quite technical, potentially leading to misunderstandings about how the fees are determined.

There seems to be a lack of clarity on why Market Makers are exempt from the ORF, raising the possibility of perceived preferential treatment. While the document mentions Market Makers' regulatory obligations, it does not clearly quantify how these obligations balance against their exemption from these fees.

The document also outlines various scenarios for ORF assessment, adding to the complexity. Differentiate between trades occurring on MRX and those on other exchanges introduces multiple layers of fee structures, which might confuse stakeholders unfamiliar with these processes.

Impact on the Public and Stakeholders

For the general public, this regulation might not have a direct impact unless individuals are involved in options trading. However, understanding how regulatory fees function and are collected can provide insight into how financial markets are monitored and managed.

From a stakeholder perspective, this proposal appears to be a double-edged sword. On the positive side, the changes aim to create a fairer system that aligns more closely with regulatory costs. This could, in theory, lead to a more efficient market as exchanges focus on cost-driven oversight. However, the temporary nature of the changes may lead to uncertainty, challenging firms to adapt quickly without the assurance of long-term stability.

For Market Makers, this adjustment will likely be seen as beneficial, as they avoid the ORF. On the other hand, Priority Customers, Professional Customers, and Broker-Dealers will encounter new rate structures, which could affect their financial strategies depending on how the fees are assessed.

Conclusion

While the proposed changes aim to streamline and optimize regulatory fee collection, the document's complexity might prevent a broader understanding among all interested parties. Clarification, particularly on the methodologies used for fee assessment and the rationale behind certain exemptions, will be crucial. A clear communication strategy and detailed examples could help stakeholders better understand the implications and prepare for the forthcoming adjustments. Overall, the impact of these changes will need to be carefully evaluated, considering both their temporary nature and the potential market responses they may trigger.

The document from the Federal Register outlines proposed changes to the Options Regulatory Fee (ORF) by Nasdaq MRX, LLC, effective January 1, 2025. The ORF is a fee imposed on certain transactions to cover regulatory costs associated with overseeing options trading.

The current ORF is $0.0004 per contract side. The proposed changes entail a new fee structure that differentiates between transactions executed on MRX and those executed on other exchanges. Specifically, the document proposes that for Priority Customers, Professional Customers, and broker-dealer transactions not affiliated with a clearing member, a Local ORF Rate of $0.0149 per contract will be assessed for trades that clear in the "C" range, with an Away ORF Rate of $0.00 per contract for trades executed elsewhere. For Firm Proprietary and Broker-Dealer transactions that clear in the "F" range, both Local and Away ORF Rates will be $0.00018 per contract.

A significant issue highlighted in the document is the complexity and technical nature of the fee calculations, which may be difficult for those unfamiliar with the options trading industry to grasp. The differentiation between local and away transaction fees and the rationale behind these specific rates lack clear public-friendly explanations, potentially leading to misunderstandings.

Additionally, the proposal states that the total ORF collected should not exceed 88% of the Options Regulatory Cost. However, the specific reasoning behind choosing this particular percentage cap remains unexplained, leading to questions regarding its fairness and adequacy. The document specifies that the revenue generated will help offset the cost of monitoring and regulating both local transactions and those that span multiple markets, yet further clarification of this threshold could aid stakeholders in understanding its significance.

Furthermore, the document notes that this new fee structure will be temporary, sunsetting on July 1, 2025, after which the ORF may revert to its prior methodology and rate of $0.0004 per contract side. This temporary nature introduces uncertainty about the duration of the proposed changes, raising concerns about the need for more permanent solutions or further adjustments depending on the observed outcomes of these interim measures.