Overview
Title
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Lower the Options Regulatory Fee (ORF) and Adopt a New Approach to ORF in 2025
Agencies
ELI5 AI
Nasdaq PHLX LLC wants to change the fee they charge when people trade options, making it cheaper and different depending on where the trade happens, starting in 2025. They also want to make sure the money they get from these fees only covers their costs, and they don't want to charge market makers the same way they charge others.
Summary AI
Nasdaq PHLX LLC proposed changes to lower the Options Regulatory Fee (ORF) starting in 2025. From November 1, 2024, to December 31, 2024, they plan to reduce the ORF fee from $0.0034 to $0.0022 per contract. Beginning January 1, 2025, the methodology for assessing ORF will change to include different rates for options traded on different exchanges, with new rates applied to various transactions except those by market makers. The proposal aims to ensure that the fees collected cover regulatory costs without exceeding them.
Keywords AI
Sources
AnalysisAI
Nasdaq PHLX LLC recently filed a proposal to adjust how it collects fees related to options trading. The key change involves lowering the Options Regulatory Fee (ORF) from $0.0034 to $0.0022 per contract side in late 2024 and then updating the fee structure entirely starting in 2025. The proposal was submitted to ensure that revenues from the ORF effectively cover, but do not exceed, regulatory costs associated with monitoring and enforcing trading compliance.
Overview of Changes
From November 1 to December 31, 2024, Nasdaq PHLX plans to reduce the ORF as part of a temporary adjustment based on current revenue and costs. Beginning January 1, 2025, a new methodology will be applied where fees differ based on the trading venue and the type of transaction being executed. This new approach separates fees into "Local" and "Away" rates, depending on the origin of the transaction, ostensibly to more accurately distribute the burden of regulatory costs.
Significant Issues and Concerns
Complexity and Understanding
The document's language is dense with financial and legal jargon, which may not be easily understood by the average reader. Terms like "CMTA," "R-Squared," and "nexus" are used frequently without definition, posing a barrier to comprehension.
Transparency and Fairness
There is a change in fees that might appear arbitrary to those outside the negotiation and decision-making processes. The rationale behind specific fee adjustments, particularly the reduction to $0.0022, is not thoroughly explained in plain terms, which might lead to questions about the fairness and transparency of these changes.
Temporary Nature of Changes
The proposal notes that the new fee structure will expire on July 1, 2025, but fails to clearly explain why this is only a temporary measure. This could suggest uncertain long-term planning or experimentation with fee structures.
Preference for Market Makers
Market Makers are excluded from certain ORF assessments, justified by their pivotal role in ensuring market liquidity. However, this exclusion could be perceived as preferential treatment unless provided with further justifications or comparative cost-benefit analyses.
Impact on the Public and Stakeholders
Broad Public Impact
The average person might not feel the direct effects of these fee changes unless they are involved in options trading. However, reduced fees could lead to marginally lower transaction costs, potentially attracting more trading activity that might benefit market health and efficiency.
Impact on Market Participants
For regular traders or firms, these changes could alter the cost landscape. The nuanced fee differentiation might create or alleviate financial pressures depending on the venues they frequently use. An increased complexity in fee structures might increase administrative burden, needing software or personnel dedicated to compliance and financial management.
Perspective of Regulators and Exchange Officials
Regulators might view these changes favorably, with dedication to tying fees closely to regulatory expenses. This aligns with accountability and fiscal responsibility principles in public financial oversight.
In conclusion, while the proposal appears to address regulatory and revenue needs effectively, it also introduces complexity and possible inequality in fee assessments. If these changes proceed as planned, market participants will need to adapt, and it remains to be seen how long-term solutions are developed after the temporary measures expire.
Financial Assessment
The document outlines changes proposed by Nasdaq PHLX LLC to the Options Regulatory Fee (ORF), focusing on a reduction of fees and the introduction of a new fee assessment methodology. These changes come amidst a backdrop of monitoring regulatory costs and revenues.
Summary of Financial Changes
Nasdaq PHLX LLC has proposed reducing the ORF from $0.0034 to $0.0022 per contract side. This reduction is slated to occur between November 1, 2024, and December 31, 2024. The adjustment aims to ensure that Options Regulatory Revenue does not exceed the Exchange's estimated Options Regulatory Costs for 2024. Lowering the fee is intended to cover a material portion of regulatory costs without generating excessive revenue.
Effective January 1, 2025, a new methodology will apply to the assessment and collection of the ORF. Different rates will be assigned for trades executed on PHLX and those executed on non-PHLX exchanges. For instance, Customer transactions will incur a Local ORF Rate of $0.0190 per contract and no charge for Away ORF Rate. In contrast, Firm and Broker-Dealer transactions will be charged a uniform Local and Away ORF Rate of $0.00022 per contract.
Relation to Identified Issues
The reduction of ORF to $0.0022 and the differentiation in rates post-January 2025 present significant shifts in how fees are levied. These changes reflect a more granular approach to accounting for regulatory expenses, evidently seeking to anchor fees to actual transactional activity. However, the document implies that the ORF rates are derivative of complex regression modeling—a method that might not be transparent to all stakeholders. The technical nature of these calculations could raise questions regarding the fairness and transparency of fee determination.
Moreover, the proposal introduces complexity by differentiating rates for Local and Away transactions, potentially benefiting some market participants over others. This complexity, combined with the exclusion of Market Makers from certain fees justified by their unique role, may suggest preferential treatment, raising concerns about equal treatment across different participant categories.
Additionally, the temporary nature of these changes, ending on July 1, 2025, introduces an element of uncertainty without clear explanations for the sunset period. The lack of explicit feedback or public comment—highlighted by the absence of written feedback—may point to gaps in stakeholder engagement, which can affect perceptions of fairness and inclusivity in financial allocations.
In summary, while the financial references in the document outline a definitive plan to recalibrate regulatory fees, they also underscore the nuanced balance between financial efficiency and equitable financial governance. The proposed financial allocations are steeped in technical financial and regulatory considerations, suggesting a need for enhanced clarity and engagement with the market participants affected by these changes.
Issues
• The document discusses a methodology for assessing and collecting the Options Regulatory Fee (ORF) which may be overly complex and difficult to follow for those not familiar with the financial and regulatory terms used.
• There is a proposal to reduce ORF from $0.0034 to $0.0022 per contract side, but it is not entirely clear how these figures were determined, which might lead to questions about the transparency and fairness of these changes.
• The change in ORF methodology effective January 1, 2025, introduces different rates for Local ORF and Away ORF, which may favor certain transactions and complicate the fee structure.
• The explanation of the regression modeling and 'normalization' process for determining ORF rates is steeped in technical statistical language, which may not be easily understandable to the general public.
• The document mentions that the proposal will be sunset on July 1, 2025, which seems to indicate a temporary change, but the reasons for this temporary period are not clearly explained.
• The exclusion of Market Makers from the ORF assessments is justified by their unique role and fees paid, but this could be seen as preferential treatment unless the reasoning is further clarified.
• Assessing different ORF rates for Customer transactions and Firm and Broker-Dealer Transactions might lead to concerns about unequal treatment among market participants.
• There is a lack of written comments from members, participants, or others, suggesting a potential lack of engagement or consultation in the proposal process.
• The document uses many technical terms (e.g., 'CMTA', 'R-Squared', 'regression coefficient values', 'nexus') without clear definitions, which could be problematic for clarity and understanding.