FR 2024-29921

General Summary

The Securities and Exchange Commission (SEC) has issued a notice regarding a proposed rule change by The Nasdaq Stock Market LLC. The change concerns the Options Regulatory Fee (ORF), which is a fee imposed on certain stock options transactions to fund the costs of regulatory oversight. The proposal seeks to temporarily reduce this fee from $0.0016 to $0.0014 per contract side from November 1, 2024, to December 31, 2024. Starting January 1, 2025, a new method will be implemented to assess the ORF, which includes differentiated rates for trades conducted on Nasdaq versus those on other exchanges. The changes aim to more accurately align the fee with the actual regulatory costs and prevent excess revenue generation. This new approach is described as a temporary adjustment, set to revert back to the prior structure on July 1, 2025, unless further action is taken.

Significant Issues and Concerns

The document outlining this change is heavily laden with complex financial terminology and methodologies. This complexity might present difficulties for members of the public and stakeholders who are not experts in financial regulation to fully comprehend. The document employs statistical concepts such as regression models and R-Squared measures without detailed explanations, leaving readers at a loss to evaluate the soundness and fairness of the proposed fee adjustments.

Additionally, there is ambiguity regarding the "sunset" clause, slated for July 1, 2025. The document does not provide clear guidelines on how decisions will be made to either continue, adjust, or discontinue the new ORF structure, potentially leading to uncertainty among market participants.

Concerns also arise from exclusions mentioned in the fee structure, particularly the exclusions of Market Makers and proprietary products from certain fees. Without comprehensive justification, these exclusions might appear to unfairly favor certain groups, raising issues about equitable treatment within the market.

Public Impact

For the general public, the impact of this change is somewhat indirect. While the fee itself applies to transactions by specific market participants, changes to such fees can influence overall market dynamics, potentially affecting market liquidity and pricing, which can have cascading effects on individual investors and the broader economy.

Overall, simplifying the fee structure and ensuring it aligns closely with regulatory costs is intended to maintain market integrity. However, the methodology and transparency around such fees are critical to public trust.

Stakeholder Impact

Investors and Traders: These participants might experience changes in transaction costs, which could affect trading strategies and profitability. The new structure aims to equitably distribute regulatory costs, though the unclear exclusions create concerns around fairness.

Market Makers and Proprietary Trade Platforms: These stakeholders might benefit from exclusions, as they are relieved from certain regulatory fees. This can aid in reducing operating costs, potentially enabling them to offer better pricing and liquidity in the market.

Regulatory Authorities: The proposal allows regulatory bodies to adjust fee structures to better reflect the actual costs of oversight. This could strengthen regulatory effectiveness by ensuring necessary activities are adequately funded without surplus revenues.

In summary, while the proposed changes have the potential to streamline the relationship between collected fees and regulatory expenses, clarity in methodology and consistent application of fees is crucial to avoid perceptions of inequity and ensure public trust in market regulations.

In the document regarding changes to The Nasdaq Stock Market LLC's Options Regulatory Fee (ORF), several key financial adjustments are proposed, which merit a thorough examination to understand their implications for market participants.

Financial Adjustments and Allocations

The document outlines a proposal to reduce the ORF from $0.0016 to $0.0014 per contract side, effective from November 1, 2024, through December 31, 2024. This reduction is aimed at ensuring that the revenue generated from the ORF does not exceed the stock exchange’s estimated regulatory costs for 2024. Such a change is significant as it reflects a strategic move by the Nasdaq Exchange to align its regulatory fee collections with its actual regulatory expenses, thereby minimizing the potential for surplus revenue generation which might not align with purely regulatory purposes.

Starting January 1, 2025, a differentiated fee structure will be implemented, introducing a "Local ORF Rate" and an "Away ORF Rate." For transactions cleared under the "C" range at the Options Clearing Corporation (OCC), a Local ORF Rate of $0.0203 per contract will be applied, while the Away ORF Rate will be set at $0.00 per contract. Meanwhile, Firm and Broker-Dealer transactions under the "F" range will incur both a Local and Away ORF Rate of $0.00024 per contract. This dual-rate system suggests a tailored approach to fee assessment based on transaction location and clearing status, which could help Nasdaq better address regulatory cost allocations.

The document also indicates that these proposed changes are temporary. The new fee structure will be "sunset" on July 1, 2025, reverting back to an earlier rate and methodology of $0.0016 per contract side, unless a decision is made to continue or amend these structures based on additional evaluations.

Relation to Identified Issues

One identified issue is the complexity in understanding the methodology behind these financial allocations due to technical language and statistical references like R-Squared. The reduction in ORF is grounded in the need to balance regulatory revenue with regulatory costs, a concept that might not be clear without a thorough explanation of the regression models used. This introduces a challenge for stakeholders trying to verify the fairness and necessity of these fee structures.

Another issue is the differentiation between Local and Away ORF Rates which may seem arbitrary without sufficient explanation of their necessity. The financial allocations designated in the proposal, such as the Local ORF Rate of $0.0203 and the Away ORF Rate of $0.00 for specific transactions, need to be justified clearly to avoid perceptions of inequity or hidden preferential treatment. Without transparent, equitable criteria defining these rates, stakeholders might question how they align with Nasdaq's broader regulatory objectives.

Moreover, the exclusion of market makers from certain fees may appear as preferential without detailed justification. The text must adequately address why such exclusions are equitable and conform to regulatory goals, helping all parties understand the rationale behind these financial decisions.

Overall, while the document attempts to address specific financial adjustments and structures to align with regulatory costs, the complexity of the underlying methodologies and lack of clarity around certain financial allocations pose challenges to broader stakeholder comprehension and acceptance.