[Federal Register Volume 86, Number 191 (Wednesday, October 6, 2021)]
[Notices]
[Pages 55672-55677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93214; File Nos. SR-NYSE-2021-05, SR-NYSEAMER-2021-04, 
SR-NYSEArca-2021-07, SR-NYSECHX-2021-01, SR-NYSENAT-2021-01]


Self-Regulatory Organizations; New York Stock Exchange LLC, NYSE 
American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, 
Inc.; Order Disapproving Proposed Rule Changes, as Modified by Partial 
Amendment No. 1, To Amend Each Exchange's Fee Schedule To Add Two 
Partial Cabinet Bundles Available in Co-Location and Establish 
Associated Fees

September 30, 2021.

I. Introduction

    On January 19, 2021, New York Stock Exchange LLC (``NYSE''), NYSE 
American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE Arca''), NYSE 
Chicago, Inc. (``NYSE Chicago''), and NYSE National, Inc. (``NYSE 
National'') (each an ``Exchange,'' collectively, the ``Exchanges'') 
each filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the Exchanges' fee 
schedules related to co-location to add two Partial Cabinet Bundles 
available in co-location and establish associated fees. The proposed 
rule changes were published for comment in the Federal Register on 
February 5, 2021 or February 8, 2021, as applicable.\3\ On March 18, 
2021, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule changes, disapprove the proposed rule changes, or institute 
proceedings to determine whether to disapprove the proposed rule 
changes.\5\ On May 6, 2021, the Division of Trading and Markets (the 
``Division''), acting on behalf of the Commission by delegated 
authority, issued an order instituting proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule changes (``Order Instituting 
Proceedings'') to determine whether to approve or disapprove the 
proposed rule changes.\7\ The Commission received an initial comment 
letter from the Exchanges in response to the Order Instituting 
Proceedings.\8\ On July 30, 2021, pursuant to Section 19(b)(2) of the 
Act,\9\ the Commission designated a longer period for Commission action 
on the proceedings to determine whether to approve or disapprove the 
proposed rule changes.\10\ On September 14, 2021, each Exchange filed 
Partial Amendment No. 1, followed by a second comment letter.\11\ This 
order disapproves the

[[Page 55673]]

proposed rule changes, as modified by Partial Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 91034 (February 1, 
2021), 86 FR 8443 (February 5, 2021) (SR-NYSE-2021-05); 91035 
(February 1, 2021), 86 FR 8449 (February 5, 2021) (SR-NYSEAMER-2021-
04); 91036 (February 1, 2021), 86 FR 8440 (February 5, 2021) (SR-
NYSECHX-2021-01); and 91037 (February 1, 2021), 86 FR 8424 (February 
5, 2021) (SR-NYSENAT-2021-01); 91044 (February 2, 2021), 86 FR 8662 
(February 8, 2021) (SR-NYSEArca-2021-07) (each, a ``Notice''). For 
ease of reference, page citations are to the Notice for NYSE-2021-
05.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release Nos. 91357 (March 18, 
2021), 86 FR 15732 (March 24, 2021) (SR-NYSE-2021-05); 91358 (March 
18, 2021), 86 FR 15732 (March 24, 2021) (SR-NYSEAMER-2021-04); 91360 
(March 18, 2021), 86 FR 15764 (March 24, 2021) (SR-NYSEArca-2021-
07); 91362 (March 18, 2021), 86 FR 15765 (March 24, 2021)(SR-
NYSECHX-2021-01); and 91363 (March 18, 2021), 86 FR 15763 (March 24, 
2021) (SR-NYSENAT-2021-01).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 91785 (May 6, 2021), 
86 FR 26082 (May 12, 2021) (SR-NYSE-2021-05, NYSEAMER-2021-04, 
NYSEArca-2021-07, SR-NYSECHX-2021-01 SR-NYSENAT-2021-01).
    \8\ NYSE filed a comment letter on behalf of all of the 
Exchanges. See, letter dated July 6, 2021 from Elizabeth K. King, 
Chief Regulatory Officer, ICE, General Counsel and Corporate 
Secretary, NYSE to Vanessa Countryman, Secretary, Commission 
(``First NYSE Response''). All comments received by the Commission 
on the proposed rule changes are available on the Commission's 
website at: https://www.sec.gov/comments/sr-nyse-2021-05/srnyse202105.htm; https://www.sec.gov/comments/sr-nyseamer-2021-04/srnyseamer202104.htm; https://www.sec.gov/comments/sr-nysearca-2021-07/srnysearca202107.htm; https://www.sec.gov/comments/sr-nysechx-2021-01/srnysechx202101.htm https://www.sec.gov/comments/sr-nysenat-2021-01/srnysenat202101.htm.
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release Nos. 92532, 86 FR 42911 
(August 5, 2021) (SR-NYSE-2021-05, SR-NYSENAT-2021-01, SR-NYSEAMER-
2021-04, NYSECHX-2021-01); 92531, 86 FR 42956 (August 5, 2021) (SR-
NYSEArca-2021-07).
    \11\ In Partial Amendment No. 1, the Exchanges propose that 
Users ordering a proposed Partial Cabinet Bundle Option E or F on or 
before December 31, 2022 (instead of December 31, 2021, as 
originally proposed) would receive a 50% reduction in the monthly 
recurring charge. See Partial Amendment No. 1 at 3-4. See also, 
letter dated September 15, 2021 from Elizabeth K. King, Chief 
Regulatory Officer, ICE, General Counsel and Corporate Secretary, 
NYSE to Vanessa Countryman, Secretary, Commission (``Second NYSE 
Response''). Partial Amendment No. 1 and the Second NYSE Response 
are available on the Commission's website at: https://www.sec.gov/comments/sr-nyse-2021-05/srnyse202105.htm; https://www.sec.gov/comments/sr-nyseamer-2021-04/srnyseamer202104.htm; https://www.sec.gov/comments/sr-nysearca-2021-07/srnysearca202107.htm; 
https://www.sec.gov/comments/sr-nysechx-2021-01/srnysechx202101.htm 
https://www.sec.gov/comments/sr-nysenat-2021-01/srnysenat202101.htm. 
For ease of reference, citations to Partial Amendment No. 1 and the 
Second NYSE Response are to those for SR-NYSE-2021-05.
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II. Background and Description of the Proposed Rule Changes, as 
Modified by Partial Amendment No. 1.

    The Exchanges offer ``co-location services'' to market participants 
from a data center in Mahwah, New Jersey (``Mahwah Data Center'') where 
their electronic trading and execution systems are located.\12\ These 
Exchange-offered services provide market participants (co-location 
``Users,'' as further described below) with a variety of options to 
obtain cabinet space, power, bandwidth, and related services that 
enable them to connect to the Exchanges from within the Mahwah Data 
Center and thereby obtain the most efficient access to the Exchanges' 
trading engines and market data.\13\ As the Exchanges have stated, 
``[u]sers that receive co-location services normally would expect 
reduced latencies in sending orders to the Exchange and receiving 
market data from the Exchange.'' \14\
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    \12\ See e.g., Securities Exchange Act Release Nos. 62960 
(September 21, 2010), 75 FR 59310 (September 27, 2010) (SR-NYSE-
2010-56); 62961 (September 21, 2010), 75 FR 59299 (September 27, 
2010) (SR-NYSEAmex-2010-80); 63275 (November 8, 2010), 75 FR 70048 
(November 16, 2010) (SR-NYSEArca-2010-100) (approving co-location 
services and fees for NYSE, NYSE American, and NYSE Arca); 83351 
(May 31, 2018), 83 FR 26314 (June 6, 2018) (SR-NYSENAT-2018-07); 
87408 (October 28, 2019), 84 FR 58778 (November 1, 2019) (SR-
NYSECHX-2019-12) (approving co-location services and fees for NYSE 
National and NYSE Chicago). The Commission has consistently reviewed 
proposed rule changes for co-location services at the Mahwah Data 
Center, which are facilities of the Exchanges.
    \13\ See id. These services are for fees filed with the 
Commission, and reflected on an Exchange's Price List. A User that 
incurs co-location fees for a particular co-location service 
pursuant to any Exchange's Price List is not subject to co-location 
fees for the same co-location service charged by one of the 
affiliated Exchanges. See e.g., Notice, 86 FR at 8444 n.5.
    \14\ See supra note 12. See also Securities Exchange Act Release 
No. 61358 (January 14, 2010), 75 FR 3594, at 3610 (January 21, 2010) 
(Concept Release on Equity Market Structure), in which the 
Commission described co-location as ``a service offered by trading 
centers that operate their own data centers and by third parties 
that host the matching engines of trading centers. The trading 
center or third party rents rack space to market participants that 
enables them to place their servers in close physical proximity to a 
trading center's matching engine. Co-location helps minimize network 
and other types of latencies between the matching engine of trading 
centers and the servers of market participants.''
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    A market participant that seeks the benefits of co-location 
generally will, at a minimum, purchase cabinet space, power, and 
bandwidth connections (1 Gb, 10 Gb, or 40 Gb), and any necessary cross-
connections. The 1 Gb, 10 Gb, and 40 Gb bandwidth connections that the 
Exchanges offer enable the transmission of data over local area 
networks in the Mahwah Data Center. These local area networks include 
the internet Protocol (``IP'') network and the Liquidity Center Network 
(``LCN''). Both the IP and LCN networks provide access to the 
Exchanges' trading and execution systems and to the Exchanges' 
proprietary market data products, with the LCN network having lower 
latency than the IP network.\15\ The IP network provides access to 
``away'' (third-party) market data products and execution systems.\16\ 
In 2020, the Exchanges added the NMS Network, a dedicated network in 
the Mahwah Data Center, providing co-location Users with 10 Gb and 40 
Gb connections access to this additional network without an associated 
fee change.\17\
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    \15\ See e.g., Securities Exchange Act Release No. 74222 
(February 6, 2015), 80 FR 7888, 7889 (February 12, 2015).
    \16\ Id.
    \17\ See Securities Exchange Act Release Nos. 88837 (May 7, 
2020), 85 FR 28671 (May 13, 2020) (SR-NYSE-2019-46, SR-NYSEAMER-
2019-34, SR-NYSEArca-2019-61, SR-NYSENAT-2019-19) (Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 
to Amend the Exchanges' Co-Location Services to Offer Co-Location 
Users Access to the NMS Network; 88972 (May 29, 2020), 85 FR 34472 
(June 4, 2020) (SR-NYSECHX-2020-18)(Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Amend the Services 
Available to Users That Use Co-location Services in the Mahwah, New 
Jersey Data Center). More specifically, the NMS Network offers 
dedicated access to the National Market System Plan data feeds 
(``NMS feeds'') for which the Securities Industry Automation 
Corporation (``SIAC,'' a wholly-owned subsidiary of the NYSE) is 
engaged as the securities information processor, namely, the 
consolidated market data feeds distributed by (1) the Consolidated 
Trade Association Plan; (2) the Consolidated Quotation Plan; and (3) 
the Options Price Reporting Authority Plan). As a result, access to 
the NMS feeds became available via dedicated bandwidth and at lower 
latency than they had been over the IP network. Id.
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    The Exchanges refer to direct purchasers of their co-location 
services as ``Users,'' and permit any market participant that requests 
to receive co-location services directly from one or more of the 
Exchanges to be a User, subject to potential inventory constraints.\18\ 
The Exchanges' also permit ``Hosting Users.'' A Hosting User is a User 
that subleases its cabinet space to a ``Hosted Customer'' and thereby 
resells or repackages and sells Exchange co-location services to 
customers of its own.\19\ Hosting Users are subject to a Hosting Fee of 
$1,000 per month per Hosted Customer for each cabinet in which such 
Hosted Customer is hosted.\20\ Thereby, the Exchanges receive payment 
from Hosting Users for co-location services they purchase from the 
Exchanges, as well as for cabinet space that a Hosting User resells, 
with the Hosting Fee determined on a per cabinet/per Hosted Customer 
basis.
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    \18\ See e.g., Securities Exchange Act Release No. 65973 
(December 15, 2011), 76 FR 79232 (December 21, 201) (SR-NYSE-2011-
53) (expanding access to co-location to any market participant that 
requests to receive co-location services directly from one or more 
of the Exchanges, and designating such persons as ``Users''); 
Securities Exchange Act Release No. 91515 (April 8, 2021), 86 FR 
19674 (April 14, 2021) (SR-NYSE-2021-12, SR-NYSEAMER-2021-08, SR-
NYSENAT-2021-03, SR-NYSEArca-2021-11, SR-NYSECHX-2021-02) 
(establishing rules for the allocation of cabinets and power to 
Users should inventory be insufficient to satisfy demand).
    \19\ A ``Hosting User'' means a User of co-location services 
that hosts a Hosted Customer in the User's co-location space. A 
``Hosted Customer'' means a customer of a Hosting User that is 
hosted in a Hosting User's co-location space. See e.g., Securities 
Exchange Act Release No. 76008 (September 29, 2015), 80 FR 60190 
(October 5, 2015) (SR-NYSE-2015-40).
    \20\ Id.
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    Among the co-location services currently offered by the Exchanges 
are ``Partial Cabinet Bundles.'' \21\ Designed for ``smaller Users'' 
having limited power or cabinet space demands, the current bundles 
offer a small co-location package: A partial cabinet with network 
access via 1 Gb or 10 Gb connections, two fiber cross connections, and 
connectivity to a time feed protocol, discounted from what the price 
would be if a User purchased the elements separately.\22\ Users 
currently may choose from four Partial Cabinet Bundles, labeled Options 
A, B, C, and D. Options A and B include a partial cabinet with either 
one or two kilowatts (``kW'') of power; a 1 Gb connection to each of 
the LCN network and the IP network; two fiber cross connections; and 
connectivity to either the Network Time Protocol or the Precision 
Timing Protocol time feeds.\23\ Options C and D

[[Page 55674]]

originally included a 10 Gb connection to the LCN Network and a 10 GB 
connection to the IP network.\24\ When the NMS Network was added, the 
Exchanges upgraded Options C and D, to further include, at no 
additional cost, two 10 Gb connections to the NMS Network.\25\ Options 
C and D are available for an initial charge of $10,000 and a recurring 
monthly charge of $14,000 and $15,000, respectively.\26\
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    \21\ See e.g., Securities Exchange Act Release No. 77072 
(February 5, 2016), 81 FR 7394 (February 11, 2016) (SR-NYSE-2015-
53).
    \22\ Id. at 7395-96. Partial Cabinet Bundle purchases are 
subject to eligibility conditions: A purchaser (together with its 
affiliates) of a Partial Cabinet Bundle from the Exchanges may have 
no more than one Partial Cabinet Bundle and is limited to a total 
footprint of 2 kW of power. See id. and Notice, 86 FR at 8444. 
Designed to limit purchases of Exchange-offered Partial Cabinet 
Bundles to ``smaller Users,'' this condition applies even if the 
purchaser is also a ``Hosted Customer.'' See Securities Exchange Act 
Release No. 76612 (December 10, 2015), 80 FR 78269, at 78271 
(December 16, 2015) (SR-NYSE-2015-53).
    \23\ See Notice, 86 FR at 8444. Cross connections are fiber 
connections at the Mahwah Data Center that provide the means to 
connect a User's multiple cabinets, a cabinet of one User to a 
cabinet of another User, or a User's cabinet to Exchange or third-
party equipment. See e.g., Securities Exchange Act Release No. 74222 
(February 6, 2015, 80 FR 7888 (February 12, 2015) (SR-NYSE-2015-05). 
The Network Time Protocol or the Precision Timing Protocol are 
options for time feeds that provide the current time of day, and 
which allow Users to receive time and synchronize clocks throughout 
a computer network, and can also be used for recordkeeping or 
measuring response times. See Securities Exchange Act Release No. 
77072 (February 5, 2016), 81 FR 7394 (February 11, 2016) (SR-NYSE-
2015-53).
    \24\ Id.
    \25\ See supra note 17 and accompanying text.
    \26\ See Notice, 86 FR at 8445.
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    The Exchanges now propose to expand their co-location services to 
add two new Partial Cabinet Bundles, designated as Options E and F, and 
establish associated fees. Proposed Options E and F would offer a 40 Gb 
connection to the LCN network and a 40 Gb connection to the IP network, 
and two 40 Gb connections to the NMS Network.\27\ Otherwise, proposed 
Options E and F would be the same as the Options C and D bundles, 
offering a 1 kW (Option E) or 2 kW (Option F) partial cabinet, two 
fiber cross connections, and either the Network Time Protocol Feed or 
the Precision Timing Protocol.\28\ The Exchanges state that the 
proposed new options are in response to customer interest \29\ and that 
the option of a Partial Cabinet Bundle that includes 40 Gb connections 
would enable small market participants to connect to more data feeds or 
have the same size connection in co-location that they have 
elsewhere.\30\ The Exchanges propose to offer each new bundle for an 
initial charge of $10,000, and, following an initial promotional 
period, a monthly charge of $18,000 for Option E, and $19,000 for 
Option F.\31\
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    \27\ See Notice, 86 FR at 8444.
    \28\ See Notice, 86 FR at 8444. Purchases of the proposed new 
bundles would likewise be subject to the same eligibility 
requirements summarized in note 22 supra.
    \29\ See id.
    \30\ See id. at 8445.
    \31\ As proposed in Partial Amendment No. 1, Users who order 
before December 31, 2022 would be charged $9,000 per month for 
Option E or $9,500 per month for Option F for the first 12 months of 
service. The Exchanges state that given the passage of time, 
extending this date beyond December 31, 2021, as originally 
proposed, would provide Users with the benefit of a longer period in 
which to order the proposed Partial Cabinet Bundles E and F with a 
reduced monthly rate, giving them more time to evaluate the benefits 
of these bundles as compared to bundles offered by various Hosting 
Users. See Partial Amendment No. 1 at 3-4.
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III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act,\32\ 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.\33\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\34\ 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.'' 
\35\ 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.'' \36\ Both the D.C. Circuit and the Commission have 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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    \32\ 15 U.S.C. 78s(b)(2)(C).
    \33\ 15 U.S.C. 78s(b)(2)(C)(i).
    \34\ 15 U.S.C. 78s(b)(2)(C)(ii). See also 17 CFR 201.700(b)(3).
    \35\ 17 CFR 201.700(b)(3).
    \36\ 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.\37\ 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. 
Although the D.C. Circuit vacated and remanded for further proceedings, 
it accepted the Commission's articulated ``market-based approach'' for 
assessing fees.\38\
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    \37\ See NetCoalition v. SEC, 615 F.3d 525, 534-35, 539-44 (D.C. 
Cir. 2010) (``NetCoalition I'').
    \38\ Id.
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    Under the market-based approach, the Commission considers ``whether 
the exchange was subject to significant competitive forces in setting 
the terms of its proposal . . ., including the level of any fees.'' 
\39\ 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.\40\ 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.'' \41\
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    \39\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74781 (December 9, 2008) (2008 ArcaBook Approval 
Order).
    \40\ Id.
    \41\ Id.
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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.\42\ The Securities 
Industry and Financial Markets Association (``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.\43\
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    \42\ See 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]'').
    \43\ See In the Matter of the Application of SIFMA, Securities 
Exchange Act Release No. 72182, (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.\44\ The Commission held that 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

[[Page 55675]]

Commission stated specifically that it was not making a determination 
that the fees themselves were not fair and reasonable. The Commission 
also explained that it was possible the challenged fees could be shown 
to be consistent with the Act, but that the evidence provided by the 
exchanges failed to satisfy their burden on the existing record. 
Accordingly, the Commission set those fees aside.\45\ After an appeal 
by the affected exchanges, the D.C. Circuit issued its opinion, holding 
that Section 19(d) of the Act is not available as a means to challenge 
the reasonableness of generally-applicable fee rules, vacated the 
Commission's decision, and remanded for proceedings consistent with the 
court's opinion.\46\
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    \44\ 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''), vacated on other grounds, NASDAQ Stock Mkt., LLC v. 
SEC, 961 F.3d 421 (D.C. Cir. 2020). See text accompanying note 46 
infra.
    \45\ See id. at 17-54. 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 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. 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. 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. See id.
    \46\ See NASDAQ Stock Mkt., LLC v. SEC, 961 F.3d 421 (D.C. Cir. 
2020).
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2. Susquehanna
    In August 2017, the D.C. Circuit issued its decision in Susquehanna 
International Group v. SEC.\47\ 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.\48\ The court found that the Commission's 
analysis was flawed in that the Commission relied too heavily on OCC's 
representations rather than performing an independent analysis of the 
Capital Plan or critically evaluating OCC's analysis of the Plan.\49\ 
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.'' \50\ Nor, according to the court, 
could the Commission reach a conclusion ``unsupported by substantial 
evidence.'' \51\ The D.C. Circuit remanded the case to the Commission 
for further proceedings.
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    \47\ 866 F.3d 442 (D.C. Cir. 2017).
    \48\ See id. at 447 (citing NetCoalition I).
    \49\ See id.
    \50\ Id.
    \51\ 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.\52\ 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.\53\
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    \52\ See Securities Exchange Act Release No. 85121 (February 13, 
2019), 84 FR 5157 (February 20, 2019) (SR-OCC-2015-02).
    \53\ Id. at 5157.
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B. The Proposed Rule Change at Issue Here

    As discussed above, the Commission applies a market-based approach 
to assessing proprietary market data fees, which has also been applied 
to connectivity fees.\54\ Under the market-based approach, the 
Commission considers ``whether the exchange was subject to significant 
competitive forces in setting the terms of its proposal . . ., 
including the level of any fees.'' \55\ 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.\56\ 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.'' \57\
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    \54\ See Section III.A.1, supra.
    \55\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74781 (December 9, 2008) (2008 ArcaBook Approval 
Order). See also NetCoalition I, supra note 37 at 535, and SIFMA 
Decision, supra note 44 at 22.
    \56\ Id.
    \57\ Id.
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    In support of the proposals, the Exchanges argue principally that 
the proposed Partial Cabinet Bundles and fees therefor are subject to 
significant competitive forces because they are offered in a 
competitive environment where substitutes are available.\58\ 
Specifically, the proposal states that the Exchanges ``operate in a 
highly competitive market in which exchanges and other vendors (e.g., 
Hosting Users) offer co-location services as a means to facilitate the 
trading and other market activities of those market participants who 
believe that co-location enhances the efficiency of their 
operations.\59\ In the First NYSE Response, the Exchanges further state 
that Hosting Users can and do offer a competing substitutable 
product.\60\ In the Second NYSE Response, the Exchanges add that, 
currently, 89 percent of customers receiving bundled services via the 
Mahwah Data Center receive them from Hosting Users, while only 11 
percent purchase them from the Exchanges as one of the existing Partial 
Cabinet Bundle Options A-D.\61\ They state further that ``the fact that 
the vast majority of customers obtain their bundles from Hosting Users 
shows that the Exchanges are subject to significant competitive forces 
in the market for bundled services.'' \62\
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    \58\ See infra Section II.B.2.
    \59\ See Notice, 86 FR at 8445.
    \60\ See First NYSE Response at 7-8.
    \61\ See Second NYSE Response at 1.
    \62\ See Second NYSE Response at 1.
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    In addition, the Exchanges state that it is reasonable to set 
monthly charges of $18,000 for an Option E bundle (a $4,000 increase 
over Option C) and $19,000 for an Option F bundle (a $4,000 increase 
over Option D), ``which reflects the fact that the Exchange will have 
to supply multiple 40 Gb connections in the Option E and F bundles, as 
opposed to the 10 Gb connections included in the Option C and D.'' \63\ 
They also urge that disapproval of the proposal would be unfair and 
would harm competition. The Commission's discussion below begins with 
the Exchanges' competition argument based on substitutability, and then 
turns to consideration of the Exchanges' other arguments.
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    \63\ See Notice, 86 FR at 8445.
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    After careful consideration, the Commission is disapproving the 
proposed rule changes, as modified by Partial Amendment No. 1, because 
the information before us is insufficient to support a finding that the 
proposed rule changes are consistent with the requirements of the Act. 
Specifically, the Commission is unable to find that the proposed rule 
changes are consistent with: (1) Section 6(b)(4) of the Act,\64\ 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,\65\ which requires that the rules

[[Page 55676]]

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,\66\ 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 proposal, the Commission disapproves the proposed rule changes.\67\
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78f(b)(4).
    \65\ 15 U.S.C. 78f(b)(5).
    \66\ 15 U.S.C. 78f(b)(8).
    \67\ In disapproving the proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f), and text 
accompanying notes 92-94 infra.
---------------------------------------------------------------------------

1. The Exchanges' Competition-Based Argument in Support of the Proposed 
Fee Rules Lacks Sufficient Information for the Commission To Determine 
Whether the Proposed Rule Changes Are Consistent With the Act
    In their proposals, the Exchanges state that they operate ``in a 
highly competitive market in which exchanges and other vendors (e.g., 
Hosting Users) offer co-location services as a means to facilitate the 
trading and other market activities of those market participants who 
believe that co-location enhances the efficiency of their operations.'' 
\68\ In the First NYSE Response, they state that competition is 
demonstrated because substitutes for the proposed services are readily 
available from third-party providers, and specifically from the 
Exchanges' Hosting Users.\69\ They also state that Partial Cabinet 
Bundle Options E and F are proposed in response to customer interest 
and for the purpose of competing with bundled services offered by 
Hosting Users.\70\ The Exchanges further state that Hosting Users are 
third parties that pay a monthly fee to the Exchanges in exchange for 
permission to subdivide cabinets and resell those partial cabinets, 
along with other services, and, in this way, Hosting Users are third 
parties that offer services in direct competition with the 
Exchanges.\71\ As noted above, the Exchanges state that competition is 
demonstrated by the fact that 89% of customers obtain their bundle 
services from alternate providers despite the availability of Partial 
Cabinet Bundle Options A-D from the Exchanges.\72\
---------------------------------------------------------------------------

    \68\ See Notice, 86 FR at 8445.
    \69\ See First NYSE Response at 7.
    \70\ See First NYSE Response at 7-8 (stating, ``approximately 
10% of Users in colocation are Hosting Users capable of selling such 
bundles to customers,'' and ``the Exchanges believe that at least 
one of the Hosting Users currently does offer a Hosting User Bundle 
that includes 40 Gb connections.'').
    \71\ See id. at 7.
    \72\ See Second NYSE Response at 2.
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    The Exchanges have not provided sufficient information to 
demonstrate that the market for the proposed Partial Cabinet Bundles is 
competitive. As an initial matter, the Exchanges' broad rationale that 
fees for proposed Partial Cabinet Bundle Options E and F are, like fees 
for all co-location services, constrained by competition, is not 
supported with data and analysis. They state that ``fees charged for 
co-location services are constrained by the active competition for the 
order flow of, and other business from, such market participants,'' and 
that ``if a particular exchange charges excessive fees for co-location 
services, affected market participants will opt to terminate their co-
location arrangements with that exchange [and pursue alternative 
strategies].'' \73\ However, they offer no evidence that substitutes 
for Partial Cabinet Bundle Options E and F may be available from other 
exchanges or vendors outside of the Mahwah Data Center. Instead, the 
Exchanges argue that substitutable services are available from Hosting 
Users.\74\
---------------------------------------------------------------------------

    \73\ See Notice, 86 FR at 8446.
    \74\ See First NYSE Response at 9-11.
---------------------------------------------------------------------------

    Based on the information provided, it appears that the market for 
the proposed Partial Cabinet Bundles could be accessed in two ways: 
Directly from the Exchanges, or from Hosting Users offering a similar 
product.\75\ But it remains unclear how the presence of Hosting Users 
brings significant competitive forces to bear on Exchange pricing of 
the proposed products, if, as it appears, Hosting User access to the 
key services comprising the proposed Partial Cabinet Bundles is 
controlled by the Exchanges and the ability of a Hosting User to resell 
cabinet space and thereby obtain Hosted Customer business is contingent 
on payment of $1,000 per Hosted Customer for each cabinet in which such 
Hosted Customer is hosted.
---------------------------------------------------------------------------

    \75\ In the First NYSE Response, the Exchanges state that 
acquiring a partial cabinet from Hosting Users is not the only way 
that a customer could acquire the services contained in the 
proposal. They state that customers could buy a partial cabinet from 
the Exchanges without any network connectivity, then cross-connect 
to a Hosting User for access to network connections. See First NYSE 
Response at 8. Such partial cabinet and network connectivity would 
have to be purchased from the Exchanges, however, as would the cross 
connects.
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    The Exchanges argue that they compete with their Hosting Users, and 
that the proposal is an attempt to ``to maintain a more level playing 
field between the Exchanges and the Hosting Users, who compete for 
Hosted Customer business.'' \76\ They also urge that Hosting Users have 
freedom in the relevant market that the Exchanges lack, stating: 
``Hosting Users are free to create a wide array of bespoke bundles of 
services for specific customers, charging whatever fees those customers 
will pay, without having to file such services with the Commission. 
Because Hosting Users are not required to pre-clear such bundles with 
the Commission, they have unfettered freedom to compete with each other 
in the market for partial cabinet bundled services.'' \77\ The 
Exchanges state that there are currently five Hosting Users available 
to offer similar substitutes, with at least one currently believed to 
have a customer.\78\ Further, the Exchanges state that they do not 
expect the availability of proposed Options E and F to cause customers 
that currently obtain bundled services from Hosting Users to migrate 
their business to the Exchanges, because the freedoms that Hosting 
Users have put Hosting Users in a superior competitive position 
relative to the Exchanges in the provision of bundled services.\79\
---------------------------------------------------------------------------

    \76\ See Notice, 86 FR at 8446.
    \77\ See First NYSE Response at 7 (italics added).
    \78\ See note 70 supra.
    \79\ See Second NYSE Response at 2.
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    These arguments are not sufficient to demonstrate the presence of a 
competitive market for the proposed Partial Cabinet Bundles. In order 
for it to offer the substitute services that the Exchanges claim will 
bring competitive forces to bear on fees, a Hosting User must accept 
the Exchanges' operational environment, purchase the key services 
comprising the Partial Cabinet Bundles (e.g., cabinet space, power, 
bandwidth connections) from the Exchanges, and bear the applicable 
Hosting Fees. In this environment,\80\ the Exchanges impose charges 
that represent a portion of the costs of their competitors, the Hosting 
Users. While offering Options E and F may expand the range of co-
location offerings available, the extent to which these offerings will 
result in Hosting Users being able to offer similar services

[[Page 55677]]

concomitantly with the Exchanges at a competitive price is unclear. The 
evidence regarding Options A-D provided in the Second NYSE Response is 
not evidence regarding Options E-F, and so does not provide support for 
the Exchanges' competition arguments. The Exchanges do not explain how 
Hosting Users may compete with the Exchanges when access to the 
services comprising the proposed Partial Cabinet Bundles is controlled 
by the Exchanges. Neither do they explain how the presence of Hosting 
Users is a force that constrains the Exchanges' pricing decisions.\81\ 
Further, it remains unclear how the proposals would result in a more 
level playing field between the Exchanges and Hosting Users, which the 
Exchanges state is their goal. Because the Exchanges have not provided 
sufficient evidence to establish that competitive forces constrain 
their ability to price the proposed Partial Cabinet Bundles, they must 
provide an alternative basis to support the proposed fees.\82\
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    \80\ As noted above, the physical environment is in space 
proximate to the Exchanges' trading engines and market data systems, 
over which the Exchanges have control.
    \81\ See, e.g., NetCoalition I at 542 (``the existence of a 
substitute does not necessarily preclude market power. . . . Rather, 
whether a market is competitive notwithstanding potential 
alternatives depends on factors such as the number of buyers who 
consider other products interchangeable and at what prices. . . . 
The inquiry into whether a market for a product is competitive, 
therefore, focuses on the customer and, in particular, his price 
sensitivity--in economic terms, the product's `elasticity of 
demand.'''); and id. at 544 (quoting United States v. Microsoft 
Corp., 253 F.3d 34, 53-54 (DCCir.2001) (``The test of reasonable 
interchangeability . . . consider[s] only substitutes that constrain 
pricing in the reasonably foreseeable future, and only products that 
can enter the market in a relatively short time can perform this 
function.'').
    \82\ See supra note 57 and accompanying text.
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2. The Exchanges' Other Arguments Lack Sufficient Information for the 
Commission To Determine Whether the Proposed Rule Changes Are 
Consistent With the Act
    Under the market-based approach, 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 proposal are equitable, fair, 
reasonable, and not unreasonably discriminatory.'' \83\ The Exchanges 
have not done so on the record here.
---------------------------------------------------------------------------

    \83\ See id.
---------------------------------------------------------------------------

    In support of the fee levels proposed for Partial Cabinet Bundle 
Options E and F, the Exchanges state that the $10,000 initial charge is 
reasonable because it is the same as that which Users currently pay 
when choosing the existing Option C or D bundles, which reflects the 
fact that setting up each of these four cabinet options involves a 
similar amount of work for the Exchanges.\84\ They also state that the 
proposed monthly charges of $18,000 for an Option E bundle (a $4,000 
increase over Option C) and $19,000 for an Option F bundle (a $4,000 
increase over Option D) are reasonable because these fees reflect the 
fact that the Exchanges will have to supply more expensive multiple 40 
Gb connections in the Option E and F bundles, as opposed to the 10 Gb 
connections included in the Option C and D bundles.\85\ However, 
although these arguments appear generally to be based on the costs 
incurred by the Exchanges in providing the proposed Partial Cabinet 
Bundles, the Exchanges provide no specific cost information to support 
their arguments. 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.\86\ Without more, these statements do little to inform the 
analysis into the level of the particular fees proposed here.
---------------------------------------------------------------------------

    \84\ See Notice, 86 FR at 8445.
    \85\ Id.
    \86\ See Susquehanna supra note 47, 866 F.3d 442 (D.C. Cir. 
2017).
---------------------------------------------------------------------------

    The Exchanges also assert that the Commission may be applying 
improper standards to the rule filings.\87\ Specifically, the First 
NYSE Response expresses the concern that the Commission may be 
improperly demanding that the Exchanges provide cost data in connection 
with all rule filings, even where the Exchanges have demonstrated that 
sufficient competition exists.\88\ The Exchanges are incorrect. As 
described above, the Commission takes a market-based approach to 
assessing proprietary market data fees, which has also been applied to 
connectivity fees. The Commission considers ``whether the exchange was 
subject to significant competitive forces in setting the terms of its 
proposal . . ., including the level of any fees.'' \89\ 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.\90\ 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.'' \91\
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    \87\ See First NYSE Response at 4-7.
    \88\ See id.
    \89\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74781 (December 9, 2008) (2008 ArcaBook Approval 
Order). See also NetCoalition I, supra note 37 at 535, and SIFMA 
Decision, supra note 44 at 22.
    \90\ Id.
    \91\ Id.
---------------------------------------------------------------------------

    Finally, the Exchanges argue that disapproval of the proposals 
would be harmful to competition.\92\ The Exchanges indicate that their 
inability to offer Partial Cabinet Bundles with 40 Gb connections 
hinders competition with Hosting Users, and may deny more cost 
effective alternatives for Users with minimal power or cabinet space 
demands, but higher bandwidth requirements.\93\ The Commission 
encourages the Exchanges to propose rule changes that enhance 
competition, and the Exchanges are free to refile these fees and 
accompany them with an updated explanation demonstrating that their 
proposals are consistent with the Act.\94\ For the reasons discussed 
above, they have not met this burden on the current record.
---------------------------------------------------------------------------

    \92\ See First NYSE Response at 9-10.
    \93\ See id. at 9.
    \94\ See supra 67.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find that 
the proposed rule changes, as modified by Partial Amendment No. 1, 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,\95\ that the proposed rule changes (SR-NYSE-2021-05, SR-NYSEAMER-
2021-04, SR-NYSEArca-2021-07, SR-NYSECHX-2021-01, SR-NYSENAT-2021-01), 
each as modified by Partial Amendment No 1, be, and hereby are, 
disapproved.
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    \95\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\96\
---------------------------------------------------------------------------

    \96\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21752 Filed 10-5-21; 8:45 am]
BILLING CODE 8011-01-P