Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule on the BOX Options Market LLC (“BOX”) Facility To Establish BOX Connectivity Fees for Participants and Non-Participants Who Connect to the BOX Network, 33788-33794 [2019-14891]
Download as PDF
<![CDATA[
33788
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
This hearing will be webcast live at
the Web address—https://www.nrc.gov/.
Week of August 19, 2019—Tentative
There are no meetings scheduled for
the week of August 19, 2019.
CONTACT PERSON FOR MORE INFORMATION:
For more information or to verify the
status of meetings, contact Denise
McGovern at 301–415–0681 or via email
at Denise.McGovern@nrc.gov. The
schedule for Commission meetings is
subject to change on short notice.
The NRC Commission Meeting
Schedule can be found on the internet
at: https://www.nrc.gov/public-involve/
public-meetings/schedule.html.
The NRC provides reasonable
accommodation to individuals with
disabilities where appropriate. If you
need a reasonable accommodation to
participate in these public meetings or
need this meeting notice or the
transcript or other information from the
public meetings in another format (e.g.,
braille, large print), please notify
Kimberly Meyer-Chambers, NRC
Disability Program Manager, at 301–
287–0739, by videophone at 240–428–
3217, or by email at Kimberly.MeyerChambers@nrc.gov. Determinations on
requests for reasonable accommodation
will be made on a case-by-case basis.
Members of the public may request to
receive this information electronically.
If you would like to be added to the
distribution, please contact the Nuclear
Regulatory Commission, Office of the
Secretary, Washington, DC 20555 (301–
415–1969), or by email at
Wendy.Moore@nrc.gov or Tyesha.Bush@
nrc.gov.
The NRC is holding the meetings
under the authority of the Government
in the Sunshine Act, 5 U.S.C. 552b.
Dated at Rockville, Maryland, this 11th day
of July, 2019.
For the Nuclear Regulatory Commission.
Denise L. McGovern,
Policy Coordinator, Office of the Secretary.
[FR Doc. 2019–15097 Filed 7–11–19; 4:15 pm]
BILLING CODE 7590–01–P
POSTAL REGULATORY COMMISSION
[Docket Nos. MC2019–160 and CP2019–180;
MC2019–161 and CP2019–181]
khammond on DSKBBV9HB2PROD with NOTICES
New Postal Products
Postal Regulatory Commission.
Notice.
AGENCY:
ACTION:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
negotiated service agreements. This
notice informs the public of the filing,
SUMMARY:
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
invites public comment, and takes other
administrative steps.
DATES: Comments are due: July 17,
2019.
Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3007.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
PO 00000
Frm 00056
Fmt 4703
Sfmt 4703
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3010, and 39
CFR part 3020, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: MC2019–160 and
CP2019–180; Filing Title: USPS Request
to Add Priority Mail & First-Class
Package Service Contract 106 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: July 9, 2019; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3020.30 et seq., and 39 CFR 3015.5;
Public Representative: Christopher C.
Mohr; Comments Due: July 17, 2019.
2. Docket No(s).: MC2019–161 and
CP2019–181; Filing Title: USPS Request
to Add Priority Mail Contract 536 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: July 9, 2019; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3020.30 et seq., and 39 CFR 3015.5;
Public Representative: Christopher C.
Mohr; Comments Due: July 17, 2019.
This Notice will be published in the
Federal Register.
Ruth Ann Abrams,
Acting Secretary.
[FR Doc. 2019–14971 Filed 7–12–19; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86335; File No. SR–BOX–
2019–22]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fee
Schedule on the BOX Options Market
LLC (‘‘BOX’’) Facility To Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network
July 9, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 26,
2019, BOX Exchange LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
1 15
2 17
E:\FR\FM\15JYN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
15JYN1
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule on the BOX
Options Market LLC (‘‘BOX’’) facility.
The text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s internet website at https://
boxexchange.com.
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
khammond on DSKBBV9HB2PROD with NOTICES
1. Purpose
The Exchange proposes to amend
Section VI. (Technology Fees) of the
BOX Fee Schedule to establish BOX
Connectivity Fees for Participants and
non-Participants who connect to the
BOX network. Connectivity fees will be
based upon the amount of bandwidth
that will be used by the Participant or
non-Participant. Further, BOX
Participants or non-Participants
connected as of the last trading day of
each calendar month will be charged the
applicable Connectivity Fee for that
month. The Connectivity Fees will be as
follows:
3 15
4 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
Connection type
Non-10 Gb Connection.
10 Gb Connection .....
Monthly fees
$1,000 per connection.
$5,000 per connection.
The Exchange also proposes to amend
certain language and numbering in
Section VI.A to reflect the changes
discussed above. Specifically, BOX
proposes to add the title ‘‘Third Party
Connectivity Fees’’ under Section VI.A.
Further, the Exchange proposes to add
Section VI.A.2, which details the
proposed BOX Connectivity Fees
discussed above. Finally the Exchange
is proposing to remove Section VI.C.
High Speed Vendor Feed (‘‘HSVF’’), and
reclassify the HSVF as a Port Fee.
The Exchange initially filed the
proposed fees on July 19, 2018,
designating the proposed fees effective
July 1, 2018. The first proposed rule
change was published for comment in
the Federal Register on August 2, 2018.5
The Commission received one comment
letter on the proposal.6 The proposed
fees remained in effect until they were
temporarily suspended pursuant to a
suspension order (the ‘‘Suspension
Order’’) issued by the Division of
Trading and Markets, which also
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change.7 The Commission
subsequently received one further
comment letter on the proposed rule
change, supporting the decision to
suspend and institute proceedings on
the proposed fee change.8
In response to the Suspension Order,
the Exchange timely filed a Notice of
Intention to Petition for Review 9 and
Petition for Review to vacate the
Division’s Order,10 which stayed the
Division’s suspension of the filing. On
November 16, 2018 the Commission
granted the Exchange’s Petition for
Review but discontinued the automatic
5 See Securities Exchange Act Release No. 83728
(July 27, 2018), 83 FR 37853 (August 2, 2018) (SR–
BOX–2018–24).
6 See Letter from Tyler Gellasch, Executive
Director, The Healthy Markets Association, to Brent
J. Fields, Secretary, Commission, dated August 23,
2018 (‘‘Healthy Markets Letter’’).
7 See Securities Exchange Act Release No. 34–
84168 (September 17, 2018).
8 See Letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, and Ellen
Greene, Managing Director, Financial Services
Operations, Securities Industry and Financial
Markets Association, dated October 15, 2018.
9 See Letter from Amir Tayrani, Partner, Gibson,
Dunn & Crutcher LLP, dated September 19, 2018.
10 See Petition for Review of Order Temporarily
Suspending BOX Exchange LLC’s Proposal to
Amend the Fee Schedule on BOX Market LLC,
dated September 26, 2018.
PO 00000
Frm 00057
Fmt 4703
Sfmt 4703
33789
stay.11 The Exchange then filed a
statement to reiterate the arguments set
for in its petition for review and to
supplement that petition with
additional information.12
The Exchange subsequently refiled its
fee proposal on November 30th, 2018.
The proposed fees were noticed and
again temporarily suspended pursuant
to a suspension order issued by the
Division of Trading and Markets, which
also instituted proceedings to determine
whether to approve or disapprove the
proposed rule change.13 The
Commission received two comment
letters supporting the decision to
suspend and institute proceedings on
the proposed fee change.14
The Exchange again refiled its fee
proposal on February 13, 2019. The
proposed fees were noticed and again
temporarily suspended pursuant to a
suspension order issued by the Division
of Trading and Markets, which also
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change.15 The
Commission received four comment
letters supporting the decision to
11 See Securities Exchange Act Release No. 84614.
Order Granting Petition for Review and Scheduling
Filing of Statements, dated November 16, 2018.
Separately, the Securities Industry and Financial
Markets Association filed an application under
Section 19(d) of the Exchange Act challenging the
Exchange’s proposed fees as alleged prohibitions or
limitations on access. See In re Securities Industry
and Financial Markets Association, Admin. Proc.
File No. 3–18680 (Aug. 24, 2018). The Commission
thereafter remanded that denial-of-access
proceeding to the Exchange while ‘‘express[ing] no
view regarding the merits’’ and emphasizing that it
was ‘‘not set[ting] aside the challenged rule
change[ ].’’ In re Applications of SIFMA &
Bloomberg, Exchange Act Rel. No. 84433, at 2 (Oct.
16, 2018) (‘‘Remand Order’’), available at https://
www.sec.gov/litigation/opinions/2018/3484433.pdf. The Division’s Suspension Order is
inconsistent with the Commission’s intent in the
Remand Order to leave the challenged fees in place
during the pendency of the remand proceedings
and singles out the Exchange for disparate
treatment because it means that the Exchange—
unlike every other exchange whose rule changes
were the subject of the Remand Order—is not
permitted to continue charging the challenged fees
during the remand proceedings.
12 See Letter from Amir Tayrani, Partner, Gibson,
Dunn & Crutcher LLP, dated December 10, 2018.
13 See Securities Exchange Act Release No. 84823
(December 14, 2018), 83 FR 65381 (December 20,
2018) (SR–BOX–2018–37).
14 See Letters from Tyler Gellasch, Executive
Director, The Healthy Markets Association
(‘‘Second Healthy Markets Letter’’), and Chester
Spatt, Pamela R. and Kenneth B. Dunn Professor of
Finance, Tepper School of Business, Carnegie
Mellon University (‘‘Chester Spatt Letter’’), to Brent
J. Fields, Secretary, Commission, dated January 2,
2019.
15 See Securities Exchange Act Release No. 85201
(February 26, 2019), 84 FR 7146 (March 1,
2019)(SR–BOX–2019–04).
E:\FR\FM\15JYN1.SGM
15JYN1
khammond on DSKBBV9HB2PROD with NOTICES
33790
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
suspend and institute proceedings on
the proposed fee change.16
On March 29, 2019, the Commission
issued its Order Disapproving each
iteration of the BOX Proposal (‘‘BOX
Order’’). In the BOX Order, the
Commission highlighted a number of
deficiencies it found in three separate
rule filings by BOX to establish BOX’s
connectivity fees that prevented the
Commission from finding that BOX’s
proposed connectivity fees were
consistent with the Act.
Finally, on May 21, 2019 the Division
of Trading and Markets released new
Guidance on SRO Rule Filings Relating
to Fees.
The Exchange is once again re-filing
the proposed fees to address each topic
raised for discussion in the BOX Order
and the new guidance on SRO Fee
Filings to ensure that the Proposed Fees
are consistent with the Act. The
proposed rule change is immediately
effective upon filing with the
Commission pursuant to Section
19(b)(3)(A) of the Act.
As discussed herein, the Exchange
believes that it is reasonable and
appropriate to begin charging for
physical connectivity fees to partially
offset the costs associated with
maintaining and enhancing a state-ofthe-art exchange network infrastructure
in the US options industry. There are
significant costs associated with various
projects and initiatives to improve
overall network performance and
stability, as well as costs paid to the
third-party data centers for space rental,
power used, etc.
The Exchange has always offered
physical connectivity to the Exchange
for Participants and non-Participants to
access the Exchange’s trading platforms,
market data, test systems and disaster
recovery facilities. These physical
connections consist of 10Gb and non10Gb connections, where the 10Gb
connection provides for faster
processing of messages sent to it in
comparison to the non-10Gb
connection. Since becoming a selfregulated organization in 2012, the
Exchange has not charged for physical
connectivity and has instead relied on
transaction fees as the basis of BOX’s
revenue. However, in recent years
transaction fees have continually
decreased across the options industry.
At the same time these transactions fees
were decreasing, the options exchanges
16 See Letters from Theodore R. Lazo, Managing
Director and Associate General Counsel, SIFMA
(‘‘Second SIFMA Comment Letter’’), Tyler Gellasch,
Executive Director, Healthy Markets Association
(‘‘Third Healthy Markets Letter’’), Stefano Durdic,
Former Owner of R2G Services, LLC, and Anand
Prakash.
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
except for BOX began charging physical
connectivity fees to market participants.
As such BOX began to find itself at a
significant competitive disadvantage,
and had no choice but to begin charging
Participants and non-Participants fees
for connecting directly to the BOX
network (which the Exchange has taken
considerable measures to maintain and
enhance for the benefit of those
Participants and non-Participants) in
order to remain competitive with the
other options exchanges in the industry.
As discussed in BOX’s recent Petition
for Review of the Commission’s Order
Disapproving BOX’s three filings, not
allowing BOX to charge such
connectivity fees arbitrarily and
inequitably treats the Exchange
differently from each of the other
exchanges that submitted prior
immediately effective connectivity fee
filings that were not suspended or
disapproved by the Commission.17 The
Exchange notes that all other options
exchanges currently charge for similar
physical connectivity.18
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the Act,
in general, and Section 6(b)(4) and
6(b)(5) of the Act,19 in particular, in that
it provides for the equitable allocation
of reasonable dues, fees, and other
17 See Securities Exchange Act Release No. 85927.
Order Granting Petition for Review and Scheduling
Filing of Statements, dated May 23, 2019.
18 Nasdaq PHLX LLC (‘‘Phlx’’), The Nasdaq Stock
Market LLC (‘‘Nasdaq’’), NYSE Arca, Inc. (‘‘Arca’’),
NYSE American LLC (‘‘NYSE American’’), Nasdaq
ISE, LLC (‘‘ISE’’), Cboe Exchange, Inc. (‘‘Cboe’’),
Cboe BZX Exchange, Inc. (‘‘CboeBZX’’), Cboe EDGX
Exchange, Inc. (‘‘CboeEDGX’’) and Cboe C2
Exchange, Inc. (‘‘C2’’) all offer a type of 10Gb and
non-10Gb connectivity alternative to their
participants. See Phlx, and ISE Rules, General
Equity and Options Rules, General 8, Section 1(b).
Phlx and ISE each charge a monthly fee of $2,500
for each 1Gb connection, $10,000 for each 10Gb
connection and $15,000 for each 10Gb Ultra
connection, which is the equivalent of the
Exchange’s 10Gb ULL connection. See also Nasdaq
Price List—Trading Connectivity. Nasdaq charges a
monthly fee of $7,500 for each 10Gb direct
connection to Nasdaq and $2,500 for each direct
connection that supports up to 1Gb. See also NYSE
American Fee Schedule, Section V.B, and Arca Fees
and Charges, Co-Location Fees. NYSE American
and Arca each charge a monthly fee of $5,000 for
each 1Gb circuit, $14,000 for each 10Gb circuit and
$22,000 for each 10Gb LX circuit, which is the
equivalent of the Exchange’s 10Gb ULL connection.
See also Cboe, CboeBZX, CboeEDGX and C2 Fee
Schedules. Cboe charges monthly quoting and order
entry bandwidth packet fees. Specifically, Cboe
charges $1,600 for the 1st through 5th packet, $800
for the 6th through 8th packet, $400 for the 9th
through 13th packet and $200 for the 14th packet
and each additional packet. CboeBZX, CboeEDGX
and C2 each charge a monthly fee of $2,500 for each
1Gb connection and $7,500 for each 10Gb
connection.
19 15 U.S.C. 78f(b)(4) and (5).
PO 00000
Frm 00058
Fmt 4703
Sfmt 4703
charges among BOX Participants and
other persons using its facilities and
does not unfairly discriminate between
customers, issuers, brokers or dealers.
The Exchange believes that the
proposed fees in general constitute an
equitable allocation of fees, and are not
unfairly discriminatory, because they
allow the Exchange to recover costs
associated with offering access through
the network connections. The proposed
fees are also expected to offset the costs
both the Exchange and BOX incur in
maintaining and implementing ongoing
improvements to the trading systems,
including connectivity costs, costs
incurred on software and hardware
enhancements and resources dedicated
to software development, quality
assurance, and technology support.
The Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act, in that the proposed
fee changes are fair, equitable and not
unreasonably discriminatory, because
the fees for the connectivity alternatives
available on the Exchange, as proposed,
are competitive and market-driven. The
U.S. options markets are highly
competitive (there are currently 16
options markets) and a reliance on
competitive markets is an appropriate
means to ensure equitable and
reasonable prices.
The Exchange acknowledges that
there is no regulatory requirement that
any market participant connect to the
Exchange, or that any participant
connect at any specific connection
speed. The rule structure for options
exchanges are, in fact, fundamentally
different from those of equities
exchanges. In particular, options market
participants are not forced to connect to
(and purchase market data from) all
options exchanges, as shown by the
number of Participants of BOX as
compared to the much greater number
of participants at other options
exchanges. Not only does BOX have less
than half the number of participants as
certain other options exchanges, but
there are also a number of the
Exchange’s Participants that do not
connect directly to BOX. Further, of the
number of Participants that connect
directly to BOX, many such Participants
do not purchase market data from BOX.
In addition, of the market makers that
are connected to BOX, it is the
individual needs of the market maker
that require whether they need one
connection or multiple connections to
the Exchange. The Exchange has market
maker Participants that only purchase
one connection (10Gb) and the
Exchange has market maker Participants
that purchase multiple connections. It is
all driven by the business needs of the
E:\FR\FM\15JYN1.SGM
15JYN1
khammond on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
market maker. Market makers that are
consolidators that target resting order
flow tend to purchase more connectivity
that [sic] market makers that simply
quote all symbols on the Exchange.
Even though non-Participants purchase
and resell 10Gb and non-10Gb
connections to both Participants and
non-Participants, no market makers
currently connect to the Exchange
indirectly through such resellers.
In SIFMA’s comment letter, they
argue that all broker-dealers are required
to connect to all exchanges which is not
true in the options markets. The options
markets have evolved differently than
the equities markets both in terms of
market structure and functionality. For
example, there are many order types
that are available in the equities markets
that are not utilized in the options
markets, which relate to mid-point
pricing and pegged pricing which
require connection to the SIPs and each
of the equities exchanges in order to
properly execute those orders in
compliance with best execution
obligations. In addition, in the options
markets there is a single SIP (OPRA)
versus two SIPs in the equities markets,
resulting in few hops and thus
alleviating the need to connect directly
to all the options exchanges.
Additionally, in the options markets,
the linkage routing and trade through
protection are handled by the
exchanges, not by the individual
participants. Thus not connecting to an
options exchange or disconnecting from
an options exchange does not
potentially subject a broker-dealer to
violate order protection requirements as
suggested by SIFMA. The Exchange
recognizes that the decision of whether
to connect to the Exchange is separate
and distinct from the decision of
whether and how to trade on the
Exchange. The Exchange acknowledges
that many firms may choose to connect
to the Exchange, but ultimately not
trade on it, based on their particular
business needs.
To assist prospective Participants or
firms considering connecting to BOX,
the Exchange provides information
about the Exchange’s available
connectivity alternatives.20 The
decision of which type of connectivity
to purchase, or whether to purchase
connectivity at all for a particular
exchange, is based on the business
needs of the firm. Section 2.4 of the
BOX Connectivity Guide details the
bandwidth requirements depending on
the type of traffic each firm requires.
20 See BOX Connectivity Guide at https://
boxoptions.com/assets/NET-BX-001E-BOXNetwork-Connection-Specifications-v2.7.pdf.
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
Simple Order routing requires 128 kbps
of bandwidth, which could be achieved
with a non-10Gb connection, while
receiving the five best limits in all
classes for the HSVF requires a 10Gb
connection not purchase such data feed
products. Accordingly, purchasing
market data is a business decision/
choice, and thus the pricing for itis [sic]
constrained by competition.
Contrary to SIFMA’s argument, there
is competition for connectivity to BOX.
BOX competes with ten (10) nonParticipants who resell BOX
connectivity or market data. Those nonParticipants resell that connectivity to
multiple market participants over that
same connection, including both
Participants and non-Participants of
BOX. When connectivity is re-sold by a
third-party, BOX does not receive any
connectivity revenue from that sale. It is
entirely between the third-party and the
purchaser, thus constraining the ability
of BOX to set its connectivity pricing as
indirect connectivity is a substitute for
direct connectivity. There are currently
ten (10) non-Participants that purchase
connectivity to BOX. Those nonParticipants resell that connectivity or
market data to approximately twentyseven (27) customers, some of whom are
agency broker-dealers that have tens of
customers of their own. Some of those
twenty-seven (27) customers also
purchase connectivity directly from
BOX. Accordingly, indirect connectivity
is a viable alternative that is already
being used by non-Participants of BOX,
constraining the price that BOX is able
to charge for connectivity to its
Exchange.
The Exchange is comprised of 51
Participants. Of those 51 Participants,
13 Participants have purchased 10Gb or
non-10Gb connections or some
combination of multiple various
connections. Furthermore, every
Participant who has purchased at least
one connection also trades on the
Exchange with the exception of one new
Participant who is currently in the onboarding process. The remaining
Participants who have not purchased
any connectivity to the Exchange are
still able to trade on the Exchange
indirectly through other Participants or
non-Participant service bureaus that are
connected. These remaining
Participants who have not purchased
connectivity are not forced or compelled
to purchase connectivity, and they
retain all of the other benefits of
membership with the Exchange.
Accordingly, Participants and nonParticipants have the choice to purchase
connectivity and are not compelled to
do so in any way.
PO 00000
Frm 00059
Fmt 4703
Sfmt 4703
33791
The Exchange believes that the
proposed fees are fair, equitable and not
unreasonably discriminatory because
the connectivity pricing is associated
with relative usage or the various
market participants and does not
impose a barrier to entry to smaller
participants. Accordingly, the Exchange
offers two direct connectivity
alternatives and various indirect
connectivity (via third party)
alternatives, as described above. BOX
recognizes that there are various
business models and varying sizes of
market participants conducting business
on the Exchange. The non-10Gb direct
connectivity alternatives 21 are all
comprised of bandwidth of equal to or
less than 1Gb and are purchased by
market participants that require less
bandwidth. As stated above, Section 2.4
of the BOX Connectivity Guide details
the bandwidth requirements depending
on the type of traffic each firm requires.
While non-10Gb connections can fully
support the sending of orders and the
consumption of BOX’s HSVF Data
Feed,22 these connections use less
exchange resources and network
infrastructure. In contrast, market
participants that purchase 10Gb
connections utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. The 10Gb connection offers
optimized connectivity for latency
sensitive participants and is faster in
round trip time for connection oriented
traffic to the Exchange than the non10Gb connection. This lower latency is
achieved through more advanced
network equipment, such as advanced
hardware and switching components,
which translates to increased costs to
the Exchange. Market participants that
are less latency sensitive can purchase
non-10Gb direct connections and quote
in all products on the Exchange and
consume the HSVF Market Data Feed,
and such non-10Gb direct connections
are priced lower than the 10Gb
connections, offering smaller sized
market makers a lower cost alternative.
A 10Gb connection uses at least ten
times the network infrastructure as the
non-10Gb connections and the
Exchange has to scale our systems by
21 Non-10Gb connectivity alternatives are
comprised of protocol types that are at or under 1Gb
bandwidth. The protocol types are: Gigabit
Ethernet, Ethernet, Fast Ethernet, Fiber Channel,
OC–3, Singlemode Fiber, ISDN, POTS and T1.
22 The Exchange notes that, unlike MIAX, BOX’s
HSVF Data Feed does not require a 10Gb physical
connection. On BOX, the HSVF Data Feed cab [sic]
be consumed through a non-10Gb connection. On
MIAX, the 1Gb connection cannot support the
consumption of the top of market data feed or the
depth data feed product—both require a 10Gb
connection.
E:\FR\FM\15JYN1.SGM
15JYN1
khammond on DSKBBV9HB2PROD with NOTICES
33792
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
the amount and size of all connections
regardless of how they are used.23
Accordingly, the Exchange believes that
the allocation of the proposed fees
($1,000 per non-10Gb connection and
$5,000 per 10Gb connection) are
reasonable based on the network
resources consumed by the market
participants—lower bandwidth
consuming market participants pay the
least, and highest bandwidth consuming
market participants pay the most,
particularly since higher bandwidth
consumption translates to higher costs
to the Exchange.
Separately, the Exchange is not aware
of any reason why market participants
could not simply drop their connections
and cease being Participants of the
Exchange if the Exchange were to
establish unreasonable and
uncompetitive price increases for its
connectivity alternatives. Market
participants choose to connect to a
particular exchange and because it is a
choice, BOX must set reasonable
connectivity pricing, otherwise
prospective participants would not
connect and existing participants would
disconnect or connect through a thirdparty reseller of connectivity. No
options market participant is required
by rule, regulation, or competitive forces
to be a Participant of the Exchange.24
Several market participants choose not
to be Participants of the Exchange and
choose not to access the Exchange, and
several market participants also access
the Exchange indirectly through another
market participant. If all market
participants were required to be
Participants of each exchange and
connect directly to the Exchange, all
exchanges would have over 200
Participants, in line with Cboe’s total
membership.
The Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act because the proposed
fees allow the Exchange to recover a
portion of the costs incurred by the
Exchange associated with maintaining
and enhancing a state-of-the-art
exchange network infrastructure in the
US options industry. Additionally, there
are significant costs associated with
various projects and initiatives to
improve overall network performance
and stability, as well as costs paid to the
third-party data centers for space rental,
power used, etc.
23 The Exchange’s network infrastructure
requirements are based on the premise of all
connections operating at full capacity, [sic].
24 Cboe Exchange Inc. has over 200 members,
Nasdaq ISE, LLC has approximately 100 members,
and NYSE American LLC has over 80 members. In
comparison, the BOX has 51 Participants.
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
The Exchange notes that unlike its
competitors, the Exchange does not own
its own data center and therefore cannot
control data center costs. While some of
the data center expenses are fixed, much
of the expenses are not fixed, and thus
increases as the number of physical
connections increase. For example, new
non-10Gb and 10Gb connections require
the purchase of additional hardware to
support those connections. Further, as
the total number of all connections
increase, BOX needs to increase their
data center footprint and consume more
power, resulting in increased costs
charged by their third-party data center
provider. Accordingly, cost to BOX is
not entirely fixed. In 2018, the annual
operational expense (which relates
100% to the network infrastructure,
associated data center processing
equipment required to support various
connections, network monitoring
systems and associated software
required to support the various forms of
connectivity) was approximately $6.4
million. This does not include
additional indirect expenses that the
Exchange incurs that are allocated to the
support of network infrastructure of the
Exchange. Additionally, every year BOX
undertakes physical improvements to
the BOX network. For example, in the
last three years, BOX spent
approximately $2 million on physical
hardware alone. As such, BOX looks to
offset those costs through the proposed
connectivity fees.
A more detailed breakdown of the
annual operational expense in 2018
includes over $2.8 million for space
rental, power used, connections, etc. at
the Exchange’s data centers, over $1.1
million for data center support and
management of third party vendors,
over $700,000 in technological
improvements to the data center
infrastructure, over $1.4 million for
resources for technical and operational
services for the Exchange’s data centers
and $400,000 in market data
connectivity fees. Of note, regarding
market data connectivity fees, this is the
cost associated with BOX consuming
connectivity/content from the equities
markets in order to operate the
Exchange, causing BOX to effectively
pay its competitors for this connectivity.
Further, as discussed herein, because
the costs of operating a data center are
significant and not economically
feasible for the Exchange, the Exchange
does not operate its own data centers,
and instead contracts with a third-party
data center provider. The Exchange
notes that larger, dominant exchange
operators own/operate their data
centers, which offers them greater
control over their data center costs.
PO 00000
Frm 00060
Fmt 4703
Sfmt 4703
Because those exchanges own and
operate their data centers as profit
centers, the Exchange is subject to
additional costs. Connectivity fees,
which are charged for accessing the
Exchange’s data center network
infrastructure, are directly related to the
network and offset such costs.
As discussed herein, the Exchange
now believes that it is reasonable and
appropriate to begin charging for
physical connectivity fees to partially
offset the costs associated with
maintaining and enhancing a state-ofthe-art exchange network infrastructure
in the U.S. options industry. There are
significant costs associated with various
projects and initiatives to improve
overall network performance and
stability, as well as costs paid to the
third-party data centers for space rental,
power used, etc. As discussed above,
the Exchange notes that unlike other
options exchanges, the Exchange does
not own and operate its own data center
and therefore cannot control data center
costs. As detailed herein, the Exchange
has incurred substantial costs associated
with maintaining and enhancing the
BOX network. These costs, coupled
with the Exchange’s historically low
transaction fees, place BOX at a
competitive disadvantage against other
options exchanges who charge
connectivity fees to market participants.
BOX has no choice but to begin charging
Participants and non-Participants fees
for connecting directly to the network
which the Exchange has taken
considerable measures to maintain and
enhance for the benefit of those
Participants and non-Participants in
order to remain competitive with the
other options exchanges in the industry.
As the Exchange explained to the
Division, the existence of robust
competition between exchanges to
attract order flow requires exchanges to
keep prices for all of their joint
services—including connectivity to the
exchanges’ networks at a procompetitive level.25 This conclusion is
substantiated by the report prepared by
Professor Janusz A. Ordover and
Gustavo Bamberger addressing the
theory of ‘‘Platform Competition’’ and
its application to the pricing of
exchanges’ services, including
connectivity services.26 In the report,
Ordover and Bamberger explain that
‘‘the provision of connectivity services
. . . is inextricably linked to the
provision of trading services, so that, as
25 Letter from Lisa J. Fall, BOX, to Brent J. Fields,
Secretary, Securities and Exchange Commission
(Feb. 19, 2019), https://www.sec.gov/comments/srbox-2018-24/srbox201824-4945872-178516.pdf.
26 See Attachment to Letter from Lisa J. Fall,
supra note 25 (‘‘Ordover/Bamberger Statement’’).
E:\FR\FM\15JYN1.SGM
15JYN1
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
khammond on DSKBBV9HB2PROD with NOTICES
a matter of economics, it is not possible
to appropriately evaluate the pricing of
connectivity services in isolation from
the pricing of trading and other ‘joint’
services offered by’’ an exchange.
Ordover and Bamberger state that
‘‘connectivity services are an ‘input’
into trading’’ and that ‘‘excessive
pricing of such services would raise the
costs of trading on [an exchange]
relative to its rivals and thus discourage
trading on’’ that exchange.
Although the Ordover/Bamberger
Statement focuses on the pricing of
connectivity services by Nasdaqaffiliated equities exchanges, its
‘‘overarching conclusion . . . that the
pricing of connectivity services should
not be analyzed in isolation’’ applies
with equal force to the proposed fees.
Because BOX is engaged with rigorous
competition with other exchanges to
attract order flow to its platform, BOX
is constrained in its ability to price its
joint services—including connectivity
services—at supracompetitive levels.
That competition ensures that BOX’s
connectivity fees are set at levels
consistent with the requirements of the
Exchange Act.
The Exchange again notes that other
exchanges have similar connectivity
alternatives for their participants,
including similar low-latency
connectivity. For example, Nasdaq
PHLX LLC (‘‘Phlx’’), NYSE Arca, Inc.
(‘‘Arca’’), NYSE American LLC (‘‘NYSE
American’’) and Nasdaq ISE, LLC
(‘‘ISE’’) all offer a 1Gb, 10Gb and 10Gb
low latency ethernet connectivity
alternatives to each of their
participants.27 The Exchange further
notes that Phlx, ISE, Arca and NYSE
American each charge higher rates for
such similar connectivity to primary
and secondary facilities.28. [sic]
Finally, the Exchange believes
redefining the HSVF Connection Fee as
a Port Fee is reasonable, equitable and
not unfairly discriminatory. This
classification is more accurate because
an HSVF subscription is not enabled
through a physical connection to the
Exchange. Although market participant
must be credentialed by BOX to receive
the HSVF, anyone can become
27 See Phlx and ISE Rules, General Equity and
Options Rules, General 8, Section 1(b). Phlx and ISE
each charge a monthly fee of $2,500 for each 1Gb
connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection, which the
[sic] equivalent of the Exchange’s 10Gb ULL
connection. See also NYSE American Fee Schedule,
Section V.B, and Arca Fees and Charges, CoLocation Fees. NYSE American and Arca each
charge a monthly fee of $5,000 for each 1Gb circuit,
$14,000 for each 10Gb circuit and $22,000 for each
10Gb LX circuit, which the [sic] equivalent of the
Exchange’s 10Gb ULL connection.
28 Id.
VerDate Sep<11>2014
16:08 Jul 12, 2019
Jkt 247001
credentialed by submitting the required
documentation.29 The Exchange does
not propose to alter the amount of the
existing HSVF fee; subscribers to the
HSVF will continue to pay $1,500 per
month. As with the Connectivity Fees,
BOX’s HSVF Port Fee is in line with
industry practice.30
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Unilateral
action by the Exchange in establishing
fees for services provided to its
Participants and others using its
facilities will not have an impact on
competition. As a small exchange in the
already highly competitive environment
for options trading, the Exchange does
not have the market power necessary to
set prices for services that are
unreasonable or unfairly discriminatory
in violation of the Exchange Act. The
Exchange’s proposed fees, as described
herein, are comparable to and generally
lower than fees charged by other options
exchanges for the same or similar
services. Lastly, the Exchange believes
the proposed change will not impose a
burden on intramarket competition as
the proposed fees are applicable to all
Participants and others using its
facilities that connect to BOX.
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)(ii) of the Exchange Act 31
and Rule 19b–4(f)(2) thereunder,32
because it establishes or changes a due,
or fee.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend the rule change if
it appears to the Commission that the
action is necessary or appropriate in the
29 See Trading Interface Specification, BOX
Options, https://boxoptions.com/technology/
trading-interface-specifications/.
30 See Cboe Data Services, LLC (CDS) Fee
Schedule § VI (charging $500 per month for up to
five users to access the Enhanced Controlled Data
Distribution Program).
31 15 U.S.C. 78s(b)(3)(A)(ii).
32 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00061
Fmt 4703
Sfmt 4703
33793
public interest, for the protection of
investors, or would otherwise further
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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–
BOX–2019–22 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–BOX–2019–22. 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 such
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–BOX–2019–22, and should
E:\FR\FM\15JYN1.SGM
15JYN1
33794
Federal Register / Vol. 84, No. 135 / Monday, July 15, 2019 / Notices
be submitted on or before August 5,
2019.
Exchange’s internet website at https://
boxexchange.com.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Vanessa A. Countryman,
Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2019–14891 Filed 7–12–19; 8:45 am]
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.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86334; File No. SR–BOX–
2019–23]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fee
Schedule on the BOX Options Market
LLC (‘‘BOX’’) Facility for Certain PIP
and COPIP Transactions
July 9, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 28,
2019, BOX Exchange LLC (the
‘‘Exchange’’) 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
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
khammond on DSKBBV9HB2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule to amend
the Fee Schedule [sic] on the BOX
Options Market LLC (‘‘BOX’’) facility.
While changes to the fee schedule
pursuant to this proposal will be
effective upon filing, the changes will
become operative on July 1, 2019.The
text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
33 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
VerDate Sep<11>2014
16:08 Jul 12, 2019
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule for trading on BOX.
PIP and COPIP Transactions
The Exchange first proposes to amend
certain PIP and COPIP transaction fees
for Professional Customers, Broker
Dealers and Market Makers in Section
I.B of the BOX Fee Schedule.
Specifically, the Exchange proposes to
increase Improvement Order 5 fees for
Professional Customers, Broker Dealers,
and Market Makers in Penny Pilot
Classes from $0.12 to $0.16 and
decrease the Improvement Order fees for
Professional Customers, Broker Dealers
and Market Makers in Non-Penny Pilot
Classes from $0.38 to $0.34.
Liquidity Fees and Credits
The Exchange then proposes to
amend Section III.A of the BOX Fee
Schedule, Liquidity Fees and Credits,
for PIP and COPIP Transactions.
Specifically, the Exchange proposes to
increase the fees and credits for PIP and
COPIP transactions in Non-Penny Pilot
Classes and decrease the fees and
credits for PIP and COPIP transactions
in Penny Pilot Classes. Currently, under
Section III.A, a Public Customer PIP or
COPIP Order receives the ‘‘removal’’
credit, while the corresponding Primary
Improvement Order and any
Improvement Orders will be charged the
‘‘add’’ fee as shown in the following
table:
5 An Improvement Order is a response to a PIP
or COPIP auction.
Jkt 247001
PO 00000
Frm 00062
Fmt 4703
Sfmt 4703
Fee for
adding
liquidity
Non-Penny Pilot Classes ......
Penny Pilot Classes ..............
SPY .......................................
$0.77
0.38
0.45
Credit for
removing
liquidity
($0.77)
(0.38)
(0.45)
Further, under current Section III.A.,
if a Non-Public Customer PIP or COPIP
Order does not trade with its Primary
Improvement Order, the Primary
Improvement Order receives the
‘‘removal’’ credit and any corresponding
Improvement Order responses are
charged the ‘‘add’’ fee as shown in the
following table:
Fee for
adding
liquidity
Non-Penny Pilot Classes ......
Penny Pilot Classes ..............
SPY .......................................
$0.77
0.38
0.45
Credit for
removing
liquidity
($0.77)
(0.38)
(0.45)
The Exchange now proposes to raise
the fees for adding liquidity in PIP and
COPIP transactions to $0.81 from $0.77
in Non-Penny Pilot Classes and decrease
the fees for adding liquidity in PIP and
COPIP transactions in Penny Pilot
Classes from $0.38 to $0.34. Further, the
Exchange proposes to increase the credit
for removing liquidity in PIP and COPIP
transactions in Non-Penny Pilot Classes
to $0.81 from $0.77. Lastly, the
Exchange proposes to decrease the
credit for removing liquidity in PIP and
COPIP transactions in Penny Pilot
Classes from $0.38 to $0.34.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the Act,
in general, and Section 6(b)(4) and
6(b)(5)of the Act,6 in particular, in that
it provides for the equitable allocation
of reasonable dues, fees, and other
charges among BOX Participants and
other persons using its facilities and
does not unfairly discriminate between
customers, issuers, brokers or dealers.
PIP and COPIP Transactions
The Exchange believes that increasing
the Improvement Order fees for
Professional Customers, Broker Dealers
and Market Makers in Penny Pilot
Classes is reasonable and equitable as
the proposed fees are lower than similar
fees assessed at other options exchanges
in the industry.7 The Exchange further
6 15
U.S.C. 78f(b)(4) and (5).
Nasdaq Phlx LLC (‘‘Phlx’’) Pricing Schedule,
where Market Maker or Specialist Responders to the
PIXL are charged $0.25 for Penny Pilot Classes and
where all other non-Customer Responders are
charged $0.48 for Penny Pilot Classes. See also
Miami International Securities Exchange LLC
(‘‘MIAX’’) Fee Schedule, where all responders are
charged $0.50 for Penny Pilot Classes.
7 See
E:\FR\FM\15JYN1.SGM
15JYN1
]]>Agencies
[Federal Register Volume 84, Number 135 (Monday, July 15, 2019)]
[Notices]
[Pages 33788-33794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14891]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86335; File No. SR-BOX-2019-22]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee
Schedule on the BOX Options Market LLC (``BOX'') Facility To Establish
BOX Connectivity Fees for Participants and Non-Participants Who Connect
to the BOX Network
July 9, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 26, 2019, BOX Exchange LLC (the ``Exchange'') filed with
the Securities and Exchange Commission
[[Page 33789]]
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange filed the proposed rule change pursuant to Section
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\
which renders the proposal effective upon filing with the Commission.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Securities and Exchange Commission
(``Commission'') a proposed rule change to amend the Fee Schedule on
the BOX Options Market LLC (``BOX'') facility. The text of the proposed
rule change is available from the principal office of the Exchange, at
the Commission's Public Reference Room and also on the Exchange's
internet website at https://boxexchange.com.
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 proposes to amend Section VI. (Technology Fees) of the
BOX Fee Schedule to establish BOX Connectivity Fees for Participants
and non-Participants who connect to the BOX network. Connectivity fees
will be based upon the amount of bandwidth that will be used by the
Participant or non-Participant. Further, BOX Participants or non-
Participants connected as of the last trading day of each calendar
month will be charged the applicable Connectivity Fee for that month.
The Connectivity Fees will be as follows:
------------------------------------------------------------------------
Connection type Monthly fees
------------------------------------------------------------------------
Non-10 Gb Connection...................... $1,000 per connection.
10 Gb Connection.......................... $5,000 per connection.
------------------------------------------------------------------------
The Exchange also proposes to amend certain language and numbering
in Section VI.A to reflect the changes discussed above. Specifically,
BOX proposes to add the title ``Third Party Connectivity Fees'' under
Section VI.A. Further, the Exchange proposes to add Section VI.A.2,
which details the proposed BOX Connectivity Fees discussed above.
Finally the Exchange is proposing to remove Section VI.C. High Speed
Vendor Feed (``HSVF''), and reclassify the HSVF as a Port Fee.
The Exchange initially filed the proposed fees on July 19, 2018,
designating the proposed fees effective July 1, 2018. The first
proposed rule change was published for comment in the Federal Register
on August 2, 2018.\5\ The Commission received one comment letter on the
proposal.\6\ The proposed fees remained in effect until they were
temporarily suspended pursuant to a suspension order (the ``Suspension
Order'') issued by the Division of Trading and Markets, which also
instituted proceedings to determine whether to approve or disapprove
the proposed rule change.\7\ The Commission subsequently received one
further comment letter on the proposed rule change, supporting the
decision to suspend and institute proceedings on the proposed fee
change.\8\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 83728 (July 27,
2018), 83 FR 37853 (August 2, 2018) (SR-BOX-2018-24).
\6\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated August 23, 2018 (``Healthy Markets Letter'').
\7\ See Securities Exchange Act Release No. 34-84168 (September
17, 2018).
\8\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director,
Financial Services Operations, Securities Industry and Financial
Markets Association, dated October 15, 2018.
---------------------------------------------------------------------------
In response to the Suspension Order, the Exchange timely filed a
Notice of Intention to Petition for Review \9\ and Petition for Review
to vacate the Division's Order,\10\ which stayed the Division's
suspension of the filing. On November 16, 2018 the Commission granted
the Exchange's Petition for Review but discontinued the automatic
stay.\11\ The Exchange then filed a statement to reiterate the
arguments set for in its petition for review and to supplement that
petition with additional information.\12\
---------------------------------------------------------------------------
\9\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated September 19, 2018.
\10\ See Petition for Review of Order Temporarily Suspending BOX
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC,
dated September 26, 2018.
\11\ See Securities Exchange Act Release No. 84614. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated November 16, 2018. Separately, the Securities Industry and
Financial Markets Association filed an application under Section
19(d) of the Exchange Act challenging the Exchange's proposed fees
as alleged prohibitions or limitations on access. See In re
Securities Industry and Financial Markets Association, Admin. Proc.
File No. 3-18680 (Aug. 24, 2018). The Commission thereafter remanded
that denial-of-access proceeding to the Exchange while
``express[ing] no view regarding the merits'' and emphasizing that
it was ``not set[ting] aside the challenged rule change[ ].'' In re
Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2
(Oct. 16, 2018) (``Remand Order''), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf. The Division's
Suspension Order is inconsistent with the Commission's intent in the
Remand Order to leave the challenged fees in place during the
pendency of the remand proceedings and singles out the Exchange for
disparate treatment because it means that the Exchange--unlike every
other exchange whose rule changes were the subject of the Remand
Order--is not permitted to continue charging the challenged fees
during the remand proceedings.
\12\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated December 10, 2018.
---------------------------------------------------------------------------
The Exchange subsequently refiled its fee proposal on November
30th, 2018. The proposed fees were noticed and again temporarily
suspended pursuant to a suspension order issued by the Division of
Trading and Markets, which also instituted proceedings to determine
whether to approve or disapprove the proposed rule change.\13\ The
Commission received two comment letters supporting the decision to
suspend and institute proceedings on the proposed fee change.\14\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 84823 (December 14,
2018), 83 FR 65381 (December 20, 2018) (SR-BOX-2018-37).
\14\ See Letters from Tyler Gellasch, Executive Director, The
Healthy Markets Association (``Second Healthy Markets Letter''), and
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance,
Tepper School of Business, Carnegie Mellon University (``Chester
Spatt Letter''), to Brent J. Fields, Secretary, Commission, dated
January 2, 2019.
---------------------------------------------------------------------------
The Exchange again refiled its fee proposal on February 13, 2019.
The proposed fees were noticed and again temporarily suspended pursuant
to a suspension order issued by the Division of Trading and Markets,
which also instituted proceedings to determine whether to approve or
disapprove the proposed rule change.\15\ The Commission received four
comment letters supporting the decision to
[[Page 33790]]
suspend and institute proceedings on the proposed fee change.\16\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 85201 (February 26,
2019), 84 FR 7146 (March 1, 2019)(SR-BOX-2019-04).
\16\ See Letters from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''),
Tyler Gellasch, Executive Director, Healthy Markets Association
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of
R2G Services, LLC, and Anand Prakash.
---------------------------------------------------------------------------
On March 29, 2019, the Commission issued its Order Disapproving
each iteration of the BOX Proposal (``BOX Order''). In the BOX Order,
the Commission highlighted a number of deficiencies it found in three
separate rule filings by BOX to establish BOX's connectivity fees that
prevented the Commission from finding that BOX's proposed connectivity
fees were consistent with the Act.
Finally, on May 21, 2019 the Division of Trading and Markets
released new Guidance on SRO Rule Filings Relating to Fees.
The Exchange is once again re-filing the proposed fees to address
each topic raised for discussion in the BOX Order and the new guidance
on SRO Fee Filings to ensure that the Proposed Fees are consistent with
the Act. The proposed rule change is immediately effective upon filing
with the Commission pursuant to Section 19(b)(3)(A) of the Act.
As discussed herein, the Exchange believes that it is reasonable
and appropriate to begin charging for physical connectivity fees to
partially offset the costs associated with maintaining and enhancing a
state-of-the-art exchange network infrastructure in the US options
industry. There are significant costs associated with various projects
and initiatives to improve overall network performance and stability,
as well as costs paid to the third-party data centers for space rental,
power used, etc.
The Exchange has always offered physical connectivity to the
Exchange for Participants and non-Participants to access the Exchange's
trading platforms, market data, test systems and disaster recovery
facilities. These physical connections consist of 10Gb and non-10Gb
connections, where the 10Gb connection provides for faster processing
of messages sent to it in comparison to the non-10Gb connection. Since
becoming a self-regulated organization in 2012, the Exchange has not
charged for physical connectivity and has instead relied on transaction
fees as the basis of BOX's revenue. However, in recent years
transaction fees have continually decreased across the options
industry. At the same time these transactions fees were decreasing, the
options exchanges except for BOX began charging physical connectivity
fees to market participants. As such BOX began to find itself at a
significant competitive disadvantage, and had no choice but to begin
charging Participants and non-Participants fees for connecting directly
to the BOX network (which the Exchange has taken considerable measures
to maintain and enhance for the benefit of those Participants and non-
Participants) in order to remain competitive with the other options
exchanges in the industry.
As discussed in BOX's recent Petition for Review of the
Commission's Order Disapproving BOX's three filings, not allowing BOX
to charge such connectivity fees arbitrarily and inequitably treats the
Exchange differently from each of the other exchanges that submitted
prior immediately effective connectivity fee filings that were not
suspended or disapproved by the Commission.\17\ The Exchange notes that
all other options exchanges currently charge for similar physical
connectivity.\18\
---------------------------------------------------------------------------
\17\ See Securities Exchange Act Release No. 85927. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated May 23, 2019.
\18\ Nasdaq PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC
(``Nasdaq''), NYSE Arca, Inc. (``Arca''), NYSE American LLC (``NYSE
American''), Nasdaq ISE, LLC (``ISE''), Cboe Exchange, Inc.
(``Cboe''), Cboe BZX Exchange, Inc. (``CboeBZX''), Cboe EDGX
Exchange, Inc. (``CboeEDGX'') and Cboe C2 Exchange, Inc. (``C2'')
all offer a type of 10Gb and non-10Gb connectivity alternative to
their participants. See Phlx, and ISE Rules, General Equity and
Options Rules, General 8, Section 1(b). Phlx and ISE each charge a
monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb
connection and $15,000 for each 10Gb Ultra connection, which is the
equivalent of the Exchange's 10Gb ULL connection. See also Nasdaq
Price List--Trading Connectivity. Nasdaq charges a monthly fee of
$7,500 for each 10Gb direct connection to Nasdaq and $2,500 for each
direct connection that supports up to 1Gb. See also NYSE American
Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location
Fees. NYSE American and Arca each charge a monthly fee of $5,000 for
each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each
10Gb LX circuit, which is the equivalent of the Exchange's 10Gb ULL
connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules.
Cboe charges monthly quoting and order entry bandwidth packet fees.
Specifically, Cboe charges $1,600 for the 1st through 5th packet,
$800 for the 6th through 8th packet, $400 for the 9th through 13th
packet and $200 for the 14th packet and each additional packet.
CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for
each 1Gb connection and $7,500 for each 10Gb connection.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act, in general, and Section
6(b)(4) and 6(b)(5) of the Act,\19\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees, and other
charges among BOX Participants and other persons using its facilities
and does not unfairly discriminate between customers, issuers, brokers
or dealers.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Exchange believes that the proposed fees in general constitute
an equitable allocation of fees, and are not unfairly discriminatory,
because they allow the Exchange to recover costs associated with
offering access through the network connections. The proposed fees are
also expected to offset the costs both the Exchange and BOX incur in
maintaining and implementing ongoing improvements to the trading
systems, including connectivity costs, costs incurred on software and
hardware enhancements and resources dedicated to software development,
quality assurance, and technology support.
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act, in that the proposed fee changes are fair,
equitable and not unreasonably discriminatory, because the fees for the
connectivity alternatives available on the Exchange, as proposed, are
competitive and market-driven. The U.S. options markets are highly
competitive (there are currently 16 options markets) and a reliance on
competitive markets is an appropriate means to ensure equitable and
reasonable prices.
The Exchange acknowledges that there is no regulatory requirement
that any market participant connect to the Exchange, or that any
participant connect at any specific connection speed. The rule
structure for options exchanges are, in fact, fundamentally different
from those of equities exchanges. In particular, options market
participants are not forced to connect to (and purchase market data
from) all options exchanges, as shown by the number of Participants of
BOX as compared to the much greater number of participants at other
options exchanges. Not only does BOX have less than half the number of
participants as certain other options exchanges, but there are also a
number of the Exchange's Participants that do not connect directly to
BOX. Further, of the number of Participants that connect directly to
BOX, many such Participants do not purchase market data from BOX. In
addition, of the market makers that are connected to BOX, it is the
individual needs of the market maker that require whether they need one
connection or multiple connections to the Exchange. The Exchange has
market maker Participants that only purchase one connection (10Gb) and
the Exchange has market maker Participants that purchase multiple
connections. It is all driven by the business needs of the
[[Page 33791]]
market maker. Market makers that are consolidators that target resting
order flow tend to purchase more connectivity that [sic] market makers
that simply quote all symbols on the Exchange. Even though non-
Participants purchase and resell 10Gb and non-10Gb connections to both
Participants and non-Participants, no market makers currently connect
to the Exchange indirectly through such resellers.
In SIFMA's comment letter, they argue that all broker-dealers are
required to connect to all exchanges which is not true in the options
markets. The options markets have evolved differently than the equities
markets both in terms of market structure and functionality. For
example, there are many order types that are available in the equities
markets that are not utilized in the options markets, which relate to
mid-point pricing and pegged pricing which require connection to the
SIPs and each of the equities exchanges in order to properly execute
those orders in compliance with best execution obligations. In
addition, in the options markets there is a single SIP (OPRA) versus
two SIPs in the equities markets, resulting in few hops and thus
alleviating the need to connect directly to all the options exchanges.
Additionally, in the options markets, the linkage routing and trade
through protection are handled by the exchanges, not by the individual
participants. Thus not connecting to an options exchange or
disconnecting from an options exchange does not potentially subject a
broker-dealer to violate order protection requirements as suggested by
SIFMA. The Exchange recognizes that the decision of whether to connect
to the Exchange is separate and distinct from the decision of whether
and how to trade on the Exchange. The Exchange acknowledges that many
firms may choose to connect to the Exchange, but ultimately not trade
on it, based on their particular business needs.
To assist prospective Participants or firms considering connecting
to BOX, the Exchange provides information about the Exchange's
available connectivity alternatives.\20\ The decision of which type of
connectivity to purchase, or whether to purchase connectivity at all
for a particular exchange, is based on the business needs of the firm.
Section 2.4 of the BOX Connectivity Guide details the bandwidth
requirements depending on the type of traffic each firm requires.
Simple Order routing requires 128 kbps of bandwidth, which could be
achieved with a non-10Gb connection, while receiving the five best
limits in all classes for the HSVF requires a 10Gb connection not
purchase such data feed products. Accordingly, purchasing market data
is a business decision/choice, and thus the pricing for itis [sic]
constrained by competition.
---------------------------------------------------------------------------
\20\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
---------------------------------------------------------------------------
Contrary to SIFMA's argument, there is competition for connectivity
to BOX. BOX competes with ten (10) non-Participants who resell BOX
connectivity or market data. Those non-Participants resell that
connectivity to multiple market participants over that same connection,
including both Participants and non-Participants of BOX. When
connectivity is re-sold by a third-party, BOX does not receive any
connectivity revenue from that sale. It is entirely between the third-
party and the purchaser, thus constraining the ability of BOX to set
its connectivity pricing as indirect connectivity is a substitute for
direct connectivity. There are currently ten (10) non-Participants that
purchase connectivity to BOX. Those non-Participants resell that
connectivity or market data to approximately twenty-seven (27)
customers, some of whom are agency broker-dealers that have tens of
customers of their own. Some of those twenty-seven (27) customers also
purchase connectivity directly from BOX. Accordingly, indirect
connectivity is a viable alternative that is already being used by non-
Participants of BOX, constraining the price that BOX is able to charge
for connectivity to its Exchange.
The Exchange is comprised of 51 Participants. Of those 51
Participants, 13 Participants have purchased 10Gb or non-10Gb
connections or some combination of multiple various connections.
Furthermore, every Participant who has purchased at least one
connection also trades on the Exchange with the exception of one new
Participant who is currently in the on-boarding process. The remaining
Participants who have not purchased any connectivity to the Exchange
are still able to trade on the Exchange indirectly through other
Participants or non-Participant service bureaus that are connected.
These remaining Participants who have not purchased connectivity are
not forced or compelled to purchase connectivity, and they retain all
of the other benefits of membership with the Exchange. Accordingly,
Participants and non-Participants have the choice to purchase
connectivity and are not compelled to do so in any way.
The Exchange believes that the proposed fees are fair, equitable
and not unreasonably discriminatory because the connectivity pricing is
associated with relative usage or the various market participants and
does not impose a barrier to entry to smaller participants.
Accordingly, the Exchange offers two direct connectivity alternatives
and various indirect connectivity (via third party) alternatives, as
described above. BOX recognizes that there are various business models
and varying sizes of market participants conducting business on the
Exchange. The non-10Gb direct connectivity alternatives \21\ are all
comprised of bandwidth of equal to or less than 1Gb and are purchased
by market participants that require less bandwidth. As stated above,
Section 2.4 of the BOX Connectivity Guide details the bandwidth
requirements depending on the type of traffic each firm requires. While
non-10Gb connections can fully support the sending of orders and the
consumption of BOX's HSVF Data Feed,\22\ these connections use less
exchange resources and network infrastructure. In contrast, market
participants that purchase 10Gb connections utilize the most bandwidth,
and those are the participants that consume the most resources from the
network. The 10Gb connection offers optimized connectivity for latency
sensitive participants and is faster in round trip time for connection
oriented traffic to the Exchange than the non-10Gb connection. This
lower latency is achieved through more advanced network equipment, such
as advanced hardware and switching components, which translates to
increased costs to the Exchange. Market participants that are less
latency sensitive can purchase non-10Gb direct connections and quote in
all products on the Exchange and consume the HSVF Market Data Feed, and
such non-10Gb direct connections are priced lower than the 10Gb
connections, offering smaller sized market makers a lower cost
alternative.
---------------------------------------------------------------------------
\21\ Non-10Gb connectivity alternatives are comprised of
protocol types that are at or under 1Gb bandwidth. The protocol
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel,
OC-3, Singlemode Fiber, ISDN, POTS and T1.
\22\ The Exchange notes that, unlike MIAX, BOX's HSVF Data Feed
does not require a 10Gb physical connection. On BOX, the HSVF Data
Feed cab [sic] be consumed through a non-10Gb connection. On MIAX,
the 1Gb connection cannot support the consumption of the top of
market data feed or the depth data feed product--both require a 10Gb
connection.
---------------------------------------------------------------------------
A 10Gb connection uses at least ten times the network
infrastructure as the non-10Gb connections and the Exchange has to
scale our systems by
[[Page 33792]]
the amount and size of all connections regardless of how they are
used.\23\ Accordingly, the Exchange believes that the allocation of the
proposed fees ($1,000 per non-10Gb connection and $5,000 per 10Gb
connection) are reasonable based on the network resources consumed by
the market participants--lower bandwidth consuming market participants
pay the least, and highest bandwidth consuming market participants pay
the most, particularly since higher bandwidth consumption translates to
higher costs to the Exchange.
---------------------------------------------------------------------------
\23\ The Exchange's network infrastructure requirements are
based on the premise of all connections operating at full capacity,
[sic].
---------------------------------------------------------------------------
Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Participants of the Exchange if the Exchange were to establish
unreasonable and uncompetitive price increases for its connectivity
alternatives. Market participants choose to connect to a particular
exchange and because it is a choice, BOX must set reasonable
connectivity pricing, otherwise prospective participants would not
connect and existing participants would disconnect or connect through a
third-party reseller of connectivity. No options market participant is
required by rule, regulation, or competitive forces to be a Participant
of the Exchange.\24\ Several market participants choose not to be
Participants of the Exchange and choose not to access the Exchange, and
several market participants also access the Exchange indirectly through
another market participant. If all market participants were required to
be Participants of each exchange and connect directly to the Exchange,
all exchanges would have over 200 Participants, in line with Cboe's
total membership.
---------------------------------------------------------------------------
\24\ Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC
has approximately 100 members, and NYSE American LLC has over 80
members. In comparison, the BOX has 51 Participants.
---------------------------------------------------------------------------
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the proposed fees allow the Exchange to
recover a portion of the costs incurred by the Exchange associated with
maintaining and enhancing a state-of-the-art exchange network
infrastructure in the US options industry. Additionally, there are
significant costs associated with various projects and initiatives to
improve overall network performance and stability, as well as costs
paid to the third-party data centers for space rental, power used, etc.
The Exchange notes that unlike its competitors, the Exchange does
not own its own data center and therefore cannot control data center
costs. While some of the data center expenses are fixed, much of the
expenses are not fixed, and thus increases as the number of physical
connections increase. For example, new non-10Gb and 10Gb connections
require the purchase of additional hardware to support those
connections. Further, as the total number of all connections increase,
BOX needs to increase their data center footprint and consume more
power, resulting in increased costs charged by their third-party data
center provider. Accordingly, cost to BOX is not entirely fixed. In
2018, the annual operational expense (which relates 100% to the network
infrastructure, associated data center processing equipment required to
support various connections, network monitoring systems and associated
software required to support the various forms of connectivity) was
approximately $6.4 million. This does not include additional indirect
expenses that the Exchange incurs that are allocated to the support of
network infrastructure of the Exchange. Additionally, every year BOX
undertakes physical improvements to the BOX network. For example, in
the last three years, BOX spent approximately $2 million on physical
hardware alone. As such, BOX looks to offset those costs through the
proposed connectivity fees.
A more detailed breakdown of the annual operational expense in 2018
includes over $2.8 million for space rental, power used, connections,
etc. at the Exchange's data centers, over $1.1 million for data center
support and management of third party vendors, over $700,000 in
technological improvements to the data center infrastructure, over $1.4
million for resources for technical and operational services for the
Exchange's data centers and $400,000 in market data connectivity fees.
Of note, regarding market data connectivity fees, this is the cost
associated with BOX consuming connectivity/content from the equities
markets in order to operate the Exchange, causing BOX to effectively
pay its competitors for this connectivity.
Further, as discussed herein, because the costs of operating a data
center are significant and not economically feasible for the Exchange,
the Exchange does not operate its own data centers, and instead
contracts with a third-party data center provider. The Exchange notes
that larger, dominant exchange operators own/operate their data
centers, which offers them greater control over their data center
costs. Because those exchanges own and operate their data centers as
profit centers, the Exchange is subject to additional costs.
Connectivity fees, which are charged for accessing the Exchange's data
center network infrastructure, are directly related to the network and
offset such costs.
As discussed herein, the Exchange now believes that it is
reasonable and appropriate to begin charging for physical connectivity
fees to partially offset the costs associated with maintaining and
enhancing a state-of-the-art exchange network infrastructure in the
U.S. options industry. There are significant costs associated with
various projects and initiatives to improve overall network performance
and stability, as well as costs paid to the third-party data centers
for space rental, power used, etc. As discussed above, the Exchange
notes that unlike other options exchanges, the Exchange does not own
and operate its own data center and therefore cannot control data
center costs. As detailed herein, the Exchange has incurred substantial
costs associated with maintaining and enhancing the BOX network. These
costs, coupled with the Exchange's historically low transaction fees,
place BOX at a competitive disadvantage against other options exchanges
who charge connectivity fees to market participants. BOX has no choice
but to begin charging Participants and non-Participants fees for
connecting directly to the network which the Exchange has taken
considerable measures to maintain and enhance for the benefit of those
Participants and non-Participants in order to remain competitive with
the other options exchanges in the industry.
As the Exchange explained to the Division, the existence of robust
competition between exchanges to attract order flow requires exchanges
to keep prices for all of their joint services--including connectivity
to the exchanges' networks at a pro-competitive level.\25\ This
conclusion is substantiated by the report prepared by Professor Janusz
A. Ordover and Gustavo Bamberger addressing the theory of ``Platform
Competition'' and its application to the pricing of exchanges'
services, including connectivity services.\26\ In the report, Ordover
and Bamberger explain that ``the provision of connectivity services . .
. is inextricably linked to the provision of trading services, so that,
as
[[Page 33793]]
a matter of economics, it is not possible to appropriately evaluate the
pricing of connectivity services in isolation from the pricing of
trading and other `joint' services offered by'' an exchange. Ordover
and Bamberger state that ``connectivity services are an `input' into
trading'' and that ``excessive pricing of such services would raise the
costs of trading on [an exchange] relative to its rivals and thus
discourage trading on'' that exchange.
---------------------------------------------------------------------------
\25\ Letter from Lisa J. Fall, BOX, to Brent J. Fields,
Secretary, Securities and Exchange Commission (Feb. 19, 2019),
https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4945872-178516.pdf.
\26\ See Attachment to Letter from Lisa J. Fall, supra note 25
(``Ordover/Bamberger Statement'').
---------------------------------------------------------------------------
Although the Ordover/Bamberger Statement focuses on the pricing of
connectivity services by Nasdaq-affiliated equities exchanges, its
``overarching conclusion . . . that the pricing of connectivity
services should not be analyzed in isolation'' applies with equal force
to the proposed fees. Because BOX is engaged with rigorous competition
with other exchanges to attract order flow to its platform, BOX is
constrained in its ability to price its joint services--including
connectivity services--at supracompetitive levels. That competition
ensures that BOX's connectivity fees are set at levels consistent with
the requirements of the Exchange Act.
The Exchange again notes that other exchanges have similar
connectivity alternatives for their participants, including similar
low-latency connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE
Arca, Inc. (``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq
ISE, LLC (``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet
connectivity alternatives to each of their participants.\27\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\28\. [sic]
---------------------------------------------------------------------------
\27\ See Phlx and ISE Rules, General Equity and Options Rules,
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection, which the [sic] equivalent
of the Exchange's 10Gb ULL connection. See also NYSE American Fee
Schedule, Section V.B, and Arca Fees and Charges, Co-Location Fees.
NYSE American and Arca each charge a monthly fee of $5,000 for each
1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb
LX circuit, which the [sic] equivalent of the Exchange's 10Gb ULL
connection.
\28\ Id.
---------------------------------------------------------------------------
Finally, the Exchange believes redefining the HSVF Connection Fee
as a Port Fee is reasonable, equitable and not unfairly discriminatory.
This classification is more accurate because an HSVF subscription is
not enabled through a physical connection to the Exchange. Although
market participant must be credentialed by BOX to receive the HSVF,
anyone can become credentialed by submitting the required
documentation.\29\ The Exchange does not propose to alter the amount of
the existing HSVF fee; subscribers to the HSVF will continue to pay
$1,500 per month. As with the Connectivity Fees, BOX's HSVF Port Fee is
in line with industry practice.\30\
---------------------------------------------------------------------------
\29\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/.
\30\ See Cboe Data Services, LLC (CDS) Fee Schedule Sec. VI
(charging $500 per month for up to five users to access the Enhanced
Controlled Data Distribution Program).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Unilateral action by the
Exchange in establishing fees for services provided to its Participants
and others using its facilities will not have an impact on competition.
As a small exchange in the already highly competitive environment for
options trading, the Exchange does not have the market power necessary
to set prices for services that are unreasonable or unfairly
discriminatory in violation of the Exchange Act. The Exchange's
proposed fees, as described herein, are comparable to and generally
lower than fees charged by other options exchanges for the same or
similar services. Lastly, the Exchange believes the proposed change
will not impose a burden on intramarket competition as the proposed
fees are applicable to all Participants and others using its facilities
that connect to BOX.
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)(ii) of the Exchange Act \31\ and Rule 19b-4(f)(2)
thereunder,\32\ because it establishes or changes a due, or fee.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78s(b)(3)(A)(ii).
\32\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend the rule
change if it appears to the Commission that the action is necessary or
appropriate in the public interest, for the protection of investors, or
would otherwise further the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
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 [email protected]. Please include
File Number SR-BOX-2019-22 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-BOX-2019-22. 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 such 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-BOX-2019-22, and should
[[Page 33794]]
be submitted on or before August 5, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-14891 Filed 7-12-19; 8:45 am]
BILLING CODE 8011-01-P
