Federal Register, Volume 84 Issue 65 (Thursday, April 4, 2019)

[Federal Register Volume 84, Number 65 (Thursday, April 4, 2019)]
[Notices]
[Pages 13363-13371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06519]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85459; File Nos. SR-BOX-2018-24; SR-BOX-2018-37; and
SR-BOX-2019-04]

Self-Regulatory Organizations; BOX Exchange LLC; Order
Disapproving Proposed Rule Changes To Amend the Fee Schedule on the BOX
Market LLC Options Facility To Establish BOX Connectivity Fees for
Participants and Non-Participants Who Connect to the BOX Network

March 29, 2019.

I. Introduction

On July 19, 2018, BOX Exchange LLC (``BOX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
BOX-2018-24) (``BOX 1'') to amend the BOX fee schedule to establish
certain connectivity fees and reclassify its high speed vendor feed
(``HSVF'') connection as a port fee. BOX 1 was immediately effective
upon filing with the Commission pursuant to Section 19(b)(3)(A) of the
Act.\3\ BOX 1 was published for comment in the Federal Register on
August 2, 2018.\4\ The Commission initially received one comment letter
on BOX 1 \5\ and one response letter from the Exchange.\6\ On September
17, 2018, the Division of Trading and Markets (the ``Division''),
acting on behalf of the Commission by delegated authority, issued an
order temporarily suspending BOX 1 pursuant to Section 19(b)(3)(C) of
the Act \7\ and simultaneously instituting proceedings under Section
19(b)(2)(B) of the Act \8\ to determine whether to approve or
disapprove BOX 1 (``Order Instituting Proceedings I'').\9\ The
Commission thereafter received three additional comment letters on BOX
1 \10\ and one

[[Page 13364]]

additional response letter from the Exchange.\11\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ See Securities Exchange Act Release No. 83728 (July 27,
2018), 83 FR 37853 (``Notice'').
\5\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated August 23, 2018 (``Healthy Markets Letter I'').
\6\ See Letter from Lisa J. Fall, President, BOX, to Brent J.
Fields, Secretary, Commission, dated September 12, 2018 (``BOX
Response Letter I'').
\7\ 15 U.S.C. 78s(b)(3)(C).
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ See Securities Exchange Act Release No. 84168 (September 17,
2018), 83 FR 47947 (September 21, 2018).
\10\ See Letters from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director,
Financial Services Operations, Securities Industry and Financial
Markets Association (``SIFMA''), to Brent J. Fields, Secretary,
Commission, dated October 15, 2018 (``SIFMA Letter I''); Tyler
Gellasch, Executive Director, The Healthy Markets Association, to
Brent J. Fields, Secretary, Commission, dated January 2, 2019
(``Healthy Markets Letter II''); and Chester Spatt, Pamela R. and
Kenneth B. Dunn Professor of Finance, Tepper School of Business,
Carnegie Mellon University, to Brent J. Fields, Secretary,
Commission, dated January 2, 2019 (``Spatt Letter'').
\11\ See Letter from Lisa J. Fall, President, BOX, to Brent J.
Fields, Secretary, Commission, dated February 19, 2019 (``BOX
Response Letter II'').
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On September 19, 2018, pursuant to Rule 430 of the Commission's
Rules of Practice,\12\ the Exchange filed a notice of intention to
petition for review of Order Instituting Proceedings I.\13\ Such action
preserved the Exchange's right to file a petition to review the
Division's action by delegated authority and, pursuant to Rule 431(e)
of the Commission's Rules of Practice, triggered an automatic stay of
the action by delegated authority, which reinstated the Exchange's
authority to charge the connectivity fees at issue.\14\ On September
26, 2018, the Exchange filed a petition for review of Order Instituting
Proceedings I.\15\ On November 16, 2018, the Commission granted the BOX
1 Petition and discontinued the automatic stay of the delegated
action,\16\ thereby suspending the Exchange's ability to charge the
connectivity fees at issue while the Commission conducts proceedings to
consider the proposed fees' consistency with the Act. In its order
granting the BOX 1 Petition, the Commission also ordered that any party
or other person could file a statement by December 10, 2018, in support
or in opposition to the action made by delegated authority.\17\ The
Commission received two such statements from the Exchange.\18\ On
January 25, 2019, pursuant to Section 19(b)(2) of the Act,\19\ the
Commission designated a longer period within which to approve or
disapprove BOX 1.\20\ On February 25, 2019, the Commission issued an
order affirming the staff's action by delegated authority, temporarily
suspending the rule filing and instituting proceedings.\21\
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\12\ 17 CFR 201.430.
\13\ See Letter from Amir C. Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, to Brent J. Fields, Secretary, Commission, dated
September 19, 2018. Pursuant to Rule 431(e) of the Commission's
Rules of Practice, a notice of intention to petition for review
results in an automatic stay of the action by delegated authority.
17 CFR 201.431(e).
\14\ 17 CFR 201.431(e).
\15\ 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 (``BOX 1 Petition'').
\16\ See Securities Exchange Act Release No. 84614 (November 16,
2018), 83 FR 59432 (November 23, 2018).
\17\ See id.
\18\ See Letter from Lisa J. Fall, President, BOX, to Brent J.
Fields, Secretary, Commission, to Brent J. Fields, Secretary,
Commission, dated December 7, 2018 (``BOX Statement''); and Letter
from Amir C. Tayrani, Gibson, Dunn & Crutcher LLP, to Brent J.
Fields, Secretary, Commission, dated December 10, 2018 (``Gibson
Dunn Statement'') (submitted on behalf of the Exchange by its
counsel).
\19\ 15 U.S.C. 78s(b)(2).
\20\ See Securities Exchange Act Release No. 84989, 84 FR 858
(January 31, 2019). The Commission designated March 29, 2019, as the
date by which the Commission would approve or disapprove BOX 1.
\21\ See Securities Exchange Act Release No. 85184, 84 FR 6842
(February 28, 2019).
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On November 30, 2018, the Exchange filed with the Commission a
second proposed rule change (SR-BOX-2018-37) (``BOX 2'') to amend the
BOX fee schedule to establish the same fees established by BOX 1.\22\
BOX 2 was immediately effective upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the Act.\23\ On December 14, 2018,
the Division, acting on behalf of the Commission by delegated
authority, issued a notice of BOX 2 and order temporarily suspending
BOX 2 pursuant to Section 19(b)(3)(C) of the Act \24\ and
simultaneously instituting proceedings under Section 19(b)(2)(B) of the
Act \25\ to determine whether to approve or disapprove BOX 2 (``Order
Instituting Proceedings II'').\26\ The Commission received two comment
letters on BOX 2.\27\
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\22\ The Commission notes that the proposed fees in BOX 2 are
identical to those proposed in BOX 1 and the Form 19b-4 for the two
filings are substantively identical, except BOX 2 also identifies
the categories of the Exchange's costs to offer connectivity
services and states that the proposed fees would ``offset'' the
Exchange's costs.
\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 15 U.S.C. 78s(b)(3)(C).
\25\ 15 U.S.C. 78s(b)(2)(B).
\26\ See Securities Exchange Act Release No. 84823 (December 14,
2018), 83 FR 65381 (December 20, 2018) (``BOX 2 Notice and OIP'').
\27\ See Healthy Markets Letter II, supra note 10; Spatt Letter,
supra note 10. The Commission notes that these two letters were also
submitted on BOX 1.
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On February 13, 2019, the Exchange filed with the Commission a
third proposed rule change (SR-BOX-2019-04) (``BOX 3'' and, together
with BOX 1 and BOX 2, the ``proposed rule changes'') to amend the BOX
fee schedule to establish the same fees proposed by BOX 1 and BOX
2.\28\ BOX 3 was immediately effective upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the Act.\29\ On February 26, 2019,
the Division, acting on behalf of the Commission by delegated
authority, issued a notice of BOX 3 and order temporarily suspending
BOX 3 pursuant to Section 19(b)(3)(C) of the Act \30\ and
simultaneously instituting proceedings under Section 19(b)(2)(B) of the
Act \31\ to determine whether to approve or disapprove BOX 3 (``Order
Instituting Proceedings III'').\32\ On February 26, 2019, pursuant to
Rule 430 of the Commission's Rules of Practice,\33\ the Exchange filed
a notice of intention to petition for review of Order Instituting
Proceedings III.\34\ Such action preserved the Exchange's right to file
a petition to review the Division's action by delegated authority and,
pursuant to Rule 431(e) of the Commission's Rules of Practice,
triggered an automatic stay of the action by delegated authority, which
reinstated the Exchange's authority to charge the connectivity fees at
issue.\35\ On March 5, 2019, the Exchange filed a petition for review
of Order Instituting Proceedings III.\36\ On March 12, 2019, the
Commission received a comment letter on BOX 3, supporting the
Division's action to suspend and institute proceedings in BOX 3.\37\ On
March 19, 2019, the Commission received another comment letter on the
proposed rule changes expressing further concerns about the proposals
\38\ and an additional response letter from BOX.\39\ On March 22, 2019,
the Commission granted the BOX 3 Petition, issued an order affirming
the action by delegated authority, and lifted the stay.\40\ On March
27, the Commission received an additional comment letter on the
proposed rule changes arguing that the exchange has not provided
necessary information

[[Page 13365]]

showing how the proposed connectivity fees comply with the Act and
challenging factual statements made in BOX's third response letter.\41\
The Commission received an additional comment letter on March 28, 2019
opposing BOX 3.\42\
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\28\ The Commission notes that the proposed fees in BOX 3 are
identical to those proposed in BOX 2 and the Form 19b-4 for the two
filings are substantively identical.
\29\ 15 U.S.C. 78s(b)(3)(A).
\30\ 15 U.S.C. 78s(b)(3)(C).
\31\ 15 U.S.C. 78s(b)(2)(B).
\32\ See Securities Exchange Act Release No. 85201, 84 FR 7146
(March 1, 2019).
\33\ 17 CFR 201.430.
\34\ See Letter from Amir C. Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, to Brent J. Fields, Secretary, Commission, dated
February 26, 2019. Pursuant to Rule 431(e) of the Commission's Rules
of Practice, a notice of intention to petition for review results in
an automatic stay of the action by delegated authority. 17 CFR
201.431(e).
\35\ 17 CFR 201.431(e).
\36\ See Petition for Review of Order Temporarily Suspending BOX
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC,
dated March 5, 2019 (``BOX 3 Petition'').
\37\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA, to Vanessa Countryman, Acting
Secretary, Commission, dated March 12, 2019 (``SIFMA Letter II'').
\38\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated March 19, 2019 (``Healthy Markets Letter III'').
\39\ See Letter from Lisa J. Fall, President, BOX, to Brent J.
Fields, Secretary, Commission, dated March 25, 2019 (``BOX Response
Letter III'').
\40\ See Securities Exchange Act Release No. 85399, 84 FR11850
(March 28, 2019).
\41\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman,
Acting Secretary, Commission, dated March 27, 2019 (``R2G Letter'').
\42\ See Letter from Anand Prakash, Managing Partner & Director
of Software Development, Cutler Group, LP, to Vanessa Countryman,
Acting Secretary, Commission, dated March 28, 2019 (``Prakash
Letter'').
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The proposed rule changes are therefore before the Commission
pursuant to Order Instituting Proceedings I, Order Instituting
Proceedings II and Order Instituting Proceedings III.
This order disapproves the proposed rule changes.

II. Description of the Proposed Rule Changes

The Exchange proposes to amend its fee schedule to establish
connectivity fees for Participants \43\ and non-Participants who
connect to the BOX network. Specifically, the Exchange proposes to
charge Participants and non-Participants with 10 Gigabit connections a
monthly fee of $5,000 per connection, and Participants and non-
Participants with non-10 Gigabit connections a monthly fee of $1,000
per connection. The Exchange would charge the applicable connectivity
fee for each calendar month to any Participant or non-Participant
connected as of the last trading day of that month.
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\43\ A participant is defined under BOX Rule 100(a)(41) as a
firm or organization that is registered with the Exchange pursuant
to the BOX Rule 2000 Series for purposes of participating in trading
on a facility of the Exchange (``Participant'').
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The Exchange also proposes to amend its fee schedule to reclassify
the HSVF connection as a port fee and to state that subscribers must be
credentialed by the Exchange to receive the HSVF. According to the
Exchange, the HSVF subscription is not dependent on a physical
connection to the Exchange, and thus is a port and not a physical
connectivity option.\44\ The amount of the HSVF fee would remain
unchanged, and the Exchange would continue to assess an HSVF port fee
of $1,500 per month for each month a Participant or non-Participant is
credentialed to use the HSVF port.
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\44\ See Notice, supra note 4, at 37853.
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III. Discussion and Commission Findings

Under Section 19(b)(2)(C) of the Act,\45\ the Commission shall
approve a proposed rule change of a self-regulatory organization
(``SRO'') if it finds that such proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
that are applicable to such organization.\46\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\47\ Rule 700(b)(3) of the Commission's Rules of Practice
states that the ``burden to demonstrate that a proposed rule change is
consistent with the [Act] and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change'' and that a ``mere assertion that the proposed rule
change is consistent with those requirements . . . is not sufficient.''
\48\ Rule 700(b)(3) also states that ``the description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding.'' \49\ Both the D.C. Circuit and the Commission have recently
addressed the application of these and analogous standards, and the
decision to disapprove the proposed rule changes is best understood in
the context of that precedent.
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\45\ 15 U.S.C. 78s(b)(2)(C).
\46\ 15 U.S.C. 78s(b)(2)(C)(i).
\47\ 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700(b)(3).
\48\ 17 CFR 201.700(b)(3).
\49\ Id.
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A. The Relevant Precedent

1. The NetCoalition Litigation
In 2010, the D.C. Circuit vacated the Commission's approval of a
fee rule filed by NYSE Arca, Inc. (``NYSE Arca'') \50\ The court held
that focusing on whether competitive market forces constrained the
exchange's pricing decisions was an acceptable basis for assessing the
fairness and reasonableness of the fees, but determined that the record
did not factually support the conclusion that significant competitive
forces limited NYSE Arca's ability to set unfair or unreasonable
prices. The D.C. Circuit vacated and remanded for further proceedings.
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\50\ NetCoalition v. SEC, 615 F.3d 525, 534-35, 539-44 (DC Cir.
2010) (``NetCoalition I'').
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Subsequently, NYSE Arca filed with the Commission a new rule that
imposed the same fees that had been vacated by the D.C. Circuit, but
that designated the filing as effective immediately pursuant to a
change in the law made by the Dodd-Frank Act.\51\ The Commission did
not suspend that filing, as Dodd-Frank permitted, and another appeal to
the D.C. Circuit ensued. In that appeal, the court held that it lacked
jurisdiction to consider challenges to the Commission's non-suspension
of the fees under Section 19(b) of the Act.\52\ But the court, in so
holding, ``[took] the Commission at its word'' that the Commission
would ``make the [Exchange Act] section 19(d) process available to
parties'' seeking to challenge fees as improper limitations or
prohibitions of access to exchange services, and recognized that this
Commission process would ``open [ ] the gate to [judicial] review.''
\53\
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\51\ Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010, Public Law 111-203, 124 Stat. 1376 (July 21, 2010); see
also 15 U.S.C. 78s(b)(3)(A) (permitting SROs to designate as
immediately effective rule changes ``establishing or changing a due,
fee, or other charge imposed by the [SRO] on any person, whether or
not the person is a member of the [SRO]'').
\52\ NetCoalition v. SEC, 715 F.3d 342 (D.C. Cir. 2013)
(``NetCoalition II'').
\53\ NetCoalition II, 715 F.3d at 353.
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Following that decision, SIFMA filed a challenge with the
Commission to NYSE Arca's 2010 fee rule under Section 19(d) of the Act
on the ground that the fee rule was an improper limitation of access to
exchange services. The Commission consolidated that challenge with
another challenge to a fee rule filed by The Nasdaq Stock Market
LLC.\54\
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\54\ See In the Matter of the Application of SIFMA, Securities
Exchange Act Release No. 72182, 21 (May 16, 2014), available at
https://www.sec.gov/litigation/opinions/2014/34-72182.pdf.
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On October 16, 2018, the Commission issued its decision in the
consolidated proceeding.\55\ The Commission held that in that case the
exchanges had failed to meet their burden of establishing that certain
challenged fees were consistent with the purposes of the Act.
Specifically, the Commission concluded that the exchanges had not
established that competitive forces constrained their pricing decisions
with respect to the fees at issue and that the fees were fair and
reasonable and not unreasonably discriminatory. In so finding, the
Commission stated specifically that it was not making a determination
that the fees themselves were not fair and reasonable. Rather, the
Commission explained that it was possible the challenged fees could be
shown to be fair and reasonable and otherwise consistent with the Act,
but that the evidence provided by the exchanges failed to satisfy their
burden on the existing record. The opinion reviewed each of the
exchanges'

[[Page 13366]]

arguments and explained why it was insufficient to justify approving
the fees. Accordingly, the Commission set those fees aside.\56\ During
the pendency of this Section 19(d) challenge, over 60 related
challenges to exchange rule changes and NMS plan amendments were filed
with the Commission. Contemporaneously with the Commission's October
16, 2018 decision, the Commission issued a separate order (``Remand
Order'') remanding those related challenges to the respective exchanges
and NMS plan participants and instructed the exchanges and plan
participants to consider the impact of the October 16, 2018 decision on
the challengers' assertions that the contested rule changes and plan
amendments should be set aside under Section 19(d) of the Act.\57\ The
Commission further directed the exchanges and NMS plan participants to
develop or identify fair procedures for assessing the challenged rule
changes and NMS plan amendments as potential denials or limitations of
access to services.\58\
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\55\ See In the Matter of the Application of SIFMA, Securities
Exchange Act Release No. 84432 (October 16, 2018), available at
https://www.sec.gov/litigation/opinions/2018/34-84432.pdf (``SIFMA
Decision'').
\56\ Id. at 17-54.
\57\ See In the Matter of the Applications of SIFMA and
Bloomberg L.P., Securities Exchange Act Release No. 84433 (October
16, 2018), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf (``Remand Order'').
\58\ Id.
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2. Susquehanna
In August 2017, the D.C. Circuit issued its decision in Susquehanna
International Group v. SEC. \59\ There, the court held that the
Commission's order approving a proposed rule change filed by the
Options Clearing Corporation (``OCC'')--its ``Capital Plan''--did not
provide the reasoned analysis required under the Act and the
Administrative Procedure Act, instead relying too heavily, the court
said, on OCC's findings and determinations.\60\ The court emphasized
that the Commission's ``unquestioning reliance on OCC's defense of its
own actions is not enough to justify approving the Plan''; rather, the
Commission ``should have critically reviewed OCC's analysis or
performed its own.'' \61\ Nor, according to the court, could the
Commission reach a conclusion ``unsupported by substantial evidence.''
\62\ The D.C. Circuit remanded the case to the Commission for further
proceedings.
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\59\ 866 F.3d 442 (D.C. Cir. 2017).
\60\ Id. at 447 (citing NetCoalition I).
\61\ Id.
\62\ Id. at 447-48.
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Following the remand, the Commission disapproved the OCC Capital
Plan because it determined that the information OCC submitted before
the Commission was insufficient to support a finding that the plan was
consistent with the Act.\63\ In reaching this determination, the
Commission reiterated the D.C. Circuit's holding that it must
``critically evaluate the representations made and the conclusions
drawn'' by the SRO in determining whether a proposed rule change is
consistent with the Act.\64\
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\63\ See Securities Exchange Act Release No. 85121 (February 13,
2019), 84 FR 5157 (February 20, 2019) (SR-OCC-2015-02).
\64\ See Securities Exchange Act Release No. 85121 (February 13,
2019), 84 FR 5157 (February 20, 2019) (SR-OCC-2015-02).
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3. NMS Plan Orders and Fee Filings
On May 1, 2018, the Commission issued orders summarily abrogating
immediately effective plan amendments that the Consolidated Tape
Association (``CTA'')/Consolidated Quotation (``CQ'') Plan and Nasdaq
Unlisted Trading Privileges (``UTP'') Plan filed regarding certain
fees.\65\ Each order explained that ``[t]he Commission is concerned
that the information and justifications provided . . . are not
sufficient for the Commission to determine whether the Amendment is
consistent with the Act''--specifically, the amendments raised
questions ``as to whether the changes will result in fees that are fair
and reasonable, not unreasonably discriminatory, and that will not
impose an undue or inappropriate burden on competition under Section
11A of the Act.'' \66\ The Commission determined that the procedures in
Rule 608(b)(2) of Regulation NMS, which are similar to those for SROs
under Section 19(b)(2)(B) of the Act, would provide a better mechanism
to make those determinations.\67\
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\65\ See Securities Exchange Act Release No. 83148 (May 1,
2018), 83 FR 20126 (May 7, 2018) (SR-CTA/CQ-2018-01) (``CTA/CQ
Order'') (Order of Summary Abrogation of the Twenty-Third Charges
Amendment to the Second Restatement of the CTA Plan and the
Fourteenth Charges Amendment to the Restated CQ Plan); Securities
Exchange Act Release No. 83149 (May 1, 2018), 83 FR 20129 (May 7,
2018), (S7-24-89) (``UTP Order'')(Order of Summary Abrogation of the
Forty-Second Amendment to the Joint Self-Regulatory Organization
Plan Governing the Collection, Consolidation and Dissemination of
Quotation and Transaction Information for Nasdaq-Listed Securities
Traded on Exchanges on an Unlisted Trading Privileges Basis).
\66\ See CTA/CQ Order, supra note 65, at 20128; UTP Order, supra
note 65, at 20130.
\67\ See 17 CFR 242.608(b)(2); 15 U.S.C. 78s(b)(2)(B).
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In addition, on July 31, 2018, the Commission issued an order
staying the effectiveness of CTA/CQ plan amendments regarding certain
fees after Bloomberg filed an application for review and requested a
stay.\68\ The order stated that the fairness and reasonableness of an
amendment ``must be explained and supported in such a manner that the
Commission has sufficient information before it to satisfy its
statutorily mandated review function.'' \69\ But CTA's filing did ``not
identify any basis by which CTA's fee changes could be assessed for
fairness and reasonableness.'' \70\ The Commission found that CTA's
``unsupported declaration'' that it ``believe[d] that the proposed
amendment[s are] fair and reasonable and provide[] for an equitable
allocation of . . . fees'' was not adequate.\71\ Following the stay
order, the plan participants rescinded the amendments.\72\
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\68\ See In the Matter of Bloomberg L.P., Securities Exchange
Act Release No. 83755 (July 31, 2018), available at https://www.sec.gov/litigation/opinions/2018/34-83755.pdf.
\69\ Id. at 14-15.
\70\ Id. at 15.
\71\ Id. at 14.
\72\ See Securities Exchange Act Release No. 84194 (September
18, 2018), 83 FR 48356 (September 24, 2018) (SR-CTA/CQ-2018-03).
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After Susquehanna, and about the same time the Commission
instituted proceedings on BOX 1, the Commission also instituted
proceedings on proposed rule changes submitted by the Miami
International Securities Exchange LLC (``MIAX'') and MIAX PEARL LLC
(``PEARL'') to increase their respective connectivity fees.\73\ In
instituting proceedings on the MIAX and PEARL connectivity filings, the
Commission noted that exchange statements in support of their proposals
should be sufficiently detailed and specific to support a finding that
the proposed

[[Page 13367]]

rules are consistent with the Act.\74\ The Commission also stated that
it intended to further consider whether increasing certain connectivity
fees to the exchange is consistent with the statutory requirements
applicable to a national securities exchange under the Act.\75\
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\73\ See Securities Exchange Act Release Nos. 84175 (September,
17, 2018), 83 FR 47955 (September 21, 2018) (SR-MIAX-2018-19); and
84177 (September 17, 2018), 83 FR 47953 (September 21, 2018) (SR-
PEARL-2018-16) (orders suspending and instituting proceedings to
determine whether to approve or disapprove connectivity fees, which
were filed by MIAX and PEARL on July 31, 2018). Both filings were
withdrawn on October 5, 2018. MIAX and PEARL submitted the proposed
connectivity fees again on September 18, 2018. In those filings,
MIAX and PEARL stated that the fee increase would partially offset
costs associated with maintaining and expanding a team of highly-
skilled network engineers, increasing fees charged by the Exchange's
third-party data center operator, and costs associated with projects
and initiatives designed to improve overall network performance and
stability. The Division, acting on behalf of the Commission by
delegated authority issued orders temporarily suspending the new
connectivity fee filings and simultaneously instituting proceedings
to determine whether to approve or disapprove the new connectivity
fee filings. See Securities Exchange Act Release Nos. 84357 (October
3, 2018), 83 FR 50976 (October 10, 2018) (SR-MIAX-2018-25); and
84358 (October 3, 2018) 83 FR 51022 (October 10, 2018) (SR-PEARL-
2018-19). MIAX and PEARL withdrew their respective filings on
November 23, 2018.
\74\ See Securities Exchange Act Release Nos. 84175 (September,
17, 2018), 83 FR 47955 (September 21, 2018) (SR-MIAX-2018-19); and
84177 (September 17, 2018), 83 FR 47953 (September 21, 2018) (SR-
PEARL-2018-16).
\75\ See Securities Exchange Act Release Nos. 84175 (September,
17, 2018), 83 FR 47955 (September 21, 2018) (SR-MIAX-2018-19); and
84177 (September 17, 2018), 83 FR 47953 (September 21, 2018) (SR-
PEARL-2018-16).
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B. The Proposed Rule Changes at Issue Here

The Commission has historically applied a ``market-based'' test in
its assessment of market data fees, which we believe present similar
issues as the connectivity fees proposed herein. Under that test, the
Commission considers ``whether the exchange was subject to significant
competitive forces in setting the terms of its proposal for [market
data], including the level of any fees.'' \76\ If an exchange meets
this burden, the Commission will find that its fee rule is consistent
with the Act unless ``there is a substantial countervailing basis to
find that the terms'' of the rule violate the Act or the rules
thereunder.\77\ If an exchange cannot demonstrate that it was subject
to significant competitive forces, it must ``provide a substantial
basis, other than competitive forces, . . . demonstrating that the
terms of the [fee] proposal are equitable, fair, reasonable, and not
unreasonably discriminatory.'' \78\ The Exchange's initial proposal,
comment responses, and statements on review focused on an alternative
basis other than competitive forces, namely, a cost-based
justification, for its proposed connectivity fees. In its latest
comment letter, the Exchange also presents a market-based argument.
Therefore, the Commission's discussion below begins with the Exchange's
cost-based argument \79\ before moving on to consider its market-based
argument.\80\
---------------------------------------------------------------------------

\76\ Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74781 (December 9, 2008) (``2008 ArcaBook
Approval Order'').
\77\ Id. See also SIFMA Decision, supra note 55, at 22.
\78\ 2008 ArcaBook Approval Order, supra note 76, at 74781. See
also SIFMA Decision, supra note 55, at 22.
\79\ See infra Section III.B.1.
\80\ See infra Section III.B.2.
---------------------------------------------------------------------------

After careful consideration, the Commission is disapproving the
proposed rule changes because the information before us is insufficient
to support a finding that the proposed rules changes are consistent
with the requirements of the Act under either argument. Specifically,
the Commission is unable to find that the proposed rule changes are
consistent with: (1) Section 6(b)(4) of the Act,\81\ which requires
that the rules of a national securities exchange provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities; (2)
Section 6(b)(5) of the Act,\82\ which requires that the rules of a
national securities exchange be designed, among other things, to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest, and not
be designed to permit unfair discrimination between customers, issuers,
brokers, or dealers; and (3) Section 6(b)(8) of the Act,\83\ which
requires that the rules of a national securities exchange do not impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Act. Because an inability to make any of these
determinations under the Act independently necessitates disapproving
the proposals, the Commission disapproves the proposed rule
changes.\84\
---------------------------------------------------------------------------

\81\ 15 U.S.C. 78f(b)(4).
\82\ 15 U.S.C. 78f(b)(5).
\83\ 15 U.S.C. 78f(b)(8).
\84\ In disapproving the proposed rule changes, the Commission
has considered the proposed rules' impact on efficiency,
competition, and capital formation, see 15 U.S.C. 78c(f), and the
Exchange's assertion that its proposal would enhance competition
because the fees would enable the Exchange to pay for improvements
to its network and offer participants higher quality software,
hardware, quality assurance, and technology support. See BOX 1
Petition, supra note 15, at 12-13 and BOX Statement, supra note 18,
at 3. The Exchange did not provide any specific information to
directly support its assertion that the proposal would enhance
competition other than the general statement that the proposed fees
would allow for the Exchange to pay for such improvements. But even
if the proposals have the potential to enhance competition, for the
reasons discussed throughout, the Commission must disapprove the
proposed rule changes in light of its inability, on the current
record, to find that they are consistent with the Act.
---------------------------------------------------------------------------

1. The Exchange's Cost-Based Argument in Support of the Proposed Rule
Changes Lacks Sufficient Information for the Commission to Determine
Whether the Proposed Rule Changes are Consistent With the Act
Prior to its second response letter, the Exchange primarily raised
a cost-based argument in support of the proposed rule changes.
Specifically, the Exchange states that the fees will ``allow the
Exchange to recover costs associated with offering access through the
network connections,'' that the fees would ``offset the costs BOX
incurs 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.'' \85\ The
Exchange also attempts to support its cost-based argument by asserting
that the proposed fees are ``reasonable in that they are competitive
with those charged by another exchange.'' \86\
---------------------------------------------------------------------------

\85\ See Notice, supra note 4, at 37854.
\86\ See id.
---------------------------------------------------------------------------

Three commenters argue that the Exchange does not provide
sufficient information in its filing to support a finding that the
proposal is consistent with the Act.\87\ Specifically, two commenters
object to the Exchange's reliance on the fees of other exchanges to
demonstrate that its fee increases are consistent with the Act. \88\
One of these commenters argues that simply comparing the proposed fees
to those charged by other exchanges and stating that they are designed
to recover costs to the Exchange is insufficient to demonstrate that
the fees are reasonable, equitable, and not unfairly
discriminatory.\89\ This commenter states that the Exchange does not
assess any differences among exchanges in the use and value of their
connectivity, or provide any information about the magnitude or
allocation of the applicable costs on the Exchange.\90\ The other
commenter argues that ``similarity'' between fees does not mean they
are reasonable.\91\ Specifically, this commenter argues that
connectivity charges outside of the exchange context are significantly
lower and that the Exchange does not explain the reasons for the
Exchange's upcharge.\92\ Further, one commenter stated its belief that
the actual impact of the proposed fees would be ``extremely
inequitable'' and the Exchange made ``no attempt . . . to explore how
the burdens of the fees will

[[Page 13368]]

be applied across its customer base.'' \93\ In this regard, a commenter
states that the proposed connectivity pricing is not associated with
the relative usage of various market participants and may impose a
large fixed barrier to entry to smaller participants.\94\
---------------------------------------------------------------------------

\87\ See Healthy Markets Letter I, supra note 5, at 4-5; SIFMA
Letter I, supra note 10, at 2; Spatt Letter, supra note 10, at 1 and
3.
\88\ See Healthy Markets Letter I, supra note 5, at 5-7 (stating
that the fees appear to be ``completely arbitrary'' and noting that
``[e]ven if the fees were somehow viewed as `similar' to those
charged by other [ ] exchanges, that does not mean that they are
reasonable.''); Spatt Letter, supra note 10, at 1.
\89\ See Spatt Letter, supra note 10, at 1.
\90\ See id.
\91\ See Healthy Markets Letter I, supra note 5, at 7.
\92\ See id.
\93\ See id. at 9-10 (noting that BOX did not ``provide
information about how many subscribers currently purchase either
level of connectivity . . . does not provide details of how much
revenues will be generated from the changes . . . [n]or . . . offer
any specific details for how those revenues would be spent (and to
whose benefit.'').
\94\ See Spatt Letter, supra note 10, at 2.
---------------------------------------------------------------------------

In its first response letter, the Exchange rejects the suggestion
that the Exchange should be required to provide additional information
to support its belief that the proposed rule change is consistent with
the Act. In addition, the Exchange argues that additional review, as
requested by one commenter,\95\ is unnecessary because the Exchange
submitted its proposal as an immediately effective rule change under
the Act.\96\ Further, in response to the comments that questioned
whether the Exchange provided sufficient information to demonstrate
that its proposed fees are consistent with the Act, the Exchange
reiterated without elaboration the arguments from its original filing
comparing the proposal to fees of certain other options exchanges,
provided general statements regarding the categories of costs that
comprise its total market connectivity expense, and, in its second
letter, claimed that platform theory constrains its ability to price
its connectivity services.\97\ The Exchange, however, did not respond
to the comments that argued the connectivity fees are inequitable in
that they fail to account for the relative usage of different market
participants and the disparate barrier to entry that certain
connectivity fees may impose on market participants of different sizes.
---------------------------------------------------------------------------

\95\ See Healthy Markets Letter I, supra note 5.
\96\ See BOX Response Letter I, supra note 6, at 1.
\97\ See BOX Statement, supra note 18, at 2-3; Gibson Dunn
Statement, supra note 18, at 3-4; BOX 2 Notice and OIP, supra note
26, at 65382; BOX Response Letter II, supra note 11, at 1-2.
---------------------------------------------------------------------------

The Commission also received one comment letter in response to the
Gibson Dunn Statement.\98\ This commenter argued that the Commission is
obligated to ensure all exchange proposed rule changes, including the
fees subject to this proposal, are consistent with the Act.\99\ The
commenter further argued that the Exchange has provided no additional
information necessary to support its conclusions and evaluate its
proposal's consistency with the Act, such as the number or types of
firms impacted by the fee changes or the quantitative and qualitative
impacts of the fee changes on market participants and the
Exchange.\100\
---------------------------------------------------------------------------

\98\ See Healthy Markets Letter II, supra note 10.
\99\ See id. at 3-5.
\100\ See id. at 5-6.
---------------------------------------------------------------------------

As noted above, Section 6 of the Act requires that the rules of a
national securities exchange provide for, among other things, ``the
equitable allocation of reasonable dues, fees and other charges'' and
be designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest, and not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.\101\ These requirements, which
apply to the rules of an exchange, apply regardless of whether a
proposed rule change is filed pursuant to Section 19(b)(2) or
19(b)(3)(A) of the Act. And, because the proposed fees are now before
the Commission pursuant to the Orders Instituting Proceedings I-III,
the Commission can approve them only if it finds that they are
consistent with these requirements. The Commission is unable to make
such a finding based on the record before us.
---------------------------------------------------------------------------

\101\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

As noted above, the Exchange makes a cost-based argument for why
the proposed fees are reasonable. Specifically, the Exchange identifies
the categories of costs it incurs and states that the proposed fees
would ``offset'' the Exchange's costs, without providing any
information as to the level of those costs or any other supporting
factual basis for its conclusion. This is insufficient. In making any
finding or determination, the Commission cannot ``[s]imply accept what
[the SRO] has done,'' and cannot have an ``unquestioning reliance'' on
an SRO's representations in a proposed rule change.\102\ And, while
stating the categories of costs and that the fees will offset those
costs could support the application of a fee, without more it does
little to inform the analysis into the level of the particular fees at
issue here ($5,000 per month for 10 Gb connections and $1,000 per month
for non-10 Gb connections) and whether they are reasonable and
equitable.
---------------------------------------------------------------------------

\102\ See Susquehanna, 866 F.3d at 446-47.
---------------------------------------------------------------------------

In addition, in enumerating the categories of costs, the Exchange
includes the cost of 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,
however, does not explain why it is appropriate to consider such cost
items when evaluating whether the connectivity fees are consistent with
the Act. The Exchange does not address how its costs to maintain and
implement ongoing improvements to the trading systems relate to
connectivity and whether, for example, transaction fees or other fees
offset those improvements to the trading systems. Similarly, the
Exchange does not offer any explanation for why the fee for 10 Gb
connections is five times the fee for non-10 GB connections or why the
disparity is reasonable and equitable. In addition, as stated by one
commenter, the filing does not support the reasonableness of the fees
by, for example, discussing ``the relative benefits to users of the
various potential exchange connectivity offerings, such as subscribing
to the 10 gigabit connection, the Non-10 gigabit connection, or
connecting through a third party.'' \103\ Nor does the Exchange offer
any information that would support a claim that its connectivity
services are becoming more costly to produce.\104\
---------------------------------------------------------------------------

\103\ See Healthy Markets Letter I, supra note 5, at 6-7.
\104\ See id. at 5.
---------------------------------------------------------------------------

Further, the Exchange does not provide any support for its
assertion that the proposed fees will offset the Exchange's costs. For
example, the Exchange did not provide any information as to whether the
monthly costs associated with connectivity always exceed the projected
monthly revenues from connectivity or provide any detail as to the
frequency of the costs (e.g., whether the costs are all marginal costs,
fixed costs, or one-time implementation costs). Further, the Exchange
did not provide information about whether any of the costs could be
characterized as fixed costs that do not vary if there are more
connections. As stated by commenters,\105\ the Exchange has not
provided information sufficient to address the questions raised above
and to support a basis for a Commission finding that the proposed fees
are consistent with the Act.
---------------------------------------------------------------------------

\105\ See id. at 5-6, 10; Healthy Markets Letter II, supra note
10, at 5-6; Spatt Letter, supra note 10, at 1.

---------------------------------------------------------------------------

[[Page 13369]]

2. The Exchange's Competition-Based Argument in Support of the Proposed
Rule Changes Lacks Sufficient Information for the Commission to
Determine Whether the Proposed Rule Changes are Consistent With the Act
The Exchange argues that the proposed fees are consistent with the
Act because they are ``competitive with those charged by another
exchange'' \106\ and that they are ``comparable to and generally lower
than the fees charged by other options exchanges for the same or
similar services.'' \107\ But Rule of Practice 700(b)(3) provides that
a ``mere assertion . . . that another self-regulatory organization has
a similar rule in place'' is ``not sufficient'' to ``explain why the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a self-regulatory
organization.'' \108\ As stated by the commenters,\109\ the Exchange
does not explain why a comparison of its proposed fees to those of
another exchange is relevant for purposes of determining whether the
Exchange's fees are consistent with the Act. The Exchange also does not
discuss whether it faces similar costs as the other exchange.
---------------------------------------------------------------------------

\106\ See Notice, supra note 4, at 37854.
\107\ See id.
\108\ 17 CFR 201.700(b)(3).
\109\ See Healthy Markets Letter I, supra note 5, at 5-7; Spatt
Letter, supra note 10, at 1.
---------------------------------------------------------------------------

Further, in its second response letter, the Exchange claims that
its connectivity services are just one set of services that are related
to its trading function and ``produced on a platform that is
characterized by joint and common costs,'' and therefore its ability to
price its joint services, including connectivity services, is
constrained by robust order flow competition.\110\ Under the total
platform theory, some products, such as market data and trade
executions, are ```joint products' with `joint costs' at each trading
`platform,' or exchange.'' \111\ If the theory applies, ``[a]lthough an
exchange may price its trade execution fees higher and its market data
fees lower (or vice versa), because of `platform' competition the
exchange nonetheless receives the same return from the two `joint
products' in the aggregate.'' \112\
---------------------------------------------------------------------------

\110\ See BOX Response Letter II, supra note 11, at 2.
\111\ SIFMA Decision, supra note 55, at 25 (quoting NetCoalition
v. SEC, 615 F.3d 525, 542 n.16 (DC Cir. 2010)).
\112\ Id.
---------------------------------------------------------------------------

In support of its platform theory argument, the Exchange attached
to its letter a statement (``Statement'') prepared for Nasdaq Inc. on
the extent to which competitive forces constrain the prices of
connectivity services offered by Nasdaq Inc. for its equities
market.\113\ This Statement argues that connectivity pricing in the
equities market must be considered in tandem with its pricing for
trading and other ``joint'' services.\114\ Therefore, the Exchange
concludes that the competition it faces for order flow ensures that its
proposed connectivity fees are reasonable, equitable, and not unfairly
discriminatory and do not impose an unnecessary or inappropriate burden
on competition.\115\ The Exchange also concludes that it is unnecessary
to provide detailed cost information in order to justify its proposed
fees.\116\
---------------------------------------------------------------------------

\113\ See BOX Response Letter II, supra note 11.
\114\ See id. at 1-2.
\115\ See id.
\116\ See id. at 3-4.
---------------------------------------------------------------------------

The total platform theory, however, does not necessarily apply to
every example of a platform offering joint products with joint costs.
The Commission previously has stated that an assertion based on ``total
platform theory'' i.e., that an SRO's aggregate return across multiple
product lines, such as transactions, market data, connectivity, and
access, is constrained by competition at the platform level is
insufficient unless the SRO demonstrates that the theory applies in
fact to the fee at issue.\117\ An SRO that wishes to rely on total
platform theory to support a proposed fee change must provide data and
analysis demonstrating that these competitive forces are sufficient to
constrain the SRO's pricing. In this context, the Commission would need
to consider whether the platform theory satisfies the exchange's burden
of establishing that the fee meets the Act's requirements, among
others, of being equitably allocated, not unreasonably discriminatory,
and not an undue burden on competition for market participants with
varying levels of trading on the SRO. Here, the Exchange did not
discuss the direction and strength of the competitive forces that
operate between and among various products provided by the platform in
the context of the options market, and in application to the Exchange
itself.\118\ In doing so, the Exchange could have provided some
quantitative or qualitative support for its assertions. The Exchange,
however, has not established that its theory of competition reflects
market realities and satisfies the market-based test with respect to
the connectivity fees.\119\
---------------------------------------------------------------------------

\117\ SIFMA Decision, supra note 55, at 28, 29, 36 (finding that
the exchange presenting the platform theory argument did not
substantiate its assertions with evidence sufficient to support its
platform-based arguments).
\118\ The Statement is not sufficient to support BOX's position
because, among other things, it is not specific to BOX and analyzes
the equities markets, not the options markets.
\119\ See supra notes 111 and 112, and accompanying text.
---------------------------------------------------------------------------

Three commenters question the competiveness of the market for
connectivity services.\120\ Specifically, one commenter argues that the
Exchange has market power with respect to its direct connectivity,
unlike the competitive market for trading, and that the Exchange does
not provide sufficient information to assess the competitiveness of the
market for connectivity.\121\ The other commenter argues that the
exchanges' market data fees are not constrained by significant
competitive forces and therefore the fairness and reasonableness of
market data fee increases should be justified with information
regarding the cost of producing the market data.\122\ In a subsequent
letter, the commenter asserts that connectivity fees cannot be based on
the ``market value'' of the connection because broker-dealers are
effectively required to connect to each market for fear of violating
order protection requirements or sacrificing execution quality.\123\ As
a result, this commenter argues that ``there is little opportunity for
market forces to determine overall levels of fees'' and thus the
exchange should be required to provide cost information to establish
why its connectivity fees are reasonable.\124\
---------------------------------------------------------------------------

\120\ See Healthy Markets Letter I, supra note 5, at 11; Spatt
Letter, supra note 10, at 2; SIFMA Letter I, supra note 10, at 2.
\121\ See Spatt Letter, supra note 10, at 2.
\122\ See SIFMA Letter I, supra note 10, at 2. The commenter
argues that the Exchange's proposed connectivity fees present a
comparable situation to the market data fees it describes. See id.
The commenter also stated that the Commission should establish a
framework--based on direct costs--for determining whether fees for
exchange products and services are reasonable when those products
and services are not constrained by significant competitive forces.
See id.
\123\ See SIFMA Letter II, supra note 37, at 1-2.
\124\ Id.
---------------------------------------------------------------------------

The Commission recognizes the possibility that the connectivity
fees at issue may satisfy the Commission's market-based test (for
example, because the theory of platform competition is in fact
applicable to the Exchange). But the Exchange has not provided
information to establish that competition constrains the Exchange's
pricing decisions. For example, the Exchange does not provide
information regarding the extent to which the establishment of
connectivity fees on the Exchange impacted order flow on the Exchange.
Nor does the Exchange provide information regarding the extent to which
BOX Participants

[[Page 13370]]

are continuing to purchase connectivity services from the
Exchange.\125\ The Exchange also does not discuss whether there are
alternatives to the Exchange-provided connectivity services and, if so,
how many BOX Participants pursue those alternatives. Finally, the
Exchange does not provide any data or analysis concerning the
Exchange's sources and amounts of revenue, costs, and gross margin that
would bear on the issue of whether the Exchange's aggregate return on
joint products is constrained by competition at the platform level and
that the total platform theory applies to the Exchange.
---------------------------------------------------------------------------

\125\ The Commission notes that, because the Exchange challenged
the Division's action by delegated authority to institute
proceedings on February 13, 2019, which triggered an automatic stay
of the action by delegated authority, the Exchange was permitted to
charge the connectivity fees on February 28, 2019. Similarly,
because of the Exchange's earlier challenge to BOX 1, the Exchange
could have charged its proposed fees on September 30, 2018 and
October 31, 2018. One commenter expressed concern that, by filing
substantially identical filings in this manner, the Exchange was
``exploiting the Commission's procedures in a manner that is
contrary to the Commission's intent, protecting investors, the
public interest, and the law.'' Specifically, the commenter
expressed its view that even though the Commission has directly
suspended the proposed rule changes, the Exchange continues to file
substantively identical fee filings and bill its customers for the
higher fees despite the suspensions. See Healthy Markets Letter III,
supra note 38, at 2-3. The commenter also expressed concern that
``at least one of BOX's customers has expressed frustration, and has
challenged the imposition of the repeatedly suspended fees.'' Id. at
3. Finally, the commenter noted that BOX responded to these
complaints by changing the procedures through which customers may
dispute its fees.'' Id. at 3-4. The Exchange responded by stating
that no Participant has complained to the Exchange about the fees
and further stated that no challenges to its fees have been
initiated. See BOX Response Letter III, supra note 39, at 2. The
Exchange also noted that it recently filed a proposed rule change to
amend its procedures regarding invoice disputes, but stated that
that filing is unrelated to its connectivity fee proposals. Id. On
March 27, 2019, a former customer of BOX submitted a comment letter,
which, among other things, contested the veracity of certain
statements in BOX Response Letter III. Specifically, the commenter
indicated that it had in fact challenged the imposition of BOX's
connectivity fees on August 18, 2018, and further stated that it
found the timing of BOX's changes to its fee dispute process
concerning. The commenter also indicated that, as a result of the
proposed fees, it was forced to terminate being a vendor of record
for the HSVF feed. See R2G Letter, supra note 41, at 1-2. Another
commenter represented that it would be significantly affected by the
proposed fee and noted that the amount of the fee would prohibit it
from participating in trades on BOX. As a result, the commenter
stated that it had terminated its access to BOX pending the
Commission's decision on the proposed rule changes. See Prakash
Letter, supra note 42.
---------------------------------------------------------------------------

Before the Commission may approve a fee for access or market data
based on a competitive pricing model, as noted above, there must be
evidence that competition will constrain its pricing.\126\ The same
analysis applies here to the market connectivity fees at issue. The
Commission recently found that two exchanges' statistical analyses were
insufficient to support a finding that competition for order flow
constrains their market data prices.\127\ In the same opinion, the
Commission addressed a similar platform-based theory as the one the
Exchange presents in its second response letter and found that the
exchange presenting the platform theory argument did not substantiate
its assertions with evidence sufficient to support its platform-based
arguments.\128\ Because the Exchange has not provided sufficient
evidence to establish that competitive forces constrain its ability to
price its connectivity fees, it must provide an alternative basis to
support the proposed fees.\129\ As described above, however, the
Exchange has not met that burden here.
---------------------------------------------------------------------------

\126\ See SIFMA Decision, supra note 55, at 29.
\127\ See id. at 31-32.
\128\ See id. at 36.
\129\ See id. at 50 (quoting 2008 ArcaBook Approval Order, supra
note 76, at 74781 (``[T]he exchanges still may meet their burden to
demonstrate consistency with the [Act] by establishing `a
substantial basis, other than competitive forces, . . .
demonstrating that the terms of the proposal are equitable, fair,
reasonable, and not unreasonably discriminatory.' '')).
---------------------------------------------------------------------------

Finally, in the BOX 1 Petition and BOX 3 Petition, the Exchange
asserts that its smaller market share and the fact that it is not a
member of a multi-exchange group make it ``especially unreasonable for
the Division to subject the Exchange to more exacting regulatory
scrutiny than its competitors'' in its analysis of the Exchange's
proposed rule changes.\130\ The Exchange also argues that Order
Instituting Proceedings I and Order Instituting Proceedings III are
inconsistent with the Commission's Remand Order with respect to the
related proceedings that remained pending before the Commission issued
its October 16, 2018 decision, discussed above.\131\ Specifically, BOX
asserts that Order Instituting Proceedings I and Order Instituting
Proceedings III ``single [ ] out the Exchange for disparate treatment
because the Exchange--unlike every other exchange whose rule changes
were the subject of the remand ruling--is not permitted to continue
charging the challenged fees during the remand proceedings.'' \132\
---------------------------------------------------------------------------

\130\ See BOX 1 Petition, supra note 15, at 14; BOX 3 Petition,
supra note 36, at 9.
\131\ See supra notes 57 and 58 and accompanying text.
\132\ See Gibson Dunn Statement, supra note 18, at 5; BOX 3
Petition, supra note 36, at 10.
---------------------------------------------------------------------------

To the extent that the Exchange is asserting that BOX 1, BOX 2 and
BOX 3 should be approved on these bases, the Commission disagrees. The
Remand Order did not alter the applicable Exchange Act standards. And,
as described throughout this order, we are unable to find that the
proposed rule changes before us meet those standards based on the
current record.
Nor has the Exchange been singled out for disparate treatment. As
discussed above, Order Instituting Proceedings I is not the only order
suspending a proposed fee change and instituting proceedings. Indeed,
two other orders instituting proceedings were issued the same day with
respect to proposed rule changes filed by MIAX and PEARL. Nor did the
Order Instituting Proceedings I treat BOX differently with respect to
the Remand Order because that Order did not issue until a month later.
Moreover, that BOX is not permitted to continue charging its fees
during the proceedings subject to the Remand Order is a consequence of
the procedural posture of the rule changes at the time that separate
order issued--in this case, the Commission's separate determination
under Exchange Act Section 19(b)(3)(C) that the suspension was
necessary and appropriate ``to allow for additional analysis of the
proposed rule change's consistency with the [Exchange] Act and the
rules thereunder.''
The Remand Order did not change the status of any of the challenged
rule changes or plan amendments at the time of the remand. Some of
those rule changes and plan amendments had instituted new fees for
market data and market access, and some did not. Some of those rule
changes and plan amendments involved fees currently in force, and some
did not. The Remand Order did not distinguish between any of the
challenged filings. Nor did the Remand Order create any new
opportunities for exchanges or plans to charge fees; it only maintained
the status quo during the remand. In the instance of the proposed rule
changes at issue here, the status quo was determined by the suspension
order instituted the previous month--proceedings under Section 19(b)
had already been instituted.
Finally, the Remand Order allows BOX to continue to collect other
challenged fees. Six proposed rule changes filed by BOX were challenged
by SIFMA over the past three years.\133\

[[Page 13371]]

Five of these rule changes went into effect without being suspended.
These rule changes, among other things, instituted or raised port fees.
The Remand Order maintains the status quo and allows BOX to continue
charging any of these fees still in force as it conducts proceedings on
remand. It was only in the sixth instance that the Commission suspended
the proposed rule changes and instituted proceedings. BOX has not been
singled out for disparate treatment.\134\
---------------------------------------------------------------------------

\133\ SR-BOX-2018-24 (challenged by File No. 3-18680 (filed Aug.
24, 2018)); SR-BOX-2018-16 (challenged by File No. 3-18572 (filed
July 2, 2018)); SR-BOX-2018-15 (challenged by File No. 3-18525
(filed May 31, 2018)); SR-BOX-2017-31 (challenged by 3-18286 (filed
Nov. 17, 2017)); SR-BOX-2016-40 (challenged by File No. 3-17663
(filed Nov. 8, 2016)); SR-BOX-2015-39 (challenged by File No. 3-
17040 (filed Jan. 8, 2016)).
\134\ The Commission notes that BOX 2 and BOX 3 were both filed
after the Remand Order and therefore are not subject to the Remand
Order.
---------------------------------------------------------------------------

IV. Conclusion

For the reasons set forth above, the Commission does not find that
the proposed rule changes are consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and in particular, Sections 6(b)(4), 6(b)(5), and 6(b)(8) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\135\ that the proposed rule changes (SR-BOX-2018-24, SR-BOX-2018-
37, and SR-BOX-2019-04) be, and hereby are, disapproved.
---------------------------------------------------------------------------

\135\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\136\
---------------------------------------------------------------------------

\136\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06519 Filed 4-3-19; 8:45 am]
BILLING CODE 8011-01-P