Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule on the BOX Options Market LLC (“BOX”) Facility To Establish BOX Connectivity Fees for Participants and Non-Participants Who Connect to the BOX Network, 50534-50541 [2019-20706]

Download as PDF 50534 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices DTC settlement optimization algorithm in identifying the optimal order to process transactions for settlement. Being able to effectively identify the optimal order to process transactions for settlement should help maximize the number of transactions processed for settlement during the night cycle. Therefore, the Commission believes that the proposed changes to the allocation algorithm used during the night cycle are designed to promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.23 The Commission also believes that the proposal to make technical changes is designed to promote prompt and accurate clearance and settlement of securities transactions. The proposed technical changes would help ensure consistency in terminology usage and correct cross references in the Rules, both of which would ensure the Rules are clear and accurate. The Commission believes that using consist terminology and correct cross references would avoid any confusion by Members and allow Members to accurately understand NSCC’s clearance and settlement services. In turn, the Commission believes that the proposal is designed to promote prompt and accurate clearance and settlement of securities transactions by NSCC. As such, the Commission believes the proposal to make technical changes is consistent with Section 17A(b)(3)(F) of the Act.24 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 NSCC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). 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–NSCC– 2019–002 and should be submitted on or before October 16, 2019. IV. Solicitation of Comments on Partial Amendment No. 1 to the Proposed Rule Change Interested persons are invited to submit written data, views and arguments concerning whether Partial Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: V. Accelerated Approval of the Proposed Rule Change, as Modified as Partial Amendment No. 1 The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,25 to approve the proposed rule change prior to the 30th day after the date of publication of Partial Amendment No. 1 in the Federal Register. As noted above, Partial Amendment No. 1 delays the implementation timeframe of the proposal from September 26, 2019 to December 6, 2019.26 The Commission believes that the Partial Amendment is consistent with the Act because it does not raise any regulatory issues and would provide more time before the proposal would go into effect. For the reasons discussed above, the Commission finds that Partial Amendment No. 1 is reasonably designed to protect investors and the public interest, and consistent with the requirements of the Act. Accordingly, the Commission finds good cause, jbell on DSK3GLQ082PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2019–002 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–NSCC–2019–002. This file number should be included on the 23 Id. 25 15 24 Id. 26 Partial VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 PO 00000 U.S.C. 78s(b)(2). Amendment No. 1, supra note 4. Frm 00164 Fmt 4703 Sfmt 4703 pursuant to Section 19(b)(2) of the Act,27 to approve the proposed rule change, as modified by Partial Amendment No. 1, on an accelerated basis. VI. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change, as modified by Partial Amendment No. 1, is consistent with the requirements of the Act and, in particular, with the requirements of Section 17A of the Act 28 and the rules and regulations promulgated thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 29 that proposed rule change SR–NSCC–2019– 002, as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis.30 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–20695 Filed 9–24–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87014; File No. SR–BOX– 2019–27] Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule on the BOX Options Market LLC (‘‘BOX’’) Facility To Establish BOX Connectivity Fees for Participants and Non-Participants Who Connect to the BOX Network September 19, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 5, 2019, BOX Exchange LLC (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposed rule change 27 15 U.S.C. 78s(b)(2). U.S.C. 78q–1. 29 15 U.S.C. 78s(b)(2). 30 In approving the proposed rule change, the Commission considered the proposals’ impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 31 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 28 15 E:\FR\FM\25SEN1.SGM 25SEN1 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices pursuant to Section 19(b)(3)(A)(ii) of the Act,3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to amend the Fee Schedule on the BOX Options Market LLC (‘‘BOX’’) facility. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s internet website at https:// boxexchange.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose jbell on DSK3GLQ082PROD with NOTICES The Exchange proposes to amend Section VI. (Technology Fees) of the BOX Fee Schedule to establish BOX Connectivity Fees for Participants and non-Participants who connect to the BOX network. Connectivity fees will be based upon the amount of bandwidth that will be used by the Participant or non-Participant. Further, BOX Participants or non-Participants connected as of the last trading day of each calendar month will be charged the applicable Connectivity Fee for that month. The Connectivity Fees will be as follows: Connection type Non-10 Gb Connection .......... 10 Gb Connection ................. 3 15 4 17 Monthly fees $1,000 per connection. $5,000 per connection. U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 The Exchange also proposes to amend certain language and numbering in Section VI.A to reflect the changes discussed above. Specifically, the Exchange proposes to add the title ‘‘Third Party Connectivity Fees’’ under Section VI.A. Further, the Exchange proposes to add Section VI.A.2, which details the proposed BOX Connectivity Fees discussed above. Finally the Exchange is proposing to remove Section VI.C. High Speed Vendor Feed (‘‘HSVF’’), and reclassify the HSVF as a Port Fee. The Exchange initially filed the proposed fees on July 19, 2018, designating the proposed fees effective July 1, 2018. The first proposed rule change was published for comment in the Federal Register on August 2, 2018.5 The Commission received one comment letter on the proposal.6 The proposed fees remained in effect until they were temporarily suspended pursuant to a suspension order (the ‘‘Suspension Order’’) issued by the Division of Trading and Markets, which also instituted proceedings to determine whether to approve or disapprove the proposed rule change.7 The Commission subsequently received one further comment letter on the proposed rule change, supporting the decision to suspend and institute proceedings on the proposed fee change.8 In response to the Suspension Order, the Exchange timely filed a Notice of Intention to Petition for Review 9 and Petition for Review to vacate the Division’s Order,10 which stayed the Division’s suspension of the filing. On November 16, 2018 the Commission granted the Exchange’s Petition for Review but discontinued the automatic stay.11 The Exchange then filed a 5 See Securities Exchange Act Release No. 83728 (July 27, 2018), 83 FR 37853 (August 2, 2018) (SR– BOX–2018–24). 6 See Letter from Tyler Gellasch, Executive Director, The Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated August 23, 2018 (‘‘Healthy Markets Letter’’). 7 See Securities Exchange Act Release No. 34– 84168 (September 17, 2018). 8 See Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association, dated October 15, 2018. 9 See Letter from Amir Tayrani, Partner, Gibson, Dunn & Crutcher LLP, dated September 19, 2018. 10 See Petition for Review of Order Temporarily Suspending BOX Exchange LLC’s Proposal to Amend the Fee Schedule on BOX Market LLC, dated September 26, 2018. 11 See Securities Exchange Act Release No. 84614. Order Granting Petition for Review and Scheduling Filing of Statements, dated November 16, 2018. Separately, the Securities Industry and Financial Markets Association filed an application under Section 19(d) of the Exchange Act challenging the Exchange’s proposed fees as alleged prohibitions or PO 00000 Frm 00165 Fmt 4703 Sfmt 4703 50535 statement to reiterate the arguments set for in its petition for review and to supplement that petition with additional information.12 The Exchange subsequently refiled its fee proposal on November 30th, 2018. The proposed fees were noticed and again temporarily suspended pursuant to a suspension order issued by the Division of Trading and Markets, which also instituted proceedings to determine whether to approve or disapprove the proposed rule change.13 The Commission received two comment letters supporting the decision to suspend and institute proceedings on the proposed fee change.14 The Exchange again refiled its fee proposal on February 13, 2019. The proposed fees were noticed and again temporarily suspended pursuant to a suspension order issued by the Division of Trading and Markets, which also instituted proceedings to determine whether to approve or disapprove the proposed rule change.15 The Commission received four comment letters supporting the decision to suspend and institute proceedings on the proposed fee change.16 On March 29, 2019, the Commission issued its Order Disapproving each limitations on access. See In re Securities Industry and Financial Markets Association, Admin. Proc. File No. 3–18680 (Aug. 24, 2018). The Commission thereafter remanded that denial-of-access proceeding to the Exchange while ‘‘express[ing] no view regarding the merits’’ and emphasizing that it was ‘‘not set[ting] aside the challenged rule change[ ].’’ In re Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2 (Oct. 16, 2018) (‘‘Remand Order’’), available at https:// www.sec.gov/litigation/opinions/2018/3484433.pdf. The Division’s Suspension Order is inconsistent with the Commission’s intent in the Remand Order to leave the challenged fees in place during the pendency of the remand proceedings and singles out the Exchange for disparate treatment because it means that the Exchange— unlike every other exchange whose rule changes were the subject of the Remand Order—is not permitted to continue charging the challenged fees during the remand proceedings. 12 See Letter from Amir Tayrani, Partner, Gibson, Dunn & Crutcher LLP, dated December 10, 2018. 13 See Securities Exchange Act Release No. 84823 (December 14, 2018), 83 FR 65381 (December 20, 2018) (SR–BOX–2018–37). 14 See Letters from Tyler Gellasch, Executive Director, The Healthy Markets Association (‘‘Second Healthy Markets Letter’’), and Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Tepper School of Business, Carnegie Mellon University (‘‘Chester Spatt Letter’’), to Brent J. Fields, Secretary, Commission, dated January 2, 2019. 15 See Securities Exchange Act Release No. 85201 (February 26, 2019), 84 FR 7146 (March 1, 2019)(SR–BOX–2019–04). 16 See Letters from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA (‘‘Second SIFMA Comment Letter’’), Tyler Gellasch, Executive Director, Healthy Markets Association (‘‘Third Healthy Markets Letter’’), Stefano Durdic, Former Owner of R2G Services, LLC, and Anand Prakash. E:\FR\FM\25SEN1.SGM 25SEN1 jbell on DSK3GLQ082PROD with NOTICES 50536 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices iteration of the BOX Proposal (‘‘BOX Order’’). In the BOX Order, the Commission highlighted a number of deficiencies it found in three separate rule filings by BOX to establish BOX’s connectivity fees that prevented the Commission from finding that BOX’s proposed connectivity fees were consistent with the Act. On May 21, 2019 the Division of Trading and Markets released new Guidance on SRO Rule Filings Relating to Fees. The Exchange then refiled the proposed fees on June 26, 2019 to incorporate the new guidance released by the Commission. The Commission received two comment letters on BOX’s June 26, 2019 Proposal.17 The Third SIFMA Comment Letter did not request that the Commission suspend BOX’s Proposal, but rather requested that the Commission ‘‘carefully consider whether BOX provided sufficient evidence to satisfy the applicable statutory standards.’’ The Fourth Healthy Markets Letter walks through the procedural history of the BOX and MIAX filings and urges the Commission to propose reforms with regard to immediately effective rule filings. The Exchange is again re-filing the fee proposal (‘‘the Proposal’’) to further bolster its cost-based discussion to support its claim that the Proposal is fair and reasonable because they will permit recovery of BOX costs and will not result in excessive pricing or supracompetitive profit. The Exchange believes that the proposed fees are consistent with the Act because they (i) are reasonable, equitably allocated, not unfairly discriminatory, and not an undue burden on competition; (ii) comply with the BOX Order and the Guidance; (iii) are, as demonstrated by this Proposal and supported by evidence (including data and analysis), constrained by significant competitive forces; and (iv) are, as demonstrated in this Proposal and supported by specific information (including quantitative information), fair and reasonable because they will permit recovery of BOX’s costs and will not result in excessive pricing or supracompetitive profit. Accordingly, the Exchange believes that the Commission should find that the proposed fees are consistent with the Act. The proposed rule change is immediately effective upon filing with the Commission 17 See Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated August 5, 2019 (‘‘Third SIFMA Comment Letter’’) and Letter from Tyler Gellasch, Executive Director, Healthy Markets Association, dated August 5, 2019 (‘‘Fourth Healthy Markets Letter’’). VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 pursuant to Section 19(b)(3)(A) of the Act. As discussed herein, the Exchange believes that it is reasonable and appropriate to begin charging for physical connectivity fees to partially offset the costs associated with maintaining and enhancing a state-ofthe-art exchange network infrastructure in the US options industry. There are significant costs associated with various projects and initiatives to improve overall network performance and stability, as well as costs paid to the third-party data centers for space rental, power used, etc. BOX has always offered physical connectivity to Participants and nonParticipants to access the BOX’s trading platforms, market data, test systems and disaster recovery facilities. These physical connections consist of 10Gb and non-10Gb connections, where the 10Gb connection provides for faster processing of messages sent to it in comparison to the non-10Gb connection. Since launching in 2012, BOX has not charged for physical connectivity and has instead relied on transaction fees as the basis of revenue. However, in recent years transaction fees have continually decreased across the options industry. At the same time these transactions fees were decreasing, the options exchanges, except for BOX, began charging physical connectivity fees to market participants. As such, BOX began to find itself at a significant competitive disadvantage, and had no choice but to begin charging Participants and non-Participants fees for connecting directly to the BOX network (which BOX has taken considerable measures to maintain and enhance for the benefit of those Participants and non-Participants) in order to remain competitive with the other options exchanges in the industry. As discussed in the Exchange’s recent Petition for Review of the Commission’s Order Disapproving BOX’s three filings, not allowing BOX to charge such connectivity fees arbitrarily and inequitably treats BOX differently from each of the other exchanges that submitted prior immediately effective connectivity fee filings that were not suspended or disapproved by the Commission.18 The Exchange notes that all other options exchanges currently charge for similar physical connectivity.19 18 See Securities Exchange Act Release No. 85927. Order Granting Petition for Review and Scheduling Filing of Statements, dated May 23, 2019. 19 Nasdaq PHLX LLC (‘‘Phlx’’), The Nasdaq Stock Market LLC (‘‘Nasdaq’’), NYSE Arca, Inc. (‘‘Arca’’), NYSE American LLC (‘‘NYSE American’’), Nasdaq ISE, LLC (‘‘ISE’’), Cboe Exchange, Inc. (‘‘Cboe’’), PO 00000 Frm 00166 Fmt 4703 Sfmt 4703 2. Statutory Basis The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Act, in general, and Section 6(b)(4) and 6(b)(5) of the Act,20 in particular, in that it provides for the equitable allocation of reasonable dues, fees, and other charges among BOX Participants and other persons using its facilities and does not unfairly discriminate between customers, issuers, brokers or dealers. The Commission has repeatedly expressed its preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. 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.’’ 21 The Exchange believes that the proposed fees in general constitute an equitable allocation of fees, and are not unfairly discriminatory, because they allow BOX to recover costs associated with offering access through the network connections. The proposed fees are also expected to offset the costs both the Exchange and BOX incur in maintaining and implementing ongoing improvements to the trading systems, including connectivity costs, costs incurred on software and hardware enhancements and resources dedicated Cboe BZX Exchange, Inc. (‘‘CboeBZX’’), Cboe EDGX Exchange, Inc. (‘‘CboeEDGX’’) and Cboe C2 Exchange, Inc. (‘‘C2’’) all offer a type of 10Gb and non-10Gb connectivity alternative to their participants. See Phlx, and ISE Rules, General Equity and Options Rules, General 8, Section 1(b). Phlx and ISE each charge a monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb connection and $15,000 for each 10Gb Ultra connection, which is the equivalent of the Exchange’s 10Gb ULL connection. See also Nasdaq Price List—Trading Connectivity. Nasdaq charges a monthly fee of $7,500 for each 10Gb direct connection to Nasdaq and $2,500 for each direct connection that supports up to 1Gb. See also NYSE American Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE American and Arca each charge a monthly fee of $5,000 for each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX circuit, which is the equivalent of the Exchange’s 10Gb ULL connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules. Cboe charges monthly quoting and order entry bandwidth packet fees. Specifically, Cboe charges $1,600 for the 1st through 5th packet, $800 for the 6th through 8th packet, $400 for the 9th through 13th packet and $200 for the 14th packet and each additional packet. CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for each 1Gb connection and $7,500 for each 10Gb connection. 20 15 U.S.C. 78f(b)(4) and (5). 21 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). E:\FR\FM\25SEN1.SGM 25SEN1 jbell on DSK3GLQ082PROD with NOTICES Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices to software development, quality assurance, and technology support. The Exchange believes that its proposal is consistent with Section 6(b)(4) of the Act, in that the proposed fee changes are fair, equitable and not unreasonably discriminatory, because the fees for the connectivity alternatives available on BOX, as proposed, are constrained by significant competitive forces. The U.S. options markets are highly competitive (there are currently 16 options markets) and a reliance on competitive markets is an appropriate means to ensure equitable and reasonable prices. The Exchange acknowledges that there is no regulatory requirement that any market participant connect to BOX, or that any participant connect at any specific connection speed. The rule structure for options exchanges are, in fact, fundamentally different from those of equities exchanges. In particular, options market participants are not forced to connect to (and purchase market data from) all options exchanges, as shown by the number of Participants of BOX as compared to the much greater number of participants at other options exchanges. Not only does BOX have less than half the number of participants as certain other options exchanges, but there are also a number of BOX Participants that do not connect directly to BOX. Further, of the number of Participants that connect directly to BOX, many such Participants do not purchase market data from BOX. In addition, of the market makers that are connected to BOX, it is the individual needs of the market maker that require whether they need one connection or multiple connections to BOX. BOX has market maker Participants that only purchase one connection (10Gb) and BOX has market maker Participants that purchase multiple connections. It is all driven by the business needs of the market maker. Market makers that are consolidators that target resting order flow tend to purchase more connectivity that market makers that simply quote all symbols on BOX. Even though nonParticipants purchase and resell 10Gb and non-10Gb connections to both Participants and non-Participants, no market makers currently connect to BOX indirectly through such resellers. In SIFMA’s comment letter, they argue that all broker-dealers are required to connect to all exchanges which is not true in the options markets. The options markets have evolved differently than the equities markets both in terms of market structure and functionality. For example, there are many order types that are available in the equities markets that are not utilized in the options VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 markets, which relate to mid-point pricing and pegged pricing which require connection to the SIPs and each of the equities exchanges in order to properly execute those orders in compliance with best execution obligations. In addition, in the options markets there is a single SIP (OPRA) versus two SIPs in the equities markets, resulting in few hops and thus alleviating the need to connect directly to all the options exchanges. Additionally, in the options markets, the linkage routing and trade through protection are handled by the exchanges, not by the individual participants. Thus not connecting to an options exchange or disconnecting from an options exchange does not potentially subject a broker-dealer to violate order protection requirements as suggested by SIFMA. The Exchange recognizes that the decision of whether to connect to BOX is separate and distinct from the decision of whether and how to trade on BOX. The Exchange acknowledges that many firms may choose to connect to BOX, but ultimately not trade on it, based on their particular business needs. To assist prospective Participants or firms considering connecting to BOX, the Exchange provides information about BOX’s available connectivity alternatives.22 The decision of which type of connectivity to purchase, or whether to purchase connectivity at all for a particular exchange, is based on the business needs of the firm. Section 2.4 of the BOX Connectivity Guide details the bandwidth requirements depending on the type of traffic each firm requires. Simple Order routing requires 128 kbps of bandwidth, which could be achieved with a non-10Gb connection, while receiving the five best limits in all classes for the HSVF requires a 10Gb connection not purchase such data feed products. Accordingly, purchasing market data is a business decision/choice, and thus the pricing for it is constrained by competition. Contrary to SIFMA’s argument, there is competition for connectivity to BOX. BOX competes with ten (10) nonParticipants who resell BOX connectivity or market data. These are resellers of BOX connectivity—they are not arrangements between broker dealers to share connectivity costs. Those non-Participants resell that connectivity to multiple market participants over that same connection, including both Participants and non22 See BOX Connectivity Guide at https:// boxoptions.com/assets/NET-BX-001E-BOXNetwork-Connection-Specifications-v2.7.pdf. PO 00000 Frm 00167 Fmt 4703 Sfmt 4703 50537 Participants of BOX. When connectivity is re-sold by a third-party, BOX does not receive any connectivity revenue from that sale. It is entirely between the thirdparty and the purchaser, thus constraining the ability of BOX to set its connectivity pricing as indirect connectivity is a substitute for direct connectivity. There are currently ten (10) non-Participants that purchase connectivity to BOX. Those nonParticipants resell that connectivity or market data to approximately twentyseven (27) customers, some of whom are agency broker-dealers that have tens of customers of their own. Some of those twenty-seven (27) customers also purchase connectivity directly from BOX. Accordingly, indirect connectivity is a viable alternative that is already being used by non-Participants of BOX, constraining the price that BOX is able to charge for connectivity. The Exchange is comprised of 51 BOX Participants. Of those 51 Participants, 13 Participants have purchased 10Gb or non-10Gb connections or some combination of multiple various connections. Furthermore, every Participant who has purchased at least one connection also trades on BOX with the exception of one new Participant who is currently in the on-boarding process. The remaining Participants who have not purchased any connectivity to BOX are still able to trade on BOX indirectly through other Participants or non-Participant service bureaus that are connected. These remaining Participants who have not purchased connectivity are not forced or compelled to purchase connectivity, and they retain all of the other benefits of membership with the Exchange. Accordingly, Participants and nonParticipants have the choice to purchase connectivity and are not compelled to do so in any way. The Exchange believes that the proposed fees are fair, equitable and not unreasonably discriminatory because the connectivity pricing is associated with relative usage or the various market participants and does not impose a barrier to entry to smaller participants. Accordingly, BOX offers two direct connectivity alternatives and various indirect connectivity (via third party) alternatives, as described above. BOX recognizes that there are various business models and varying sizes of market participants conducting business on BOX. The non-10Gb direct connectivity alternatives 23 are all 23 Non-10Gb connectivity alternatives are comprised of protocol types that are at or under 1Gb bandwidth. The protocol types are: Gigabit E:\FR\FM\25SEN1.SGM Continued 25SEN1 50538 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES comprised of bandwidth of equal to or less than 1Gb and are purchased by market participants that require less bandwidth. As stated above, Section 2.4 of the BOX Connectivity Guide details the bandwidth requirements depending on the type of traffic each firm requires. While non-10Gb connections can fully support the sending of orders and the consumption of BOX’s HSVF Data Feed,24 these connections use less exchange resources and network infrastructure. In contrast, market participants that purchase 10Gb connections utilize the most bandwidth, and those are the participants that consume the most resources from the network. The 10Gb connection offers optimized connectivity for latency sensitive participants and is faster in round trip time for connection oriented traffic to BOX than the non-10Gb connection. This lower latency is achieved through more advanced network equipment, such as advanced hardware and switching components, which translates to increased costs to BOX. Market participants that are less latency sensitive can purchase non10Gb direct connections and quote in all products on BOX and consume the HSVF Market Data Feed, and such non10Gb direct connections are priced lower than the 10Gb connections, offering smaller sized market makers a lower cost alternative. A 10Gb connection uses at least ten times the network infrastructure as the non-10Gb connections and BOX has to scale the systems by the amount and size of all connections regardless of how they are used.25 Accordingly, the Exchange believes that the allocation of the proposed fees ($1,000 per non-10Gb connection and $5,000 per 10Gb connection) are reasonable based on the network resources consumed by the market participants—lower bandwidth consuming market participants pay the least, and highest bandwidth consuming market participants pay the most, particularly since higher bandwidth consumption translates to higher costs to BOX. Separately, the Exchange is not aware of any reason why market participants could not simply drop their connections Ethernet, Ethernet, Fast Ethernet, Fiber Channel, OC–3, Singlemode Fiber, ISDN, POTS and T1. 24 The Exchange notes that, unlike MIAX, BOX’s HSVF Data Feed does not require a 10Gb physical connection. On BOX, the HSVF Data Feed cab be consumed through a non-10Gb connection. On MIAX, the 1Gb connection cannot support the consumption of the top of market data feed or the depth data feed product—both require a 10Gb connection. 25 The Exchange’s network infrastructure requirements are based on the premise of all connections operating at full capacity, VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 and cease being BOX Participants if the Exchange were to establish unreasonable and uncompetitive price increases for its connectivity alternatives. Market participants choose to connect to a particular exchange and because it is a choice, BOX must set reasonable connectivity pricing, otherwise prospective participants would not connect and existing participants would disconnect or connect through a third-party reseller of connectivity. No options market participant is required by rule, regulation, or competitive forces to be a BOX Participant.26 Several market participants choose not to be BOX Participants and choose not to access BOX, and several market participants also access BOX indirectly through another market participant. If all market participants were required to be Participants of each exchange and connect directly to the exchange, all exchanges would have over 200 Participants, in line with Cboe’s total membership. The Exchange believes that its proposal is consistent with Section 6(b)(4) of the Act because the proposed fees allow the BOX to recover a portion of the costs incurred by BOX associated with maintaining and enhancing a stateof-the-art exchange network infrastructure in the US options industry. Additionally, there are significant costs associated with various projects and initiatives to improve overall network performance and stability, as well as costs paid to the third-party data centers for space rental, power used, etc. The Exchange notes that unlike its competitors, BOX does not own its own data center and therefore cannot control data center costs. While some of the data center expenses are fixed, much of the expenses are not fixed, and thus increases as the number of physical connections increase. For example, new non-10Gb and 10Gb connections require the purchase of additional hardware to support those connections. Further, as the total number of all connections increase, BOX needs to increase their data center footprint and consume more power, resulting in increased costs charged by their third-party data center provider. Further, as discussed herein, because the costs of operating a data center are significant and not economically feasible for BOX, BOX does not operate its own data centers, and instead contracts with a third-party data center provider. The Exchange notes that larger, dominant exchange operators own/operate their data centers, which offers them greater control over their data center costs. Because those exchanges own and operate their data centers as profit centers, BOX is subject to additional costs. Connectivity fees, which are charged for accessing the BOX’s data center network infrastructure, are directly related to the network and offset such costs. As discussed herein, the Exchange now believes that it is reasonable and appropriate to begin charging for physical connectivity fees to partially offset the costs associated with maintaining and enhancing a state-ofthe-art exchange network infrastructure in the US options industry. There are significant costs associated with various projects and initiatives to improve overall network performance and stability, as well as costs paid to the third-party data centers for space rental, power used, etc. As discussed above, the Exchange notes that unlike other options exchanges, BOX does not own and operate its own data center and therefore cannot control data center costs. As detailed herein, BOX has incurred substantial costs associated with maintaining and enhancing the BOX network. These costs, coupled with BOX’s historically low transaction fees, place BOX at a competitive disadvantage against other options exchanges who charge connectivity fees to market participants. BOX has no choice but to begin charging Participants and non-Participants fees for connecting directly to the network which BOX has taken considerable measures to maintain and enhance for the benefit of those Participants and non-Participants in order to remain competitive with the other options exchanges in the industry. As the Exchange explained to the Division, the existence of robust competition between exchanges to attract order flow requires exchanges to keep prices for all of their joint services—including connectivity to the exchanges’ networks at a procompetitive level.27 This conclusion is substantiated by the report prepared by Professor Janusz A. Ordover and Gustavo Bamberger addressing the theory of ‘‘Platform Competition’’ and its application to the pricing of exchanges’ services, including 26 Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC has approximately 100 members, and NYSE American LLC has over 80 members. In comparison, the BOX has 51 Participants. 27 Letter from Lisa J. Fall, BOX, to Brent J. Fields, Secretary, Securities and Exchange Commission (Feb. 19, 2019), https://www.sec.gov/comments/srbox-2018-24/srbox201824-4945872-178516.pdf. PO 00000 Frm 00168 Fmt 4703 Sfmt 4703 E:\FR\FM\25SEN1.SGM 25SEN1 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES connectivity services.28 In the report, Ordover and Bamberger explain that ‘‘the provision of connectivity services . . . is inextricably linked to the provision of trading services, so that, as a matter of economics, it is not possible to appropriately evaluate the pricing of connectivity services in isolation from the pricing of trading and other ‘joint’ services offered by’’ an exchange. Ordover and Bamberger state that ‘‘connectivity services are an ‘input’ into trading’’ and that ‘‘excessive pricing of such services would raise the costs of trading on [an exchange] relative to its rivals and thus discourage trading on’’ that exchange. Although the Ordover/Bamberger Statement focuses on the pricing of connectivity services by Nasdaqaffiliated equities exchanges, its ‘‘overarching conclusion . . . that the pricing of connectivity services should not be analyzed in isolation’’ applies with equal force to the proposed fees. Because BOX is engaged with rigorous competition with other exchanges to attract order flow to its platform, BOX is constrained in its ability to price its joint services—including connectivity services—at supracompetitive levels. That competition ensures that BOX’s connectivity fees are set at levels consistent with the requirements of the Exchange Act. As detailed in the Exchange’s and BOX Market’s 29 2018 audited financial statements which are publicly available as part of the Exchange’s Form 1 Amendment, BOX only has two sources of revenue that it can control: Transaction fees and non-transactions fees.30 Accordingly, BOX must cover all of its expenses from these two sources of revenue. The Proposed Fees are fair and reasonable because they will not result in excessive pricing or supracompetitive profit, when comparing the total annual expense of the Exchange and BOX associated with providing the network connectivity services versus the total projected annual revenue of the Exchange 31 and BOX associated with 28 See Attachment to Letter from Lisa J. Fall, supra note 27 (‘‘Ordover/Bamberger Statement’’). 29 BOX Exchange LLC (‘‘Exchange’’) and BOX Options Market LLC (‘‘BOX’’) are two different entities. The Exchange is a national securities exchange registered with the SEC under Section 6 of the Securities Exchange Act of 1934. The Exchange fulfills the regulatory functions and responsibilities and oversees BOX, the equity options market. Expenses associated with network connectivity services are born by both the Exchange and BOX. 30 Options Price Authority Reporting (‘‘OPRA’’) income is not controlled by BOX. 31 Revenues for the Exchange are limited to the Options Regulatory Fee (‘‘ORF’’) and fines and disgorgements. VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 providing the network connectivity services. For 2018, the annual expense for BOX and the Exchange associated with providing the network connectivity services was approximately $8.9 million.32 This amount is comprised of both direct and indirect expenses. The direct expense (which relates 100% to the network infrastructure, associated data center processing equipment required to support various connections, network monitoring systems and associated software required to support the various forms of connectivity) was approximately $6.4 million.33 The indirect expense (which includes expense from such areas as trading operations, software development, business development, information technology, marketing, human resources, legal and regulatory, finance and accounting) that the Exchange and BOX allocate to the maintenance and support of network connectivity services was approximately $2.5 million.34 This indirect expense amount of $2.5 million represents approximately 10% of the total annual expenses of BOX and the Exchange for 2018. Total projected annualized revenue associated with selling the network connectivity services (reflecting the proposed fees on a fully-annualized basis, using July 2019 data) for BOX is projected to be approximately $4.6 million. This projected revenue amount of $4.6 million represents approximately 13% of total net revenue of BOX and Exchange for 2018 of approximately $35.5 million. The Exchange believes that an indirect expense allocation of 10% of total expense (less direct expense) to network connectivity services is fair and reasonable, as total projected network connectivity revenue represents approximately 13% of total net revenue 32 A more detailed breakdown of the annual operational expense in 2018 includes over $2.8 million for space rental, power used, connections, etc. at the Exchange’s data centers, over $1.1 million for data center support and management of third party vendors, over $700,000 in technological improvements to the data center infrastructure, over $1.4 million for resources for technical and operational services for the Exchange’s data centers and $400,000 in market data connectivity fees. Of note, regarding market data connectivity fees, this is the cost associated with BOX consuming connectivity/content from the equities markets in order to operate the Exchange, causing BOX to effectively pay its competitors for this connectivity. 33 Direct connectivity expenses are a portion of the following line items in the BOX and Exchange Form 1 Financial Statements: Technical and Operational, Other and Communications and Data Processing. 34 Indirect expenses for connectivity are a portion of the following line items in the BOX and Exchange Form 1 Financial Statements: Employee Costs, Depreciation and Amortization, Consulting, Financial and Administrative, and Other. PO 00000 Frm 00169 Fmt 4703 Sfmt 4703 50539 for 2018. That is, direct expense of $6.4 million plus indirect expense of $2.5 million fairly reflects the total annual expense associated with providing the network connectivity services, both from the perspective of similar revenue and expense percentages (connectivity to total), as well as matching connectivity resources to connectivity expenses. The Exchange believes that this is a conservative allocation of indirect expense. Accordingly, the total projected connectivity revenue for BOX, reflective of the proposed fees, on an annualized basis, of $4.6 million, is almost half of the total annual actual BOX and Exchange connectivity expense (direct and indirect) for 2018 of $8.9 million. Further, even the direct expense associated with providing network connectivity ($6.4 million) exceeds expected revenue from connectivity. The Exchange projects comparable network connectivity revenue and expense for 2019 for BOX. Accordingly, the Proposed Fees are fair and reasonable because they do not result in excessive pricing or supracompetitive profit, when comparing the actual network connectivity costs to the Exchange and BOX versus the projected network connectivity annual revenue. Additional information on overall revenue and expense can be found in the Exchange’s and BOX’s 2018 audited financial results, which is publicly available as part of the Exchange’s Form 1 filed with the Commission. The Exchange again notes that other exchanges have similar connectivity alternatives for their participants, including similar low-latency connectivity. For example, Nasdaq PHLX LLC (‘‘Phlx’’), NYSE Arca, Inc. (‘‘Arca’’), NYSE American LLC (‘‘NYSE American’’) and Nasdaq ISE, LLC (‘‘ISE’’) all offer a 1Gb, 10Gb and 10Gb low latency ethernet connectivity alternatives to each of their participants.35 The Exchange further notes that Phlx, ISE, Arca and NYSE American each charge higher rates for such similar connectivity to primary and secondary facilities.36 35 See Phlx and ISE Rules, General Equity and Options Rules, General 8, Section 1(b). Phlx and ISE each charge a monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb connection and $15,000 for each 10Gb Ultra connection, which the equivalent of the Exchange’s 10Gb ULL connection. See also NYSE American Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE American and Arca each charge a monthly fee of $5,000 for each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX circuit, which the equivalent of the Exchange’s 10Gb ULL connection. 36 Id. E:\FR\FM\25SEN1.SGM 25SEN1 50540 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices Finally, the Exchange believes redefining the HSVF Connection Fee as a Port Fee is reasonable, equitable and not unfairly discriminatory. This classification is more accurate because an HSVF subscription is not enabled through a physical connection to the Exchange. Although market participant must be credentialed by BOX to receive the HSVF, anyone can become credentialed by submitting the required documentation.37 The Exchange does not propose to alter the amount of the existing HSVF fee; subscribers to the HSVF will continue to pay $1,500 per month. As with the Connectivity Fees, BOX’s HSVF Port Fee is in line with industry practice.38 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. jbell on DSK3GLQ082PROD with NOTICES Intra-Market Competition The Exchange does not believe that the proposed rule change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. In particular, the Exchange has received no official complaints from Participants that purchase the Exchange’s connectivity that the Exchange’s fees or the Proposed Fees are negatively impacting or would negatively impact their abilities to compete with other market participants or that they are placed at a disadvantage.39 The Exchange believes that the Proposed Fees do not place certain market participants at a relative disadvantage to other market participants because the connectivity pricing is associated with relative usage of the various market participants and does not impose a barrier to entry to smaller participants. As described above, the less expensive non-10Gb direct connection is generally purchased by market participants that utilize less bandwidth. The market participants that purchase 10Gb connections utilize the 37 See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/ trading-interface-specifications/ 38 See Cboe Data Services, LLC (CDS) Fee Schedule § VI (charging $500 per month for up to five users to access the Enhanced Controlled Data Distribution Program). 39 The Exchange notes that it did receive one complaint from a non-Participant third party that, prior to the proposed fees, received connectivity for free and resold it to other market participants. This non-Participant ceased connectivity to the Exchange in January 2019. VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 most bandwidth, and those are the participants that consume the most resources from the network. Accordingly, the Proposed Fees do not favor certain categories of market participants in a manner that would impose a burden on competition; rather, the allocation of the Proposed Fees reflect the network resources consumed by the various size of market participants—lowest bandwidth consuming members pay the least, and highest bandwidth consuming members pays the most, particularly since higher bandwidth consumption translates to higher costs to BOX. Inter-Market Competition The Exchange believes the Proposed Fees do not place an undue burden on competition on other SROs that is not necessary or appropriate. In particular, options market participants are not forced to connect to (and purchase market data from) all options exchanges, as shown by the number of Participants of BOX as compared to the much greater number of members at other options exchanges (as described above). Not only does BOX have less than half the number of Participants as certain other options exchanges, but there are also a number of the Exchange’s Participants that do not connect directly to BOX. Additionally, the Exchange notes other exchanges have similar connectivity alternatives for their participants, including similar low-latency connectivity, but with much higher rates to connect.40 The Exchange is also unaware of any assertion that its existing fee levels or the Proposed Fees would somehow unduly impair its competition with other options exchanges. To the contrary, if the fees charged are deemed too high by market participants, they can simply disconnect. Unilateral action by the Exchange in establishing fees for services provided to its Participants and others using its facilities will not have an impact on competition. As a small exchange in the already highly competitive environment for options trading, the Exchange does not have the market power necessary to set prices for services that are unreasonable or unfairly discriminatory in violation of the Exchange Act. The Exchange’s proposed fees, as described herein, are comparable to and generally lower than fees charged by other options exchanges for the same or similar services. Lastly, the Exchange believes the proposed change will not impose a burden on intramarket competition as the proposed fees are applicable to all Participants and others using its facilities that connect to BOX. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Exchange Act 41 and Rule 19b–4(f)(2) thereunder,42 because it establishes or changes a due, or fee. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend the rule change if it appears to the Commission that the action is necessary or appropriate in the public interest, for the protection of investors, or would otherwise further the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comment Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BOX–2019–27 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–BOX–2019–27. 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 41 15 40 See PO 00000 supra note 19. Frm 00170 Fmt 4703 42 17 Sfmt 4703 E:\FR\FM\25SEN1.SGM U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 25SEN1 Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BOX–2019–27, and should be submitted on or before October 16, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–20706 Filed 9–24–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87022; File No. SR–DTC– 2019–005] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Amend the Settlement Guide To Implement a New Algorithm for Transactions Processed in the Night Cycle jbell on DSK3GLQ082PROD with NOTICES September 19, 2019. I. Introduction On July 22, 2019, the Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–DTC–2019–005, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) and Rule 19b–4 thereunder.1 The proposed rule change 43 17 1 15 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1) and 17 CFR 240.19b–4. VerDate Sep<11>2014 18:25 Sep 24, 2019 Jkt 247001 was published for comment in the Federal Register on August 8, 2019.2 On September 16, 2019, DTC filed Partial Amendment No. 1 to the proposed rule change to postpone the implementation date of the proposed rule change.3 The Commission did not receive any comment letters on the proposed rule change. The Commission is publishing this notice to solicit comment on Partial Amendment No. 1 from interested persons and to approve the proposed rule change, as modified by Partial Amendment No. 1 (hereinafter, ‘‘Proposed Rule Change’’), on an accelerated basis. II. Description of the Proposed Rule Change 4 DTC proposes to amend the Settlement Guide to implement a new processing algorithm for book-entry Deliveries 5 and Payment Orders 6 processed in the DTC night cycle (‘‘Night Cycle’’).7 Specifically, DTC proposes to make enhancements to its processing of transactions in the Night Cycle. Currently, other than a limited lookahead process as described below, DTC does not employ a processing mechanism that is designed to proactively optimize the percentage of available transactions that are processed 2 Securities Exchange Act Release No. 86554 (August 2, 2019), 84 FR 39025 (August 8, 2019) (SR–DTC–2019–005) (‘‘Notice’’). 3 DTC submitted a courtesy copy of Partial Amendment No. 1 to the proposed rule change through the Commission’s electronic public comment letter mechanism. Accordingly, Partial Amendment No. 1 to the proposed rule change has been publicly available on the Commission’s website since September 16, 2019: https:// www.sec.gov/comments/sr-dtc-2019-005/ srdtc2019005-6132114-192254.pdf 4 Capitalized terms not defined herein are defined in the Rules, By-Laws and Organization Certificate of DTC (‘‘Rules’’), available at www.dtcc.com/∼/ media/Files/Downloads/legal/rules/dtc_rules.pdf, and the DTC Settlement Service Guide (‘‘Settlement Guide’’), available at https://www.dtcc.com/∼/ media/Files/Downloads/legal/service-guides/ Settlement.pdf. 5 Pursuant to Rule 1, the term ‘‘Delivery’’ as used with respect to a Security held in the form of a Security Entitlement on the books of DTC, means debiting the Security from an Account of the Deliverer and crediting the Security to an Account of the Receiver. See Rules, supra note 4. 6 Pursuant to the Settlement Guide, ‘‘Payment Order’’ means a transaction in which a Participant charges another Participant for changes in value for outstanding stock loans or option contract premiums. See Settlement Guide, supra note 4, at 5. 7 The Night Cycle starts at approximately 8:30 p.m. ET on the Business Day prior to settlement date and runs until approximately 10:00 p.m. ET each Business Day. Transactions that cannot satisfy DTC’s controls at the time they are introduced to DTC will recycle throughout the day and be continuously reattempted until approximately 3:10 p.m. for valued transactions, and 6:35 p.m. for free transactions. See Notice, supra note 2, at 39026. PO 00000 Frm 00171 Fmt 4703 Sfmt 4703 50541 for settlement on settlement date. DTC proposes to implement a process that would facilitate a higher percentage of available transactions being processed for settlement during the Night Cycle.8 Specifically, pursuant to the Proposed Rule Change, DTC would introduce an algorithm that would test multiple scenarios that would incorporate all transactions available for processing at the start of the Night Cycle as a single batch (‘‘Night Batch Process’’), to determine the order of processing of those transactions that allows for the optimal percentage of the transactions to satisfy risk and position controls (i.e., the Collateral Monitor and Net Debit Cap controls),9 and therefore be processed for settlement in the Night Cycle. Consistent with DTC’s existing processing environment, the scenarios used would only involve processing of the transactions on a bilateral basis (i.e., no netting of Deliveries).10 Once the optimal order of processing has been identified, the results reflecting this optimal processing order would be incorporated into DTC’s core processing environment on a transaction-bytransaction basis, and member output would be produced using existing DTC output facilities. Delivery instructions provided to DTC after the Night Batch Process has begun would be submitted for daytime processing. According to DTC, the Proposed Rule Change would facilitate more efficient processing of Deliveries and Payment Orders in the Night Cycle and increase the percentage of transactions that have been processed for settlement prior to the start of regular daytime processing.11 8 DTC stated that 50 percent of transactions available for processing at the start of the Night Cycle are processed for settlement during the Night Cycle. DTC anticipates that the proposal would increase the percentage of transactions processed for settlement during the Night Cycle to approximately 65 percent. See Notice, supra note 2, at 39026. 9 In managing its credit risk, DTC uses the Collateral Monitor and Net Debit Cap. These two controls work together to protect the DTC settlement system in the event of Participant default. The Collateral Monitor requires net debit settlement obligations, as they accrue intraday, to be fully collateralized; the Net Debit Cap limits the amount of any Participant’s net debit settlement obligation to an amount that can be satisfied with DTC liquidity resources (the Participants Fund and the committed line of credit from a consortium of lenders). See Settlement Guide, supra note 4, at 64– 67. 10 The Proposed Rule Change relates only to the processing order of Deliveries and does not impact DTC’s funds settlement process, by which associated funds debits and credits in the Participant’s settlement account are netted intraday to calculate, at any time, a net debit balance or net credit balance, resulting in an end-of-day settlement obligation or right to receive payment. 11 See Notice, supra note 2, at 39026. E:\FR\FM\25SEN1.SGM 25SEN1

Agencies

[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50534-50541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20706]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87014; File No. SR-BOX-2019-27]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee 
Schedule on the BOX Options Market LLC (``BOX'') Facility To Establish 
BOX Connectivity Fees for Participants and Non-Participants Who Connect 
to the BOX Network

September 19, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 5, 2019, BOX Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Exchange filed the 
proposed rule change

[[Page 50535]]

pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule on 
the BOX Options Market LLC (``BOX'') facility. The text of the proposed 
rule change is available from the principal office of the Exchange, at 
the Commission's Public Reference Room and also on the Exchange's 
internet website at https://boxexchange.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Section VI. (Technology Fees) of the 
BOX Fee Schedule to establish BOX Connectivity Fees for Participants 
and non-Participants who connect to the BOX network. Connectivity fees 
will be based upon the amount of bandwidth that will be used by the 
Participant or non-Participant. Further, BOX Participants or non-
Participants connected as of the last trading day of each calendar 
month will be charged the applicable Connectivity Fee for that month. 
The Connectivity Fees will be as follows:

------------------------------------------------------------------------
              Connection type                       Monthly fees
------------------------------------------------------------------------
Non-10 Gb Connection......................  $1,000 per connection.
10 Gb Connection..........................  $5,000 per connection.
------------------------------------------------------------------------

The Exchange also proposes to amend certain language and numbering in 
Section VI.A to reflect the changes discussed above. Specifically, the 
Exchange proposes to add the title ``Third Party Connectivity Fees'' 
under Section VI.A. Further, the Exchange proposes to add Section 
VI.A.2, which details the proposed BOX Connectivity Fees discussed 
above. Finally the Exchange is proposing to remove Section VI.C. High 
Speed Vendor Feed (``HSVF''), and reclassify the HSVF as a Port Fee.
    The Exchange initially filed the proposed fees on July 19, 2018, 
designating the proposed fees effective July 1, 2018. The first 
proposed rule change was published for comment in the Federal Register 
on August 2, 2018.\5\ The Commission received one comment letter on the 
proposal.\6\ The proposed fees remained in effect until they were 
temporarily suspended pursuant to a suspension order (the ``Suspension 
Order'') issued by the Division of Trading and Markets, which also 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change.\7\ The Commission subsequently received one 
further comment letter on the proposed rule change, supporting the 
decision to suspend and institute proceedings on the proposed fee 
change.\8\
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    \5\ See Securities Exchange Act Release No. 83728 (July 27, 
2018), 83 FR 37853 (August 2, 2018) (SR-BOX-2018-24).
    \6\ See Letter from Tyler Gellasch, Executive Director, The 
Healthy Markets Association, to Brent J. Fields, Secretary, 
Commission, dated August 23, 2018 (``Healthy Markets Letter'').
    \7\ See Securities Exchange Act Release No. 34-84168 (September 
17, 2018).
    \8\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, and Ellen Greene, Managing Director, 
Financial Services Operations, Securities Industry and Financial 
Markets Association, dated October 15, 2018.
---------------------------------------------------------------------------

    In response to the Suspension Order, the Exchange timely filed a 
Notice of Intention to Petition for Review \9\ and Petition for Review 
to vacate the Division's Order,\10\ which stayed the Division's 
suspension of the filing. On November 16, 2018 the Commission granted 
the Exchange's Petition for Review but discontinued the automatic 
stay.\11\ The Exchange then filed a statement to reiterate the 
arguments set for in its petition for review and to supplement that 
petition with additional information.\12\
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    \9\ See Letter from Amir Tayrani, Partner, Gibson, Dunn & 
Crutcher LLP, dated September 19, 2018.
    \10\ See Petition for Review of Order Temporarily Suspending BOX 
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC, 
dated September 26, 2018.
    \11\ See Securities Exchange Act Release No. 84614. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated November 16, 2018. Separately, the Securities Industry and 
Financial Markets Association filed an application under Section 
19(d) of the Exchange Act challenging the Exchange's proposed fees 
as alleged prohibitions or limitations on access. See In re 
Securities Industry and Financial Markets Association, Admin. Proc. 
File No. 3-18680 (Aug. 24, 2018). The Commission thereafter remanded 
that denial-of-access proceeding to the Exchange while 
``express[ing] no view regarding the merits'' and emphasizing that 
it was ``not set[ting] aside the challenged rule change[ ].'' In re 
Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2 
(Oct. 16, 2018) (``Remand Order''), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf. The Division's 
Suspension Order is inconsistent with the Commission's intent in the 
Remand Order to leave the challenged fees in place during the 
pendency of the remand proceedings and singles out the Exchange for 
disparate treatment because it means that the Exchange--unlike every 
other exchange whose rule changes were the subject of the Remand 
Order--is not permitted to continue charging the challenged fees 
during the remand proceedings.
    \12\ See Letter from Amir Tayrani, Partner, Gibson, Dunn & 
Crutcher LLP, dated December 10, 2018.
---------------------------------------------------------------------------

    The Exchange subsequently refiled its fee proposal on November 
30th, 2018. The proposed fees were noticed and again temporarily 
suspended pursuant to a suspension order issued by the Division of 
Trading and Markets, which also instituted proceedings to determine 
whether to approve or disapprove the proposed rule change.\13\ The 
Commission received two comment letters supporting the decision to 
suspend and institute proceedings on the proposed fee change.\14\
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    \13\ See Securities Exchange Act Release No. 84823 (December 14, 
2018), 83 FR 65381 (December 20, 2018) (SR-BOX-2018-37).
    \14\ See Letters from Tyler Gellasch, Executive Director, The 
Healthy Markets Association (``Second Healthy Markets Letter''), and 
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, 
Tepper School of Business, Carnegie Mellon University (``Chester 
Spatt Letter''), to Brent J. Fields, Secretary, Commission, dated 
January 2, 2019.
---------------------------------------------------------------------------

    The Exchange again refiled its fee proposal on February 13, 2019. 
The proposed fees were noticed and again temporarily suspended pursuant 
to a suspension order issued by the Division of Trading and Markets, 
which also instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\15\ The Commission received four 
comment letters supporting the decision to suspend and institute 
proceedings on the proposed fee change.\16\
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    \15\ See Securities Exchange Act Release No. 85201 (February 26, 
2019), 84 FR 7146 (March 1, 2019)(SR-BOX-2019-04).
    \16\ See Letters from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''), 
Tyler Gellasch, Executive Director, Healthy Markets Association 
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of 
R2G Services, LLC, and Anand Prakash.
---------------------------------------------------------------------------

    On March 29, 2019, the Commission issued its Order Disapproving 
each

[[Page 50536]]

iteration of the BOX Proposal (``BOX Order''). In the BOX Order, the 
Commission highlighted a number of deficiencies it found in three 
separate rule filings by BOX to establish BOX's connectivity fees that 
prevented the Commission from finding that BOX's proposed connectivity 
fees were consistent with the Act.
    On May 21, 2019 the Division of Trading and Markets released new 
Guidance on SRO Rule Filings Relating to Fees. The Exchange then 
refiled the proposed fees on June 26, 2019 to incorporate the new 
guidance released by the Commission.
    The Commission received two comment letters on BOX's June 26, 2019 
Proposal.\17\ The Third SIFMA Comment Letter did not request that the 
Commission suspend BOX's Proposal, but rather requested that the 
Commission ``carefully consider whether BOX provided sufficient 
evidence to satisfy the applicable statutory standards.'' The Fourth 
Healthy Markets Letter walks through the procedural history of the BOX 
and MIAX filings and urges the Commission to propose reforms with 
regard to immediately effective rule filings.
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    \17\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA, dated August 5, 2019 (``Third 
SIFMA Comment Letter'') and Letter from Tyler Gellasch, Executive 
Director, Healthy Markets Association, dated August 5, 2019 
(``Fourth Healthy Markets Letter'').
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    The Exchange is again re-filing the fee proposal (``the Proposal'') 
to further bolster its cost-based discussion to support its claim that 
the Proposal is fair and reasonable because they will permit recovery 
of BOX costs and will not result in excessive pricing or 
supracompetitive profit. The Exchange believes that the proposed fees 
are consistent with the Act because they (i) are reasonable, equitably 
allocated, not unfairly discriminatory, and not an undue burden on 
competition; (ii) comply with the BOX Order and the Guidance; (iii) 
are, as demonstrated by this Proposal and supported by evidence 
(including data and analysis), constrained by significant competitive 
forces; and (iv) are, as demonstrated in this Proposal and supported by 
specific information (including quantitative information), fair and 
reasonable because they will permit recovery of BOX's costs and will 
not result in excessive pricing or supracompetitive profit. 
Accordingly, the Exchange believes that the Commission should find that 
the proposed fees are consistent with the Act. The proposed rule change 
is immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.
    As discussed herein, the Exchange believes that it is reasonable 
and appropriate to begin charging for physical connectivity fees to 
partially offset the costs associated with maintaining and enhancing a 
state-of-the-art exchange network infrastructure in the US options 
industry. There are significant costs associated with various projects 
and initiatives to improve overall network performance and stability, 
as well as costs paid to the third-party data centers for space rental, 
power used, etc.
    BOX has always offered physical connectivity to Participants and 
non-Participants to access the BOX's trading platforms, market data, 
test systems and disaster recovery facilities. These physical 
connections consist of 10Gb and non-10Gb connections, where the 10Gb 
connection provides for faster processing of messages sent to it in 
comparison to the non-10Gb connection. Since launching in 2012, BOX has 
not charged for physical connectivity and has instead relied on 
transaction fees as the basis of revenue. However, in recent years 
transaction fees have continually decreased across the options 
industry. At the same time these transactions fees were decreasing, the 
options exchanges, except for BOX, began charging physical connectivity 
fees to market participants. As such, BOX began to find itself at a 
significant competitive disadvantage, and had no choice but to begin 
charging Participants and non-Participants fees for connecting directly 
to the BOX network (which BOX has taken considerable measures to 
maintain and enhance for the benefit of those Participants and non-
Participants) in order to remain competitive with the other options 
exchanges in the industry.
    As discussed in the Exchange's recent Petition for Review of the 
Commission's Order Disapproving BOX's three filings, not allowing BOX 
to charge such connectivity fees arbitrarily and inequitably treats BOX 
differently from each of the other exchanges that submitted prior 
immediately effective connectivity fee filings that were not suspended 
or disapproved by the Commission.\18\ The Exchange notes that all other 
options exchanges currently charge for similar physical 
connectivity.\19\
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    \18\ See Securities Exchange Act Release No. 85927. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated May 23, 2019.
    \19\ Nasdaq PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC 
(``Nasdaq''), NYSE Arca, Inc. (``Arca''), NYSE American LLC (``NYSE 
American''), Nasdaq ISE, LLC (``ISE''), Cboe Exchange, Inc. 
(``Cboe''), Cboe BZX Exchange, Inc. (``CboeBZX''), Cboe EDGX 
Exchange, Inc. (``CboeEDGX'') and Cboe C2 Exchange, Inc. (``C2'') 
all offer a type of 10Gb and non-10Gb connectivity alternative to 
their participants. See Phlx, and ISE Rules, General Equity and 
Options Rules, General 8, Section 1(b). Phlx and ISE each charge a 
monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb 
connection and $15,000 for each 10Gb Ultra connection, which is the 
equivalent of the Exchange's 10Gb ULL connection. See also Nasdaq 
Price List--Trading Connectivity. Nasdaq charges a monthly fee of 
$7,500 for each 10Gb direct connection to Nasdaq and $2,500 for each 
direct connection that supports up to 1Gb. See also NYSE American 
Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location 
Fees. NYSE American and Arca each charge a monthly fee of $5,000 for 
each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 
10Gb LX circuit, which is the equivalent of the Exchange's 10Gb ULL 
connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules. 
Cboe charges monthly quoting and order entry bandwidth packet fees. 
Specifically, Cboe charges $1,600 for the 1st through 5th packet, 
$800 for the 6th through 8th packet, $400 for the 9th through 13th 
packet and $200 for the 14th packet and each additional packet. 
CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for 
each 1Gb connection and $7,500 for each 10Gb connection.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act, in general, and Section 
6(b)(4) and 6(b)(5) of the Act,\20\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees, and other 
charges among BOX Participants and other persons using its facilities 
and does not unfairly discriminate between customers, issuers, brokers 
or dealers.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. 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.'' \21\
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees in general constitute 
an equitable allocation of fees, and are not unfairly discriminatory, 
because they allow BOX to recover costs associated with offering access 
through the network connections. The proposed fees are also expected to 
offset the costs both the Exchange and BOX incur in maintaining and 
implementing ongoing improvements to the trading systems, including 
connectivity costs, costs incurred on software and hardware 
enhancements and resources dedicated

[[Page 50537]]

to software development, quality assurance, and technology support.
    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act, in that the proposed fee changes are fair, 
equitable and not unreasonably discriminatory, because the fees for the 
connectivity alternatives available on BOX, as proposed, are 
constrained by significant competitive forces. The U.S. options markets 
are highly competitive (there are currently 16 options markets) and a 
reliance on competitive markets is an appropriate means to ensure 
equitable and reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to BOX, or that any participant 
connect at any specific connection speed. The rule structure for 
options exchanges are, in fact, fundamentally different from those of 
equities exchanges. In particular, options market participants are not 
forced to connect to (and purchase market data from) all options 
exchanges, as shown by the number of Participants of BOX as compared to 
the much greater number of participants at other options exchanges. Not 
only does BOX have less than half the number of participants as certain 
other options exchanges, but there are also a number of BOX 
Participants that do not connect directly to BOX. Further, of the 
number of Participants that connect directly to BOX, many such 
Participants do not purchase market data from BOX. In addition, of the 
market makers that are connected to BOX, it is the individual needs of 
the market maker that require whether they need one connection or 
multiple connections to BOX. BOX has market maker Participants that 
only purchase one connection (10Gb) and BOX has market maker 
Participants that purchase multiple connections. It is all driven by 
the business needs of the market maker. Market makers that are 
consolidators that target resting order flow tend to purchase more 
connectivity that market makers that simply quote all symbols on BOX. 
Even though non-Participants purchase and resell 10Gb and non-10Gb 
connections to both Participants and non-Participants, no market makers 
currently connect to BOX indirectly through such resellers.
    In SIFMA's comment letter, they argue that all broker-dealers are 
required to connect to all exchanges which is not true in the options 
markets. The options markets have evolved differently than the equities 
markets both in terms of market structure and functionality. For 
example, there are many order types that are available in the equities 
markets that are not utilized in the options markets, which relate to 
mid-point pricing and pegged pricing which require connection to the 
SIPs and each of the equities exchanges in order to properly execute 
those orders in compliance with best execution obligations. In 
addition, in the options markets there is a single SIP (OPRA) versus 
two SIPs in the equities markets, resulting in few hops and thus 
alleviating the need to connect directly to all the options exchanges. 
Additionally, in the options markets, the linkage routing and trade 
through protection are handled by the exchanges, not by the individual 
participants. Thus not connecting to an options exchange or 
disconnecting from an options exchange does not potentially subject a 
broker-dealer to violate order protection requirements as suggested by 
SIFMA. The Exchange recognizes that the decision of whether to connect 
to BOX is separate and distinct from the decision of whether and how to 
trade on BOX. The Exchange acknowledges that many firms may choose to 
connect to BOX, but ultimately not trade on it, based on their 
particular business needs.
    To assist prospective Participants or firms considering connecting 
to BOX, the Exchange provides information about BOX's available 
connectivity alternatives.\22\ The decision of which type of 
connectivity to purchase, or whether to purchase connectivity at all 
for a particular exchange, is based on the business needs of the firm. 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. 
Simple Order routing requires 128 kbps of bandwidth, which could be 
achieved with a non-10Gb connection, while receiving the five best 
limits in all classes for the HSVF requires a 10Gb connection not 
purchase such data feed products. Accordingly, purchasing market data 
is a business decision/choice, and thus the pricing for it is 
constrained by competition.
---------------------------------------------------------------------------

    \22\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
---------------------------------------------------------------------------

    Contrary to SIFMA's argument, there is competition for connectivity 
to BOX. BOX competes with ten (10) non-Participants who resell BOX 
connectivity or market data. These are resellers of BOX connectivity--
they are not arrangements between broker dealers to share connectivity 
costs. Those non-Participants resell that connectivity to multiple 
market participants over that same connection, including both 
Participants and non-Participants of BOX. When connectivity is re-sold 
by a third-party, BOX does not receive any connectivity revenue from 
that sale. It is entirely between the third-party and the purchaser, 
thus constraining the ability of BOX to set its connectivity pricing as 
indirect connectivity is a substitute for direct connectivity. There 
are currently ten (10) non-Participants that purchase connectivity to 
BOX. Those non-Participants resell that connectivity or market data to 
approximately twenty-seven (27) customers, some of whom are agency 
broker-dealers that have tens of customers of their own. Some of those 
twenty-seven (27) customers also purchase connectivity directly from 
BOX. Accordingly, indirect connectivity is a viable alternative that is 
already being used by non-Participants of BOX, constraining the price 
that BOX is able to charge for connectivity.
    The Exchange is comprised of 51 BOX Participants. Of those 51 
Participants, 13 Participants have purchased 10Gb or non-10Gb 
connections or some combination of multiple various connections. 
Furthermore, every Participant who has purchased at least one 
connection also trades on BOX with the exception of one new Participant 
who is currently in the on-boarding process. The remaining Participants 
who have not purchased any connectivity to BOX are still able to trade 
on BOX indirectly through other Participants or non-Participant service 
bureaus that are connected. These remaining Participants who have not 
purchased connectivity are not forced or compelled to purchase 
connectivity, and they retain all of the other benefits of membership 
with the Exchange. Accordingly, Participants and non-Participants have 
the choice to purchase connectivity and are not compelled to do so in 
any way.
    The Exchange believes that the proposed fees are fair, equitable 
and not unreasonably discriminatory because the connectivity pricing is 
associated with relative usage or the various market participants and 
does not impose a barrier to entry to smaller participants. 
Accordingly, BOX offers two direct connectivity alternatives and 
various indirect connectivity (via third party) alternatives, as 
described above. BOX recognizes that there are various business models 
and varying sizes of market participants conducting business on BOX. 
The non-10Gb direct connectivity alternatives \23\ are all

[[Page 50538]]

comprised of bandwidth of equal to or less than 1Gb and are purchased 
by market participants that require less bandwidth. As stated above, 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. While 
non-10Gb connections can fully support the sending of orders and the 
consumption of BOX's HSVF Data Feed,\24\ these connections use less 
exchange resources and network infrastructure. In contrast, market 
participants that purchase 10Gb connections utilize the most bandwidth, 
and those are the participants that consume the most resources from the 
network. The 10Gb connection offers optimized connectivity for latency 
sensitive participants and is faster in round trip time for connection 
oriented traffic to BOX than the non-10Gb connection. This lower 
latency is achieved through more advanced network equipment, such as 
advanced hardware and switching components, which translates to 
increased costs to BOX. Market participants that are less latency 
sensitive can purchase non-10Gb direct connections and quote in all 
products on BOX and consume the HSVF Market Data Feed, and such non-
10Gb direct connections are priced lower than the 10Gb connections, 
offering smaller sized market makers a lower cost alternative.
---------------------------------------------------------------------------

    \23\ Non-10Gb connectivity alternatives are comprised of 
protocol types that are at or under 1Gb bandwidth. The protocol 
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel, 
OC-3, Singlemode Fiber, ISDN, POTS and T1.
    \24\ The Exchange notes that, unlike MIAX, BOX's HSVF Data Feed 
does not require a 10Gb physical connection. On BOX, the HSVF Data 
Feed cab be consumed through a non-10Gb connection. On MIAX, the 1Gb 
connection cannot support the consumption of the top of market data 
feed or the depth data feed product--both require a 10Gb connection.
---------------------------------------------------------------------------

    A 10Gb connection uses at least ten times the network 
infrastructure as the non-10Gb connections and BOX has to scale the 
systems by the amount and size of all connections regardless of how 
they are used.\25\ Accordingly, the Exchange believes that the 
allocation of the proposed fees ($1,000 per non-10Gb connection and 
$5,000 per 10Gb connection) are reasonable based on the network 
resources consumed by the market participants--lower bandwidth 
consuming market participants pay the least, and highest bandwidth 
consuming market participants pay the most, particularly since higher 
bandwidth consumption translates to higher costs to BOX.
---------------------------------------------------------------------------

    \25\ The Exchange's network infrastructure requirements are 
based on the premise of all connections operating at full capacity,
---------------------------------------------------------------------------

    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
BOX Participants if the Exchange were to establish unreasonable and 
uncompetitive price increases for its connectivity alternatives. Market 
participants choose to connect to a particular exchange and because it 
is a choice, BOX must set reasonable connectivity pricing, otherwise 
prospective participants would not connect and existing participants 
would disconnect or connect through a third-party reseller of 
connectivity. No options market participant is required by rule, 
regulation, or competitive forces to be a BOX Participant.\26\ Several 
market participants choose not to be BOX Participants and choose not to 
access BOX, and several market participants also access BOX indirectly 
through another market participant. If all market participants were 
required to be Participants of each exchange and connect directly to 
the exchange, all exchanges would have over 200 Participants, in line 
with Cboe's total membership.
---------------------------------------------------------------------------

    \26\ Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC 
has approximately 100 members, and NYSE American LLC has over 80 
members. In comparison, the BOX has 51 Participants.
---------------------------------------------------------------------------

    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the proposed fees allow the BOX to recover a 
portion of the costs incurred by BOX associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the US 
options industry. Additionally, there are significant costs associated 
with various projects and initiatives to improve overall network 
performance and stability, as well as costs paid to the third-party 
data centers for space rental, power used, etc.
    The Exchange notes that unlike its competitors, BOX does not own 
its own data center and therefore cannot control data center costs. 
While some of the data center expenses are fixed, much of the expenses 
are not fixed, and thus increases as the number of physical connections 
increase. For example, new non-10Gb and 10Gb connections require the 
purchase of additional hardware to support those connections. Further, 
as the total number of all connections increase, BOX needs to increase 
their data center footprint and consume more power, resulting in 
increased costs charged by their third-party data center provider.
    Further, as discussed herein, because the costs of operating a data 
center are significant and not economically feasible for BOX, BOX does 
not operate its own data centers, and instead contracts with a third-
party data center provider. The Exchange notes that larger, dominant 
exchange operators own/operate their data centers, which offers them 
greater control over their data center costs. Because those exchanges 
own and operate their data centers as profit centers, BOX is subject to 
additional costs. Connectivity fees, which are charged for accessing 
the BOX's data center network infrastructure, are directly related to 
the network and offset such costs.
    As discussed herein, the Exchange now believes that it is 
reasonable and appropriate to begin charging for physical connectivity 
fees to partially offset the costs associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the US 
options industry. There are significant costs associated with various 
projects and initiatives to improve overall network performance and 
stability, as well as costs paid to the third-party data centers for 
space rental, power used, etc. As discussed above, the Exchange notes 
that unlike other options exchanges, BOX does not own and operate its 
own data center and therefore cannot control data center costs. As 
detailed herein, BOX has incurred substantial costs associated with 
maintaining and enhancing the BOX network. These costs, coupled with 
BOX's historically low transaction fees, place BOX at a competitive 
disadvantage against other options exchanges who charge connectivity 
fees to market participants. BOX has no choice but to begin charging 
Participants and non-Participants fees for connecting directly to the 
network which BOX has taken considerable measures to maintain and 
enhance for the benefit of those Participants and non-Participants in 
order to remain competitive with the other options exchanges in the 
industry.
    As the Exchange explained to the Division, the existence of robust 
competition between exchanges to attract order flow requires exchanges 
to keep prices for all of their joint services--including connectivity 
to the exchanges' networks at a pro-competitive level.\27\ This 
conclusion is substantiated by the report prepared by Professor Janusz 
A. Ordover and Gustavo Bamberger addressing the theory of ``Platform 
Competition'' and its application to the pricing of exchanges' 
services, including

[[Page 50539]]

connectivity services.\28\ In the report, Ordover and Bamberger explain 
that ``the provision of connectivity services . . . is inextricably 
linked to the provision of trading services, so that, as a matter of 
economics, it is not possible to appropriately evaluate the pricing of 
connectivity services in isolation from the pricing of trading and 
other `joint' services offered by'' an exchange. Ordover and Bamberger 
state that ``connectivity services are an `input' into trading'' and 
that ``excessive pricing of such services would raise the costs of 
trading on [an exchange] relative to its rivals and thus discourage 
trading on'' that exchange.
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    \27\ Letter from Lisa J. Fall, BOX, to Brent J. Fields, 
Secretary, Securities and Exchange Commission (Feb. 19, 2019), 
https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4945872-178516.pdf.
    \28\ See Attachment to Letter from Lisa J. Fall, supra note 27 
(``Ordover/Bamberger Statement'').
---------------------------------------------------------------------------

    Although the Ordover/Bamberger Statement focuses on the pricing of 
connectivity services by Nasdaq-affiliated equities exchanges, its 
``overarching conclusion . . . that the pricing of connectivity 
services should not be analyzed in isolation'' applies with equal force 
to the proposed fees. Because BOX is engaged with rigorous competition 
with other exchanges to attract order flow to its platform, BOX is 
constrained in its ability to price its joint services--including 
connectivity services--at supracompetitive levels. That competition 
ensures that BOX's connectivity fees are set at levels consistent with 
the requirements of the Exchange Act.
    As detailed in the Exchange's and BOX Market's \29\ 2018 audited 
financial statements which are publicly available as part of the 
Exchange's Form 1 Amendment, BOX only has two sources of revenue that 
it can control: Transaction fees and non-transactions fees.\30\ 
Accordingly, BOX must cover all of its expenses from these two sources 
of revenue.
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    \29\ BOX Exchange LLC (``Exchange'') and BOX Options Market LLC 
(``BOX'') are two different entities. The Exchange is a national 
securities exchange registered with the SEC under Section 6 of the 
Securities Exchange Act of 1934. The Exchange fulfills the 
regulatory functions and responsibilities and oversees BOX, the 
equity options market. Expenses associated with network connectivity 
services are born by both the Exchange and BOX.
    \30\ Options Price Authority Reporting (``OPRA'') income is not 
controlled by BOX.
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    The Proposed Fees are fair and reasonable because they will not 
result in excessive pricing or supracompetitive profit, when comparing 
the total annual expense of the Exchange and BOX associated with 
providing the network connectivity services versus the total projected 
annual revenue of the Exchange \31\ and BOX associated with providing 
the network connectivity services. For 2018, the annual expense for BOX 
and the Exchange associated with providing the network connectivity 
services was approximately $8.9 million.\32\ This amount is comprised 
of both direct and indirect expenses. The direct expense (which relates 
100% to the network infrastructure, associated data center processing 
equipment required to support various connections, network monitoring 
systems and associated software required to support the various forms 
of connectivity) was approximately $6.4 million.\33\
---------------------------------------------------------------------------

    \31\ Revenues for the Exchange are limited to the Options 
Regulatory Fee (``ORF'') and fines and disgorgements.
    \32\ A more detailed breakdown of the annual operational expense 
in 2018 includes over $2.8 million for space rental, power used, 
connections, etc. at the Exchange's data centers, over $1.1 million 
for data center support and management of third party vendors, over 
$700,000 in technological improvements to the data center 
infrastructure, over $1.4 million for resources for technical and 
operational services for the Exchange's data centers and $400,000 in 
market data connectivity fees. Of note, regarding market data 
connectivity fees, this is the cost associated with BOX consuming 
connectivity/content from the equities markets in order to operate 
the Exchange, causing BOX to effectively pay its competitors for 
this connectivity.
    \33\ Direct connectivity expenses are a portion of the following 
line items in the BOX and Exchange Form 1 Financial Statements: 
Technical and Operational, Other and Communications and Data 
Processing.
---------------------------------------------------------------------------

    The indirect expense (which includes expense from such areas as 
trading operations, software development, business development, 
information technology, marketing, human resources, legal and 
regulatory, finance and accounting) that the Exchange and BOX allocate 
to the maintenance and support of network connectivity services was 
approximately $2.5 million.\34\ This indirect expense amount of $2.5 
million represents approximately 10% of the total annual expenses of 
BOX and the Exchange for 2018. Total projected annualized revenue 
associated with selling the network connectivity services (reflecting 
the proposed fees on a fully-annualized basis, using July 2019 data) 
for BOX is projected to be approximately $4.6 million. This projected 
revenue amount of $4.6 million represents approximately 13% of total 
net revenue of BOX and Exchange for 2018 of approximately $35.5 
million. The Exchange believes that an indirect expense allocation of 
10% of total expense (less direct expense) to network connectivity 
services is fair and reasonable, as total projected network 
connectivity revenue represents approximately 13% of total net revenue 
for 2018. That is, direct expense of $6.4 million plus indirect expense 
of $2.5 million fairly reflects the total annual expense associated 
with providing the network connectivity services, both from the 
perspective of similar revenue and expense percentages (connectivity to 
total), as well as matching connectivity resources to connectivity 
expenses. The Exchange believes that this is a conservative allocation 
of indirect expense. Accordingly, the total projected connectivity 
revenue for BOX, reflective of the proposed fees, on an annualized 
basis, of $4.6 million, is almost half of the total annual actual BOX 
and Exchange connectivity expense (direct and indirect) for 2018 of 
$8.9 million. Further, even the direct expense associated with 
providing network connectivity ($6.4 million) exceeds expected revenue 
from connectivity.
---------------------------------------------------------------------------

    \34\ Indirect expenses for connectivity are a portion of the 
following line items in the BOX and Exchange Form 1 Financial 
Statements: Employee Costs, Depreciation and Amortization, 
Consulting, Financial and Administrative, and Other.
---------------------------------------------------------------------------

    The Exchange projects comparable network connectivity revenue and 
expense for 2019 for BOX. Accordingly, the Proposed Fees are fair and 
reasonable because they do not result in excessive pricing or 
supracompetitive profit, when comparing the actual network connectivity 
costs to the Exchange and BOX versus the projected network connectivity 
annual revenue. Additional information on overall revenue and expense 
can be found in the Exchange's and BOX's 2018 audited financial 
results, which is publicly available as part of the Exchange's Form 1 
filed with the Commission.
    The Exchange again notes that other exchanges have similar 
connectivity alternatives for their participants, including similar 
low-latency connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE 
Arca, Inc. (``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq 
ISE, LLC (``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\35\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\36\
---------------------------------------------------------------------------

    \35\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the equivalent of the 
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule, 
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE 
American and Arca each charge a monthly fee of $5,000 for each 1Gb 
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX 
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \36\ Id.

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[[Page 50540]]

    Finally, the Exchange believes redefining the HSVF Connection Fee 
as a Port Fee is reasonable, equitable and not unfairly discriminatory. 
This classification is more accurate because an HSVF subscription is 
not enabled through a physical connection to the Exchange. Although 
market participant must be credentialed by BOX to receive the HSVF, 
anyone can become credentialed by submitting the required 
documentation.\37\ The Exchange does not propose to alter the amount of 
the existing HSVF fee; subscribers to the HSVF will continue to pay 
$1,500 per month. As with the Connectivity Fees, BOX's HSVF Port Fee is 
in line with industry practice.\38\
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    \37\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/
    \38\ See Cboe Data Services, LLC (CDS) Fee Schedule Sec.  VI 
(charging $500 per month for up to five users to access the Enhanced 
Controlled Data Distribution Program).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, the 
Exchange has received no official complaints from Participants that 
purchase the Exchange's connectivity that the Exchange's fees or the 
Proposed Fees are negatively impacting or would negatively impact their 
abilities to compete with other market participants or that they are 
placed at a disadvantage.\39\ The Exchange believes that the Proposed 
Fees do not place certain market participants at a relative 
disadvantage to other market participants because the connectivity 
pricing is associated with relative usage of the various market 
participants and does not impose a barrier to entry to smaller 
participants. As described above, the less expensive non-10Gb direct 
connection is generally purchased by market participants that utilize 
less bandwidth. The market participants that purchase 10Gb connections 
utilize the most bandwidth, and those are the participants that consume 
the most resources from the network. Accordingly, the Proposed Fees do 
not favor certain categories of market participants in a manner that 
would impose a burden on competition; rather, the allocation of the 
Proposed Fees reflect the network resources consumed by the various 
size of market participants--lowest bandwidth consuming members pay the 
least, and highest bandwidth consuming members pays the most, 
particularly since higher bandwidth consumption translates to higher 
costs to BOX.
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    \39\ The Exchange notes that it did receive one complaint from a 
non-Participant third party that, prior to the proposed fees, 
received connectivity for free and resold it to other market 
participants. This non-Participant ceased connectivity to the 
Exchange in January 2019.
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Inter-Market Competition
    The Exchange believes the Proposed Fees do not place an undue 
burden on competition on other SROs that is not necessary or 
appropriate. In particular, options market participants are not forced 
to connect to (and purchase market data from) all options exchanges, as 
shown by the number of Participants of BOX as compared to the much 
greater number of members at other options exchanges (as described 
above). Not only does BOX have less than half the number of 
Participants as certain other options exchanges, but there are also a 
number of the Exchange's Participants that do not connect directly to 
BOX. Additionally, the Exchange notes other exchanges have similar 
connectivity alternatives for their participants, including similar 
low-latency connectivity, but with much higher rates to connect.\40\ 
The Exchange is also unaware of any assertion that its existing fee 
levels or the Proposed Fees would somehow unduly impair its competition 
with other options exchanges. To the contrary, if the fees charged are 
deemed too high by market participants, they can simply disconnect.
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    \40\ See supra note 19.
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    Unilateral action by the Exchange in establishing fees for services 
provided to its Participants and others using its facilities will not 
have an impact on competition. As a small exchange in the already 
highly competitive environment for options trading, the Exchange does 
not have the market power necessary to set prices for services that are 
unreasonable or unfairly discriminatory in violation of the Exchange 
Act. The Exchange's proposed fees, as described herein, are comparable 
to and generally lower than fees charged by other options exchanges for 
the same or similar services. Lastly, the Exchange believes the 
proposed change will not impose a burden on intramarket competition as 
the proposed fees are applicable to all Participants and others using 
its facilities that connect to BOX.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the
    Exchange Act \41\ and Rule 19b-4(f)(2) thereunder,\42\ because it 
establishes or changes a due, or fee.
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    \41\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \42\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comment

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BOX-2019-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2019-27. 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

[[Page 50541]]

amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-BOX-
2019-27, and should be submitted on or before October 16, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20706 Filed 9-24-19; 8:45 am]
BILLING CODE 8011-01-P
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