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 Facility To Establish BOX Connectivity Fees for Participants and Non-Participants Who Connect to the BOX Network, 8968-8976 [2020-03091]
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Federal Register / Vol. 85, No. 32 / Tuesday, February 18, 2020 / Notices
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–
2020–002 and should be submitted on
or before March 10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–03092 Filed 2–14–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88161; File No. SR–BOX–
2020–03]
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 Facility To Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network
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February 11, 2020.
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 January
29, 2020, 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
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
prepared by the Exchange. The
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule regarding
connectivity to BOX in order to provide
greater detail and clarity concerning
BOX’s costs, as they pertain to expenses
for network connectivity services, on
the BOX Options Market LLC (‘‘BOX’’)
options 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 is refiling its proposal
to amend the Fee Schedule regarding
connectivity to BOX in order to provide
greater detail and clarity concerning
BOX’s costs, as they pertain to expenses
for network connectivity services. The
Exchange is now presenting more
connectivity cost details that correspond
with income statement expense line
items to provide greater transparency
into its actual costs associated with
providing network connectivity
services. The Exchange believes that its
proposed fees are fair and reasonable
35 17
1 15
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CFR 240.19b–4(f)(2).
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because they will permit recovery of
less than all of the Exchange’s costs for
providing connectivity and will not
result in excessive pricing or
supracompetitive profit, when
comparing the Exchange’s total annual
expense associated with providing the
network connectivity services versus the
total projected annual revenue the
Exchange projects to collect for
providing the network connectivity
services.
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 ..........
Monthly fees
(per connection)
$1,000
5,000
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
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’’).
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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
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
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
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).
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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
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
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.
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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8969
to propose reforms with regard to
immediately effective rule filings.
On September 5, 2019 the Exchange
withdrew the proposed rule change and
refiled the proposed fees to further
bolster its cost-based discussion to
support its claim that the Proposal is
fair and reasonable because they will
permit recovery of a portion of BOX
costs and will not result in excessive
pricing or supra-competitive profit. The
Commission received only one
comment letter on the proposed rule
change, twelve days after the comment
period ended.18 Of note, no Participant,
other person, industry group, or
operator of an options market
commented on the proposed rule
change. Rather, the only comment letter
came from an operator of a single
equities market (equities market
structure and the resulting network
demands are fundamentally different
from those in the options markets) and
which the operator also has a
fundamentally different business model
(and agenda) than does the Exchange.
That letter called for, among other
things, the Exchange to explain its basis
for concluding it incurred substantially
higher costs to provide lower-latency
connections and further described the
nature and closeness of the relationship
between the identified costs and
connectivity products and services as
stated in the Exchange’s cost allocation
analysis.
The Exchange is again re-filing the fee
proposal (‘‘the Proposal’’) to provide
greater detail and clarity concerning the
Exchange’s costs, as they pertain to the
Exchange’s expense relating to the
provision of network connectivity
services. The Exchange is also refiling
its proposal in order to clarify certain
points raised in the IEX Letter.
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, supported by specific information
(including quantitative information),
fair and reasonable because they will
permit recovery of a portion of BOX’s
costs and will not result in excessive
pricing or supracompetitive profit.
Accordingly, the Exchange believes that
18 See Letter from John Ramsay, Chief Market
Policy Officer, Investors Exchange LLC (‘‘IEX’’) to
Vanessa Countryman, Secretary, Commission, dated
October 9, 2019.
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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-ofthe-art exchange network infrastructure
in the U.S. options industry. There are
significant costs associated with various
projects and initiatives to improve
overall network performance and
stability, as well as costs paid to the
third-party data centers for space rental,
power used, etc.
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 10 Gb
and non-10 Gb connections, where the
10 Gb connection provides for faster
processing of messages sent to it in
comparison to the non-10 Gb
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 due to the
decreased transaction fees at other
exchanges. To remain competitive, BOX
was forced to follow suit and decrease
its transaction fees in order to continue
receiving order flow to the Exchange.
While other exchanges lowered
transaction fees, they were still able to
rely on the connectivity fee revenues as
a means of covering a portion of the
costs to operate their respective
exchanges. BOX had no choice but to
begin charging Participants and nonParticipants 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
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submitted prior immediately effective
connectivity fee filings that were not
suspended or disapproved by the
Commission.19 The Exchange notes that
all other options exchanges currently
charge for similar physical
connectivity.20
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,21 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.’’ 22
19 See Securities Exchange Act Release No. 85927.
Order Granting Petition for Review and Scheduling
Filing of Statements, dated May 23, 2019.
20 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 10 Gb and
non-10 Gb 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 1 Gb connection, $10,000 for each 10 Gb
connection and $15,000 for each 10 Gb Ultra
connection, which is the equivalent of the
Exchange’s 10 Gb ULL connection. See also Nasdaq
Price List—Trading Connectivity. Nasdaq charges a
monthly fee of $7,500 for each 10 Gb direct
connection to Nasdaq and $2,500 for each direct
connection that supports up to 1 Gb. 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 1 Gb circuit, $14,000 for each 10 Gb circuit
and $22,000 for each 10 Gb LX circuit, which is the
equivalent of the Exchange’s 10 Gb 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
1 Gb connection and $7,500 for each 10 Gb
connection.
21 15 U.S.C. 78f(b)(4) and (5).
22 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
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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
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. As stated above, BOX
instituted the proposed fees after
finding itself at a competitive
disadvantage with other options
exchanges. As other options exchanges
lowered their transaction fees, they were
still able to rely on the connectivity fee
revenues as a means of covering a
portion of the costs to operate their
respective exchanges. By not charging
for connectivity, BOX could not
realistically compete for order flow
through reduced transaction fees and
still remain solvent.
Further, as the Exchange explained to
the Division in previous filings and
comment letters, 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.23 This conclusion is
substantiated by the report prepared by
Professor Janusz A. Ordover and
Gustavo Bamberger addressing the
theory of ‘‘Platform Competition’’ and
its application to the pricing of
exchanges’ services, including
connectivity services.24 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
23 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.
24 Id.
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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 BOX
fees. As discussed herein, BOX is
engaged with rigorous competition with
other exchanges to attract order flow to
its platform. As such, BOX is
constrained in its ability to price its
joint services—including connectivity
services—at supracompetitive levels.
That competition ensures that BOX’s
connectivity fees are set at levels
consistent with the requirements of the
Exchange Act.
The Exchange acknowledges that
there is no regulatory requirement that
any market participant must connect to
BOX, or that any participant must
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 (10 Gb) 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
than market makers that simply quote
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all symbols on BOX. Even though nonParticipants purchase and resell 10 Gb
and non-10 Gb connections to both
Participants and non-Participants, no
market makers currently connect to
BOX indirectly through such resellers.
The argument that all broker-dealers
are required to connect to all exchanges
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.
Further, there is competition for
connectivity to BOX. BOX competes
with eleven (11) 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 nonParticipants resell that connectivity to
multiple market participants over that
same connection, including both
Participants and non-Participants of
BOX. When connectivity is re-sold by a
third-party, BOX does not receive any
connectivity revenue from that sale. It is
entirely between the third-party and the
purchaser, thus constraining the ability
of BOX to set its connectivity pricing as
indirect connectivity is a substitute for
direct connectivity. There are currently
eleven (11) non-Participants that
purchase connectivity to BOX. Those
non-Participants resell that connectivity
or market data to approximately twenty-
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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.
Prior to charging the proposed
connectivity fees to market participants,
the Exchange distributed an
Informational Circular to all subscribers
detailing the fees.25 The circular stated
that Participants connected as of the last
trading day of each calendar month
would be charged the applicable
connectivity fee for that month. In
addition to the Circular, the Exchange
reached out to certain nonParticipants 26 connected to BOX to
ensure they knew of the upcoming
connectivity fees and allow them the
opportunity to disconnect any old
connections before being charged.
Finally, the Exchange instituted a grace
period where Participants could contact
the Exchange and make modifications to
their connections (i.e. disconnect, add,
downsize, etc.) prior to being charged
the new connectivity fees. This grace
period was in effect until August 7,
2018.
The Exchange is comprised of 51 BOX
Participants. Of those 51 Participants,
24 Participants have purchased 10 Gb or
non-10 Gb connections or some
combination of multiple various
connections.27 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
25 See
IC–2018–15.
included past Participants who had
terminated their membership with BOX and were
no longer receiving BOX circulars, as well as third
party network providers who were not on the
Exchange’s distribution list. The Exchange reached
out to these firms individually to alert them of the
upcoming fee change and give them the opportunity
to disconnect any old connections to the BOX
system.
27 Currently, there are a total of 119 physical
connections to BOX: 70 10 Gb connections and 49
non-10 Gb connections.
26 These
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the connectivity pricing is directly
related to the relative costs to BOX to
provide those respective services and
does not impose a barrier to entry to
smaller participants. Accordingly, BOX
offers various direct connectivity
alternatives and various indirect
connectivity (via third party)
alternatives. BOX recognizes that there
are various business models and varying
sizes of market participants conducting
business on BOX. 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. To assist
prospective Participants or firms
considering connecting to BOX, the
Exchange provides information about
BOX’s available connectivity
alternatives on the BOX website.28
Section 2.4 of the BOX Connectivity
Guide details the bandwidth
requirements depending on the type of
traffic each firm requires.
The non-10 Gb direct connectivity
alternatives 29 are all comprised of
bandwidth of equal to or less than 1 Gb
and are purchased by market
participants that require less bandwidth.
For example, a firm requiring only
simple order routing (which requires
128 kbps of bandwidth) would be
satisfied with a non-10 Gb connection.
Additionally, non-10 Gb connections
can fully support both the sending of
orders and the consumption of BOX’s
HSVF Data Feed.30 By definition, non10 Gb connections utilize less
bandwidth and consume less resources
from the network. Additionally, non-10
Gb connections and their interface
modules cost considerably less than 10
Gb connections. Accordingly, because
these connections consume the least
resources of the Exchange and are the
least costly for the Exchange to provide,
the non-10 Gb connections are at a
lower price point than the 10 Gb
connections.31
28 See BOX Connectivity Guide at https://
boxoptions.com/assets/NET-BX-001E-BOXNetwork-Connection-Specifications-v2.7.pdf.
29 Non-10 Gb connectivity alternatives are
comprised of protocol types that are at or under 1
Gb bandwidth. The protocol types are: Gigabit
Ethernet, Ethernet, Fast Ethernet, Fiber Channel,
OC–3, Singlemode Fiber, ISDN, POTS and T1.
30 BOX’s HSVF Data Feed does not require a 10
Gb physical connection. However, to receive the
five best limits on the HSVF, a 10 Gb connection
is required. On MIAX, the 1 Gb connection cannot
support the consumption of the top of market data
feed or the depth data feed product—both require
a 10 Gb connection.
31 Based on one trading day in January 2020,
Participants with 10 Gb connections accounted for
approximately 85% of message traffic over the
network where Participants with non-10 Gb
connections accounted for approximately 15% of
message traffic over the network. As discussed
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In contrast, market participants that
purchase 10 Gb connections utilize the
most bandwidth and consume the most
resources from the network.32 The 10 Gb
connection offers optimized
connectivity with lower latency for
latency sensitive participants and is
faster in round trip time for connection
oriented traffic to BOX than the non-10
Gb connection. In other words, 10 Gb
connections carry ten times more
gigabits than the non-10 Gb connection
so information travelling over a 10 Gb
connection will generally get to the
destination faster than if it travelled
over a non-10 Gb connection. As
discussed herein, this lower latency is
achieved through more advanced
network equipment, such as advanced
hardware and switching components,
which translates to increased costs to
BOX. A 10 Gb connection uses at least
ten times the network infrastructure as
the non-10 Gb connections as BOX has
to scale the systems by the amount and
size of all connections regardless of how
they are used.33 Accordingly, the
Exchange believes that the allocation of
the proposed fees ($1,000 per non-10 Gb
connection and $5,000 per 10 Gb
connection) are reasonable based on the
resources consumed by the respective
type of connection—lower resource
consuming market participants pay the
least, and highest resource consuming
market participants pay the most,
particularly since higher resource
consumption translates to higher costs
to BOX.34
herein, non-10 Gb connections consume less
resources from the network and are therefore priced
lower than the 10 Gb connection.
32 Supporting a 10 Gb connection requires larger
internal uplinks, firewalls and sniffer devices, all of
which cost considerably more to maintain than
support for non-10 Gb connections. Specifically, in
order to support 10 Gb connections, BOX must
obtain switches that offer 40Gb or more of uplink
speed which cost more than the 1 Gb alternatives.
In addition, BOX must obtain the appropriate
connectors to support the 40Gb switches. These
connectors are also more expensive than the 1 Gb
alternatives. It is important to note that, as
evidenced above, offering 10 Gb connections has
downstream cost impacts as BOX needs to ensure
that there is sufficient bandwidth internally in
order to support multiple 10 Gb connections for
Participants and non-Participants accessing the
BOX system. The Exchange also notes that in
addition to the higher cost of the internal 40Gb
switches and appropriate connectors to support
these connections, there are higher third party
support contract costs in order to implement and
maintain these technology components for the
benefit of Participants and non-Participants who
access the BOX system.
33 The Exchange’s network infrastructure
requirements are based on the premise of all
connections operating at full capacity.
34 The IEX Comment Letter questioned if there
were cost differentials between 10 Gb and non-10
Gb connections, stating that ‘‘the hardware
components to support a 10 Gb connection are
essentially the same as those for a non-10 Gb
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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.35 As evidence of the
fact that market participants can and do
disconnect from exchanges based on
connectivity pricing, see the R2G
Services LLC (‘‘R2G’’) letter based on
BOX’s proposed rule changes to
increase its connectivity fees. The R2G
letter stated, ‘‘[w]hen BOX instituted a
$10,000/month price increase for
connectivity; we had no choice but to
terminate connectivity into them as well
as terminate our market data
relationship. The cost benefit analysis
just didn’t make any sense for us at
those new levels.’’ 36 Accordingly, this
example shows that if an exchange sets
too high of a fee for connectivity and/
or market data services for its relevant
marketplace, market participants can
choose to disconnect from the exchange.
The Exchange notes that no other
Participant or non-Participant
disconnected from the exchange as a
result of the connectivity fees.
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.
connection . . . there may be marginally higher
maintenance costs in the way of replacements or
upgrades for a 10 Gb option, but IEX believes the
difference in exchange cost for a 10 Gb connection
will certainly be less than twice that of a higher
latency connection.’’ As described above, this is not
true for BOX.
35 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.
36 The Exchange notes that R2G was a nonParticipant service provider who connected to BOX
at no cost and then sold BOX connectivity and
market data to its customers. The $10,000 charge
referenced in the R2G Letter was for two (2) 10 Gb
connections.
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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-10 Gb and 10 Gb 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 thirdparty 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 detailed in the Exchange’s and
BOX Market’s 37 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.38 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 39 and BOX associated with
providing the network connectivity
services.
The Exchange conducted an extensive
review of the Exchange and BOX
expenses to determine whether such
expenses relate to the provision of
network connectivity services, and, if
such expense did so relate, what portion
of such expense actually supports the
provision of network connectivity
services, and thus bears a relationship
that is, ‘‘in nature and closeness,’’
directly related to network connectivity
services. The sum of all such portions
of expenses represents the total actual
baseline cost of the Exchange and BOX
to provide 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. This amount is comprised of
both direct and indirect expenses. The
financial information below is meant to
provide greater detail and clarity
concerning BOX’s cost allocations as
they pertain to expenses for network
connectivity services; and further
describe the nature and closeness of the
relationship between the identified
costs and connectivity services where
possible.
The direct expense (which relates 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.40 The
37 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. A summary of the Form 1 Statement of
Income and Expense for both the Exchange and
BOX is included as an Exhibit 3 of this filing. The
Exchange notes that the Non-Transaction Fees for
BOX Options Market LLC are now broken down
further into three additional categories: Access
Fees, Market Data Fees, and Participant Fees.
38 Options Price Authority Reporting (‘‘OPRA’’)
income is not controlled by BOX.
39 Revenues for the Exchange are limited to the
Options Regulatory Fee (‘‘ORF’’) and fines and
disgorgements.
40 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 Exchange notes that these direct
expenses include all expenses associated with the
Exchanges’ data centers. BOX’s infrastructure
design does not distinguish network connectivity
expenses from other data center expenses. In other
words, network connectivity is intertwined with the
overall infrastructure of the BOX system.
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Exchange notes the $6.4 million direct
expense is only a portion of the overall
technology costs for BOX and the
Exchange. The $6.4 million direct
expense does not include technology
items such as the Exchange and BOX
technological improvements and
upkeep to the BOX trading and
matching system,41 third party
technology security expenses for the
BOX trading and matching system,
technology license contract costs for the
BOX trading and matching system, and
third party billing expenses associated
with the BOX trading and matching
system. Further, the direct expense of
$6.4 million does not include the
indirect expenses detailed below. A
more detailed breakdown of the direct
annual operational expense in 2018
includes the following:
• Over $2.8 million for space rental,
power usage, connections, etc. at the
Exchanges data centers; 42
• Over $1.1 million for data center
support and management of third party
vendors; 43
41 In determining the $6.4 million direct cost for
network connectivity, the Exchange did not include
any expenses related to business development
initiatives. For example, the technological cost for
adding complex order functionality to certain order
types would not be included in the technological
improvement costs outlined in the direct expense
for network connectivity. The total cost for
technological improvements in 2018, including
business development initiatives and other
initiatives not related to network connectivity was
$3.86 million.
42 This cost can be found in three line items in
the Statement of Income of the BOX and Exchange
Form 1 documents: ‘‘Professional Services: Other,’’
‘‘Professional Services: Technical and Operational’’;
and ‘‘Communications and data processing.’’ The
Exchange notes that the $2.8 million figure
includes, but is not limited to, the fees paid to:
Equinix and 365 Services LLC, the data centers that
host the Exchange’s network infrastructure, Secure
Financial Transaction Infrastructure (‘‘SFTI’’),
which supports connectivity and fees for the entire
US options industry, various other service
providers (including Cogent, Lightower and Activ
Financial Systems, Inc) which provide content,
connectivity services, and infrastructure services for
critical components of options connectivity; and
various other hardware and software providers
which support the production environment in
which Participants and non-Participants connect to
the network to trade, receive market data, etc. The
Exchange believes that without the technology
services of the all providers discussed above, the
Exchange would not be able to operate and support
the BOX network and provide network connectivity
services to Participants and non-Participants. The
Exchange believes that including the costs of these
services is reasonable as they represent the
Exchange’s cost to operate and support the BOX
network and ultimately provide optimal network
connectivity to market participants.
43 These costs include annual service and support
contracts with a large number of third party vendors
to support the data centers and trading platform.
These costs appear in the ‘‘Professional Services:
Technical and Operational’’ line item of the
Statement of Income of the BOX and Exchange
Form 1 documents.
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• Over $700,000 in technological
improvements to the data center
infrastructure; 44
• Over $1.4 million for resources for
technical and operational services for
the Exchange’s data centers; 45 and
• $400,000 in market data
connectivity fees.46
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.47 Included in this indirect
expense total are the following:
• Over $1 million in employee
compensation and benefits for full-time
employees that support network
connectivity services; 48
• Over $1 million in software and
hardware depreciation; 49
44 This cost is represented on the BOX’s Financial
Statement document under the ‘‘Computer
equipment and software and leasehold
improvements’’ line item. The associated
amortization in 2018 was excluded from the
indirect depreciation outlined herein.
45 These costs are included in the ‘‘Professional
Services: Technical and Operational’’ line item of
the Statement of Income of the BOX and Exchange
Form 1 documents.
46 A portion can be tied to the ‘‘Communications
and data processing’’ line item of the BOX and
Exchange Statement of Income. The remaining
portion is in the ‘‘Professional Services: Other’’ line
item of the BOX and the Exchange Statement of
Income. 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.
47 Indirect expenses for connectivity are a portion
of the following line items in the BOX and
Exchange Form 1 Financial Statements: Employee,
facilities, and other, Depreciation and Amortization,
Consulting and Financial and Administrative. The
Exchange notes that these indirect expenses
represent approximately 10% of the total annual
expenses for BOX and the Exchange in 2018.
48 This cost includes employees in network
operations, trading operations, development,
system operations, business, etc., as well as staff in
general corporate departments (such as legal,
regulatory, and finance) that support those
employees and functions. BOX’s employee
compensation and benefits expense relating to
providing network connectivity services was a
portion of the total expense for employee
compensation and benefits that is stated in the
Employee, facilities, and other line item in the 2018
Financial Statements for BOX and the Exchange.
49 This cost includes depreciation and
amortization of hardware and software used to
provide network connectivity services, including
equipment, servers, cabling, purchased software
and internally developed software used in the
production environment to support the provision of
network connectivity for trading. BOX’s
depreciation and amortization expense relating to
providing network connectivity services was a
portion of the total expense for depreciation and
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• Over $100,000 in office space and
rent to support employees related to
network connectivity; 50 and
• Over $200,000 in miscellaneous
data, communications, external IT, and
regulatory audit costs relate to expenses
that support general connectivity for
trading and personnel support.51
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.
The Exchange projects comparable
network connectivity revenue and
expense for 2020 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.
For the avoidance of doubt, none of
the expenses included herein relating to
the provision of network connectivity
services relate to the provision of any
other services offered by BOX. Stated
differently, no expense amount of the
Exchange or BOX is allocated twice.
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 1 Gb, 10 Gb and 10
Gb low latency ethernet connectivity
alternatives to each of their
participants.52 The Exchange further
notes that Phlx, ISE, Arca and NYSE
American each charge higher rates for
such similar connectivity to primary
and secondary facilities.53
The financials above show that 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.
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
amortization that is stated in the 2018 Financial
Statements for BOX and the Exchange.
50 This cost includes occupancy costs for leased
office space for staff that support the provision of
network connectivity services. BOX and Exchange’s
combined occupancy expense relating to providing
network connectivity services is a portion of the
total expense for occupancy that is stated in the
Employee, facilities, and other line item in the 2018
Financial Statements for BOX and the Exchange.
51 The combined miscellaneous expense relating
to trading connectivity and personnel support was
a portion of multiple line items in the 2018
Financial Statements for BOX and the Exchange.
52 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 1 Gb
connection, $10,000 for each 10 Gb connection and
$15,000 for each 10 Gb Ultra connection, which the
equivalent of the Exchange’s 10 Gb 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 1 Gb circuit, $14,000 for each
10 Gb circuit and $22,000 for each 10 Gb LX circuit,
which the equivalent of the Exchange’s 10 Gb ULL
connection.
53 Id.
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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.54 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.55
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.
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.
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.57 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.
lotter on DSKBCFDHB2PROD 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.56 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-10 Gb
direct connection is generally purchased
by market participants that utilize less
bandwidth. The market participants that
purchase 10 Gb 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
54 See Trading Interface Specification, BOX
Options, https://boxoptions.com/technology/
trading-interface-specifications/.
55 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).
56 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
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 58
and Rule 19b–4(f)(2) thereunder,59
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 Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2020–03 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–2020–03. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
58 15
57 See
PO 00000
supra note 20.
Frm 00171
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59 17
Sfmt 4703
8975
E:\FR\FM\18FEN1.SGM
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
18FEN1
8976
Federal Register / Vol. 85, No. 32 / Tuesday, February 18, 2020 / Notices
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–2020–03, and should
be submitted on or before March 10,
2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.60
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–03091 Filed 2–14–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88158; File No. SR–CFE–
2020–001]
Self-Regulatory Organizations; Cboe
Futures Exchange, LLC; Notice of
Filing of a Proposed Rule Change
Regarding Quoting Functionality
lotter on DSKBCFDHB2PROD with NOTICES
February 11, 2020.
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
January 29, 2020 Cboe Futures
Exchange, LLC (‘‘CFE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change described in Items
I, II, and III below, which Items have
been prepared by CFE. The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons. CFE also has
filed this proposed rule change with the
Commodity Futures Trading
Commission (‘‘CFTC’’). CFE filed a
written certification with the CFTC
under Section 5c(c) of the Commodity
Exchange Act (‘‘CEA’’) 2 on January 29,
2020.
I. Self-Regulatory Organization’s
Description of the Proposed Rule
Change
The Exchange proposes to specify the
information that is required to be
included within a Bulk Message and
within a Quote in connection with the
implementation of quoting functionality
on CFE’s trading system (‘‘CFE
System’’).
The scope of this filing is limited
solely to the application of the rule
amendments to security futures that
may be traded on CFE. Although no
security futures are currently listed for
trading on CFE, CFE may list security
futures for trading in the future.
CFE is making the rule amendments
included in this proposed rule change
in conjunction with other rule
amendments being made by CFE in
connection with its implementation of
quoting functionality that are not
required to be submitted to the
Commission pursuant to Section
19(b)(7) of the Act 3 and thus are not
included as part of this rule change.
The rule amendments included as
part of this proposed rule change are to
apply to all products traded on CFE,
including both non-security futures and
any security futures that may be listed
for trading on CFE. CFE is submitting
these rule amendments to the
Commission under Section 19(b)(7) of
the Act 4 because they relate to reporting
requirements that would apply with
respect to any security futures that may
be traded on CFE.
The text of the proposed rule change
is attached as Exhibit 4 to the filing but
is not attached to the publication of this
notice.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, CFE
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. CFE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
27
U.S.C. 7a–2(c).
U.S.C. 78s(b)(7).
4 15 U.S.C. 78s(b)(7).
60 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(7).
VerDate Sep<11>2014
17:48 Feb 14, 2020
3 15
Jkt 250001
PO 00000
Frm 00172
Fmt 4703
Sfmt 4703
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
CFE Trading Privilege Holders
(‘‘TPHs’’) currently utilize match
capacity allocations to submit Orders to
the CFE System. These match capacity
allocations may be used for the
submission of single Orders to the CFE
System utilizing either the Financial
Information Exchange (‘‘FIX’’) or Binary
Order Entry (‘‘BOE’’) protocol. A single
Order refers to an Order that is
submitted to the CFE System through a
message type that may include one
Order in each message. Going forward,
these match capacity allocations will be
referred to as order match capacity
allocations.
In connection with the
implementation of quoting functionality
on the CFE System, CFE will provide all
TPHs with the option to use order
match capacity allocations and/or
quoting match capacity allocations. A
quoting match capacity allocation is an
additional type of match capacity
allocation that will provide the ability to
submit single Orders and Bulk Messages
to the CFE System utilizing the BOE
protocol. A Bulk Message is a new
message type that may be utilized to
submit multiple Quotes to the CFE
System in a single message. A Quote
refers to the entry, modification, or
cancellation of a bid or offer for a CFE
Contract through a Bulk Message. A
Quote will be treated the same as an
Order, and the term ‘‘Order’’
encompasses a Quote, unless the
Exchange rules specify otherwise.
CFE Rule 403 (Order Entry and
Maintenance of Front-End Audit Trail
Information) currently requires that
Orders contain specified information
and that Orders that do not contain this
information are rejected or canceled
back to the sender. CFE is proposing to
modify Rule 403 to provide that these
existing provisions apply to single
Orders, to set forth the information that
is required to be included within a Bulk
Message and within a Quote, and to
provide that Bulk Messages and Quotes
that do not contain the required
information will be rejected or canceled
back to the sender.
Specifically, CFE is proposing to
amend Rule 403 in the following ways:
Rule 403(a) currently provides, in
pertinent part, that each Order must
contain the following information: (i)
Whether such Order is a buy or sell
Order; (ii) Order type; (iii) price or
premium (if the Order is not a Market
Order); (iv) quantity; (v) Contract
E:\FR\FM\18FEN1.SGM
18FEN1
]]>Agencies
[Federal Register Volume 85, Number 32 (Tuesday, February 18, 2020)]
[Notices]
[Pages 8968-8976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03091]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88161; File No. SR-BOX-2020-03]
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 Facility To Establish BOX
Connectivity Fees for Participants and Non-Participants Who Connect to
the BOX Network
February 11, 2020.
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 January 29, 2020, BOX Exchange LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Exchange filed the
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Securities and Exchange Commission
(``Commission'') a proposed rule change to amend the Fee Schedule
regarding connectivity to BOX in order to provide greater detail and
clarity concerning BOX's costs, as they pertain to expenses for network
connectivity services, on the BOX Options Market LLC (``BOX'') options
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 is refiling its proposal to amend the Fee Schedule
regarding connectivity to BOX in order to provide greater detail and
clarity concerning BOX's costs, as they pertain to expenses for network
connectivity services. The Exchange is now presenting more connectivity
cost details that correspond with income statement expense line items
to provide greater transparency into its actual costs associated with
providing network connectivity services. The Exchange believes that its
proposed fees are fair and reasonable because they will permit recovery
of less than all of the Exchange's costs for providing connectivity and
will not result in excessive pricing or supracompetitive profit, when
comparing the Exchange's total annual expense associated with providing
the network connectivity services versus the total projected annual
revenue the Exchange projects to collect for providing the network
connectivity services.
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:
------------------------------------------------------------------------
Monthly fees
Connection type (per connection)
------------------------------------------------------------------------
Non-10 Gb Connection................................. $1,000
10 Gb Connection..................................... 5,000
------------------------------------------------------------------------
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
[[Page 8969]]
proposed rule change.\7\ The Commission subsequently received one
further comment letter on the proposed rule change, supporting the
decision to suspend and institute proceedings on the proposed fee
change.\8\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 83728 (July 27,
2018), 83 FR 37853 (August 2, 2018) (SR-BOX-2018-24).
\6\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated August 23, 2018 (``Healthy Markets Letter'').
\7\ See Securities Exchange Act Release No. 34-84168 (September
17, 2018).
\8\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director,
Financial Services Operations, Securities Industry and Financial
Markets Association, dated October 15, 2018.
---------------------------------------------------------------------------
In response to the Suspension Order, the Exchange timely filed a
Notice of Intention to Petition for Review \9\ and Petition for Review
to vacate the Division's Order,\10\ which stayed the Division's
suspension of the filing. On November 16, 2018 the Commission granted
the Exchange's Petition for Review but discontinued the automatic
stay.\11\ The Exchange then filed a statement to reiterate the
arguments set for in its petition for review and to supplement that
petition with additional information.\12\
---------------------------------------------------------------------------
\9\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated September 19, 2018.
\10\ See Petition for Review of Order Temporarily Suspending BOX
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC,
dated September 26, 2018.
\11\ See Securities Exchange Act Release No. 84614. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated November 16, 2018. Separately, the Securities Industry and
Financial Markets Association filed an application under Section
19(d) of the Exchange Act challenging the Exchange's proposed fees
as alleged prohibitions or limitations on access. See In re
Securities Industry and Financial Markets Association, Admin. Proc.
File No. 3-18680 (Aug. 24, 2018). The Commission thereafter remanded
that denial-of-access proceeding to the Exchange while
``express[ing] no view regarding the merits'' and emphasizing that
it was ``not set[ting] aside the challenged rule change[ ].'' In re
Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2
(Oct. 16, 2018) (``Remand Order''), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf. The Division's
Suspension Order is inconsistent with the Commission's intent in the
Remand Order to leave the challenged fees in place during the
pendency of the remand proceedings and singles out the Exchange for
disparate treatment because it means that the Exchange--unlike every
other exchange whose rule changes were the subject of the Remand
Order--is not permitted to continue charging the challenged fees
during the remand proceedings.
\12\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated December 10, 2018.
---------------------------------------------------------------------------
The Exchange subsequently refiled its fee proposal on November
30th, 2018. The proposed fees were noticed and again temporarily
suspended pursuant to a suspension order issued by the Division of
Trading and Markets, which also instituted proceedings to determine
whether to approve or disapprove the proposed rule change.\13\ The
Commission received two comment letters supporting the decision to
suspend and institute proceedings on the proposed fee change.\14\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 84823 (December 14,
2018), 83 FR 65381 (December 20, 2018) (SR-BOX-2018-37).
\14\ See Letters from Tyler Gellasch, Executive Director, The
Healthy Markets Association (``Second Healthy Markets Letter''), and
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance,
Tepper School of Business, Carnegie Mellon University (``Chester
Spatt Letter''), to Brent J. Fields, Secretary, Commission, dated
January 2, 2019.
---------------------------------------------------------------------------
The Exchange again refiled its fee proposal on February 13, 2019.
The proposed fees were noticed and again temporarily suspended pursuant
to a suspension order issued by the Division of Trading and Markets,
which also instituted proceedings to determine whether to approve or
disapprove the proposed rule change.\15\ The Commission received four
comment letters supporting the decision to suspend and institute
proceedings on the proposed fee change.\16\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 85201 (February 26,
2019), 84 FR 7146 (March 1, 2019)(SR-BOX-2019-04).
\16\ See Letters from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''),
Tyler Gellasch, Executive Director, Healthy Markets Association
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of
R2G Services, LLC, and Anand Prakash.
---------------------------------------------------------------------------
On March 29, 2019, the Commission issued its Order Disapproving
each iteration of the BOX Proposal (``BOX Order''). In the BOX Order,
the Commission highlighted a number of deficiencies it found in three
separate rule filings by BOX to establish BOX's connectivity fees that
prevented the Commission from finding that BOX's proposed connectivity
fees were consistent with the Act.
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.
---------------------------------------------------------------------------
\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'').
---------------------------------------------------------------------------
On September 5, 2019 the Exchange withdrew the proposed rule change
and refiled the proposed fees to further bolster its cost-based
discussion to support its claim that the Proposal is fair and
reasonable because they will permit recovery of a portion of BOX costs
and will not result in excessive pricing or supra-competitive profit.
The Commission received only one comment letter on the proposed rule
change, twelve days after the comment period ended.\18\ Of note, no
Participant, other person, industry group, or operator of an options
market commented on the proposed rule change. Rather, the only comment
letter came from an operator of a single equities market (equities
market structure and the resulting network demands are fundamentally
different from those in the options markets) and which the operator
also has a fundamentally different business model (and agenda) than
does the Exchange. That letter called for, among other things, the
Exchange to explain its basis for concluding it incurred substantially
higher costs to provide lower-latency connections and further described
the nature and closeness of the relationship between the identified
costs and connectivity products and services as stated in the
Exchange's cost allocation analysis.
---------------------------------------------------------------------------
\18\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC (``IEX'') to Vanessa Countryman, Secretary,
Commission, dated October 9, 2019.
---------------------------------------------------------------------------
The Exchange is again re-filing the fee proposal (``the Proposal'')
to provide greater detail and clarity concerning the Exchange's costs,
as they pertain to the Exchange's expense relating to the provision of
network connectivity services. The Exchange is also refiling its
proposal in order to clarify certain points raised in the IEX Letter.
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,
supported by specific information (including quantitative information),
fair and reasonable because they will permit recovery of a portion of
BOX's costs and will not result in excessive pricing or
supracompetitive profit. Accordingly, the Exchange believes that
[[Page 8970]]
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 U.S. options
industry. There are significant costs associated with various projects
and initiatives to improve overall network performance and stability,
as well as costs paid to the third-party data centers for space rental,
power used, etc.
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 10 Gb and non-10 Gb connections, where the 10 Gb
connection provides for faster processing of messages sent to it in
comparison to the non-10 Gb 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 due to the decreased transaction
fees at other exchanges. To remain competitive, BOX was forced to
follow suit and decrease its transaction fees in order to continue
receiving order flow to the Exchange. While other exchanges lowered
transaction fees, they were still able to rely on the connectivity fee
revenues as a means of covering a portion of the costs to operate their
respective exchanges. BOX 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.\19\ The Exchange notes that all other
options exchanges currently charge for similar physical
connectivity.\20\
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 85927. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated May 23, 2019.
\20\ 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 10 Gb and non-10 Gb 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 1 Gb connection, $10,000 for each 10
Gb connection and $15,000 for each 10 Gb Ultra connection, which is
the equivalent of the Exchange's 10 Gb ULL connection. See also
Nasdaq Price List--Trading Connectivity. Nasdaq charges a monthly
fee of $7,500 for each 10 Gb direct connection to Nasdaq and $2,500
for each direct connection that supports up to 1 Gb. 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 1 Gb circuit, $14,000 for each 10 Gb circuit and
$22,000 for each 10 Gb LX circuit, which is the equivalent of the
Exchange's 10 Gb 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 1 Gb connection and $7,500 for each 10 Gb
connection.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act, in general, and Section
6(b)(4) and 6(b)(5)of the Act,\21\ 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.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78f(b)(4) and (5).
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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.'' \22\
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\22\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
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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 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. As stated above, BOX instituted the
proposed fees after finding itself at a competitive disadvantage with
other options exchanges. As other options exchanges lowered their
transaction fees, they were still able to rely on the connectivity fee
revenues as a means of covering a portion of the costs to operate their
respective exchanges. By not charging for connectivity, BOX could not
realistically compete for order flow through reduced transaction fees
and still remain solvent.
Further, as the Exchange explained to the Division in previous
filings and comment letters, 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.\23\ This conclusion is
substantiated by the report prepared by Professor Janusz A. Ordover and
Gustavo Bamberger addressing the theory of ``Platform Competition'' and
its application to the pricing of exchanges' services, including
connectivity services.\24\ In the report, Ordover and Bamberger explain
that ``the provision of connectivity services . . . is inextricably
linked to the provision of trading services, so that, as
[[Page 8971]]
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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\23\ 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.
\24\ Id.
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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 BOX fees. As discussed herein, BOX is engaged with
rigorous competition with other exchanges to attract order flow to its
platform. As such, BOX is constrained in its ability to price its joint
services--including connectivity services--at supracompetitive levels.
That competition ensures that BOX's connectivity fees are set at levels
consistent with the requirements of the Exchange Act.
The Exchange acknowledges that there is no regulatory requirement
that any market participant must connect to BOX, or that any
participant must 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 (10 Gb) 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 than market makers that simply quote all symbols on BOX.
Even though non-Participants purchase and resell 10 Gb and non-10 Gb
connections to both Participants and non-Participants, no market makers
currently connect to BOX indirectly through such resellers.
The argument that all broker-dealers are required to connect to all
exchanges 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.
Further, there is competition for connectivity to BOX. BOX competes
with eleven (11) 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 eleven (11) 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.
Prior to charging the proposed connectivity fees to market
participants, the Exchange distributed an Informational Circular to all
subscribers detailing the fees.\25\ The circular stated that
Participants connected as of the last trading day of each calendar
month would be charged the applicable connectivity fee for that month.
In addition to the Circular, the Exchange reached out to certain non-
Participants \26\ connected to BOX to ensure they knew of the upcoming
connectivity fees and allow them the opportunity to disconnect any old
connections before being charged. Finally, the Exchange instituted a
grace period where Participants could contact the Exchange and make
modifications to their connections (i.e. disconnect, add, downsize,
etc.) prior to being charged the new connectivity fees. This grace
period was in effect until August 7, 2018.
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\25\ See IC-2018-15.
\26\ These included past Participants who had terminated their
membership with BOX and were no longer receiving BOX circulars, as
well as third party network providers who were not on the Exchange's
distribution list. The Exchange reached out to these firms
individually to alert them of the upcoming fee change and give them
the opportunity to disconnect any old connections to the BOX system.
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The Exchange is comprised of 51 BOX Participants. Of those 51
Participants, 24 Participants have purchased 10 Gb or non-10 Gb
connections or some combination of multiple various connections.\27\
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.
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\27\ Currently, there are a total of 119 physical connections to
BOX: 70 10 Gb connections and 49 non-10 Gb connections.
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The Exchange believes that the proposed fees are fair, equitable
and not unreasonably discriminatory because
[[Page 8972]]
the connectivity pricing is directly related to the relative costs to
BOX to provide those respective services and does not impose a barrier
to entry to smaller participants. Accordingly, BOX offers various
direct connectivity alternatives and various indirect connectivity (via
third party) alternatives. BOX recognizes that there are various
business models and varying sizes of market participants conducting
business on BOX. 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. To assist
prospective Participants or firms considering connecting to BOX, the
Exchange provides information about BOX's available connectivity
alternatives on the BOX website.\28\ Section 2.4 of the BOX
Connectivity Guide details the bandwidth requirements depending on the
type of traffic each firm requires.
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\28\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
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The non-10 Gb direct connectivity alternatives \29\ are all
comprised of bandwidth of equal to or less than 1 Gb and are purchased
by market participants that require less bandwidth. For example, a firm
requiring only simple order routing (which requires 128 kbps of
bandwidth) would be satisfied with a non-10 Gb connection.
Additionally, non-10 Gb connections can fully support both the sending
of orders and the consumption of BOX's HSVF Data Feed.\30\ By
definition, non-10 Gb connections utilize less bandwidth and consume
less resources from the network. Additionally, non-10 Gb connections
and their interface modules cost considerably less than 10 Gb
connections. Accordingly, because these connections consume the least
resources of the Exchange and are the least costly for the Exchange to
provide, the non-10 Gb connections are at a lower price point than the
10 Gb connections.\31\
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\29\ Non-10 Gb connectivity alternatives are comprised of
protocol types that are at or under 1 Gb bandwidth. The protocol
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel,
OC-3, Singlemode Fiber, ISDN, POTS and T1.
\30\ BOX's HSVF Data Feed does not require a 10 Gb physical
connection. However, to receive the five best limits on the HSVF, a
10 Gb connection is required. On MIAX, the 1 Gb connection cannot
support the consumption of the top of market data feed or the depth
data feed product--both require a 10 Gb connection.
\31\ Based on one trading day in January 2020, Participants with
10 Gb connections accounted for approximately 85% of message traffic
over the network where Participants with non-10 Gb connections
accounted for approximately 15% of message traffic over the network.
As discussed herein, non-10 Gb connections consume less resources
from the network and are therefore priced lower than the 10 Gb
connection.
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In contrast, market participants that purchase 10 Gb connections
utilize the most bandwidth and consume the most resources from the
network.\32\ The 10 Gb connection offers optimized connectivity with
lower latency for latency sensitive participants and is faster in round
trip time for connection oriented traffic to BOX than the non-10 Gb
connection. In other words, 10 Gb connections carry ten times more
gigabits than the non-10 Gb connection so information travelling over a
10 Gb connection will generally get to the destination faster than if
it travelled over a non-10 Gb connection. As discussed herein, this
lower latency is achieved through more advanced network equipment, such
as advanced hardware and switching components, which translates to
increased costs to BOX. A 10 Gb connection uses at least ten times the
network infrastructure as the non-10 Gb connections as BOX has to scale
the systems by the amount and size of all connections regardless of how
they are used.\33\ Accordingly, the Exchange believes that the
allocation of the proposed fees ($1,000 per non-10 Gb connection and
$5,000 per 10 Gb connection) are reasonable based on the resources
consumed by the respective type of connection--lower resource consuming
market participants pay the least, and highest resource consuming
market participants pay the most, particularly since higher resource
consumption translates to higher costs to BOX.\34\
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\32\ Supporting a 10 Gb connection requires larger internal
uplinks, firewalls and sniffer devices, all of which cost
considerably more to maintain than support for non-10 Gb
connections. Specifically, in order to support 10 Gb connections,
BOX must obtain switches that offer 40Gb or more of uplink speed
which cost more than the 1 Gb alternatives. In addition, BOX must
obtain the appropriate connectors to support the 40Gb switches.
These connectors are also more expensive than the 1 Gb alternatives.
It is important to note that, as evidenced above, offering 10 Gb
connections has downstream cost impacts as BOX needs to ensure that
there is sufficient bandwidth internally in order to support
multiple 10 Gb connections for Participants and non-Participants
accessing the BOX system. The Exchange also notes that in addition
to the higher cost of the internal 40Gb switches and appropriate
connectors to support these connections, there are higher third
party support contract costs in order to implement and maintain
these technology components for the benefit of Participants and non-
Participants who access the BOX system.
\33\ The Exchange's network infrastructure requirements are
based on the premise of all connections operating at full capacity.
\34\ The IEX Comment Letter questioned if there were cost
differentials between 10 Gb and non-10 Gb connections, stating that
``the hardware components to support a 10 Gb connection are
essentially the same as those for a non-10 Gb connection . . . there
may be marginally higher maintenance costs in the way of
replacements or upgrades for a 10 Gb option, but IEX believes the
difference in exchange cost for a 10 Gb connection will certainly be
less than twice that of a higher latency connection.'' As described
above, this is not true for BOX.
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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.\35\ As
evidence of the fact that market participants can and do disconnect
from exchanges based on connectivity pricing, see the R2G Services LLC
(``R2G'') letter based on BOX's proposed rule changes to increase its
connectivity fees. The R2G letter stated, ``[w]hen BOX instituted a
$10,000/month price increase for connectivity; we had no choice but to
terminate connectivity into them as well as terminate our market data
relationship. The cost benefit analysis just didn't make any sense for
us at those new levels.'' \36\ Accordingly, this example shows that if
an exchange sets too high of a fee for connectivity and/or market data
services for its relevant marketplace, market participants can choose
to disconnect from the exchange. The Exchange notes that no other
Participant or non-Participant disconnected from the exchange as a
result of the connectivity fees.
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\35\ 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.
\36\ The Exchange notes that R2G was a non-Participant service
provider who connected to BOX at no cost and then sold BOX
connectivity and market data to its customers. The $10,000 charge
referenced in the R2G Letter was for two (2) 10 Gb connections.
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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.
[[Page 8973]]
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-10 Gb and 10 Gb 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 detailed in the Exchange's and BOX Market's \37\ 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.\38\
Accordingly, BOX must cover all of its expenses from these two sources
of revenue.
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\37\ 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. A summary of the
Form 1 Statement of Income and Expense for both the Exchange and BOX
is included as an Exhibit 3 of this filing. The Exchange notes that
the Non-Transaction Fees for BOX Options Market LLC are now broken
down further into three additional categories: Access Fees, Market
Data Fees, and Participant Fees.
\38\ 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 \39\ and BOX associated with providing
the network connectivity services.
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\39\ Revenues for the Exchange are limited to the Options
Regulatory Fee (``ORF'') and fines and disgorgements.
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The Exchange conducted an extensive review of the Exchange and BOX
expenses to determine whether such expenses relate to the provision of
network connectivity services, and, if such expense did so relate, what
portion of such expense actually supports the provision of network
connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. The sum of all such portions of expenses represents the total
actual baseline cost of the Exchange and BOX to provide 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. This amount is comprised of both direct and indirect expenses.
The financial information below is meant to provide greater detail and
clarity concerning BOX's cost allocations as they pertain to expenses
for network connectivity services; and further describe the nature and
closeness of the relationship between the identified costs and
connectivity services where possible.
The direct expense (which relates 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.\40\ The Exchange notes the $6.4 million
direct expense is only a portion of the overall technology costs for
BOX and the Exchange. The $6.4 million direct expense does not include
technology items such as the Exchange and BOX technological
improvements and upkeep to the BOX trading and matching system,\41\
third party technology security expenses for the BOX trading and
matching system, technology license contract costs for the BOX trading
and matching system, and third party billing expenses associated with
the BOX trading and matching system. Further, the direct expense of
$6.4 million does not include the indirect expenses detailed below. A
more detailed breakdown of the direct annual operational expense in
2018 includes the following:
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\40\ 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 Exchange notes that these direct expenses include
all expenses associated with the Exchanges' data centers. BOX's
infrastructure design does not distinguish network connectivity
expenses from other data center expenses. In other words, network
connectivity is intertwined with the overall infrastructure of the
BOX system.
\41\ In determining the $6.4 million direct cost for network
connectivity, the Exchange did not include any expenses related to
business development initiatives. For example, the technological
cost for adding complex order functionality to certain order types
would not be included in the technological improvement costs
outlined in the direct expense for network connectivity. The total
cost for technological improvements in 2018, including business
development initiatives and other initiatives not related to network
connectivity was $3.86 million.
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Over $2.8 million for space rental, power usage,
connections, etc. at the Exchanges data centers; \42\
---------------------------------------------------------------------------
\42\ This cost can be found in three line items in the Statement
of Income of the BOX and Exchange Form 1 documents: ``Professional
Services: Other,'' ``Professional Services: Technical and
Operational''; and ``Communications and data processing.'' The
Exchange notes that the $2.8 million figure includes, but is not
limited to, the fees paid to: Equinix and 365 Services LLC, the data
centers that host the Exchange's network infrastructure, Secure
Financial Transaction Infrastructure (``SFTI''), which supports
connectivity and fees for the entire US options industry, various
other service providers (including Cogent, Lightower and Activ
Financial Systems, Inc) which provide content, connectivity
services, and infrastructure services for critical components of
options connectivity; and various other hardware and software
providers which support the production environment in which
Participants and non-Participants connect to the network to trade,
receive market data, etc. The Exchange believes that without the
technology services of the all providers discussed above, the
Exchange would not be able to operate and support the BOX network
and provide network connectivity services to Participants and non-
Participants. The Exchange believes that including the costs of
these services is reasonable as they represent the Exchange's cost
to operate and support the BOX network and ultimately provide
optimal network connectivity to market participants.
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Over $1.1 million for data center support and management
of third party vendors; \43\
---------------------------------------------------------------------------
\43\ These costs include annual service and support contracts
with a large number of third party vendors to support the data
centers and trading platform. These costs appear in the
``Professional Services: Technical and Operational'' line item of
the Statement of Income of the BOX and Exchange Form 1 documents.
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[[Page 8974]]
Over $700,000 in technological improvements to the data
center infrastructure; \44\
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\44\ This cost is represented on the BOX's Financial Statement
document under the ``Computer equipment and software and leasehold
improvements'' line item. The associated amortization in 2018 was
excluded from the indirect depreciation outlined herein.
---------------------------------------------------------------------------
Over $1.4 million for resources for technical and
operational services for the Exchange's data centers; \45\ and
---------------------------------------------------------------------------
\45\ These costs are included in the ``Professional Services:
Technical and Operational'' line item of the Statement of Income of
the BOX and Exchange Form 1 documents.
---------------------------------------------------------------------------
$400,000 in market data connectivity fees.\46\
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\46\ A portion can be tied to the ``Communications and data
processing'' line item of the BOX and Exchange Statement of Income.
The remaining portion is in the ``Professional Services: Other''
line item of the BOX and the Exchange Statement of Income. 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.
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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.\47\ Included in this indirect expense total
are the following:
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\47\ Indirect expenses for connectivity are a portion of the
following line items in the BOX and Exchange Form 1 Financial
Statements: Employee, facilities, and other, Depreciation and
Amortization, Consulting and Financial and Administrative. The
Exchange notes that these indirect expenses represent approximately
10% of the total annual expenses for BOX and the Exchange in 2018.
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Over $1 million in employee compensation and benefits for
full-time employees that support network connectivity services; \48\
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\48\ This cost includes employees in network operations, trading
operations, development, system operations, business, etc., as well
as staff in general corporate departments (such as legal,
regulatory, and finance) that support those employees and functions.
BOX's employee compensation and benefits expense relating to
providing network connectivity services was a portion of the total
expense for employee compensation and benefits that is stated in the
Employee, facilities, and other line item in the 2018 Financial
Statements for BOX and the Exchange.
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Over $1 million in software and hardware depreciation;
\49\
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\49\ This cost includes depreciation and amortization of
hardware and software used to provide network connectivity services,
including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the provision of network connectivity for trading. BOX's
depreciation and amortization expense relating to providing network
connectivity services was a portion of the total expense for
depreciation and amortization that is stated in the 2018 Financial
Statements for BOX and the Exchange.
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Over $100,000 in office space and rent to support
employees related to network connectivity; \50\ and
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\50\ This cost includes occupancy costs for leased office space
for staff that support the provision of network connectivity
services. BOX and Exchange's combined occupancy expense relating to
providing network connectivity services is a portion of the total
expense for occupancy that is stated in the Employee, facilities,
and other line item in the 2018 Financial Statements for BOX and the
Exchange.
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Over $200,000 in miscellaneous data, communications,
external IT, and regulatory audit costs relate to expenses that support
general connectivity for trading and personnel support.\51\
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\51\ The combined miscellaneous expense relating to trading
connectivity and personnel support was a portion of multiple line
items in the 2018 Financial Statements for BOX and the Exchange.
---------------------------------------------------------------------------
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.
The Exchange projects comparable network connectivity revenue and
expense for 2020 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.
For the avoidance of doubt, none of the expenses included herein
relating to the provision of network connectivity services relate to
the provision of any other services offered by BOX. Stated differently,
no expense amount of the Exchange or BOX is allocated twice.
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 1 Gb, 10 Gb and 10 Gb low latency
ethernet connectivity alternatives to each of their participants.\52\
The Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\53\
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\52\ 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 1 Gb connection, $10,000 for each 10 Gb connection
and $15,000 for each 10 Gb Ultra connection, which the equivalent of
the Exchange's 10 Gb 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
1 Gb circuit, $14,000 for each 10 Gb circuit and $22,000 for each 10
Gb LX circuit, which the equivalent of the Exchange's 10 Gb ULL
connection.
\53\ Id.
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The financials above show that 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.
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
[[Page 8975]]
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.\54\ 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.\55\
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\54\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/.
\55\ 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).
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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.\56\ 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-10 Gb direct
connection is generally purchased by market participants that utilize
less bandwidth. The market participants that purchase 10 Gb 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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\56\ 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.\57\
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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\57\ See supra note 20.
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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 \58\ and Rule 19b-4(f)(2)
thereunder,\59\ because it establishes or changes a due, or fee.
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\58\ 15 U.S.C. 78s(b)(3)(A)(ii).
\59\ 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 Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BOX-2020-03 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-2020-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the
[[Page 8976]]
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-2020-03, and should be submitted on
or before March 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-03091 Filed 2-14-20; 8:45 am]
BILLING CODE 8011-01-P
