Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Price List To Adopt Transition Pricing To Support the Introduction of Ports That Connect to the Exchange Using Pillar Technology, 34210-34217 [2019-15138]
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Federal Register / Vol. 84, No. 137 / Wednesday, July 17, 2019 / Notices
it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Contract 537 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2019–163, CP2019–183.
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2019–15202 Filed 7–16–19; 8:45 am]
BILLING CODE 7710–12–P
POSTAL SERVICE
Product Change—Priority Mail Express
Negotiated Service Agreement
Postal ServiceTM.
ACTION: Notice.
AGENCY:
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
DATES: Date of required notice: July 17,
2019.
FOR FURTHER INFORMATION CONTACT:
Sean Robinson, 202–268–8405.
SUPPLEMENTARY INFORMATION: The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on July 12, 2019,
it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Express Contract 78 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2019–162, CP2019–182.
SUMMARY:
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2019–15201 Filed 7–16–19; 8:45 am]
BILLING CODE 7710–12–P
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Price List to adopt transition pricing to
support the introduction of ports that
connect to the Exchange using Pillar
technology. The Exchange proposes to
implement these changes to its Price
List effective July 3, 2019. The proposed
rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86360; File No. SR–NYSE–
2019–39]
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‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on July 3,
2019, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Its
Price List To Adopt Transition Pricing
To Support the Introduction of Ports
That Connect to the Exchange Using
Pillar Technology
July 11, 2019.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
1. Purpose
The Exchange proposes to amend its
Price List to adopt transition pricing to
support the introduction of ports that
connect to the Exchange using Pillar
technology. With the proposed
transition fee pricing, the Exchange
would (1) adopt a cap on monthly fees
for the use of certain ports connecting
to the Exchange for the billing months
July 2019 through March 2020; (2) adopt
a Decommission Extension Fee
applicable for the billing months April
2020 through September 2020 for legacy
port connections; and (3) prorate the
2 15
1 15
U.S.C. 78s(b)(1).
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monthly fee for certain ports activated
after July 1, 2019, effective April 1,
2020. Without this proposed rule
change, the Exchange would be required
to charge a member organization for all
of its ports—both legacy ports and the
new ports using Pillar technology—
during the transition period, which
could significantly increase costs to
member organizations.
This filing does not to propose to
increase the rates charged for ports.
Rather, the purpose of this filing is to
incent the transition from older to
newer and more efficient Pillar
technology with no fee increase.
Moreover, the Exchange proposes to do
so in essentially the same way that the
Exchange’s affiliate, NYSE Arca, Inc.
(‘‘NYSE Arca’’), did in 2017 4 by, first,
providing a cap on how much member
organizations would be charged for
ports for a nine-month period so that
they would not incur additional charges
during the transition to Pillar
communication protocols and, second,
providing that the fees for the few firms
that do not transition during the ninemonth period offset the Exchange’s
continuing costs of supporting legacy
ports.
The Exchange proposes to implement
these changes to its Price List effective
July 3, 2019.5
Overview of the Proposed Fee Changes
Member organizations enter orders
and order instructions and receive
information from the Exchange by
establishing a connection to a gateway
that uses communication protocols that
map to the order types and modifiers
described in Exchange rules. These
gateway connections, also known as
logical port connections, are referred to
as ‘‘ports’’ on the Exchange’s Price List.
The Exchange currently makes
available ports that provide this
connectivity to the Exchange’s trading
systems (i.e., ports for entry of orders
and/or quotes (‘‘order/quote entry
ports’’)) and charges $550 per port per
month for such ports.6 Designated
4 See Securities Exchange Act Release No. 81901
(October 19, 2017), 82 FR 49426 (SR–NYSArca–
2017–121) (adopting decommission extension fee
for initial three months of March–May 2018);
Securities Exchange Act Release No. 83410 (June
12, 2018), 83 FR 28300 (SR–NYSArca–2018–42)
(extending decommission extension fee for the
additional three months of June–September 2018).
5 The Exchange originally filed to amend the
Schedule of Fees and Rebates on June 28, 2019 (SR–
NYS–2019–36). SR–NYSE–2019–36 was
subsequently withdrawn and replaced by this filing.
6 All ports on the Exchange currently connect via
a Common Customer Gateway (‘‘CCG’’) that
accesses its equity trading systems. See, e.g.,
Securities Exchange Act Release No. 64542 (May
25, 2011), 76 FR 31659 (June 1, 2011) (SR–NYSE–
2011–13).
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Market Makers (‘‘DMMs’’) connect via
‘‘DMM Gateways’’ and are not charged
for the first 12 ports per month that
connect to the Exchange.7 The Exchange
also currently makes ports available for
drop copies and charges $550 per port
per month,8 except that DMMs are not
charged for drop copy ports that connect
to the Exchange via the DMM Gateway.
Fees for order/quote entry ports and
drop copy ports have remained
relatively stable over time and have not
increased since 2015, and not since
2017 for DMMs.9
The Exchange is undergoing a multiphase transition to the Pillar trading
platform that began in April 2018, when
the Exchange introduced trading of UTP
Securities on the Pillar trading
platform.10 Because Exchange-listed
securities are not yet on the Pillar
trading platform, all ports currently
communicate with the Exchange using
CCG (‘‘Phase I ports’’), regardless of
whether trading UTP securities or
Exchange-listed securities.
The Exchange next plans to transition
Exchange-listed securities to the Pillar
trading platform.11 In anticipation of the
transition of Exchange-listed securities
to the Pillar trading platform, the
Exchange will be introducing new
technology to support how all member
organizations, including DMMs, will
communicate with the Exchange when
trading on the Pillar trading platform.
The Exchange plans to make available
ports using Pillar gateways (‘‘Phase II
ports’’) beginning July 1, 2019, at which
time such ports will be available for
trading UTP Securities on the Exchange.
7 See Securities Exchange Act Release No. 68229
(November 14, 2012), 77 FR 69688 (November 20,
2012) (SR–NYSE–2012–60) (Notice).
8 Only one fee per drop copy port applies, even
if receiving drop copies from multiple order/quote
entry ports.
9 See Securities Exchange Act Release No. 76072
(October 5, 2015), 80 FR 61258 (October 9, 2015)
(SR–NYSE–2015–43) (Notice); Securities Exchange
Act Release No. 79748 (January 6, 2017), 82 FR
3828 (January 12, 2017) (SR–NYSE–2016–93)
(Notice).
10 The term ‘‘UTP Security’’ is defined under Rule
1.1(aa) to mean a security that is listed on a national
securities exchange other than the Exchange and
that trades on the Exchange pursuant to unlisted
trading privileges. The Exchange began trading UTP
Securities on the Pillar trading platform on April 9,
2018. See also Securities Exchange Act Release No.
82945 (March 26, 2018), 83 FR 13553 (March 29,
2018) (SR–NYSE–2017–36) (Order approving
trading rules to support trading of UTP Securities
on the Pillar trading platform).
11 The Exchange has announced that, subject to
rule approvals, it will begin transitioning Exchangelisted securities to Pillar on August 5, 2019,
available here: https://www.nyse.com/publicdocs/
nyse/markets/nyse/Revised_Pillar_Migration_
Timeline.pdf. See also Securities Exchange Act
Release No. 85962 (May 29, 2019), 84 FR 26188
(June 5, 2019) (SR–NYSE–2019–05) (Order
approving rules to support the transition of
Exchange-listed securities to Pillar).
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The Phase II ports will also be available
for trading Exchange-listed securities
once they transition to the Pillar trading
platform. Once Exchange-listed
securities transition to Pillar, DMMs
will communicate with the Exchange
using Phase II ports and will no longer
use DMM Gateways.12
As the experience of the Exchange’s
affiliates that trade on the Pillar trading
platform and use the Phase II ports
shows, the Phase II ports constitute a
significant performance improvement
over current ports, with an expected
reduction in average latency up to 80%
over Phase I ports.13 The Phase II ports
will provide member organizations with
a low-latency connection that will
provide a more deterministic trading
experience on the Exchange. Because of
the latency improvements of the Phase
II ports and because Exchange member
organizations that are members of one or
more of the Affiliated Exchanges already
use Phase II ports, the Exchange expects
its member organizations to transition
expeditiously to using Phase II ports.
However, because of the technology
changes that a member organization
would need to make to connect to Phase
II ports, the Exchange anticipates that
there will be a period of time before all
member organization will be fully
transitioned to the Phase II ports. During
that transition period, a member
organization may choose to maintain its
Phase I ports while it replaces them
with Phase II ports. Accordingly, during
this implementation, there will be a
period when both the Phase I and Phase
II ports will be available to member
organizations.14
In connection with this transition, the
Exchange proposes transition pricing
that has two distinct phases.
• The first phase would be a
transition period during which the fees
charged for both order/quote entry and
drop copy ports would, with certain
exceptions, be capped at, and thus not
charged for more than, the total number
of both order/quote entry and drop copy
12 The Exchange accordingly proposes to refer
generally to DMM ports that connect to the
Exchange by deleting the phrase ‘‘via the DMM
Gateway’’ in the sections of the Price List describing
order/quote entry ports and drop copy ports.
13 Latency statistics for the Pillar gateways are
available at https://www.nyse.com/pillar. These
gateways are currently available on NYSE American
LLC (‘‘NYSE American’’), NYSE Arca, Inc. (‘‘NYSE
Arca’’), and NYSE National, Inc. (‘‘NYSE National’’)
(collectively, the ‘‘Affiliated Exchanges’’).
14 The Exchange’s affiliate NYSE Arca similarly
offered a parallel period when both Pillar phase I
and Pillar phase II protocols were available to its
members. See Securities Exchange Act Release No.
79588 (December 23, 2016), 81 FR 96534 (December
30, 2016) (SR–NYSEArca–2016–170) (Notice of
filing and immediate effectiveness of proposed rule
change).
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ports that the member organization has
activated as of its June 2019 invoice.
The first phase would last nine months,
from July 2019 through March 2020,
during which the Exchange will be
making both the Phase I and Phase II
ports available to member organizations.
• The second phase would
encompass a six-month decommission
period between April 2020 and
September 2020 during which the
Exchange’s proposed pricing would
provide increased costs to member
organizations that did not transition in
the nine-month transition period.
Effective April 1, 2020, the Exchange
would also prorate the monthly fee for
certain ports activated on or after July 1,
2019.
Competitive Environment
The Exchange operates in a highly
competitive market. The Commission
has repeatedly expressed its preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 15
As the Commission itself recognized,
the market for trading services in NMS
stocks has become ‘‘more fragmented
and competitive.’’ 16 Indeed, equity
trading is currently dispersed across 13
exchanges,17 31 alternative trading
systems,18 and numerous broker-dealer
internalizers and wholesalers. Based on
publicly-available information, no
single exchange has more than 18% of
the market share of executed volume of
equity trades (whether excluding or
15 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37495, 37499 (June 29, 2005)
(S7–10–04) (‘‘Regulation NMS’’).
16 See Securities Exchange Act Release No. 51808,
84 FR 5202, 5253 (February 20, 2019) (File No. S7–
05–18) (Transaction Fee Pilot for NMS Stocks Final
Rule) (‘‘Transaction Fee Pilot’’).
17 See Cboe Global Markets, U.S. Equities Market
Volume Summary (June 28, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
See generally https://www.sec.gov/fast-answers/
divisionsmarketregmrexchangesshtml.html.
18 See FINRA ATS Transparency Data (June 3,
2019), available at https://
otctransparency.finra.org/otctransparency/Ats
IssueData. Although 54 alternative trading systems
were registered with the Commission as of May 31,
2019, only 31 are currently trading. A list of
alternative trading systems registered with the
Commission is available at https://www.sec.gov/
foia/docs/atslist.htm.
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including auction volume).19 The
Exchange believes that the ever-shifting
market share among the exchanges from
month to month demonstrates that
market participants can shift order flow,
or discontinue or reduce use of certain
categories of products, including ports,
in response to fee changes. Accordingly,
the Exchange’s fees, including port fees,
are reasonably constrained by
competitive alternatives and market
participants can readily trade on
competing venues if they deem pricing
levels at those other venues to be more
favorable.
The Exchange is proposing this
transition pricing in the context of a
competitive environment in which
market participants can and do shift
order flow, or discontinue or reduce use
of certain categories of products, in
response to fee changes. Because ports
are used by member organizations to
trade electronically on the Exchange,
fees associated with ports are subject to
these same competitive forces. The
Exchange believes that the proposal
represents a reasonable attempt to
provide member organizations with an
orderly transition to upgraded
technology without needing to incur
any additional costs. If a member
organization is unable to complete this
transition within the nine-month
period, the pricing is designed to offset
the Exchange’s continuing costs of
supporting the Phase I ports.
Proposed Rule Change
As noted above, the Exchange
proposes to introduce transition pricing
designed to provide member
organizations an extended transition
period to connect to Phase II ports
without subjecting them to fee increases
as they transition and once that
transition period ends, to prorate fees
for order/quote entry and drop copy
ports, as follows.
The Exchange proposes to set forth
the proposed ‘‘Pillar Port Transition Fee
Pricing’’ as a separate entry on its Price
List, to be added after the entry for Ports
for drop copies. As proposed, the Pillar
Port Transition Fee Pricing would be
applicable to both order/quote entry and
drop copy ports. Accordingly, all
references to ports in this proposed
pricing refer to both types of ports.
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Proposed Transition Period Pricing
During the billing months of July 2019
through March 2020 (the ‘‘Transition
Period’’), the Exchange proposes that
the total number of ports charged per
19 See Cboe Global Markets U.S. Equities Market
Volume Summary (June 27, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
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member organization would be capped
at the total number of such ports that
the member organization has activated
as of the June 2019 invoice, which is the
last full month prior to the introduction
of the new gateways (the ‘‘Transition
Cap’’).
As further proposed, the Transition
Cap pricing would be available until the
earlier of (1) the end of the Transition
Period, i.e., March 2020, or (2) the
billing month during which a member
organization has fully transitioned to
using only ports that communicate
using Pillar phase II protocols. For
example, if in June 2019, Firm A has 10
ports, that firm’s Transition Cap would
be 10 ports. At any time during the
Transition Cap period, if Firm A keeps
those 10 Phase I ports and adds 10
Phase II ports, Firm A would only be
charged for 10 ports. If, during the
Transition Period, Firm A no longer had
any Phase I ports and had eight Phase
II ports, it would no longer be eligible
for the Transition Cap pricing and
would be charged for those eight ports.
As an exception to the cap, the
Exchange proposes that if, during the
Transition Period, a member
organization increases the number of
Phase I ports above the Transition Cap,
those ports would be charged at the
current rates for order/quote entry ports
and drop copy ports. The purpose of the
Transition Cap is to facilitate the
transition to Phase II ports. If this were
not a transition period, and a member
organization increased its number of
ports, it would be charged accordingly.
The Exchange therefore believes that if
a member organization increases the
number of Phase I ports, i.e., is not
transitioning to the new technology, it
should be charged for those additional
ports no differently than during periods
when the Transition Cap pricing is not
in effect.
The Exchange further proposes that if,
during the Transition Period, a member
organization has a total number of ports
below the Transition Cap, the Exchange
would charge a member organization for
their actual number of ports. For
example, if during the Transition
Period, Firm A with a Transition Cap of
10 ports had four Phase I ports and five
Phase II ports that firm would be
charged for only nine ports, which is
under its Transition Cap.
As proposed, the charge per port
(order/quote entry and drop copy) will
not be changing, and would remain at
$550 per port per month for all ports.
DMMs would continue not to be
charged for drop copy ports and for
their first 12 order/quote entry ports per
month that connect to the Exchange and
then $550 per order/quote entry port
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that connects to the Exchange per
month thereafter.20
Application and Impact of Transition
Period Pricing
The purpose of Transition Period
Pricing is to cap port fees to allow
member organizations sufficient time to
implement technology changes
necessary to connect to the Exchange
using the Phase II ports without
incurring any additional Exchange fees.
Based on the experience of the
Exchange’s affiliate NYSE Arca, the
Exchange believes that nine months
provides sufficient time for all member
organizations, regardless of size, to be
able to complete the necessary changes.
The Exchange proposes to extend the
Transition Pricing through March 2020
so that if a member organization is
unable to complete its changes in 2019,
it would have sufficient time in 2020 to
plan for and implement the changes.
The proposed cap would have the
effect of waiving the port fees during the
Transition Period of any new Phase II
ports that a member organization may
use. Without this proposed rule change,
the Exchange would be required to
charge a member organization for all of
its ports—both Phase I and Phase II
ports—during the transition period,
which could significantly increase costs
to member organizations.
Proposed Decommission Extension Fee
The Exchange proposes to amend the
Price List to adopt a Decommission
Extension Fee that would apply during
the billing months of April 2020
through September 2020 (the
‘‘Decommission Period’’). As proposed,
during the Decommission Period, in
addition to the current port fees,
member organizations would be charged
a Decommission Extension Fee of $500
per port per month, increasing by $500
per port for each month for any ports
that communicate using Pillar phase I
protocols. The proposed Decommission
Extension Fee would apply only to
member organizations that use Phase I
ports during the Decommission Period.
The Exchange proposes that ports using
Pillar phase I protocols would no longer
be available beginning October 1, 2020.
For example, in June 2019, Firm A
has 10 Phase I ports and a Transition
Cap of 10 ports. By April 2020, the first
month of the Decommission Period,
Firm A still has four Phase I ports. In
this scenario, Firm A would be charged
the standard port rate for the four Phase
I ports plus $500 per port for the
Decommission Extension Fee.
20 See
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If Firm A has the same four Phase I
ports in May 2020, Firm A would be
charged the standard port rate for the
four Phase I ports plus $1,000 per port
for the Decommission Extension Fee.
If Firm A retains the four Phase I ports
until September 2020, the final month
of the Decommission Extension Pricing,
Firm A would be charged the standard
port rate for the four Phase I ports plus
$3,000 per port for the Decommission
Extension Fee.
Application and Impact of the Proposed
Decommission Extension Fee
As noted above, the Exchange
believes that a nine-month Transition
Period is sufficient time for member
organizations to fully transition to Phase
II ports and eliminate their use of Phase
I ports. To the extent that member
organizations do not complete the
transition during the Transition Period,
the Exchange will offer member
organizations the ability to choose to
continue using Phase I ports until
September 2020. To cover the costs
associated with maintaining and
supporting both Phase I ports and Phase
II ports beyond the nine-month
Transition Period, the Exchange
proposes that such costs would be paid
by the expected very small number of
member organizations that would need
longer to transition than the nine-month
Transition Period. Specifically, to
support the continued availability of the
Phase I ports, the Exchange would have
to maintain additional hardware and
devote technology resources to maintain
and operate those ports, which is a cost
to the Exchange. While these costs
cannot be specifically quantified and it
is unknown how many (if any) member
organizations would need to continue to
access the Exchange using Phase I ports
after the Transition Period, the
Exchange believes that the proposed
Decommission Extension Fee would, in
part, cover the costs associated with
continuing to support the Phase I port
infrastructure for use by a dwindling
number of member organizations.
The proposed Decommission
Extension Fee is not novel. As noted
previously, the Exchange’s affiliate
NYSE Arca previously adopted a
decommission extension fee and was
successful in using the fee to incent its
members to fully transition to the phase
II ports within a seven-month transition
period.21 Specifically, NYSE Arca
introduced its Phase II ports in August
2017. Beginning March 1, 2018, NYSE
Arca began charging a decommission
extension fee. Accordingly, NYSE Arca
members had seven months to transition
21 See
note 4, supra.
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before the decommission extension fee
was to be charged. During March 2018,
the first month that NYSE Arca charged
a decommission extension fee, 29
members of the 139 members that had
Phase I ports prior August 2017, or 21%
of the total, were subject to the
decommission extension fee. In other
words, 79% of NYSE Arca members had
fully transitioned to the Phase II ports
before NYSE Arca began charging its
decommission extension fee. Sixteen of
those firms were relatively large firms
with at least ten ports that choose to
absorb the cost rather than to transition
to Phase II ports within the seven-month
transition period.
By September 2018, the last month
that NYSE Arca charged a
decommission extension fee, only five
NYSE Arca members out of 139 (4% of
the total), were subject to the
decommission extension fee. Of those
five members, three were relatively large
firms with at least 10 ports.
Based on NYSE Arca’s experience, the
Exchange believes that a similarly small
number of larger firms will be subject to
the proposed Decommission Extension
Fee because they choose not to fully
move to Phase II ports during the
Transition Period. The Exchange notes
that it proposes a Transition Period of
nine months, which will provide firms
two more months to transition as
compared to NYSE Arca. The Exchange
believes that these additional two
months will provide more than
sufficient time for the transition and
that fewer member organizations will
choose to pay the proposed
Decommission Fee because they do not
transition within the nine months, as
compared to the number of firms that
paid the NYSE Arca’s decommission
extension fee.
Proration of Port Fees
Effective April 1, 2020, the fee for
order/quote entry and drop copy ports
activated after July 1, 2019, will be
prorated to the number of trading days
that a port is eligible for production
trading with the Exchange, including
any scheduled early closing days.22
Application and Impact of Proration of
Port Fees
The purpose of prorating the fees for
order/quote entry and drop copy ports
activated after July 1, 2019 is to charge
member organizations port fees only for
the days in which the member
22 Cboe BZX prorates port fees for the first month
of service. See Cboe BZX U.S. Equities Exchange
Fee Schedule, available at https://
markets.cboe.com/us/equities/membership/fee_
schedule/bzx/.
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organization’s port is connected to the
Exchange.
For example, in June 2019, Firm A
has 10 Phase I ports and a Pillar
Transition Cap of 10 ports. If, in the first
month after the Transition Cap, April
2020, Firm A has 10 Phase II ports and
adds 2 Phase II ports on April 15, 2020,
Firm A would be charged the standard
port rate for the 10 Phase II ports, plus
a prorated rate for the 2 additional
Phase II ports added mid-month. The
prorated rate would be calculated by
dividing the number of trading days that
a port is eligible for production trading
with the Exchange by the total number
of trading days in that month, then
multiplying by the standard port rate.
The Exchange does not propose to
introduce such pro-rated pricing until
after the Transition Period because
during the Transition Period, member
organizations will be subject to the
Transition Cap pricing, which will cap
the total port costs as member
organizations add Phase II ports and
drop Phase I ports.
The proposed changes are not
otherwise intended to address any other
issues, and the Exchange is not aware of
any problems that member
organizations would have in complying
with the proposed change.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,23 in general, and
furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,24 in
particular, because it provides for the
equitable allocation of reasonable dues,
fees, and other charges among its
members, issuers and other persons
using its facilities and does not unfairly
discriminate between customers,
issuers, brokers or dealers.
The Proposed Change Is Reasonable
The Exchange operates in a highly
competitive market. The Commission
has repeatedly expressed its preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
23 15
24 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(4) & (5).
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broader forms that are most important to
investors and listed companies.’’ 25
As the Commission itself recognized,
the market for trading services in NMS
stocks has become ‘‘more fragmented
and competitive.’’ 26 Indeed, equity
trading is currently dispersed across 13
exchanges,27 31 alternative trading
systems,28 and numerous broker-dealer
internalizers and wholesalers. Based on
publicly-available information, no
single exchange has more than 18% of
the market share of executed volume of
equity trades (whether excluding or
including auction volume).29 The
Exchange believes that the ever-shifting
market share among the exchanges from
month to month demonstrates that
market participants can shift order flow,
or discontinue or reduce use of certain
categories of products, including ports,
in response to fee changes. Accordingly,
the Exchange’s fees, including port fees,
are reasonably constrained by
competitive alternatives and market
participants can readily trade on
competing venues if they deem pricing
levels at those other venues to be more
favorable.
If a particular exchange charges
excessive fees for connectivity,
impacted members and non-members
may opt to terminate their connectivity
arrangements with that exchange, and
adopt a possible range of alternative
strategies, including routing to the
applicable exchange through another
participant or market center or taking
that exchange’s data indirectly.
Accordingly, if the Exchange charges
excessive fees, it would stand to lose not
only connectivity revenues but also
revenues associated with the execution
of orders routed to it, and, to the extent
applicable, market data revenues. The
Exchange believes that this competitive
dynamic imposes powerful restraints on
the ability of any exchange to charge
unreasonable fees for connectivity.
Given this competitive environment,
the proposal represents a reasonable
method of providing member
25 See
Regulation NMS, 70 FR at 37499.
Transaction Fee Pilot, 84 FR at 5253.
27 See Cboe Global Markets, U.S. Equities Market
Volume Summary (June 28, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
See generally https://www.sec.gov/fast-answers/
divisionsmarketregmrexchangesshtml.html.
28 See FINRA ATS Transparency Data (June 3,
2019), available at https://
otctransparency.finra.org/otctransparency/
AtsIssueData. Although 54 alternative trading
systems were registered with the Commission as of
May 31, 2019, only 31 are currently trading. A list
of alternative trading systems registered with the
Commission is available at https://www.sec.gov/
foia/docs/atslist.htm.
29 See Cboe Global Markets U.S. Equities Market
Volume Summary (June 28, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
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26 See
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organizations with a means to make an
orderly transition to upgraded
technology without increasing their
costs. As noted, the purpose of this
filing is not to change the rates charged
for ports. Rather the proposal would
provide a cap on how much member
organizations would be charged for
ports during a nine-month period so
that they would not incur additional
charges during the transition to Pillar
communication protocols. Accordingly,
the Exchange believes that the proposal
is a fair and reasonable way for member
organizations to transition to upgraded
technology without needing to incur
any additional Exchange fees. If a
member organization is unable to
complete this transition within the ninemonth period, the pricing is designed so
that only those few member
organizations that may not transition
within the nine-month period pay for
the Exchange to continue to support the
Phase I ports.
Transition Period Pricing
The Exchange believes that the
proposed Transition Cap for the billing
months of July 2019 through March
2020, which will be available until the
earlier of the end of the Transition
Period or the billing month during
which a member organization has fully
transitioned to using only ports that
communicate using Pillar phase II
protocols, is reasonable.
The proposed change is designed to
permit member organizations an
extended transition period to adjust to
the new gateways. The Exchange
believes that a nine-month transition
period is reasonable and provides
sufficient notice of the changeover. The
proposed pricing is designed to provide
all member organizations with no fee
increases while they transition, and
provides certainty for when this
transition pricing ends so that firms can
plan when and how to fully transition
to the new gateways. Without such
Transition Period pricing, member
organizations costs would increase
because, without this proposed rule
change, the Exchange would be required
to charge a member organization for all
of its ports—both Phase I and Phase II
ports—during the transition period,
which could significantly increase costs
to member organizations. In this regard,
absent similar transition pricing, the
Exchange’s affiliate NYSE Arca’s
transition to Phase II protocols would
have increased the average firms’ port
fees by 67.5% in the first month of the
migration. Thus, the proposed cap
balances the Exchange’s desire to
improve technology without increasing
PO 00000
Frm 00099
Fmt 4703
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Exchange fees for member
organizations.
Decommission Extension Fee
The Exchange believes that the
proposed Decommission Extension Fee
for member organizations that choose to
continue to connect to the Exchange
through the use of Phase I ports after the
Transition Period, which is scheduled
to end at the close of trading on
September 30, 2020, is also reasonable.
As noted above, the Exchange will
incur ongoing costs in maintaining
Phase I ports during the Decommission
Period, including costs to maintain
servers and their physical location,
monitoring order activity, and other
support, with no real benefit. The
Exchange believes that it is reasonable
to require member organizations to pay
the proposed Decommission Extension
Fee because a small number of member
organizations would need longer to
transition than the nine-month
Transition Period. Due to the additional
costs that the Exchange would continue
incur to support Phase I ports after the
Transition Period, the Exchange
believes that it is fair and reasonable to
charge those member organizations that
choose not to fully transition during the
Transition Period, fees to defray the
costs of such support during the
Decommission Period because it is
expected that the number of member
organizations that do not transition to
Phase II ports by March 31, 2020 will be
small. Further, the Exchange believes
that it is reasonable for the
Decommission Extension Fee to
increase for each month for any ports
that communicate using Pillar phase I
protocols once the Decommission
Period begins because the number of
member organizations not fully
migrated from legacy technology to the
Phase II ports will be expected to
diminish over time. Member
organizations can avoid or mitigate the
impact of the proposed increase of the
Decommission Extension Fee by
migrating to the new ports before or
earlier in the Decommission Period.
Proration of Port Fees
The Exchange believes that the
proposal to prorate the monthly fee for
ports activated on or after July 1, 2019
to the number of trading days in a
billing month the port is connected to
the Exchange is fair and reasonable
because it would allow all Exchange
participants to subscribe to the most
effective connectivity according to their
trading requirements and as a result will
only be assessed fees for the
connectivity they utilize during any
trading month beginning April 1, 2020
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for ports activated after July 1, 2019.30
The Exchange does not propose to
introduce pro-rated pricing until after
the Transition Period because during
the Transition Period, member
organizations will be subject to the
Transition Cap pricing, which will cap
the total port costs as member
organizations add Phase II ports and
drop Phase I ports.
The Exchange believes the proposed
proration of fees for ports activated after
July 1, 2019 would serve only to charge
member organizations port fees for the
actual days a member organization’s
ports are connected to the Exchange.
The Exchange further notes that billing
for ports activated before July 1, 2019
will continue to be based on the number
of ports on the third business day prior
to the end of the month consistent with
the Exchange’s billing policy, and so
firms that cancel ports before the third
business day prior to the end of the
month will not be billed for those ports.
Moreover, as noted above, Cboe BZX
currently charges new ports on a
prorated basis for the first month of
service. The Exchange notes, however,
that fees for ports activated before July
1, 2019 would not be pro-rated. The
Exchange believes it is reasonable to
charge flat fees for ports activated before
July 1, 2019 as such ports are expected
to be phased out within a short period
of time after the introduction of the
Phase II ports and would be subject to
the proposed Decommission Fee,
described above.
The Proposal is an Equitable Allocation
of Fees
The Exchange believes its proposal
equitably allocates its fees among its
market participants. The Exchange is
not proposing to adjust the amount of
the port fees, which will remain at the
current level for all market participants.
Rather, the proposal would provide an
additional fee for those few member
organizations that choose not to
transition to Phase II ports during the
Transition Period and to adopt a fee cap
and pro-rata billing for ports without
any change to the fees currently charged
by the Exchange for the use of ports to
connect to the Exchange’s trading
systems.
The Exchange believes that the
proposal constitutes an equitable
allocation of fees because all similarly
situated member organizations and
other market participants would be
charged the same rates.
30 The level of activity with respect to a particular
port does not affect the assessment of monthly fees,
so even if a particular port that is available to a
participant is not used, the participant is still billed
for that port.
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Specifically, the Transition Cap
constitutes an equitable allocation of
fees because it would be applied to all
similarly situated member
organizations, who would be eligible for
the Transition Cap in equal measure and
would thereby all be eligible to not be
charged for more than the total number
of both order/quote entry and drop copy
ports that the member organization has
activated as of its June 2019 invoice.
The Exchange further believes that the
proposal is an equitable allocation of
fees because the Exchange will be
making both the Phase I and Phase II
ports available to all member
organizations during the Transition
Period on an equal basis. Accordingly,
no member organization already
operating on the Exchange would be
disadvantaged by this allocation of fees.
Similarly, the proposed
Decommission Extension Fee would
apply equally to all member
organizations that choose to connect to
the Exchange through the use of Phase
I ports during the Decommission Period.
Moreover, as noted above, the
experience of the Exchange’s affiliate
NYSE Arca with a decommission
extension fee suggests that most member
organizations would complete the
transition before the decommission
extension fee goes into effect, and that
many of the firms that were subject to
the NYSE Arca fee were larger firms that
choose to absorb the additional cost.
The Exchange proposes a longer
transition period than was available on
NYSE Arca, which the Exchange
expects should be more than sufficient
for all member organizations, regardless
of their size, to be able to transition
Phase II ports before the proposed
Decommission Fee goes into effect.
The proposal to pro-rate port fees is
also equitable since it would also apply
equally to all member organizations that
connect to the Exchange, who would
equally receive the benefit of being
charged only for the connectivity
utilized during any trading month
beginning April 1, 2020. As noted
above, to the extent a member
organization continues to use ports
activated before July 1, 2019 to connect
to the Exchange during April 1, 2020
and any subsequent months, the
Exchange believes it is fair and
equitable to continue to charge flat fees
for such ports until such time that
connection to the Exchange through the
use of Phase I ports is no longer
available beginning October 1, 2020.
Moreover, as noted above, Cboe BZX
currently charges new ports on a
prorated basis for the first month of
service. The Exchange notes, however,
that fees for ports activated before July
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
34215
1, 2019 would not be pro-rated
(consistent with current practice). The
Exchange believes it is reasonable to
charge flat fees for ports activated before
July 1, 2019 as such ports are expected
to be phased out within a short period
of time after the introduction of the new
gateways.
The Proposal is Not Unfairly
Discriminatory
The Exchange believes that the
proposal is not unfairly discriminatory.
In the prevailing competitive
environment, member organizations are
free to disfavor the Exchange’s pricing if
they believe that alternatives offer them
better value, and are free to discontinue
to connect to the Exchange through its
ports. As noted, the Exchange is offering
upgraded connections in an effort to
keep pace with changes in the industry
and evolving customer needs as new
technologies emerge and products
continue to develop and change.
The proposal neither targets nor will
it have a disparate impact on any
particular category of market
participant. The Exchange believes that
the proposal does not permit unfair
discrimination because the proposal
would be applied to all similarly
situated member organizations and
other market participants would be
charged the same rates.
The Exchange believes that the
proposed Transition Cap is not unfairly
discriminatory because all member
organizations would be eligible for the
Transition Cap in equal measure and
would thereby all be eligible to not be
charged for more than the total number
of ports that the member organization
has activated as of its June 2019 invoice.
The Exchange further believes that the
proposal does not permit unfair
discrimination because the Exchange
will be making available both the Phase
I and Phase II ports available to all
member organizations during the
Transition Period on an equal basis.
Accordingly, no member organization
already operating on the Exchange
would be disadvantaged by this
allocation of fees. For the same reasons,
the Exchange believes that the proposal
would not permit unfair discrimination
between member organizations.
Similarly, the proposal does not
permit unfair discrimination between
member organizations because the
proposed Decommission Extension Fee
would apply equally to all member
organizations that choose to connect to
the Exchange through the use of such
ports during the Decommission Period.
If a member organizations becomes
subject to the Decommission Fee, it
would only be because such firm chose
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jbell on DSK3GLQ082PROD with NOTICES
not to complete its transition to the
Phase II ports by the end of the
Transition Period. While the Exchange
cannot predict with certainty whether
any firms would be subject to the
Decommission Fee, and if so, which
ones, based on NYSE Arca’s experience
with its decommission fee, the
Exchange anticipates that it would be a
limited set of member organizations that
would incur such fees. Moreover, the
Exchange believes that increasing the
Decommission Extension Fee for each
month for ports that communicate using
Pillar phase I protocols once the
Decommission Period begins would also
apply equally to all member
organizations that continue to choose to
connect to the Exchange utilizing legacy
ports.
The Exchange believes that the
proposal to pro-rate port fees does not
permit unfair discrimination because it
would apply equally to all member
organizations that connect to the
Exchange, who would equally receive
the benefit of being charged only for the
connectivity utilized during any trading
month beginning April 1, 2020. As
noted, to the extent a member
organization continues to use ports
activated before July 1, 2019 to connect
to the Exchange during April 1, 2020
and any subsequent months, the
Exchange believes it is fair, equitable
and not unfairly discriminatory to
continue to charge flat fees for such
ports until such time that connection to
the Exchange through the use of old
ports is no longer available beginning
October 1, 2020.
Finally, the Exchange believes that it
is subject to significant competitive
forces, as described below in the
Exchange’s statement regarding the
burden on competition.
For the foregoing reasons, the
Exchange believes that the proposal is
consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,31 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Instead, as
discussed above, the Exchange believes
that the proposed changes would offset
the Exchange’s continuing costs of
supporting the Phase I ports for the few
firms that do not transition to during the
nine-month period and to adopt a fee
cap and pro-rata billing for ports
without any change to the fees currently
charged by the Exchange for the use of
31 15
ports to connect to the Exchange’s
trading systems.
Intramarket Competition. The
Exchange does not believe the proposed
rule change would impose any burden
on intramarket competition that is not
necessary or appropriate because it
would apply to all member
organizations equally that connect to the
Exchange. All member organizations,
regardless of size, will be eligible for the
Transition Pricing for the billing months
July 2019 through March 2020 and will
be eligible to connect via either Phase I
or Phase II ports during this period. In
addition, all member organizations will
be subject to the proposed
Decommission Fee on an equal basis if
they do complete the transition to Phase
II ports by the end of March 2020. Based
on the experience of the Exchange’s
affiliate, the Exchange anticipates that a
low percentage of member organizations
would be subject to the proposed
Decommission Fee, and the firms likely
to be subject to such fee would be larger
firms that could more easily absorb the
cost of that fee. The Exchange further
believes that by providing nine months’
notice of the Decommission Fee, all
member organizations have an equal
opportunity to timely transition to
Phase II ports before the Decommission
Fee would take effect.
Intermarket Competition. The
Exchange does not believe the proposed
rule change would impose any burden
on intermarket competition that is not
necessary or appropriate because the
Exchange operates in a highly
competitive market in which market
participants can readily choose to send
their orders to other exchange and offexchange venues if they deem fee levels
at those other venues to be more
favorable. The Exchange believes that
fees for connectivity are constrained by
the robust competition for order flow
among exchanges and non-exchange
markets.
The Commission has repeatedly
expressed its preference for competition
over regulatory intervention in
determining prices, products, and
services in the securities markets.
Specifically, in Regulation NMS, the
Commission highlighted the importance
of market forces in determining prices
and SRO revenues and, also, recognized
that current regulation of the market
system ‘‘has been remarkably successful
in promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 32
As the Commission itself recognized,
the market for trading services in NMS
stocks has become ‘‘more fragmented
U.S.C. 78f(b)(8).
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18:05 Jul 16, 2019
32 See
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Frm 00101
Fmt 4703
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and competitive.’’ 33 Indeed, equity
trading is currently dispersed across 13
exchanges,34 31 alternative trading
systems,35 and numerous broker-dealer
internalizers and wholesalers. Based on
publicly-available information, no
single exchange has more than 18% of
the market share of executed volume of
equity trades (whether excluding or
including auction volume).36 The
Exchange believes that the ever-shifting
market share among the exchanges from
month to month demonstrates that
market participants can shift order flow,
or discontinue or reduce use of certain
categories of products, including ports,
in response to fee changes. Accordingly,
the Exchange’s fees, including port fees,
are reasonably constrained by
competitive alternatives and market
participants can readily trade on
competing venues if they deem pricing
levels at those other venues to be more
favorable.
The Exchange is proposing this
transition pricing for ports in the
context of a competitive environment in
which market participants can and do
shift order flow, or discontinue or
reduce use of certain categories of
products in response to fee changes.
Because ports are used by member
organizations to trade on the Exchange,
fees associated with ports are subject to
these same competitive forces. If a
particular exchange charges excessive
fees for connectivity, impacted members
and non-members may opt to terminate
their connectivity arrangements with
that exchange, and adopt a possible
range of alternative strategies, including
routing orders to the applicable
exchange through another participant or
market center.
The Exchange therefore believes that
the proposal would not impose an
undue burden on intermarket
competition because the purpose of this
filing is not to change the rates charged
for ports but rather to, first, to provide
a cap on how much member
organizations would be charged for
ports for a nine-month period so that
they would not incur additional charges
33 See
Transaction Fee Pilot, 84 FR at 5253.
Cboe Global Markets, U.S. Equities Market
Volume Summary (June 28, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
See generally https://www.sec.gov/fast-answers/
divisionsmarketregmrexchangesshtml.html.
35 See FINRA ATS Transparency Data (June 3,
2019), available at https://otctransparency.finra.org/
otctransparency/AtsIssueData. Although 54
alternative trading systems were registered with the
Commission as of May 31, 2019, only 31 are
currently trading. A list of alternative trading
systems registered with the Commission is available
at https://www.sec.gov/foia/docs/atslist.htm.
36 See Cboe Global Markets U.S. Equities Market
Volume Summary (June 28, 2019), available at
https://markets.cboe.com/us/equities/market_share/.
34 See
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during the transition to Pillar
communication protocols, and second,
to provide that the fees for the few firms
that do not transition to during the ninemonth period offset the Exchange’s
continuing costs of supporting the Phase
I ports. The Exchange believes that the
proposal represents a reasonable
attempt to provide member
organizations with an orderly transition
to upgraded technology without needing
to incur any additional costs. If a
member organization is unable to
complete this transition within the ninemonth period, the pricing is designed to
offset the Exchange’s continuing costs of
supporting the Phase I ports.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 37 of the Act and
subparagraph (f)(2) of Rule 19b–4 38
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 39 of the Act to
determine whether the proposed rule
change 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:
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–NYSE–2019–39. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSE–2019–39 and should
be submitted on or before August 7,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15138 Filed 7–16–19; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
jbell on DSK3GLQ082PROD with NOTICES
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSE–2019–39 on the subject line.
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
37 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
39 15 U.S.C. 78s(b)(2)(B).
38 17
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40 17
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CFR 200.30–3(a)(12).
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34217
SECURITIES AND EXCHANGE
COMMISSION
Investment Company Act Release No.
33551; 812–15032
Northern Lights Fund Trust III, et al.
July 11, 2019.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application for an order
under section 6(c) of the Investment
Company Act of 1940 (the ‘‘Act’’) for an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 22(e) of the Act and
rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act. The requested order would
permit (a) index-based series of certain
open-end management investment
companies (‘‘Funds’’) to issue shares
redeemable in large aggregations only
(‘‘Creation Units’’); (b) secondary market
transactions in Fund shares to occur at
negotiated market prices rather than at
net asset value (‘‘NAV’’); (c) certain
Funds to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of shares for
redemption; (d) certain affiliated
persons of a Fund to deposit securities
into, and receive securities from, the
Fund in connection with the purchase
and redemption of Creation Units; and
(e) certain registered management
investment companies and unit
investment trusts outside of the same
group of investment companies as the
Funds (‘‘Funds of Funds’’) to acquire
shares of the Funds.
APPLICANTS: Howard Capital
Management, Inc. (the ‘‘Initial
Adviser’’), a Delaware corporation that
is registered as an investment adviser
under the Investment Advisers Act of
1940, and Northern Lights Fund Trust
III (the ‘‘Trust’’), a Delaware statutory
trust registered under the Act as an
open-end management investment
company with multiple series.
FILING DATES: The application was filed
on May 14, 2019 and amended on June
20, 2019.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
E:\FR\FM\17JYN1.SGM
17JYN1
]]>Agencies
[Federal Register Volume 84, Number 137 (Wednesday, July 17, 2019)]
[Notices]
[Pages 34210-34217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15138]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86360; File No. SR-NYSE-2019-39]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Its Price List To Adopt Transition Pricing To Support the
Introduction of Ports That Connect to the Exchange Using Pillar
Technology
July 11, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 3, 2019, New York Stock Exchange LLC (``NYSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the self-
regulatory organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its Price List to adopt transition
pricing to support the introduction of ports that connect to the
Exchange using Pillar technology. The Exchange proposes to implement
these changes to its Price List effective July 3, 2019. The proposed
rule change is available on the Exchange's website at www.nyse.com, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its Price List to adopt transition
pricing to support the introduction of ports that connect to the
Exchange using Pillar technology. With the proposed transition fee
pricing, the Exchange would (1) adopt a cap on monthly fees for the use
of certain ports connecting to the Exchange for the billing months July
2019 through March 2020; (2) adopt a Decommission Extension Fee
applicable for the billing months April 2020 through September 2020 for
legacy port connections; and (3) prorate the monthly fee for certain
ports activated after July 1, 2019, effective April 1, 2020. Without
this proposed rule change, the Exchange would be required to charge a
member organization for all of its ports--both legacy ports and the new
ports using Pillar technology--during the transition period, which
could significantly increase costs to member organizations.
This filing does not to propose to increase the rates charged for
ports. Rather, the purpose of this filing is to incent the transition
from older to newer and more efficient Pillar technology with no fee
increase. Moreover, the Exchange proposes to do so in essentially the
same way that the Exchange's affiliate, NYSE Arca, Inc. (``NYSE
Arca''), did in 2017 \4\ by, first, providing a cap on how much member
organizations would be charged for ports for a nine-month period so
that they would not incur additional charges during the transition to
Pillar communication protocols and, second, providing that the fees for
the few firms that do not transition during the nine-month period
offset the Exchange's continuing costs of supporting legacy ports.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 81901 (October 19,
2017), 82 FR 49426 (SR-NYSArca-2017-121) (adopting decommission
extension fee for initial three months of March-May 2018);
Securities Exchange Act Release No. 83410 (June 12, 2018), 83 FR
28300 (SR-NYSArca-2018-42) (extending decommission extension fee for
the additional three months of June-September 2018).
---------------------------------------------------------------------------
The Exchange proposes to implement these changes to its Price List
effective July 3, 2019.\5\
---------------------------------------------------------------------------
\5\ The Exchange originally filed to amend the Schedule of Fees
and Rebates on June 28, 2019 (SR-NYS-2019-36). SR-NYSE-2019-36 was
subsequently withdrawn and replaced by this filing.
---------------------------------------------------------------------------
Overview of the Proposed Fee Changes
Member organizations enter orders and order instructions and
receive information from the Exchange by establishing a connection to a
gateway that uses communication protocols that map to the order types
and modifiers described in Exchange rules. These gateway connections,
also known as logical port connections, are referred to as ``ports'' on
the Exchange's Price List.
The Exchange currently makes available ports that provide this
connectivity to the Exchange's trading systems (i.e., ports for entry
of orders and/or quotes (``order/quote entry ports'')) and charges $550
per port per month for such ports.\6\ Designated
[[Page 34211]]
Market Makers (``DMMs'') connect via ``DMM Gateways'' and are not
charged for the first 12 ports per month that connect to the
Exchange.\7\ The Exchange also currently makes ports available for drop
copies and charges $550 per port per month,\8\ except that DMMs are not
charged for drop copy ports that connect to the Exchange via the DMM
Gateway. Fees for order/quote entry ports and drop copy ports have
remained relatively stable over time and have not increased since 2015,
and not since 2017 for DMMs.\9\
---------------------------------------------------------------------------
\6\ All ports on the Exchange currently connect via a Common
Customer Gateway (``CCG'') that accesses its equity trading systems.
See, e.g., Securities Exchange Act Release No. 64542 (May 25, 2011),
76 FR 31659 (June 1, 2011) (SR-NYSE-2011-13).
\7\ See Securities Exchange Act Release No. 68229 (November 14,
2012), 77 FR 69688 (November 20, 2012) (SR-NYSE-2012-60) (Notice).
\8\ Only one fee per drop copy port applies, even if receiving
drop copies from multiple order/quote entry ports.
\9\ See Securities Exchange Act Release No. 76072 (October 5,
2015), 80 FR 61258 (October 9, 2015) (SR-NYSE-2015-43) (Notice);
Securities Exchange Act Release No. 79748 (January 6, 2017), 82 FR
3828 (January 12, 2017) (SR-NYSE-2016-93) (Notice).
---------------------------------------------------------------------------
The Exchange is undergoing a multi-phase transition to the Pillar
trading platform that began in April 2018, when the Exchange introduced
trading of UTP Securities on the Pillar trading platform.\10\ Because
Exchange-listed securities are not yet on the Pillar trading platform,
all ports currently communicate with the Exchange using CCG (``Phase I
ports''), regardless of whether trading UTP securities or Exchange-
listed securities.
---------------------------------------------------------------------------
\10\ The term ``UTP Security'' is defined under Rule 1.1(aa) to
mean a security that is listed on a national securities exchange
other than the Exchange and that trades on the Exchange pursuant to
unlisted trading privileges. The Exchange began trading UTP
Securities on the Pillar trading platform on April 9, 2018. See also
Securities Exchange Act Release No. 82945 (March 26, 2018), 83 FR
13553 (March 29, 2018) (SR-NYSE-2017-36) (Order approving trading
rules to support trading of UTP Securities on the Pillar trading
platform).
---------------------------------------------------------------------------
The Exchange next plans to transition Exchange-listed securities to
the Pillar trading platform.\11\ In anticipation of the transition of
Exchange-listed securities to the Pillar trading platform, the Exchange
will be introducing new technology to support how all member
organizations, including DMMs, will communicate with the Exchange when
trading on the Pillar trading platform. The Exchange plans to make
available ports using Pillar gateways (``Phase II ports'') beginning
July 1, 2019, at which time such ports will be available for trading
UTP Securities on the Exchange. The Phase II ports will also be
available for trading Exchange-listed securities once they transition
to the Pillar trading platform. Once Exchange-listed securities
transition to Pillar, DMMs will communicate with the Exchange using
Phase II ports and will no longer use DMM Gateways.\12\
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\11\ The Exchange has announced that, subject to rule approvals,
it will begin transitioning Exchange-listed securities to Pillar on
August 5, 2019, available here: https://www.nyse.com/publicdocs/nyse/markets/nyse/Revised_Pillar_Migration_Timeline.pdf. See also
Securities Exchange Act Release No. 85962 (May 29, 2019), 84 FR
26188 (June 5, 2019) (SR-NYSE-2019-05) (Order approving rules to
support the transition of Exchange-listed securities to Pillar).
\12\ The Exchange accordingly proposes to refer generally to DMM
ports that connect to the Exchange by deleting the phrase ``via the
DMM Gateway'' in the sections of the Price List describing order/
quote entry ports and drop copy ports.
---------------------------------------------------------------------------
As the experience of the Exchange's affiliates that trade on the
Pillar trading platform and use the Phase II ports shows, the Phase II
ports constitute a significant performance improvement over current
ports, with an expected reduction in average latency up to 80% over
Phase I ports.\13\ The Phase II ports will provide member organizations
with a low-latency connection that will provide a more deterministic
trading experience on the Exchange. Because of the latency improvements
of the Phase II ports and because Exchange member organizations that
are members of one or more of the Affiliated Exchanges already use
Phase II ports, the Exchange expects its member organizations to
transition expeditiously to using Phase II ports. However, because of
the technology changes that a member organization would need to make to
connect to Phase II ports, the Exchange anticipates that there will be
a period of time before all member organization will be fully
transitioned to the Phase II ports. During that transition period, a
member organization may choose to maintain its Phase I ports while it
replaces them with Phase II ports. Accordingly, during this
implementation, there will be a period when both the Phase I and Phase
II ports will be available to member organizations.\14\
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\13\ Latency statistics for the Pillar gateways are available at
https://www.nyse.com/pillar. These gateways are currently available
on NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE
Arca''), and NYSE National, Inc. (``NYSE National'') (collectively,
the ``Affiliated Exchanges'').
\14\ The Exchange's affiliate NYSE Arca similarly offered a
parallel period when both Pillar phase I and Pillar phase II
protocols were available to its members. See Securities Exchange Act
Release No. 79588 (December 23, 2016), 81 FR 96534 (December 30,
2016) (SR-NYSEArca-2016-170) (Notice of filing and immediate
effectiveness of proposed rule change).
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In connection with this transition, the Exchange proposes
transition pricing that has two distinct phases.
The first phase would be a transition period during which
the fees charged for both order/quote entry and drop copy ports would,
with certain exceptions, be capped at, and thus not charged for more
than, the total number of both order/quote entry and drop copy ports
that the member organization has activated as of its June 2019 invoice.
The first phase would last nine months, from July 2019 through March
2020, during which the Exchange will be making both the Phase I and
Phase II ports available to member organizations.
The second phase would encompass a six-month decommission
period between April 2020 and September 2020 during which the
Exchange's proposed pricing would provide increased costs to member
organizations that did not transition in the nine-month transition
period. Effective April 1, 2020, the Exchange would also prorate the
monthly fee for certain ports activated on or after July 1, 2019.
Competitive Environment
The Exchange operates in a highly competitive market. The
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. Specifically, in Regulation NMS, the
Commission highlighted the importance of market forces in determining
prices and SRO revenues and, also, recognized that current regulation
of the market system ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \15\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37495, 37499 (June 29, 2005) (S7-10-04) (``Regulation
NMS'').
---------------------------------------------------------------------------
As the Commission itself recognized, the market for trading
services in NMS stocks has become ``more fragmented and competitive.''
\16\ Indeed, equity trading is currently dispersed across 13
exchanges,\17\ 31 alternative trading systems,\18\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available
information, no single exchange has more than 18% of the market share
of executed volume of equity trades (whether excluding or
[[Page 34212]]
including auction volume).\19\ The Exchange believes that the ever-
shifting market share among the exchanges from month to month
demonstrates that market participants can shift order flow, or
discontinue or reduce use of certain categories of products, including
ports, in response to fee changes. Accordingly, the Exchange's fees,
including port fees, are reasonably constrained by competitive
alternatives and market participants can readily trade on competing
venues if they deem pricing levels at those other venues to be more
favorable.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 51808, 84 FR 5202,
5253 (February 20, 2019) (File No. S7-05-18) (Transaction Fee Pilot
for NMS Stocks Final Rule) (``Transaction Fee Pilot'').
\17\ See Cboe Global Markets, U.S. Equities Market Volume
Summary (June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
\18\ See FINRA ATS Transparency Data (June 3, 2019), available
at https://otctransparency.finra.org/otctransparency/AtsIssueData.
Although 54 alternative trading systems were registered with the
Commission as of May 31, 2019, only 31 are currently trading. A list
of alternative trading systems registered with the Commission is
available at https://www.sec.gov/foia/docs/atslist.htm.
\19\ See Cboe Global Markets U.S. Equities Market Volume Summary
(June 27, 2019), available at https://markets.cboe.com/us/equities/market_share/.
---------------------------------------------------------------------------
The Exchange is proposing this transition pricing in the context of
a competitive environment in which market participants can and do shift
order flow, or discontinue or reduce use of certain categories of
products, in response to fee changes. Because ports are used by member
organizations to trade electronically on the Exchange, fees associated
with ports are subject to these same competitive forces. The Exchange
believes that the proposal represents a reasonable attempt to provide
member organizations with an orderly transition to upgraded technology
without needing to incur any additional costs. If a member organization
is unable to complete this transition within the nine-month period, the
pricing is designed to offset the Exchange's continuing costs of
supporting the Phase I ports.
Proposed Rule Change
As noted above, the Exchange proposes to introduce transition
pricing designed to provide member organizations an extended transition
period to connect to Phase II ports without subjecting them to fee
increases as they transition and once that transition period ends, to
prorate fees for order/quote entry and drop copy ports, as follows.
The Exchange proposes to set forth the proposed ``Pillar Port
Transition Fee Pricing'' as a separate entry on its Price List, to be
added after the entry for Ports for drop copies. As proposed, the
Pillar Port Transition Fee Pricing would be applicable to both order/
quote entry and drop copy ports. Accordingly, all references to ports
in this proposed pricing refer to both types of ports.
Proposed Transition Period Pricing
During the billing months of July 2019 through March 2020 (the
``Transition Period''), the Exchange proposes that the total number of
ports charged per member organization would be capped at the total
number of such ports that the member organization has activated as of
the June 2019 invoice, which is the last full month prior to the
introduction of the new gateways (the ``Transition Cap'').
As further proposed, the Transition Cap pricing would be available
until the earlier of (1) the end of the Transition Period, i.e., March
2020, or (2) the billing month during which a member organization has
fully transitioned to using only ports that communicate using Pillar
phase II protocols. For example, if in June 2019, Firm A has 10 ports,
that firm's Transition Cap would be 10 ports. At any time during the
Transition Cap period, if Firm A keeps those 10 Phase I ports and adds
10 Phase II ports, Firm A would only be charged for 10 ports. If,
during the Transition Period, Firm A no longer had any Phase I ports
and had eight Phase II ports, it would no longer be eligible for the
Transition Cap pricing and would be charged for those eight ports.
As an exception to the cap, the Exchange proposes that if, during
the Transition Period, a member organization increases the number of
Phase I ports above the Transition Cap, those ports would be charged at
the current rates for order/quote entry ports and drop copy ports. The
purpose of the Transition Cap is to facilitate the transition to Phase
II ports. If this were not a transition period, and a member
organization increased its number of ports, it would be charged
accordingly. The Exchange therefore believes that if a member
organization increases the number of Phase I ports, i.e., is not
transitioning to the new technology, it should be charged for those
additional ports no differently than during periods when the Transition
Cap pricing is not in effect.
The Exchange further proposes that if, during the Transition
Period, a member organization has a total number of ports below the
Transition Cap, the Exchange would charge a member organization for
their actual number of ports. For example, if during the Transition
Period, Firm A with a Transition Cap of 10 ports had four Phase I ports
and five Phase II ports that firm would be charged for only nine ports,
which is under its Transition Cap.
As proposed, the charge per port (order/quote entry and drop copy)
will not be changing, and would remain at $550 per port per month for
all ports. DMMs would continue not to be charged for drop copy ports
and for their first 12 order/quote entry ports per month that connect
to the Exchange and then $550 per order/quote entry port that connects
to the Exchange per month thereafter.\20\
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\20\ See note 12, supra.
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Application and Impact of Transition Period Pricing
The purpose of Transition Period Pricing is to cap port fees to
allow member organizations sufficient time to implement technology
changes necessary to connect to the Exchange using the Phase II ports
without incurring any additional Exchange fees. Based on the experience
of the Exchange's affiliate NYSE Arca, the Exchange believes that nine
months provides sufficient time for all member organizations,
regardless of size, to be able to complete the necessary changes. The
Exchange proposes to extend the Transition Pricing through March 2020
so that if a member organization is unable to complete its changes in
2019, it would have sufficient time in 2020 to plan for and implement
the changes.
The proposed cap would have the effect of waiving the port fees
during the Transition Period of any new Phase II ports that a member
organization may use. Without this proposed rule change, the Exchange
would be required to charge a member organization for all of its
ports--both Phase I and Phase II ports--during the transition period,
which could significantly increase costs to member organizations.
Proposed Decommission Extension Fee
The Exchange proposes to amend the Price List to adopt a
Decommission Extension Fee that would apply during the billing months
of April 2020 through September 2020 (the ``Decommission Period''). As
proposed, during the Decommission Period, in addition to the current
port fees, member organizations would be charged a Decommission
Extension Fee of $500 per port per month, increasing by $500 per port
for each month for any ports that communicate using Pillar phase I
protocols. The proposed Decommission Extension Fee would apply only to
member organizations that use Phase I ports during the Decommission
Period. The Exchange proposes that ports using Pillar phase I protocols
would no longer be available beginning October 1, 2020.
For example, in June 2019, Firm A has 10 Phase I ports and a
Transition Cap of 10 ports. By April 2020, the first month of the
Decommission Period, Firm A still has four Phase I ports. In this
scenario, Firm A would be charged the standard port rate for the four
Phase I ports plus $500 per port for the Decommission Extension Fee.
[[Page 34213]]
If Firm A has the same four Phase I ports in May 2020, Firm A would
be charged the standard port rate for the four Phase I ports plus
$1,000 per port for the Decommission Extension Fee.
If Firm A retains the four Phase I ports until September 2020, the
final month of the Decommission Extension Pricing, Firm A would be
charged the standard port rate for the four Phase I ports plus $3,000
per port for the Decommission Extension Fee.
Application and Impact of the Proposed Decommission Extension Fee
As noted above, the Exchange believes that a nine-month Transition
Period is sufficient time for member organizations to fully transition
to Phase II ports and eliminate their use of Phase I ports. To the
extent that member organizations do not complete the transition during
the Transition Period, the Exchange will offer member organizations the
ability to choose to continue using Phase I ports until September 2020.
To cover the costs associated with maintaining and supporting both
Phase I ports and Phase II ports beyond the nine-month Transition
Period, the Exchange proposes that such costs would be paid by the
expected very small number of member organizations that would need
longer to transition than the nine-month Transition Period.
Specifically, to support the continued availability of the Phase I
ports, the Exchange would have to maintain additional hardware and
devote technology resources to maintain and operate those ports, which
is a cost to the Exchange. While these costs cannot be specifically
quantified and it is unknown how many (if any) member organizations
would need to continue to access the Exchange using Phase I ports after
the Transition Period, the Exchange believes that the proposed
Decommission Extension Fee would, in part, cover the costs associated
with continuing to support the Phase I port infrastructure for use by a
dwindling number of member organizations.
The proposed Decommission Extension Fee is not novel. As noted
previously, the Exchange's affiliate NYSE Arca previously adopted a
decommission extension fee and was successful in using the fee to
incent its members to fully transition to the phase II ports within a
seven-month transition period.\21\ Specifically, NYSE Arca introduced
its Phase II ports in August 2017. Beginning March 1, 2018, NYSE Arca
began charging a decommission extension fee. Accordingly, NYSE Arca
members had seven months to transition before the decommission
extension fee was to be charged. During March 2018, the first month
that NYSE Arca charged a decommission extension fee, 29 members of the
139 members that had Phase I ports prior August 2017, or 21% of the
total, were subject to the decommission extension fee. In other words,
79% of NYSE Arca members had fully transitioned to the Phase II ports
before NYSE Arca began charging its decommission extension fee. Sixteen
of those firms were relatively large firms with at least ten ports that
choose to absorb the cost rather than to transition to Phase II ports
within the seven-month transition period.
---------------------------------------------------------------------------
\21\ See note 4, supra.
---------------------------------------------------------------------------
By September 2018, the last month that NYSE Arca charged a
decommission extension fee, only five NYSE Arca members out of 139 (4%
of the total), were subject to the decommission extension fee. Of those
five members, three were relatively large firms with at least 10 ports.
Based on NYSE Arca's experience, the Exchange believes that a
similarly small number of larger firms will be subject to the proposed
Decommission Extension Fee because they choose not to fully move to
Phase II ports during the Transition Period. The Exchange notes that it
proposes a Transition Period of nine months, which will provide firms
two more months to transition as compared to NYSE Arca. The Exchange
believes that these additional two months will provide more than
sufficient time for the transition and that fewer member organizations
will choose to pay the proposed Decommission Fee because they do not
transition within the nine months, as compared to the number of firms
that paid the NYSE Arca's decommission extension fee.
Proration of Port Fees
Effective April 1, 2020, the fee for order/quote entry and drop
copy ports activated after July 1, 2019, will be prorated to the number
of trading days that a port is eligible for production trading with the
Exchange, including any scheduled early closing days.\22\
---------------------------------------------------------------------------
\22\ Cboe BZX prorates port fees for the first month of service.
See Cboe BZX U.S. Equities Exchange Fee Schedule, available at
https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
---------------------------------------------------------------------------
Application and Impact of Proration of Port Fees
The purpose of prorating the fees for order/quote entry and drop
copy ports activated after July 1, 2019 is to charge member
organizations port fees only for the days in which the member
organization's port is connected to the Exchange.
For example, in June 2019, Firm A has 10 Phase I ports and a Pillar
Transition Cap of 10 ports. If, in the first month after the Transition
Cap, April 2020, Firm A has 10 Phase II ports and adds 2 Phase II ports
on April 15, 2020, Firm A would be charged the standard port rate for
the 10 Phase II ports, plus a prorated rate for the 2 additional Phase
II ports added mid-month. The prorated rate would be calculated by
dividing the number of trading days that a port is eligible for
production trading with the Exchange by the total number of trading
days in that month, then multiplying by the standard port rate.
The Exchange does not propose to introduce such pro-rated pricing
until after the Transition Period because during the Transition Period,
member organizations will be subject to the Transition Cap pricing,
which will cap the total port costs as member organizations add Phase
II ports and drop Phase I ports.
The proposed changes are not otherwise intended to address any
other issues, and the Exchange is not aware of any problems that member
organizations would have in complying with the proposed change.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\23\ in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5) of the Act,\24\ in
particular, because it provides for the equitable allocation of
reasonable dues, fees, and other charges among its members, issuers and
other persons using its facilities and does not unfairly discriminate
between customers, issuers, brokers or dealers.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(4) & (5).
---------------------------------------------------------------------------
The Proposed Change Is Reasonable
The Exchange operates in a highly competitive market. The
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. Specifically, in Regulation NMS, the
Commission highlighted the importance of market forces in determining
prices and SRO revenues and, also, recognized that current regulation
of the market system ``has been remarkably successful in promoting
market competition in its
[[Page 34214]]
broader forms that are most important to investors and listed
companies.'' \25\
---------------------------------------------------------------------------
\25\ See Regulation NMS, 70 FR at 37499.
---------------------------------------------------------------------------
As the Commission itself recognized, the market for trading
services in NMS stocks has become ``more fragmented and competitive.''
\26\ Indeed, equity trading is currently dispersed across 13
exchanges,\27\ 31 alternative trading systems,\28\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available
information, no single exchange has more than 18% of the market share
of executed volume of equity trades (whether excluding or including
auction volume).\29\ The Exchange believes that the ever-shifting
market share among the exchanges from month to month demonstrates that
market participants can shift order flow, or discontinue or reduce use
of certain categories of products, including ports, in response to fee
changes. Accordingly, the Exchange's fees, including port fees, are
reasonably constrained by competitive alternatives and market
participants can readily trade on competing venues if they deem pricing
levels at those other venues to be more favorable.
---------------------------------------------------------------------------
\26\ See Transaction Fee Pilot, 84 FR at 5253.
\27\ See Cboe Global Markets, U.S. Equities Market Volume
Summary (June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
\28\ See FINRA ATS Transparency Data (June 3, 2019), available
at https://otctransparency.finra.org/otctransparency/AtsIssueData.
Although 54 alternative trading systems were registered with the
Commission as of May 31, 2019, only 31 are currently trading. A list
of alternative trading systems registered with the Commission is
available at https://www.sec.gov/foia/docs/atslist.htm.
\29\ See Cboe Global Markets U.S. Equities Market Volume Summary
(June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/.
---------------------------------------------------------------------------
If a particular exchange charges excessive fees for connectivity,
impacted members and non-members may opt to terminate their
connectivity arrangements with that exchange, and adopt a possible
range of alternative strategies, including routing to the applicable
exchange through another participant or market center or taking that
exchange's data indirectly. Accordingly, if the Exchange charges
excessive fees, it would stand to lose not only connectivity revenues
but also revenues associated with the execution of orders routed to it,
and, to the extent applicable, market data revenues. The Exchange
believes that this competitive dynamic imposes powerful restraints on
the ability of any exchange to charge unreasonable fees for
connectivity.
Given this competitive environment, the proposal represents a
reasonable method of providing member organizations with a means to
make an orderly transition to upgraded technology without increasing
their costs. As noted, the purpose of this filing is not to change the
rates charged for ports. Rather the proposal would provide a cap on how
much member organizations would be charged for ports during a nine-
month period so that they would not incur additional charges during the
transition to Pillar communication protocols. Accordingly, the Exchange
believes that the proposal is a fair and reasonable way for member
organizations to transition to upgraded technology without needing to
incur any additional Exchange fees. If a member organization is unable
to complete this transition within the nine-month period, the pricing
is designed so that only those few member organizations that may not
transition within the nine-month period pay for the Exchange to
continue to support the Phase I ports.
Transition Period Pricing
The Exchange believes that the proposed Transition Cap for the
billing months of July 2019 through March 2020, which will be available
until the earlier of the end of the Transition Period or the billing
month during which a member organization has fully transitioned to
using only ports that communicate using Pillar phase II protocols, is
reasonable.
The proposed change is designed to permit member organizations an
extended transition period to adjust to the new gateways. The Exchange
believes that a nine-month transition period is reasonable and provides
sufficient notice of the changeover. The proposed pricing is designed
to provide all member organizations with no fee increases while they
transition, and provides certainty for when this transition pricing
ends so that firms can plan when and how to fully transition to the new
gateways. Without such Transition Period pricing, member organizations
costs would increase because, without this proposed rule change, the
Exchange would be required to charge a member organization for all of
its ports--both Phase I and Phase II ports--during the transition
period, which could significantly increase costs to member
organizations. In this regard, absent similar transition pricing, the
Exchange's affiliate NYSE Arca's transition to Phase II protocols would
have increased the average firms' port fees by 67.5% in the first month
of the migration. Thus, the proposed cap balances the Exchange's desire
to improve technology without increasing Exchange fees for member
organizations.
Decommission Extension Fee
The Exchange believes that the proposed Decommission Extension Fee
for member organizations that choose to continue to connect to the
Exchange through the use of Phase I ports after the Transition Period,
which is scheduled to end at the close of trading on September 30,
2020, is also reasonable.
As noted above, the Exchange will incur ongoing costs in
maintaining Phase I ports during the Decommission Period, including
costs to maintain servers and their physical location, monitoring order
activity, and other support, with no real benefit. The Exchange
believes that it is reasonable to require member organizations to pay
the proposed Decommission Extension Fee because a small number of
member organizations would need longer to transition than the nine-
month Transition Period. Due to the additional costs that the Exchange
would continue incur to support Phase I ports after the Transition
Period, the Exchange believes that it is fair and reasonable to charge
those member organizations that choose not to fully transition during
the Transition Period, fees to defray the costs of such support during
the Decommission Period because it is expected that the number of
member organizations that do not transition to Phase II ports by March
31, 2020 will be small. Further, the Exchange believes that it is
reasonable for the Decommission Extension Fee to increase for each
month for any ports that communicate using Pillar phase I protocols
once the Decommission Period begins because the number of member
organizations not fully migrated from legacy technology to the Phase II
ports will be expected to diminish over time. Member organizations can
avoid or mitigate the impact of the proposed increase of the
Decommission Extension Fee by migrating to the new ports before or
earlier in the Decommission Period.
Proration of Port Fees
The Exchange believes that the proposal to prorate the monthly fee
for ports activated on or after July 1, 2019 to the number of trading
days in a billing month the port is connected to the Exchange is fair
and reasonable because it would allow all Exchange participants to
subscribe to the most effective connectivity according to their trading
requirements and as a result will only be assessed fees for the
connectivity they utilize during any trading month beginning April 1,
2020
[[Page 34215]]
for ports activated after July 1, 2019.\30\ The Exchange does not
propose to introduce pro-rated pricing until after the Transition
Period because during the Transition Period, member organizations will
be subject to the Transition Cap pricing, which will cap the total port
costs as member organizations add Phase II ports and drop Phase I
ports.
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\30\ The level of activity with respect to a particular port
does not affect the assessment of monthly fees, so even if a
particular port that is available to a participant is not used, the
participant is still billed for that port.
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The Exchange believes the proposed proration of fees for ports
activated after July 1, 2019 would serve only to charge member
organizations port fees for the actual days a member organization's
ports are connected to the Exchange. The Exchange further notes that
billing for ports activated before July 1, 2019 will continue to be
based on the number of ports on the third business day prior to the end
of the month consistent with the Exchange's billing policy, and so
firms that cancel ports before the third business day prior to the end
of the month will not be billed for those ports.
Moreover, as noted above, Cboe BZX currently charges new ports on a
prorated basis for the first month of service. The Exchange notes,
however, that fees for ports activated before July 1, 2019 would not be
pro-rated. The Exchange believes it is reasonable to charge flat fees
for ports activated before July 1, 2019 as such ports are expected to
be phased out within a short period of time after the introduction of
the Phase II ports and would be subject to the proposed Decommission
Fee, described above.
The Proposal is an Equitable Allocation of Fees
The Exchange believes its proposal equitably allocates its fees
among its market participants. The Exchange is not proposing to adjust
the amount of the port fees, which will remain at the current level for
all market participants. Rather, the proposal would provide an
additional fee for those few member organizations that choose not to
transition to Phase II ports during the Transition Period and to adopt
a fee cap and pro-rata billing for ports without any change to the fees
currently charged by the Exchange for the use of ports to connect to
the Exchange's trading systems.
The Exchange believes that the proposal constitutes an equitable
allocation of fees because all similarly situated member organizations
and other market participants would be charged the same rates.
Specifically, the Transition Cap constitutes an equitable
allocation of fees because it would be applied to all similarly
situated member organizations, who would be eligible for the Transition
Cap in equal measure and would thereby all be eligible to not be
charged for more than the total number of both order/quote entry and
drop copy ports that the member organization has activated as of its
June 2019 invoice. The Exchange further believes that the proposal is
an equitable allocation of fees because the Exchange will be making
both the Phase I and Phase II ports available to all member
organizations during the Transition Period on an equal basis.
Accordingly, no member organization already operating on the Exchange
would be disadvantaged by this allocation of fees.
Similarly, the proposed Decommission Extension Fee would apply
equally to all member organizations that choose to connect to the
Exchange through the use of Phase I ports during the Decommission
Period. Moreover, as noted above, the experience of the Exchange's
affiliate NYSE Arca with a decommission extension fee suggests that
most member organizations would complete the transition before the
decommission extension fee goes into effect, and that many of the firms
that were subject to the NYSE Arca fee were larger firms that choose to
absorb the additional cost. The Exchange proposes a longer transition
period than was available on NYSE Arca, which the Exchange expects
should be more than sufficient for all member organizations, regardless
of their size, to be able to transition Phase II ports before the
proposed Decommission Fee goes into effect.
The proposal to pro-rate port fees is also equitable since it would
also apply equally to all member organizations that connect to the
Exchange, who would equally receive the benefit of being charged only
for the connectivity utilized during any trading month beginning April
1, 2020. As noted above, to the extent a member organization continues
to use ports activated before July 1, 2019 to connect to the Exchange
during April 1, 2020 and any subsequent months, the Exchange believes
it is fair and equitable to continue to charge flat fees for such ports
until such time that connection to the Exchange through the use of
Phase I ports is no longer available beginning October 1, 2020.
Moreover, as noted above, Cboe BZX currently charges new ports on a
prorated basis for the first month of service. The Exchange notes,
however, that fees for ports activated before July 1, 2019 would not be
pro-rated (consistent with current practice). The Exchange believes it
is reasonable to charge flat fees for ports activated before July 1,
2019 as such ports are expected to be phased out within a short period
of time after the introduction of the new gateways.
The Proposal is Not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory. In the prevailing competitive environment, member
organizations are free to disfavor the Exchange's pricing if they
believe that alternatives offer them better value, and are free to
discontinue to connect to the Exchange through its ports. As noted, the
Exchange is offering upgraded connections in an effort to keep pace
with changes in the industry and evolving customer needs as new
technologies emerge and products continue to develop and change.
The proposal neither targets nor will it have a disparate impact on
any particular category of market participant. The Exchange believes
that the proposal does not permit unfair discrimination because the
proposal would be applied to all similarly situated member
organizations and other market participants would be charged the same
rates.
The Exchange believes that the proposed Transition Cap is not
unfairly discriminatory because all member organizations would be
eligible for the Transition Cap in equal measure and would thereby all
be eligible to not be charged for more than the total number of ports
that the member organization has activated as of its June 2019 invoice.
The Exchange further believes that the proposal does not permit
unfair discrimination because the Exchange will be making available
both the Phase I and Phase II ports available to all member
organizations during the Transition Period on an equal basis.
Accordingly, no member organization already operating on the Exchange
would be disadvantaged by this allocation of fees. For the same
reasons, the Exchange believes that the proposal would not permit
unfair discrimination between member organizations.
Similarly, the proposal does not permit unfair discrimination
between member organizations because the proposed Decommission
Extension Fee would apply equally to all member organizations that
choose to connect to the Exchange through the use of such ports during
the Decommission Period. If a member organizations becomes subject to
the Decommission Fee, it would only be because such firm chose
[[Page 34216]]
not to complete its transition to the Phase II ports by the end of the
Transition Period. While the Exchange cannot predict with certainty
whether any firms would be subject to the Decommission Fee, and if so,
which ones, based on NYSE Arca's experience with its decommission fee,
the Exchange anticipates that it would be a limited set of member
organizations that would incur such fees. Moreover, the Exchange
believes that increasing the Decommission Extension Fee for each month
for ports that communicate using Pillar phase I protocols once the
Decommission Period begins would also apply equally to all member
organizations that continue to choose to connect to the Exchange
utilizing legacy ports.
The Exchange believes that the proposal to pro-rate port fees does
not permit unfair discrimination because it would apply equally to all
member organizations that connect to the Exchange, who would equally
receive the benefit of being charged only for the connectivity utilized
during any trading month beginning April 1, 2020. As noted, to the
extent a member organization continues to use ports activated before
July 1, 2019 to connect to the Exchange during April 1, 2020 and any
subsequent months, the Exchange believes it is fair, equitable and not
unfairly discriminatory to continue to charge flat fees for such ports
until such time that connection to the Exchange through the use of old
ports is no longer available beginning October 1, 2020.
Finally, the Exchange believes that it is subject to significant
competitive forces, as described below in the Exchange's statement
regarding the burden on competition.
For the foregoing reasons, the Exchange believes that the proposal
is consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\31\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. Instead, as discussed above, the Exchange believes
that the proposed changes would offset the Exchange's continuing costs
of supporting the Phase I ports for the few firms that do not
transition to during the nine-month period and to adopt a fee cap and
pro-rata billing for ports without any change to the fees currently
charged by the Exchange for the use of ports to connect to the
Exchange's trading systems.
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\31\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition. The Exchange does not believe the proposed
rule change would impose any burden on intramarket competition that is
not necessary or appropriate because it would apply to all member
organizations equally that connect to the Exchange. All member
organizations, regardless of size, will be eligible for the Transition
Pricing for the billing months July 2019 through March 2020 and will be
eligible to connect via either Phase I or Phase II ports during this
period. In addition, all member organizations will be subject to the
proposed Decommission Fee on an equal basis if they do complete the
transition to Phase II ports by the end of March 2020. Based on the
experience of the Exchange's affiliate, the Exchange anticipates that a
low percentage of member organizations would be subject to the proposed
Decommission Fee, and the firms likely to be subject to such fee would
be larger firms that could more easily absorb the cost of that fee. The
Exchange further believes that by providing nine months' notice of the
Decommission Fee, all member organizations have an equal opportunity to
timely transition to Phase II ports before the Decommission Fee would
take effect.
Intermarket Competition. The Exchange does not believe the proposed
rule change would impose any burden on intermarket competition that is
not necessary or appropriate because the Exchange operates in a highly
competitive market in which market participants can readily choose to
send their orders to other exchange and off-exchange venues if they
deem fee levels at those other venues to be more favorable. The
Exchange believes that fees for connectivity are constrained by the
robust competition for order flow among exchanges and non-exchange
markets.
The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. Specifically, in
Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \32\
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\32\ See Regulation NMS, 70 FR at 37499.
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As the Commission itself recognized, the market for trading
services in NMS stocks has become ``more fragmented and competitive.''
\33\ Indeed, equity trading is currently dispersed across 13
exchanges,\34\ 31 alternative trading systems,\35\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available
information, no single exchange has more than 18% of the market share
of executed volume of equity trades (whether excluding or including
auction volume).\36\ The Exchange believes that the ever-shifting
market share among the exchanges from month to month demonstrates that
market participants can shift order flow, or discontinue or reduce use
of certain categories of products, including ports, in response to fee
changes. Accordingly, the Exchange's fees, including port fees, are
reasonably constrained by competitive alternatives and market
participants can readily trade on competing venues if they deem pricing
levels at those other venues to be more favorable.
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\33\ See Transaction Fee Pilot, 84 FR at 5253.
\34\ See Cboe Global Markets, U.S. Equities Market Volume
Summary (June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
\35\ See FINRA ATS Transparency Data (June 3, 2019), available
at https://otctransparency.finra.org/otctransparency/AtsIssueData.
Although 54 alternative trading systems were registered with the
Commission as of May 31, 2019, only 31 are currently trading. A list
of alternative trading systems registered with the Commission is
available at https://www.sec.gov/foia/docs/atslist.htm.
\36\ See Cboe Global Markets U.S. Equities Market Volume Summary
(June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/.
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The Exchange is proposing this transition pricing for ports in the
context of a competitive environment in which market participants can
and do shift order flow, or discontinue or reduce use of certain
categories of products in response to fee changes. Because ports are
used by member organizations to trade on the Exchange, fees associated
with ports are subject to these same competitive forces. If a
particular exchange charges excessive fees for connectivity, impacted
members and non-members may opt to terminate their connectivity
arrangements with that exchange, and adopt a possible range of
alternative strategies, including routing orders to the applicable
exchange through another participant or market center.
The Exchange therefore believes that the proposal would not impose
an undue burden on intermarket competition because the purpose of this
filing is not to change the rates charged for ports but rather to,
first, to provide a cap on how much member organizations would be
charged for ports for a nine-month period so that they would not incur
additional charges
[[Page 34217]]
during the transition to Pillar communication protocols, and second, to
provide that the fees for the few firms that do not transition to
during the nine-month period offset the Exchange's continuing costs of
supporting the Phase I ports. The Exchange believes that the proposal
represents a reasonable attempt to provide member organizations with an
orderly transition to upgraded technology without needing to incur any
additional costs. If a member organization is unable to complete this
transition within the nine-month period, the pricing is designed to
offset the Exchange's continuing costs of supporting the Phase I ports.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \37\ of the Act and subparagraph (f)(2) of Rule
19b-4 \38\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\37\ 15 U.S.C. 78s(b)(3)(A).
\38\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \39\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\39\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSE-2019-39 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-NYSE-2019-39. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2019-39 and should be submitted on
or before August 7, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15138 Filed 7-16-19; 8:45 am]
BILLING CODE 8011-01-P
