Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the BZX Equities Fee Schedule, 830-833 [2019-00474]
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Federal Register / Vol. 84, No. 21 / Thursday, January 31, 2019 / Notices
Additional Information or Comments:
Copies of the forms and supporting
documents can be obtained from Brian
Foster at (312) 751–4826 or
Brian.Foster@rrb.gov.
Comments regarding the information
collection should be addressed to Brian
Foster, Railroad Retirement Board, 844
North Rush Street, Chicago, Illinois
60611–1275 or Brian.Foster@rrb.gov and
to the OMB Desk Officer for the RRB,
Fax: 202–395–6974, Email address:
OIRA_Submission@omb.eop.gov.
Brian Foster,
Clearance Officer.
[FR Doc. 2019–00450 Filed 1–30–19; 8:45 am]
BILLING CODE 7905–01–P
[Release No. 34–84963; File No. SR–
CboeBZX–2018–095]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend the
BZX Equities Fee Schedule
December 26, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
21, 2018, Cboe BZX Exchange, Inc.
(‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
amozie on DSK3GDR082PROD with NOTICES1
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. is proposing
a rule change to change the
nomenclature associated with the
current logical port fees charged for
order entry ports to reflect a new match
capacity fee that better captures the
service offering of these products. The
text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
1. Purpose
The Exchange offers two types of
logical ports that permit members to
enter orders into its trading system—i.e.,
Financial Information eXchange (‘‘FIX’’)
and Binary Order Entry (‘‘BOE’’). The
purpose of the proposed rule change is
to amend the BZX Equities fee schedule
to change the nomenclature associated
with the current logical port fees
charged for these offerings to reflect a
new match capacity fee that better
captures the service offering of these
products. As communicated to
members, although the Exchange is
changing its nomenclature to better
reflect the services provided to market
participants, the proposed capacity
allocations described in this proposed
rule change would continue to operate
in the same manner as logical ports
currently used to connect to the
Exchange. The Exchange believes,
however, that properly characterizing
these fees as ‘‘capacity fees,’’ and
specifying the actual levels of message
traffic supported by these products, will
increase transparency and clarity
around its charges and reduce confusion
about the value of the services being
provided to market participants that
choose to access these services.
Today, the Exchange charges all
logical connectivity fees on a ‘‘per port’’
basis. A logical port represents a
technical port established by the
Exchange within the Exchange’s trading
system for the delivery and/or receipt of
trading messages—i.e., orders, accepts,
cancels, transactions, etc.3 Market
participants that wish to connect
3 The Exchange separately offers physical ports
that grant access to the Exchange’s physical
connectivity infrastructure.
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
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and at the Commission’s Public
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directly to the Exchange can request a
number of different types of ports,
including ports that support order entry,
customizable purge functionality, or the
receipt of market data. Firms can also
choose to connect indirectly through a
number of different third party
providers, such as another broker-dealer
or service bureau that the Exchange
permits through specialized access to
the Exchange’s trading system and that
may provide additional services or
operate at a lower mutualized cost by
providing access to multiple members.4
Each logical port that supports order
entry entitles a firm to submit message
traffic of up to 5,000 messages per
second, an amount equivalent to 117
million messages daily, and is currently
charged at a rate of $550 per month.5
An obvious driver for a member’s
decision to purchase multiple ports is
their desire to send or receive additional
levels of message traffic in some
manner, either by increasing the
member’s total amount of message
capacity available, or by segregating
order flow for different trading desks
and clients to avoid latency sensitive
applications from competing for a single
thread of resources. For example, a
member may purchase one or more
ports for its market making business
based on the amount of message traffic
needed to support that business, and
then purchase separate ports for
proprietary trading or customer facing
businesses so that those businesses have
their own distinct connection, allowing
the firm to send multiple messages into
the Exchange’s trading system in
parallel rather than sequentially. Some
members that provide direct market
access to their customers also purchase
separate ports for different clients as a
service for latency sensitive customers
that desire the lowest possible latency to
improve trading performance. Thus,
while a smaller firm with a simple
business model may be able to transact
on the Exchange using one or two FIX
or BOE ports that are billed at a modest
rate of $550 per month each,6 a larger
4 24% of members that traded equities on BZX in
November determined that their business does not
require direct order entry access, and instead
connect indirectly to the Exchange today through a
service bureau or other service provider.
5 Logical port fees are limited to logical ports
within the primary data center. No logical port fees
are assessed for redundant secondary data center
ports. See BZX Equities Fee Schedule, Logical Port
Fees. New requests are prorated for the first month
of service. Cancellation requests are billed in full
month increments as firms are required to pay for
the service for the remainder of the month, unless
the session is terminated within the first month of
service. Id.
6 18% of members that traded equities on BZX in
November purchased only one or two order entry
ports.
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market participant with a substantial
and diversified U.S. equities business
may purchase additional order entry
ports to support both the volume and
types of activity that they conduct on
the Exchange.
Based on data analyzed by the
Exchange, the top ten BZX members,
which account as a group for nearly
two-thirds of BZX equities volume, have
chosen to purchase 47% of order entry
ports. More simply put, the top ten BZX
members have purchased the ability to
use 47% of the capacity of the BZX
trading system. In addition to the
Exchange’s commercial obligations to
maintain resilient systems capable of
efficiently processing the message traffic
that originates from those firms, the
Exchange is now also under regulatory
obligations to maintain resilient systems
while receiving messages at the peak
capacity of those ports. While the
Exchange does not know the trading
results of its members, it is clear that the
members with larger businesses, based
on volume executed, have larger
demands for the capacity of the
Exchange’s systems. It should also be
noted that half of those top ten members
are net positive in terms of total revenue
flows as the trading rebates provided to
these firms for liquidity and order flow
exceed the sum of all non-transaction
and transaction fees collected from
them.
In addition to volume, the types of
trading strategies employed by a
particular member may also impact the
amount of message traffic delivered to
Exchange systems, and hence the
number of ports purchased to support
their equities trading business. As a
national securities exchange, the
Exchange is tasked with cultivating a
vibrant and competitive market that
facilitates fair and orderly trading
between a wide range of market
participants that employ a wide range of
trading strategies. These market
participants together help cultivate the
equities trading ecosystem, and both
support that ecosystem in different ways
and use different amounts of resources
(i.e., capacity) in doing so. Some simple
trading strategies such as those
employed by investors seeking to source
available liquidity at the national best
bid or offer may require a modest
amount of capacity. Other trading
strategies used by professional market
makers or algorithmic traders that
involve the frequent entry, modification,
and cancellation of orders, may require
additional capacity, including
potentially higher peak capacity when
multiple trading strategies or algorithms
across multiple logical ports attempt to
access the Exchange at similar and
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granular time intervals due to
anticipated changes in the market. The
Exchange believes that charging for
capacity ensures that firms that demand
the most resources are charged
appropriately, while firms that demand
relatively less capacity can connect and
trade on the Exchange at a low cost.
Charging fees based on allocated
capacity thus ensures that the cost of
access is equitably apportioned between
market participants based on their
business needs. Nevertheless, the
Exchange believes that there is some
confusion in the industry surrounding
how the Exchange and other national
securities exchanges charge for
connectivity, including the burden on
smaller firms that actually benefit from
the current structure where market
participants are charged based on the
number of ports (i.e., capacity) that they
request. In the interest of transparency,
the Exchange is therefore proposing to
replace its ‘‘per port’’ fees with capacity
fees that more accurately capture the
intent this fee. While the Exchange’s
logical connectivity offerings will
continue to operate in the same manner
as they do today, the Exchange believes
that the proposed changes in
terminology, which connect the fees
charged for logical connectivity to the
capacity requested by market
participants, would shed additional
light on this service offering. As
proposed, fees would be explicitly
assessed based on the capacity
allocation (i.e., messages per second)
requested for order entry in the
Exchange’s primary data center.7
Specifically, the match capacity fee
would be $550 per month for an
allocation of 5,000 messages per
second.8 Members that require more
capacity due to the size of their U.S.
equities business, the trading strategies
that they employ, the desire to reduce
latency by maintaining multiple
separate logical connections, or any
other reason, would be able to continue
purchasing additional capacity
allocations in the primary data center at
the same monthly rate. As is the case
today, no fee would be assessed for
redundant capacity in the secondary
data center thus providing members
with free, identical capacity allocations
in the secondary data center based on
their capacity requests in the primary.
7 Firms that already connect through logical ports
would have uninterrupted service across the
established connections and would not need to rerequest capacity allocations.
8 New requests would continue to be prorated for
the first month of service, and cancellation requests
would be billed in full month increments. See note
5 supra.
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2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Act,9 in general, and
furthers the requirements of Section
6(b)(4),10 in particular, as it is designed
to provide for the equitable allocation of
reasonable dues, fees and other charges
among its members and other persons
using its facilities. In light of recent
debate and calls for transparency
around exchange charges for market
access, the Exchange believes that the
proposed changes to how fees for logical
connectivity are reflected on the fee
schedule would shed additional light on
how market participants are charged for
connectivity. The Exchange believes
that its fees for logical connectivity,
which would now be reflected as a
match capacity fee, continue to be
reasonable, equitable, and not unfairly
discriminatory as they are designed to
ensure that firms that use the most
capacity pay for that capacity, rather
than placing that burden on market
participants that have more modest
needs.
Today, the Exchange charges a ‘‘per
port’’ fee for logical connectivity. This
fee is in effect a capacity fee as each FIX
or BOE port used for order entry
supports a specified capacity (i.e.,
messages per second) in the matching
engine, and firms purchase additional
logical ports when they require more
capacity due to their business needs.
Smaller members that demand more
limited message traffic may connect
through a service bureau or other
service provider, as chosen by 24% of
members,11 or may choose to purchase
one or two order entry ports, as chosen
by 18% of members.12 At the same time,
firms with more order flow, or that
employ unique trading strategies that
result in increased message traffic
throughout the trading day or at times
of higher peak traffic, may choose to
purchase additional ports to support
their business. The Exchange believes
that the proposed match capacity fees
are appropriate as these fees would
ensure that market participants continue
to pay for the amount of capacity that
they request. The Exchange therefore
believes that its logical connectivity fees
are aligned with the goals of the
Commission in facilitating a competitive
9 15
U.S.C. 78f.
U.S.C. 78f(b)(4).
11 See supra note 4.
12 See supra note 6. Altogether, a significant
percentage of members (42%) that trade equities on
BZX purchase two or fewer order entry ports—i.e.,
including members that purchase no ports and
connect indirectly instead.
10 15
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market for all firms that trade on the
Exchange.
The proposed match capacity fee
would not change the services provided
to market participants, and would be
billed at the same monthly rate as
currently charged today on a per port
basis, but would ensure that the way the
Exchange’s fees are described is more
closely aligned with the goal of those
fees. Specifically, each match capacity
fee paid by a member would allow that
firm to continue to submit up to 5,000
messages per second to the Exchange for
processing in accordance with the
Exchange’s trading rules.13 For only
$550 per month a member would
therefore be able submit as many as 117
million messages daily into the
Exchange’s trading system. In addition,
market participants that desire more
total capacity due to their business
needs, or that wish to segregate order
flow by purchasing separate capacity
allocations to reduce latency or for other
operational reasons, would be permitted
to choose to purchase such additional
capacity at the same marginal cost. The
Exchange believes that it is reasonable,
equitable, and not unfairly
discriminatory to charge for
connectivity in this manner as this
structure ensures that the firms can
choose based on their needs, and the
firms that pay the most are the ones that
demand the most resources from the
Exchange.
To illustrate the large variance in
message traffic used by BZX members,
the Exchange compiled statistics on the
average message traffic generated during
November 2018 by each firm across
three periods: (1) The open (9:30 a.m.–
9:35 a.m.), (2) regular trading (9:35 a.m.–
3:55 p.m.), and (3) the close (3:55 p.m.–
4:00 p.m.).14 The summary table below
shows the average order rate/second for
firms,15 bucketed in groups based on
their rank in the distribution.
Significantly higher message traffic is
generated by firms at the top of the
distribution, which represents the firms
with the largest U.S. equities businesses,
with firms at the bottom of the
distribution accounting for a small
percentage of traffic generated.
SUMMARY TABLE—AVERAGE ORDER RATE/SECOND
Rank
Open
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1–5 ...............................................................................................................................................
6–10 .............................................................................................................................................
11–20 ...........................................................................................................................................
21–30 ...........................................................................................................................................
31–40 ...........................................................................................................................................
41–50 ...........................................................................................................................................
51+ ...............................................................................................................................................
4,693
1,743
666
176
123
68
2
Regular
trading
2,059
739
296
99
42
12
1
Close
3,904
1,173
437
207
68
28
2
While message traffic for individual
market participants typically peaks at
higher levels during certain periods of
greater market activity, not a single firm
had an average order rate that exceeded
the 5,000 messages per second
permitted over a single port for the
period of regular trading that accounts
for the substantial majority of the
trading day. In fact, only five firms
exceeded an average of greater than
1,000 messages per second, and these
firms collectively generated more
message traffic than every other firm
combined.16 In the first and last five
minutes of the trading day around the
open and close of trading, where
volatility and therefore message traffic is
typically higher, only three firms had an
average order rate that exceeded 5,000
messages per second, with the top five
again accounting for more message
traffic than all other market participants
combined in both of these periods. A
number of sophisticated market
participants may also have higher peak
traffic intraday if their business involves
the frequent modification or
cancellation of a large number of orders
at very granular millisecond or
microsecond time intervals, particularly
when multiple trading strategies or
algorithms that come through different
logical connections attempt to access
the market simultaneously. The
Exchange must build resilient trading
systems that are able support significant
bursts in message traffic from such
firms, including most recently on
October 18, 2018 when the Exchange
successfully processed a historical high
burst in message traffic of 1,140,183
messages per second.
Thus, although certain broker-dealers
with large and profitable U.S. equities
businesses may purchase multiple order
entry ports, the Exchange believes that
this is appropriately driven by the
amount of message traffic that they
generate throughout the day and at
periods where more message traffic is
generated. Furthermore, the data shows
that market participants with modest
capacity needs can access the Exchange
at a very low cost. While the Exchange
believes that encouraging order flow
and liquidity from a diverse set of
market participants facilitates price
discovery and improves the quality of
our markets, the Exchange also believes
that firms that desire additional capacity
to support trading strategies with higher
peak traffic should continue to be
charged for the capacity that they
request rather than have this cost
mutualized across firms with a much
smaller footprint.
With the proposed fees, firms with
modest capacity needs could continue
to pay for and operate their business
with the baseline capacity of 5,000
messages per second, which represents
the equivalent of one logical port today.
Furthermore, large and sophisticated
market participants that require
significantly more capacity than their
smaller counterparts would be able to
purchase that capacity from the
Exchange at a reasonable marginal cost
and thereby satisfy their business needs,
including the need for higher peak
traffic. The Exchange therefore believes
that the proposed match capacity fee
both appropriately reflects the benefits
13 The Exchange has invested considerable time
and resources in designing and maintaining a
resilient trading system that is capable of handling
the message traffic produced by members in a
manner that complies with its obligations as a
national securities exchange.
14 The dataset includes all firms that have
purchased order entry ports, including BZX
members or non-members that provide indirect
access to the Exchange.
15 The order rate includes, for each firm, all new
orders, modifies, and cancel messages submitted
into the trading system. The average order rate is
calculated by dividing the number of messages by
the number of seconds for the period.
16 Individually, all but one of the firms in the top
five generated more message traffic than the total
message traffic generated by all firms outside of the
top 20 combined, and the firm with the highest
order rate alone generated almost twice as much as
such firms.
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Federal Register / Vol. 84, No. 21 / Thursday, January 31, 2019 / Notices
to different firms of being able to send
messages into the Exchange’s trading
system, and facilitates the Commission’s
goal of ensuring that critical market
infrastructure has ‘‘levels of capacity,
integrity, resiliency, availability, and
security adequate to maintain their
operational capability and promote the
maintenance of fair and orderly
markets.’’ 17
B. Self-Regulatory Organization’s
Statement on Burden on Competition
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 18 and paragraph (f) of Rule
19b–4 19 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
17 See Securities Exchange Act Release No. 73639
(November 19, 2014), 79 FR 72251 (December 5,
2014) (File No. S7–01–13) (Regulation SCI Adopting
Release).
18 15 U.S.C. 78s(b)(3)(A).
19 17 CFR 240.19b–4(f).
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2018–095 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2018–095. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2018–095 and
should be submitted on or before
February 21, 2019.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–00474 Filed 1–30–19; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84976; File No. SR–
NYSEARCA–2018–77]
Electronic Comments
The Exchange does not believe that
the proposed rule change would result
in any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As explained
herein, the proposed rule change is
designed to increase transparency
around the Exchange’s fees by changing
the nomenclature associated with ‘‘per
port’’ fees for order entry logical ports
to reflect a capacity fee. The Exchange
believes that charging logical
connectivity fees based on the capacity
used by a market participant is procompetitive because it ensures that
firms with the largest U.S. equities
market share, or that employ trading
strategies that result in increased
message traffic, continue to pay for the
capacity that they request, while smaller
firms can connect and trade at a low
cost.
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change should be approved or
disapproved.
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Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Amend Rule 7.44–E To
Expand and Modify the Exchange’s
Retail Liquidity Program
December 26, 2018.
I. Introduction
On October 26, 2018, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend Rule
7.44–E to expand the Exchange’s Retail
Liquidity Program (‘‘RLP’’) to all
securities traded on NYSE Arca and
make certain other modifications.
The proposed rule change was
published for comment in the Federal
Register on November 14, 2018.3 On
December 10, 2018, the Commission
extended to February 12, 2019, the time
period in which to approve, disapprove,
or institute proceedings to determine
whether to approve or disapprove, the
proposed rule change.4 The Commission
received no comments on the proposed
rule change. This order institutes
proceedings under Section 19(b)(2)(B) of
the Act 5 to determine whether to
approve or disapprove the proposed
rule change.
II. Summary of the Proposed Rule
Change
The Exchange proposes to amend
Rule 7.44–E, which sets forth the
Exchange’s Retail Liquidity Program
(the ‘‘Program’’), to: (i) Expand the
Program’s availability to all securities
traded on the Exchange; (ii) remove
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 84547
(November 7, 2018), 83 FR 56890 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 84772,
83 FR 64381 (December 14, 2018).
5 15 U.S.C. 78(s)(b)(2)(B).
1 15
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]]>Agencies
[Federal Register Volume 84, Number 21 (Thursday, January 31, 2019)]
[Notices]
[Pages 830-833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00474]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84963; File No. SR-CboeBZX-2018-095]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the BZX Equities Fee Schedule
December 26, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 21, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. is proposing a rule change to change the
nomenclature associated with the current logical port fees charged for
order entry ports to reflect a new match capacity fee that better
captures the service offering of these products. The text of the
proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange offers two types of logical ports that permit members
to enter orders into its trading system--i.e., Financial Information
eXchange (``FIX'') and Binary Order Entry (``BOE''). The purpose of the
proposed rule change is to amend the BZX Equities fee schedule to
change the nomenclature associated with the current logical port fees
charged for these offerings to reflect a new match capacity fee that
better captures the service offering of these products. As communicated
to members, although the Exchange is changing its nomenclature to
better reflect the services provided to market participants, the
proposed capacity allocations described in this proposed rule change
would continue to operate in the same manner as logical ports currently
used to connect to the Exchange. The Exchange believes, however, that
properly characterizing these fees as ``capacity fees,'' and specifying
the actual levels of message traffic supported by these products, will
increase transparency and clarity around its charges and reduce
confusion about the value of the services being provided to market
participants that choose to access these services.
Today, the Exchange charges all logical connectivity fees on a
``per port'' basis. A logical port represents a technical port
established by the Exchange within the Exchange's trading system for
the delivery and/or receipt of trading messages--i.e., orders, accepts,
cancels, transactions, etc.\3\ Market participants that wish to connect
directly to the Exchange can request a number of different types of
ports, including ports that support order entry, customizable purge
functionality, or the receipt of market data. Firms can also choose to
connect indirectly through a number of different third party providers,
such as another broker-dealer or service bureau that the Exchange
permits through specialized access to the Exchange's trading system and
that may provide additional services or operate at a lower mutualized
cost by providing access to multiple members.\4\ Each logical port that
supports order entry entitles a firm to submit message traffic of up to
5,000 messages per second, an amount equivalent to 117 million messages
daily, and is currently charged at a rate of $550 per month.\5\
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\3\ The Exchange separately offers physical ports that grant
access to the Exchange's physical connectivity infrastructure.
\4\ 24% of members that traded equities on BZX in November
determined that their business does not require direct order entry
access, and instead connect indirectly to the Exchange today through
a service bureau or other service provider.
\5\ Logical port fees are limited to logical ports within the
primary data center. No logical port fees are assessed for redundant
secondary data center ports. See BZX Equities Fee Schedule, Logical
Port Fees. New requests are prorated for the first month of service.
Cancellation requests are billed in full month increments as firms
are required to pay for the service for the remainder of the month,
unless the session is terminated within the first month of service.
Id.
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An obvious driver for a member's decision to purchase multiple
ports is their desire to send or receive additional levels of message
traffic in some manner, either by increasing the member's total amount
of message capacity available, or by segregating order flow for
different trading desks and clients to avoid latency sensitive
applications from competing for a single thread of resources. For
example, a member may purchase one or more ports for its market making
business based on the amount of message traffic needed to support that
business, and then purchase separate ports for proprietary trading or
customer facing businesses so that those businesses have their own
distinct connection, allowing the firm to send multiple messages into
the Exchange's trading system in parallel rather than sequentially.
Some members that provide direct market access to their customers also
purchase separate ports for different clients as a service for latency
sensitive customers that desire the lowest possible latency to improve
trading performance. Thus, while a smaller firm with a simple business
model may be able to transact on the Exchange using one or two FIX or
BOE ports that are billed at a modest rate of $550 per month each,\6\ a
larger
[[Page 831]]
market participant with a substantial and diversified U.S. equities
business may purchase additional order entry ports to support both the
volume and types of activity that they conduct on the Exchange.
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\6\ 18% of members that traded equities on BZX in November
purchased only one or two order entry ports.
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Based on data analyzed by the Exchange, the top ten BZX members,
which account as a group for nearly two-thirds of BZX equities volume,
have chosen to purchase 47% of order entry ports. More simply put, the
top ten BZX members have purchased the ability to use 47% of the
capacity of the BZX trading system. In addition to the Exchange's
commercial obligations to maintain resilient systems capable of
efficiently processing the message traffic that originates from those
firms, the Exchange is now also under regulatory obligations to
maintain resilient systems while receiving messages at the peak
capacity of those ports. While the Exchange does not know the trading
results of its members, it is clear that the members with larger
businesses, based on volume executed, have larger demands for the
capacity of the Exchange's systems. It should also be noted that half
of those top ten members are net positive in terms of total revenue
flows as the trading rebates provided to these firms for liquidity and
order flow exceed the sum of all non-transaction and transaction fees
collected from them.
In addition to volume, the types of trading strategies employed by
a particular member may also impact the amount of message traffic
delivered to Exchange systems, and hence the number of ports purchased
to support their equities trading business. As a national securities
exchange, the Exchange is tasked with cultivating a vibrant and
competitive market that facilitates fair and orderly trading between a
wide range of market participants that employ a wide range of trading
strategies. These market participants together help cultivate the
equities trading ecosystem, and both support that ecosystem in
different ways and use different amounts of resources (i.e., capacity)
in doing so. Some simple trading strategies such as those employed by
investors seeking to source available liquidity at the national best
bid or offer may require a modest amount of capacity. Other trading
strategies used by professional market makers or algorithmic traders
that involve the frequent entry, modification, and cancellation of
orders, may require additional capacity, including potentially higher
peak capacity when multiple trading strategies or algorithms across
multiple logical ports attempt to access the Exchange at similar and
granular time intervals due to anticipated changes in the market. The
Exchange believes that charging for capacity ensures that firms that
demand the most resources are charged appropriately, while firms that
demand relatively less capacity can connect and trade on the Exchange
at a low cost.
Charging fees based on allocated capacity thus ensures that the
cost of access is equitably apportioned between market participants
based on their business needs. Nevertheless, the Exchange believes that
there is some confusion in the industry surrounding how the Exchange
and other national securities exchanges charge for connectivity,
including the burden on smaller firms that actually benefit from the
current structure where market participants are charged based on the
number of ports (i.e., capacity) that they request. In the interest of
transparency, the Exchange is therefore proposing to replace its ``per
port'' fees with capacity fees that more accurately capture the intent
this fee. While the Exchange's logical connectivity offerings will
continue to operate in the same manner as they do today, the Exchange
believes that the proposed changes in terminology, which connect the
fees charged for logical connectivity to the capacity requested by
market participants, would shed additional light on this service
offering. As proposed, fees would be explicitly assessed based on the
capacity allocation (i.e., messages per second) requested for order
entry in the Exchange's primary data center.\7\ Specifically, the match
capacity fee would be $550 per month for an allocation of 5,000
messages per second.\8\ Members that require more capacity due to the
size of their U.S. equities business, the trading strategies that they
employ, the desire to reduce latency by maintaining multiple separate
logical connections, or any other reason, would be able to continue
purchasing additional capacity allocations in the primary data center
at the same monthly rate. As is the case today, no fee would be
assessed for redundant capacity in the secondary data center thus
providing members with free, identical capacity allocations in the
secondary data center based on their capacity requests in the primary.
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\7\ Firms that already connect through logical ports would have
uninterrupted service across the established connections and would
not need to re-request capacity allocations.
\8\ New requests would continue to be prorated for the first
month of service, and cancellation requests would be billed in full
month increments. See note 5 supra.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act,\9\ in general, and furthers the requirements
of Section 6(b)(4),\10\ in particular, as it is designed to provide for
the equitable allocation of reasonable dues, fees and other charges
among its members and other persons using its facilities. In light of
recent debate and calls for transparency around exchange charges for
market access, the Exchange believes that the proposed changes to how
fees for logical connectivity are reflected on the fee schedule would
shed additional light on how market participants are charged for
connectivity. The Exchange believes that its fees for logical
connectivity, which would now be reflected as a match capacity fee,
continue to be reasonable, equitable, and not unfairly discriminatory
as they are designed to ensure that firms that use the most capacity
pay for that capacity, rather than placing that burden on market
participants that have more modest needs.
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\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(4).
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Today, the Exchange charges a ``per port'' fee for logical
connectivity. This fee is in effect a capacity fee as each FIX or BOE
port used for order entry supports a specified capacity (i.e., messages
per second) in the matching engine, and firms purchase additional
logical ports when they require more capacity due to their business
needs. Smaller members that demand more limited message traffic may
connect through a service bureau or other service provider, as chosen
by 24% of members,\11\ or may choose to purchase one or two order entry
ports, as chosen by 18% of members.\12\ At the same time, firms with
more order flow, or that employ unique trading strategies that result
in increased message traffic throughout the trading day or at times of
higher peak traffic, may choose to purchase additional ports to support
their business. The Exchange believes that the proposed match capacity
fees are appropriate as these fees would ensure that market
participants continue to pay for the amount of capacity that they
request. The Exchange therefore believes that its logical connectivity
fees are aligned with the goals of the Commission in facilitating a
competitive
[[Page 832]]
market for all firms that trade on the Exchange.
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\11\ See supra note 4.
\12\ See supra note 6. Altogether, a significant percentage of
members (42%) that trade equities on BZX purchase two or fewer order
entry ports--i.e., including members that purchase no ports and
connect indirectly instead.
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The proposed match capacity fee would not change the services
provided to market participants, and would be billed at the same
monthly rate as currently charged today on a per port basis, but would
ensure that the way the Exchange's fees are described is more closely
aligned with the goal of those fees. Specifically, each match capacity
fee paid by a member would allow that firm to continue to submit up to
5,000 messages per second to the Exchange for processing in accordance
with the Exchange's trading rules.\13\ For only $550 per month a member
would therefore be able submit as many as 117 million messages daily
into the Exchange's trading system. In addition, market participants
that desire more total capacity due to their business needs, or that
wish to segregate order flow by purchasing separate capacity
allocations to reduce latency or for other operational reasons, would
be permitted to choose to purchase such additional capacity at the same
marginal cost. The Exchange believes that it is reasonable, equitable,
and not unfairly discriminatory to charge for connectivity in this
manner as this structure ensures that the firms can choose based on
their needs, and the firms that pay the most are the ones that demand
the most resources from the Exchange.
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\13\ The Exchange has invested considerable time and resources
in designing and maintaining a resilient trading system that is
capable of handling the message traffic produced by members in a
manner that complies with its obligations as a national securities
exchange.
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To illustrate the large variance in message traffic used by BZX
members, the Exchange compiled statistics on the average message
traffic generated during November 2018 by each firm across three
periods: (1) The open (9:30 a.m.-9:35 a.m.), (2) regular trading (9:35
a.m.-3:55 p.m.), and (3) the close (3:55 p.m.-4:00 p.m.).\14\ The
summary table below shows the average order rate/second for firms,\15\
bucketed in groups based on their rank in the distribution.
Significantly higher message traffic is generated by firms at the top
of the distribution, which represents the firms with the largest U.S.
equities businesses, with firms at the bottom of the distribution
accounting for a small percentage of traffic generated.
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\14\ The dataset includes all firms that have purchased order
entry ports, including BZX members or non-members that provide
indirect access to the Exchange.
\15\ The order rate includes, for each firm, all new orders,
modifies, and cancel messages submitted into the trading system. The
average order rate is calculated by dividing the number of messages
by the number of seconds for the period.
Summary Table--Average Order Rate/Second
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Regular
Rank Open trading Close
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1-5............................................................. 4,693 2,059 3,904
6-10............................................................ 1,743 739 1,173
11-20........................................................... 666 296 437
21-30........................................................... 176 99 207
31-40........................................................... 123 42 68
41-50........................................................... 68 12 28
51+............................................................. 2 1 2
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While message traffic for individual market participants typically
peaks at higher levels during certain periods of greater market
activity, not a single firm had an average order rate that exceeded the
5,000 messages per second permitted over a single port for the period
of regular trading that accounts for the substantial majority of the
trading day. In fact, only five firms exceeded an average of greater
than 1,000 messages per second, and these firms collectively generated
more message traffic than every other firm combined.\16\ In the first
and last five minutes of the trading day around the open and close of
trading, where volatility and therefore message traffic is typically
higher, only three firms had an average order rate that exceeded 5,000
messages per second, with the top five again accounting for more
message traffic than all other market participants combined in both of
these periods. A number of sophisticated market participants may also
have higher peak traffic intraday if their business involves the
frequent modification or cancellation of a large number of orders at
very granular millisecond or microsecond time intervals, particularly
when multiple trading strategies or algorithms that come through
different logical connections attempt to access the market
simultaneously. The Exchange must build resilient trading systems that
are able support significant bursts in message traffic from such firms,
including most recently on October 18, 2018 when the Exchange
successfully processed a historical high burst in message traffic of
1,140,183 messages per second.
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\16\ Individually, all but one of the firms in the top five
generated more message traffic than the total message traffic
generated by all firms outside of the top 20 combined, and the firm
with the highest order rate alone generated almost twice as much as
such firms.
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Thus, although certain broker-dealers with large and profitable
U.S. equities businesses may purchase multiple order entry ports, the
Exchange believes that this is appropriately driven by the amount of
message traffic that they generate throughout the day and at periods
where more message traffic is generated. Furthermore, the data shows
that market participants with modest capacity needs can access the
Exchange at a very low cost. While the Exchange believes that
encouraging order flow and liquidity from a diverse set of market
participants facilitates price discovery and improves the quality of
our markets, the Exchange also believes that firms that desire
additional capacity to support trading strategies with higher peak
traffic should continue to be charged for the capacity that they
request rather than have this cost mutualized across firms with a much
smaller footprint.
With the proposed fees, firms with modest capacity needs could
continue to pay for and operate their business with the baseline
capacity of 5,000 messages per second, which represents the equivalent
of one logical port today. Furthermore, large and sophisticated market
participants that require significantly more capacity than their
smaller counterparts would be able to purchase that capacity from the
Exchange at a reasonable marginal cost and thereby satisfy their
business needs, including the need for higher peak traffic. The
Exchange therefore believes that the proposed match capacity fee both
appropriately reflects the benefits
[[Page 833]]
to different firms of being able to send messages into the Exchange's
trading system, and facilitates the Commission's goal of ensuring that
critical market infrastructure has ``levels of capacity, integrity,
resiliency, availability, and security adequate to maintain their
operational capability and promote the maintenance of fair and orderly
markets.'' \17\
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\17\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13)
(Regulation SCI Adopting Release).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As explained
herein, the proposed rule change is designed to increase transparency
around the Exchange's fees by changing the nomenclature associated with
``per port'' fees for order entry logical ports to reflect a capacity
fee. The Exchange believes that charging logical connectivity fees
based on the capacity used by a market participant is pro-competitive
because it ensures that firms with the largest U.S. equities market
share, or that employ trading strategies that result in increased
message traffic, continue to pay for the capacity that they request,
while smaller firms can connect and trade at a low cost.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \18\ and paragraph (f) of Rule 19b-4 \19\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CboeBZX-2018-095 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2018-095. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2018-095 and should be submitted
on or before February 21, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-00474 Filed 1-30-19; 8:45 am]
BILLING CODE P
