[Federal Register Volume 89, Number 44 (Tuesday, March 5, 2024)]
[Notices]
[Pages 15907-15915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04548]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99620; File No. SR-CBOE-2024-008]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt a New Rule Regarding Order
and Execution Management Systems (``OEMS'')
February 28, 2024.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 13, 2024, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to adopt a new rule regarding order and execution management systems
(``OEMS''). The text of the proposed rule change is provided in Exhibit
5.
The text of the proposed rule change is also available on the
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt a rule regarding OEMSs. An OEMS is a
software product that market participants may install on their computer
systems \3\ and use to enter and route orders to trade securities (and
non-securities) \4\ for execution as well as manage their executions
and perform other tasks related to their trading activities.\5\ OEMSs
generally permit users to route orders to other market participants
that use the same OEMS platform or directly to trading venues. OEMS
platforms generally provide their users with the capability to create
orders, route them for execution, and input parameters to control the
size, timing, and other variables of their trades. OEMSs may also
provide users with access to real-time options and stock market data,
as well as certain historical data. Additionally, OEMSs may offer their
users a variety of other tools to manage their trading, such as risk
management tools, analytics, and algorithms. OEMS platforms generally
consist of a ``front-end'' order execution and management trading
platform. These platforms may also include a ``back-end'' platform that
provides a connection to the infrastructure network of the OEMS (and
thus permits users to send orders to other users of that OEMS).
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\3\ For example, the Silexx front-end and back-end platforms
constitute a software application that is installed locally on a
user's desktop.
\4\ Many OEMSs provide execution and management functionality
for multiple asset classes, including U.S. securities, non-U.S.
securities, and non-securities. This filing focuses on OEMS
functionality related to U.S. securities, which are within the
jurisdiction of the Act and the Securities and Exchange Commission
(the ``Commission'').
\5\ This additional functionality is not subject to rule filing
requirements of section 19(b) of the Securities Exchange Act of 1934
(the ``Act''). See, e.g., Securities Exchange Act Release Nos. 82088
(November 15, 2017), 82 FR 55443, 55444 at note 8 (November 21,
2017) (SR-CBOE-2017-068) (``Silexx Approval Order''); and 75302
(June 25, 2015), 80 FR 37685, 37687 at note 10 (July 1, 2015) (SR-
CBOE-2015-062) (``Livevol Approval Order''). The Exchange notes any
real-time or other market data that is subject to these rule filing
requirements is purchased by the OEMS provider in accordance with
the Exchange's (or other national securities exchanges') fees
schedules.
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An OEMS is designed generally to permit a user to route orders
through the platform (1) to an executing broker of that user's choice
with connectivity to the platform, which broker may then send the
orders to any U.S. exchange or trading center of which it is a member,
including Cboe Options (if the broker is a Trading Permit Holder
(``TPH'')); or (2) to any U.S. exchange or trading center of which the
user is a member and to which it has established direct connectivity.
On the Exchange, a TPH user may only establish this direct connectivity
if it separately purchased a port from the Exchange pursuant to the
Exchange's Fees Schedule.\6\ An OEMS is merely software that a TPH can
install on its computer system and use to route orders to ports it
purchases separately from the Exchange--this software is not integrated
with ports, or any other part of the Exchange's trading systems. Thus,
[[Page 15908]]
if [sic]TPH user wants to send an order to the Exchange for execution
from an OEMS platform, it can only do so if it purchases a port from
the Exchange. If a user that is not a broker or TPH wants to send an
order for execution at the Exchange through an OEMS, the user must
route its order from its OEMS software to a broker that is also a TPH,
which broker can then route the order to the Exchange for execution--
either through the same OEMS or a different OEMS. This is true for
OEMSs in general, regardless of whether an OEMS is offered by an
Exchange affiliate or a third-party OEMS. Specifically, if a non-TPH
market participant wants to send an order from its OEMS software, which
happens to be offered by an Exchange affiliate, for execution at the
Exchange, that market participant must route the order to a TPH, which
TPH can then route the order to the Exchange for execution using its
OEMS platform, which may or may not be the same OEMS platform as used
by the initial market participant, through its separately purchased
port.
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\6\ For example, the Financial Information eXchange (``FIX'')
protocol is a vendor-neutral electronic communications protocol for
the exchange of securities order and transaction messages. A TPH may
establish direct connectivity to the Exchange by purchasing a FIX
port or Binary Order Entry (``BOE'') port, depending on the
connection type of its OEMS. The Silexx platform currently permits
connection to an exchange, including Cboe Options, via FIX ports. A
Silexx user that is a member of another securities exchange may
separately purchase a FIX port from that exchange and directly send
orders from its Silexx software to that exchange.
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There is a variety of OEMS software for securities available in the
industry, which may be offered by technology vendors, broker-dealers,
or national securities exchanges (or their affiliates).\7\ The Exchange
does not require the use of any specific OEMS to access the
Exchange.\8\ TPHs and other market participants may use any OEMS
software to send orders to the Exchange for execution and manage those
orders. The Exchange handles all orders it receives in the same manner,
regardless of how those orders were sent to the Exchange. As noted
above, TPHs may send orders in the form of FIX or BOE messages. Once
the Exchange's system receives an order (regardless of whether it is in
FIX or BOE form), the Exchange's system (including the ports through
which orders are routed to the Exchange for execution) is unable to
identify in what manner the order was sent. For example, if a TPH
submits an order from its OEMS platform, even if such OEMS platform is
offered by an Exchange affiliate, the Exchange's system has no way to
identify what OEMS(s) was used to submit that order to the Exchange.
The Exchange's system only sees orders as BOE or FIX messages.\9\ The
Exchange handles all orders in a nondiscretionary manner and in
accordance with its Rules as required by the Act.\10\
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\7\ For example, Cboe Silexx, LLC (``Cboe Silexx''), which is a
wholly owned, direct subsidiary of Cboe Global Markets, Inc.
(``CGM'') (of which the Exchange is also a wholly owned subsidiary)
develops, offers, and maintains an OEMS platform. CGM owns or has
owned or contracted with entities that offered OEMSs (such as
Livevol and PULSe) for which it submitted rule filings. See, e.g.,
Silexx Approval Order; Livevol Approval Order; and Securities
Exchange Act Release no. 62286 (June 11, 2010), 75 FR 34799 (June
18, 2010) (SR-CBOE-2010-051) (``PULSe Approval Order''). The
Exchange is aware of only one other national securities exchange
that offers an OEMS. See Nasdaq Precise, information available at
Nasdaq Precise [verbar] Nasdaq. Examples of non-U.S. securities
exchange affiliated providers (the majority of which are broker-
dealers) of OEMSs that compete with Cboe Silexx include SS&C
Technologies (Eze), FlexTrade Systems (FlexTRADER and other
products), TS Imagine (TS One and TradeSmart), LSEG Data & Analytics
(formerly Refinitiv) (REDI), Bloomberg (execution management
system), Factset (formerly Portware) (execution management system),
Neovest (execution management systems), Dash Financial
Technologies(execution management systems), and Wolverine Execution
Services (WEX Trading Platform).
\8\ For example, use of the Silexx platform (and prior OEMSs
offered by Exchange affiliates) is optional and completely within
the discretion of the user and is not required to access the
Exchange.
\9\ For example, orders submitted to the Exchange via Silexx are
handled in the same manner by the Exchange as orders submitted to
the Exchange via any other OEMS platform. All OEMSs that offer the
ability to establish connectivity to the Exchange use the same
technical specifications to submit messages through those
connections. See Cboe US Options FIX Specification, available at: US
Options FIX Specification (cboe.com); and Cboe Options Exchange
Binary Order Entry Specification, available at: US Options BOE
Specification (cboe.com). Per these specifications, FIX and BOE
messages contain no fields or indicators for which OEMS platform was
used to send the order to the Exchange.
\10\ 17 CFR 240.3b-16(a)(2). What OEMS platform was used to
generate and send an order for execution is unrelated to how that
order will be handled and executed on the Exchange.
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OEMSs are generally not subject to the rule filing requirements
under section 19(b) of the Act.\11\ Historically, however, when CGM (or
its predecessor) acquired entities or assets that have included OEMS
platforms (such as Silexx and Livevol)--thus causing those entities or
assets to become owned by the Exchange or an Exchange affiliate--
Commission staff advised the Exchange that affiliation with those
entities caused the OEMSs to be considered ``facilities'' under the Act
because it could be used to route orders to the Exchange and thus
subject to the rule filing requirements under section 19(b) of the
Act.\12\ Consideration of such platforms as facilities solely because
of Exchange affiliation causes the providers of the these platforms to
operate at a competitive disadvantage compared to other OEMS providers
that are not subject to section 6(b) or 19(b) of the Act, despite
offering substantially similar products and services, connecting to the
Exchange in the same manner, and receiving no benefits or advantages
from the Exchange despite its affiliation.\13\
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\11\ For example, prior to their acquisitions by CGM (or its
predecessor) in 2015 and 2017, the Livevol and Silexx platforms,
respectively, were offered in substantially the same manner as they
are offered as part of the CGM organization. However, the prior
owners of those platforms did not have to submit rule filings to
operate or enhance those platforms and were not otherwise subject to
the requirements of the Act.
\12\ See, e.g., Silexx Approval Order and Livevol Approval
Order.
\13\ The Exchange notes it currently offers certain port fee
waivers to users of the Silexx platform and different pricing for
certain functionality to TPHs and non-TPHs. Because the Commission
has required the Exchange to submit rule filings regarding the
Silexx platform due to the Commission's view that it is a facility
of the Exchange, Cboe Silexx operated at a competitive disadvantage
compared to its competitors as a result of it being subject to rule
filing requirements. At the Commission's request, in connection with
representations Cboe Options made in prior rule filings, Cboe
Options and Cboe Silexx adopted procedures and internal controls
reasonably designed to prevent Cboe Silexx from unfairly receiving
an advantage due to receipt of confidential information as a result
of its relationship with Cboe Options in connection with the
platform or any other business activities. Therefore, despite being
a facility of the Exchange, Cboe Silexx was still required to be on
the same footing as a similarly situated third-party vendor with
respect to things such as system updates. To offset this competitive
disadvantage, the Exchange adopted port fee waivers. While the
Exchange acknowledges the ability to provide this pricing may
demonstrate that the Exchange's ability to act with Cboe Silexx, the
Exchange notes affiliation is not required to offer such pricing, as
it would be technologically possible to provide port fee waivers to
users of any OEMS, as the Exchange could request what type of OEMS
would be connected to a port when such port is purchased in the same
manner it did to determine that a port was for a Silexx platform
(such pricing would subject to Commission review in the same manner
as the Silexx pricing was). However, as discussed below, if the
Exchange adopted procedures and internal controls in accordance with
proposed Rule 3.66, those barriers would prevent Cboe Silexx or any
other Exchange-affiliated OEMS to adopt such fees without submission
of a rule filing.
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Based on its review of relevant facts and circumstances, and as
discussed further below, the Exchange believes an OEMS platform offered
by an Exchange affiliate or pursuant to a contractual relationship
(such as a joint venture) but that is ultimately operated as a separate
business from the Exchange, and thus is operated with respect to the
Exchange on the same terms as third-party OEMSs, is not a facility of
the Exchange within the meaning of the Act and, thus, is not subject to
the rule filing requirement.\14\ The Exchange believes the rules and
fees related to such an OEMS platform are not the ``rules of an
exchange'' \15\ required to be filed with the Commission under the Act.
Such an OEMS platform receives no advantage over other OEMS platforms
as a result of its affiliation with the Exchange and orders from such
an OEMS are handled by the Exchange pursuant to its Rules in
[[Page 15909]]
the same manner as orders from any other OEMSs.
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\14\ See 15 U.S.C. 78c(a)(1) and (2) (definitions of
``exchange'' and ``facility'').
\15\ See 15 U.S.C. 78c(a)(27) (definition of ``rules of an
exchange'').
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To provide clarity and transparency within its Rulebook, the
Exchange proposes to adopt Rule 3.66 to provide that an OEMS platform
operated in a manner independent from the Exchange despite affiliation
with the Exchange will not be deemed a facility of the Exchange.
Specifically, proposed Rule 3.66 provides that for so long as the
Exchange provides or is affiliated with any entity that provides, or
the Exchange or an affiliate has a contractual relationship with any
entity that provides, an OEMS platform, such OEMS will not be regulated
as a facility of the Exchange (as defined in section 3(a)(2) of the
Act) and thus not subject to section 6 of the Act if:
(a) use of the OEMS is voluntary (i.e., solely within the
discretion of a TPH) and not required for a TPH to access to the
Exchange (i.e., the OEMS is a nonexclusive means of access to the
Exchange);
(b) if a TPH using the OEMS establishes a direct connection to the
Exchange via an Exchange port, that connection is established in the
same manner and in accordance with the same terms, conditions, and fees
as any third-party OEMS as set forth in the Exchange's Rules, technical
specifications, and Fees Schedule;
(c) the OEMS (or the entity that owns the OEMS) is not a registered
broker-dealer;
(d) for any orders ultimately routed through the OEMS to the
Exchange:
(1) users and their brokers are solely responsible for routing
decisions; and
(2) the Exchange processes those orders in the same manner as any
other orders received by the Exchange (i.e., orders submitted through
the OEMS to the Exchange receive no preferential treatment on the
Exchange);
(e) any fees charged to a user of the OEMS are unrelated to that
user's Exchange activity or to Exchange fees set forth on the
Exchange's fees schedule;
(f) the OEMS and its users use any premises or service from the
Exchange that is a facility, such as market data, pursuant to the same
terms, conditions, and fees as any other user of Exchange premises and
services as set forth in the Exchange's Rules, technical
specifications, and Fees Schedule;
(g) a third-party not required to register as a national securities
exchange under section 6 of the Act can offer a similar OEMS; and
(h) the Exchange has established and maintains procedures and
internal controls reasonably designed to prevent the OEMS from
receiving any competitive advantage or benefit as a result of its
affiliation/relationship with the Exchange, including the provision of
information to the entity or personnel operating the OEMS regarding
updates to the System (such as technical specifications) until such
information is available generally to similarly situated market
participants.\16\
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\16\ This proposed rule change refers to any OEMS that satisfies
the criteria of proposed Rule 3.66 as a (``Rule 3.66 OEMS''). If the
Commission approves this rule filing, the Exchange intends to
propose in a separate rule filing to delete the Silexx Fee Schedule
from its Rules, as the Exchange believes the Silexx platform is a
Rule 3.66 OEMS.
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The Exchange believes proposed Rule 3.66 will provide clarity
regarding when an OEMS platform does not constitute a facility of the
Exchange in a manner that ensures an OEMS platform (and orders its[sic]
ends[sic] to the Exchange) would receive no advantage over any other
OEMS platform (and orders send[sic] from that platform to the
Exchange), regardless of its affiliation or relationship with the
Exchange.\17\
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\17\ The Exchange notes it may be possible for an OEMS platform
provided by an Exchange affiliate or an entity with which the
Exchange has a business relationship to satisfy a subset of these
criteria or a different set of criteria and still not be a facility
of the Exchange. However, the proposed rule provides certainty with
respect to the non-facility status of an OEMS provided by an
Exchange affiliate or an entity with which the Exchange has a
business relationship that meets this set of criteria.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of section 6(b) of the
Act.\18\ Specifically, the Exchange believes the proposed rule change
is consistent with the section 6(b)(5) \19\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the section 6(b)(5) \20\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ Id.
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In particular, the Exchange believes proposed Rule 3.66 is
consistent with the Act, because it promotes just and equitable
principles of trade and removes impediments to and perfects the
mechanism of a free and open market and a national market system. It
will permit substantially similar OEMS platforms in the industry to
compete on equal footing if they operate with respect to securities
exchanges in the same manner, regardless of their affiliation or other
relationship with a securities exchange. While the rules of an exchange
generally impose requirements on its members and not itself, the
Exchange believes it is appropriate to adopt proposed Rule 3.66,
despite it describing circumstances in which the Exchange will not
submit rule filings.\21\ The Exchange believes it is appropriate to
adopt Rule 3.66 as a stated interpretation of the Exchange, as it will
provide transparency and certainty regarding when an OEMS platform
offered by an affiliate or otherwise by the Exchange is not a facility
of the exchange. The Exchange believes[sic] will benefit the public as
it will contribute to the provision of a competitive market for these
important tools used by market participants, thus making it appropriate
to be filed as a rule of the Exchange.\22\ Similarly, the Exchange
believes descriptions of functionality and fees regarding Rule 3.66
OEMSs, despite their relationship with the Exchange, do not constitute
``rules of an exchange,'' \23\ as such OEMSs are not facilities of an
exchange and thus are not subject to regulation by the Commission under
section 6(b)(5) or section 19(b) of the Act.
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\21\ Other Rules impose certain restrictions on the Exchange,
including with respect to permissible affiliations. See, e.g., Rule
3.62 (which restricts the Exchange's ability to acquire or maintain
an interest in a TPH).
\22\ 15 U.S.C. 78c(a)(27) (defines the term ``rules of an
exchange'' to include, among other things, the ``stated policies,
practices, and interpretations of such exchange . . . as the
Commission, by rule, may determine to be necessary or appropriate in
the public interest or for the protection of investors to be deemed
to be rules of such exchange . . . .'').
\23\ Id.
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D.C. Circuit Test
Based on the Exchange's review of relevant facts and circumstances,
the Exchange has concluded that a Rule 3.66 OEMS would not be a
facility that is part of the Exchange, and thus is not subject to the
SRO rule filing requirements under the Act. To determine whether a
service or property is a facility of the Exchange subject to the rule
filing requirements of section 19(b) of the Act, it must be determined
[[Page 15910]]
whether the service or property satisfies a two-pronged test (``D.C.
Circuit Test''):
1. the service or property must fall within the definition of
``facility'' in section 3(a)(2) of the Act; and
2. the service or property must be the type of facility that is
part of the definition of ``exchange'' in section 3(a)(1) of the
Act.\24\
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\24\ Intercontinental Exch., Inc. (ICE), et al. v. SEC, 23 F.4th
1013, 1024 (D.C. Cir. 2022) (``. . . only the rules of an SRO are
subject to a filing requirement, and the rules of a facility are not
rules of an SRO unless that facility is part of an SRO.'')
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D.C. Circuit Test Prong 1: A Rule 3.66 OEMS Does Not Fall Within the
Definition of ``Facility''
Pursuant to the first prong of the D.C. Circuit Test, the Exchange
first considers whether a Rule 3.66 OEMS fits within the definition of
a facility. Section 3(a)(2) of the Act defines ``facility'' as follows:
The term ``facility'' when used with respect to an exchange
includes its premises, tangible or intangible property whether on
the premises or not, any right to the use of such premises or
property or any service thereof for the purpose of effecting or
reporting a transaction on an exchange (including, among other
things, any system of communication to or from the exchange, by
ticker or otherwise, maintained by or with the consent of the
exchange), and any right of the exchange to the use of any property
or service.\25\
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\25\ 15 U.S.C. 78c(a)(2).
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The Exchange Has No Right To Use a Rule 3.66 OEMS for Purposes of
Effecting or Reporting a Transaction
The Exchange asserts that it does not have any right to use a Rule
3.66 OEMS for the purpose of effecting or reporting a transaction on an
exchange nor is a Rule 3.66 OEMS a system of communication to or from
the Exchange maintained by or with the consent of the Exchange. As
discussed above, one main function of an OEMS platform is for market
participants to use it to create, enter, and route orders to trade
securities (and non-securities) for execution (either directly to
trading venues or to other market participants).\26\ Market
participants may, among other things, use OEMS platforms to enter and
route orders for ultimate execution at a trading venue, which may cause
an OEMS to be deemed to be used for the ``purpose of effecting or
reporting a transaction on an exchange'' under the facility definition.
However, the Exchange has no right to use a Rule 3.66 OEMS (or any
OEMS) for that purpose. Use of an OEMS for purposes of effecting or
reporting a transaction to the Exchange (or any exchange) is solely
within the discretion of the OEMS user. The Exchange does not handle
any orders for the purpose of execution until those orders are received
by its order handler and matching engine system. As further discussed
below, this happens after an order message passes through an Exchange
port and into the Exchange's core trading system. Such an order message
has no indication of from which OEMS the order message originated,
including if it was from a Rule 3.66 OEMS, and thus the Exchange's
handling an execution of the message occurs in accordance with its
Rules. As proposed in Rule 3.66, a Rule 3.66 OEMS would have in place
procedures and internal controls that would prevent the OEMS from
receiving any competitive advantage as a result of its affiliation or
relationship with the Exchange.\27\ Because the Exchange (as further
discussed below) handles and executes all orders its receives in a
nondiscretionary manner pursuant to its Rules, the Exchange has no
influence over or right to use a Rule 3.66 OEMS for purposes of
effecting or reporting transactions.
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\26\ As noted above, OEMS platform provides users with
additional functionality.
\27\ The Exchange notes Silexx and other OEMS previously
operated by an affiliate of the Exchange have adopted information
barriers that satisfy this proposed requirement.
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A Rule 3.66 OEMS Is Not a System of Communication Maintained by or With
the Consent of the Exchange
Similarly, the Exchange notes that a Rule 3.66 OEMS is not a system
of communication to or from the Exchange maintained by or with the
consent of the Exchange. As noted above, users of OEMS platforms \28\
may establish direct connectivity from the computer systems on which
those platforms reside to the Exchange--only after separately
purchasing a port from the Exchange and connecting their systems on
which the OEMSs lie to that port. While it is possible this may cause
the OEMS to be deemed part of a ``system of communication to or from
the exchange,'' a Rule 3.66 OEMS is still not maintained with the
consent of the Exchange, as required by the facility definition. Such
an OEMS is not a system of communication to or from the Exchange
provided for the purpose of executing and managing securities trades on
the Exchange,\29\ but rather on an exchange (or other trading venue).
As required by proposed Rule 3.66(a), a Rule 3.66 OEMS (and OEMS
platform, for that matter) is a voluntary, nonexclusive means of access
to the Exchange. Market participants may or may not use a specific
OEMS, including a Rule 3.66 OEMS, to submit orders for execution at the
Exchange. For example, it is possible that a user of a Rule 3.66 OEMS
never has a single order it sends from that OEMS execute on the
Exchange. Additionally, use of a Rule 3.66 OEMS (or any OEMS for that
matter) is not required to access the Exchange.
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\28\ This includes Silexx as well as third-party OEMSs that have
no affiliation or contractual relationship with the Exchange.
\29\ See ICE, 23 F.4th at 1023.
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Use of a Rule 3.66 OEMS Is Not Required To Access the Exchange
Use of a Rule 3.66 OEMS does not require the user to establish a
direct connection to the Exchange or any other trading venue. In fact,
many users of a Rule 3.66 OEMS may not establish a direct connection to
the Exchange \30\ and instead will use an OEMS platform to route orders
to other market participants (such as brokers) for ultimate routing for
execution, which may be done through the same or different OEMS
platform.\31\ In this case, the OEMS platform would have no
connectivity in any form to the Exchange's core trading system and thus
does not fall within the definition of a facility.\32\ Unlike what is
required for a product or service to be considered a facility, with
respect to execution of orders, the purpose of providing an OEMS
platform (including a Rule 3.66 OEMS) is not to effect a transaction on
the Exchange specifically; the primary
[[Page 15911]]
purpose instead is to effect a transaction at any applicable trading
venue. Moreover, the market for OEMS platforms is diverse enough such
that, even if the Exchange did not submit rule filings related to a
Rule 3.66 OEMS (such as for fees to use the OEMS), the Exchange would
not be able to exploit its control over the marketplace for OEMS
platforms to increase the costs of or limit access to the Exchange.
Market participants would be able to use other OEMSs to access the
Exchange in the same manner as a Rule 3.66 OEMS.\33\
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\30\ In other words, users of a Rule 3.66 OEMS may decide to not
purchase a port from the Exchange, which is required to submit an
order to the Exchange for execution. Purchase of a port from the
Exchange is a separate from and unliked[sic] to the purchase of a
Rule 3.66 OEMS. Additionally, only a TPH may purchase a port from
the Exchange, so users of an OEMS that are not TPHs may never
establish direct connectivity to the Exchange.
\31\ The SEC previously determined that a neutral communications
service that allows an exchange's members to and non-members to
route orders to one another and to execute orders they receive
through that system as they deem fit, but which service does not
effect trade executions or report executed trades to the
consolidated tape[sic]. See Securities Exchange Act Release No.
56237 (August 9, 2007), 72 FR 46118 (August 16, 2007) (SR-NASDAQ-
2007-043) (the Commission noted that it was ``not possible for an
order to be routed to the Nasdaq Market Center via the ACES
system''). Any OEMS user that does not establish direct connectivity
to an Exchange (which is the case for the vast majority of current
Silexx users) would thus be using that OEMS merely to route orders,
which according to the Commission would cause the OEMS to not be a
facility of the Exchange. See id. The Exchange notes that as of
January 30, 2024, of the approximately 700 Silexx platform user log-
ins, only 275 of those users have access to a FIX port that connects
to the Exchange, and thus the majority of Silexx platform users are
able to use Silexx only as a communications service to route orders
to other users, which use the Commission has already deemed to be
outside the definition of a facility of an Exchange.
\32\ See id.
\33\ Contrast with SEC Reply Brief, ICE v. SEC at 4.
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Even if a TPH using a Rule 3.66 OEMS purchases a port from the
Exchange and establishes a direct connection between its computer
systems on which the OEMS platform has been installed and the Exchange,
the Rule 3.66 OEMS is still not connected to the Exchange's core
trading system (see diagram below). Instead, the connection occurs at
the Exchange customer switch. It is at this switch where TPHs may
purchase and obtain access to ports from the Exchange, through which
order messages are sent into the Exchange's order handler and matching
engine. A port ultimately creates a connection between two separate
systems--the TPH's system on which an OEMS may reside and the
Exchange's core trading system. If a TPH has a Rule 3.66 OEMS installed
on its computer system, the TPH could determine to separately purchase
a port and connect that port to that computer system. The port is a
system of communications to the Exchange that transmits messages from
the connecting TPH's system (on which an OEMS platform may be
installed) to the Exchange's order handler and matching engine, where
orders are actually handled and executed, which port is maintained with
the consent of the Exchange and thus constitutes a facility of the
Exchange.\34\ On the other hand, the OEMS platform (which software was
installed on the TPH's computer system--a non-Exchange system) that
connects to the port (i.e., an Exchange-maintained system of
communication) does not cause the OEMS software (including if a Rule
3.66 OEMS) to become integrated with (and thus part of) that system of
communication. As discussed above, ports receive and route to the
appropriate place within the Exchange's core trading system FIX or BOE
messages that contain no information identifying from what OEMS the
messages originated. In other words, ports are Exchange-provided
conduits through which messages are sent from a non-Exchange system
(the TPH's system, which may contain an OEMS platform, including a Rule
3.66 OEMS platform) to an Exchange system (the Exchange's order handler
and matching engine system). A Rule 3.66 OEMS and an Exchange port are
independently maintained and operated systems--the port by the Exchange
and the Rule 3.66 OEMS by the OEMS provider \35\ and OEMS user. Any TPH
may establish direct connectivity to the Exchange by obtaining a port
and connecting at the customer switch, regardless of what OEMS or other
product it uses to submit orders to the Exchange. While the connection
must occur with the consent of the Exchange, because a TPH must
purchase a port from the Exchange, and the Exchange must then assist
with establishing the physical connection at the customer switch, any
TPH that purchases a port establishes this physical connection at the
same place and in the same manner (and subject to the same fees set
forth in the Exchange's Fees Schedule), regardless of the OEMS that TPH
uses.
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\34\ See Cboe Fees Schedule (which contains fees for various
ports).
\35\ As required by proposed Rule 3.66, the Exchange would have
in place procedures and internal controls that would prevent it from
providing an affiliated OEMS provider with any competitive advantage
over other OEMS providers. Additionally, proposed Rule 3.66 would
codify that users and their brokers are solely responsible for
routing decisions of orders through a Rule 3.66 OEMS (this is true
today of any OEMS) and that the Exchange processes all orders it
receives in the same manner (which is also true today).
---------------------------------------------------------------------------
As noted above, the purchase of a port from the Exchange is a
separate transaction from the purchase of a Rule 3.66 OEMS log-in.\36\
The port itself is a facility of the Exchange (and thus subject to rule
filings), but a port and a computer system on which an OEMS is
installed that connects to the customer switch to access a port are
completely separate systems, as demonstrated below:
---------------------------------------------------------------------------
\36\ As the Commission previously stated, it would be possible
to tie fees of a non-facility to fees for, or usage of, any Exchange
services, which fees would then be subject to the rule filing
requirements of section 19(b) of the Act. See id. at 46119.
Therefore, the fact that, for example, the Exchange adopted fees
that tied the Silexx platform to an Exchange usage fee (as noted
above) does not on its face cause the Silexx platform to become a
facility of the Exchange. Rather, it would just require the Exchange
to file the fee with the Commission.
[GRAPHIC] [TIFF OMITTED] TN05MR24.005
The port is ultimately an Exchange-provided conduit through which
messages a TPH wants to send to the Exchange (including order messages
sent for execution on the Exchange) travel. The Exchange takes no part
in the creation or submission of those messages, which is within the
TPH's sole discretion. In this sense, a TPH using a Rule 3.66 OEMS
connects to the Exchange's trading system with the Exchange's consent,
but it does so in the same way that a TPH using any OEMS platform
connects to the Exchange with its consent and is untethered to the
TPH's usage of an OEMS.\37\ The systems on which OEMS platforms reside
are outside of the Exchange's trading systems and infrastructure.
Ultimately, the Exchange's consent to sell a port to a TPH is what
permits a TPH to establish a connection to the Exchange's core trading
system, which consent is unrelated to any software (including a Rule
3.66 OEMS) or hardware the TPH uses to submit an order to the Exchange
through that port. While a system does not need to be directly
connected to the Exchange's matching engine to be deemed a facility, it
needs to be part of a necessary link in the chain of communication that
facilitates access to, and trading activity on, the Exchange.\38\ An
OEMS platform, including a Rule 3.66 OEMS, is not a necessary link in
this chain, as it is not required to access the Exchange or engage in
trading on the Exchange. Instead, a Rule 3.66 OEMS (or any OEMS for
that matter) is one possible means for a TPH to access the chain of
communication that facilitates access to, and trading activity on, the
Exchange. A market participant's purchase of an OEMS log-in, even if a
Rule 3.66 OEMS, is unrelated to whether the market participant intends
to engage in trading options on the Exchange. Unlike an Exchange port,
which a TPH likely purchases for the specific reason of submitting
orders to the Exchange for execution (as the port
[[Page 15912]]
would serve no purpose other than for the TPH to submit orders to the
Exchange), a TPH (or any market participant) purchases an OEMS log-in
for the specific reason of creating and submitting securities orders
(as well as non-securities), which orders may execute only after being
routed to a broker or with submission into a separately purchased
exchange port--the OEMS can serve this purpose for any execution venue
and not solely the Exchange. In the chain of communication that
facilitates access to, and trading activity on, the Exchange, an
Exchange-provided port is the first necessary link in this chain. No
OEMS platform is required to access the Exchange and thus is not a
necessary link in this chain, even an OEMS platform happens to be
offered by an Exchange affiliate.
---------------------------------------------------------------------------
\37\ See proposed Rule 3.66(b).
\38\ See SEC Reply Brief, ICE v. SEC at 33.
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Further, because any Rule 3.66 OEMS would not be a registered
broker-dealer,\39\ any order submitted for execution from an OEMS
platform would need to be handled and submitted to the Exchange for
execution only by a TPH (which must be a broker-dealer). Many OEMS
users are non-brokers, which would require an interim step for those
users' orders to take before those orders could possibly end up at the
Exchange for execution. Additionally, only a TPH may submit an order
into the Exchange for execution, which could create an additional step
that needs to be taken before an order can ultimately end up at the
Exchange.\40\ The OEMS user and its broker, if applicable, that
ultimately routes an order for execution have sole responsible for any
routing decision for that order, including the decision regarding to
where the orders should be routed for execution (to the Exchange or
elsewhere).\41\ Entry into an OEMS is merely one of many steps in an
order's path to ultimate execution at a trading venue, which occurs
outside of the Exchange's core system and outside the data centers at
which the Exchange's system equipment resides (such as NY4).\42\
---------------------------------------------------------------------------
\39\ See proposed Rule 3.66(c).
\40\ For example, suppose a non-broker customer uses an OEMS
(including a an OEMS offered by an Exchange affiliate, such as
Silexx). If that customer wanted to execute an order on the
Exchange, it would first need to route the order from its OEMS to
its broker. At that point, the broker, if a TPH that has established
connectivity to the Exchange, can route the order to the Exchange
(through the same or different or another OEMS); if not a TPH, the
broker must route the order to a TPH (through the same or another
OEMS), which TPH can then submit the order for execution on the
Exchange (through the same or another OEMS).
\41\ See proposed Rule 3.66(d).
\42\ Compare with SEC Reply Brief, ICE v. SEC at 31 (stating
that the exchanges and its affiliates together provide the
infrastructure at the exchanges' data centers that facilitate
interactions between buyers and sellers). A Rule 3.66 OEMS is
operated outside of the Exchange's data center, the ``nerve center''
of the Exchange's operations. See id. at 38.
---------------------------------------------------------------------------
While purchase of an Exchange port by a TPH using a Rule 3.66 OEMS
would establish a connection from that TPH's computer system operating
the OEMS software to the Exchange's trading system, it is not required
or vital and is in fact explicitly not required to access the
Exchange's trading system.\43\ Any TPH that establishes a direct
connection between its computer systems operating any OEMS does so only
upon purchase of a port from the Exchange with the Exchange's consent,
in the same manner, and at the same customer-facing location within the
Exchange's data center cage (the customer switch). Purchase of a log-in
for a Rule 3.66 OEMS does not on its own establish access to the
Exchange's trading system. A TPH using a Rule 3.66 OEMS would need to
receive separately from the Exchange the same consent (i.e., sale of a
port) to establish this connection as a TPH using any other OEMS.
Additionally, a Rule 3.66 OEMS could exist without the consent of an
Exchange and does not owe its existence to the consent of the
Exchange.\44\ For example, if CGM sold Cboe Silexx, it would have no
material impact on how the Silexx platform is operated or maintained.
Further, if the Exchange shutdown, the Silexx platform would continue
to be used in the same manner as it is today, with one fewer ultimate
execution venue.
---------------------------------------------------------------------------
\43\ See ICE, 23 F.4th at 1023 (finding that a connection being
a ``vital and proximate link in a system of communication'' is a
factor as to whether the functionality is a facility of the
exchange).
\44\ See id. This is evidenced by the fact that OEMSs provided
by entities that became affiliated with the Exchange (such as Silexx
and Livevol) due to acquisition by the Exchange's parent company
operated in a substantially similar manner after such acquisition as
they did prior to such acquisition (when they were unaffiliated with
the Exchange). Any upgrades made to those platforms after becoming
affiliated with the Exchange, such as added functionality, could
have occurred in the same manner if the Exchange's parent company
had never purchased the entities providing those OEMSs.
---------------------------------------------------------------------------
D.C. Circuit Test Prong 2: A Rule 3.66 OEMS Does Not Fall Within the
Definition of ``Exchange''
Even if it is determined that an OEMS fits within the statutory
definition of ``facility,'' ``satisfying the statutory definition of
`facility' in Section 3(a)(2) [of the Act] is . . . not sufficient to
subject a facility to the jurisdiction of the Commission; it must also
be the type of facility that section 3(a)(1) [of the Act] includes in
the term `exchange.' '' \45\ section 3(a)(1) of the Act defines
``exchange'' as follows:
---------------------------------------------------------------------------
\45\ See id. at 1024.
The term ``exchange'' means any organization, association, or
group of persons, whether incorporated or unincorporated, which
constitutes, maintains, or provides a market place or facilities for
bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions
commonly performed by a stock exchange as that term is generally
understood, and includes the market place and the market facilities
maintained by such exchange.\46\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78c(a)(1).
Rule 3b-16 under the Act provides further clarity regarding what
does and does not constitute an exchange for purposes of the Act. It
states that ``[a]n organization, association, or group of persons shall
be considered to constitute, maintain, or provide `a market place or
facilities for bringing together purchasers and sellers of securities
or for otherwise performing with respect to securities the functions
commonly performed by a stock exchange,' as those terms are used in
[S]ection 3(a)(1) of the Act . . . if such organization, association,
or group of persons: (1) [b]rings together the orders for securities of
multiple buyers and sellers; and (2) [u]ses established, non-
discretionary methods (whether by providing a trading facility or by
setting rules) under which such orders interact with each other, and
the buyers and sellers entering such orders agree to the terms of a
trade.'' \47\ It goes on to state that ``[a]n organization,
association, or group of persons shall not be considered to constitute,
maintain, or provide `a market place or facilities for bringing
together purchasers and sellers of securities or for otherwise
performing with respect to securities the functions commonly performed
by a stock exchange,' solely because such organization . . . [r]outes
orders to a national securities exchange . . . .'' \48\
---------------------------------------------------------------------------
\47\ 17 CFR 240.3b-16(a).
\48\ 17 CFR 240.3b-16(b).
---------------------------------------------------------------------------
The Exchange believes a Rule 3.66 OEMS is outside the definition of
an exchange, as (1) Rule 3b-16 explicitly excludes OEMS functionality
from that definition and (2) the provider of such an OEMS (Cboe Silexx
or otherwise) and the Exchange together do not constitute a ``group of
persons'' that is providing a marketplace for the purpose of ``bringing
together purchasers and sellers of securities or for otherwise
performing with respect to securities the functions commonly performed
by a stock exchange . . . .'' \49\
---------------------------------------------------------------------------
\49\ As noted above, Cboe Silexx is an affiliate of the Exchange
that offers and operates the Silexx platform. However, the Exchange
is not arguing that being owned and operated by an entity separate
from the Exchange is sufficient reason for an OEMS to not be
considered a facility of an exchange. The Exchange is arguing,
rather, that an entity operates an OEMS that satisfies the specified
proposed criteria is not part of a group of persons with the
Exchange.
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[[Page 15913]]
A Rule 3.66 OEMS Is Excluded From the Definition of Exchange
The Exchange asserts that OEMS functionality is excluded from the
definition of an Exchange. First, the development, maintenance, and
sale of an OEMS does not fit within the definition of an exchange. An
OEMS does not bring together purchasers and sellers of securities.
Rather, market participants use an OEMS to route their securities
orders (directly or indirectly) for execution at a facility that can
match those purchasers and sellers (such as the Exchange, another
national securities exchange, or trading venue). As discussed above, an
order submitted through an OEMS may need to go through multiple steps
and handled by multiple parties (including through a broker and TPH)
before it may be executed on the Exchange, and such execution may
ultimately take place on any exchange. If one market participant
submits a buy order for a security and another market participant
submits a sell order for the same security that is marketable with the
buy order, despite those two orders being within the same OEMS network,
the OEMS cannot bring those orders together for execution; instead, the
OEMS sends those orders to trading venues (in accordance with the
instructions of the users and their brokers), where the buy order is
matched with a sell order and the sell order is matched with a buy
order in accordance with the exchange's nondiscretionary methods used
to match buyers and sellers.\50\
---------------------------------------------------------------------------
\50\ As set forth in proposed Rule 3.66(d)(2), the Exchange's
system processes all orders it receives in the same manner,
regardless of the OEMS used to submit the orders (the Exchange's
order handler and matching engine are unable to distinguish from
which OEMS and order was submitted, as order messages are submitted
in the same format).
---------------------------------------------------------------------------
Second, the Act recognizes that order entry and routing to a
national securities exchange for execution is not a function commonly
performed by [an exchange]. As noted above, Rule 3b-16 under the Act
states that an organization is not considered to provide a marketplace
or facility for bringing together purchasers and sellers of securities
or for otherwise performing with respect to securities the functions
commonly performed by a stock exchange ``solely because such
organization . . . [r]outes orders to a national securities exchange .
. . .'' \51\ An OEMS platform's interaction with the Exchange is solely
its ability to route orders to the Exchange (and can only route orders
directly to the Exchange if the TPH separately purchased an Exchange
port, as discussed above). The Act explicitly excludes this function
from the definition of an exchange, demonstrating the Commission's
intent that systems whose purpose was to route orders to an exchange
should not be subject to the rule filing process.
---------------------------------------------------------------------------
\51\ 17 CFR 240.3b-16(b) (emphasis added).
---------------------------------------------------------------------------
A Rule 3.66 OEMS Provider Is Not Part of a Group of Persons With the
Exchange
The Exchange also asserts that a Rule 3.66 OEMS is not part of a
group of persons with the Exchange that together is performing and
facilitating exchange functions and thus is not considered an exchange.
An entity does not automatically become part of a group of persons with
an exchange because such entity is affiliated with the exchange. As
noted above, Commission staff previously advised the Exchange that its
parent's acquisitions of entities that offered OEMS platforms was
sufficient for those OEMS platforms to become Exchange facilities,
despite those acquisitions resulting in no material changes to the
operation of those platforms, and thus subjected to regulation by and
the submission of rule filings to the Commission.\52\ However,
corporate affiliation is not determinative of what constitutes a
``group of persons''; instead, the facts and circumstances around the
relationship must be considered.\53\ A Rule 3.66 OEMS is not maintained
by the Exchange and is not part of a group of persons with the
Exchange.
---------------------------------------------------------------------------
\52\ Prior to their acquisitions by CGM's predecessor in 2015
and 2017, Livevol and Silexx, respectively, each were operated by a
third-party entity in substantially the same manner as they were
operated after the acquisitions (the Exchange notes it no longer
offers a Livevol OEMS). The Exchange began filing rules for these
OEMSs solely because their operated became affiliated with the
Exchange. See Livevol Approval Order and Silexx Approval Order.
\53\ ``Unaffiliated entities engaged in join ventures or other
concerted activity may or may not, depending upon the circumstances,
be considered a `group of persons' . . . . On the other hand, one
corporation that is affiliated with but not controlled by another
may or may not, depending upon the circumstances, be considered a
`group of persons' . . . .'' See ICE, 23 F.4th at 1024.
---------------------------------------------------------------------------
From a business perspective, an OEMS and the Exchange have
different primary goals and thus a lack of unity of interests.\54\
Despite being owned by the same parent, the Exchange and a Rule 3.66
OEMS are not closely connected, as they have different principal
functions. Specifically, the Exchange's principal function is to
operate its market in accordance with the Act while a Rule 3.66 OEMS's
function is to develop, maintain, and sell the OEMS platform for market
participants (both TPHs and non-TPHs) to execute orders at one of many
trading venues, which may or may not include the Exchange. The
Exchange's business benefits from increased volume on its market (due
to transaction fees), while an OEMS's business benefits from increased
numbers of users (a user's executed volume generally has no impact on
fees that user pays to the OEMS, which fees are generally based on log-
ins and add-on functionality). While it is possible an increase in a
Rule 3.66 OEMS users could lead to increased volume on the Exchange, it
is also possible that such an increase in users results in no increase
in volume on the Exchange.\55\ Use of a Rule 3.66 OEMS would not be
Exchange-specific, as users can ultimately send orders from a Rule 3.66
OEMS to execute on any exchange or trading venue. For example, if a
market participant uses a Rule 3.66 OEMS, that market participant has
the discretion to ultimately send no orders to the Exchange for
execution. Additionally, proposed Rule 3.66 would require that any fees
charged to a user of the OEMS are unrelated to that user's Exchange
activity or to Exchange fees set forth in the Exchange's Fees Schedule.
---------------------------------------------------------------------------
\54\ See ICE, 23 F.4th at 1024-1025 (finding that a unity of
interests between the affiliates was an important component of the
finding that the affiliates were acting as a group of persons).
\55\ As noted above, the Exchange's system has no way to
determine how many orders it receives from a specific OEMS, and the
user of an OEMS may ultimately send no orders to the Exchange for
execution.
---------------------------------------------------------------------------
Further, as noted above and as set forth in proposed Rule 3.66, use
of a Rule 3.66 OEMS would be voluntary and not required to access the
Exchange (as discussed above). The act of entering an order into and
sending an order from a Rule 3.66 OEMS for execution would be one of
many steps an order must take before potential execution at the
Exchange (and one within sole discretion of the OEMS user and its
broker), and that step often precedes other steps that other parties
and other systems must take before ultimate execution at the Exchange.
This is true even if the Rule 3.66 OEMS user is a TPH that has
purchased a port to access the Exchange; market participants often
connect to multiple trading venues, particularly brokers who need to
seek best execution for their customers. The different primary business
functions between the Exchange and a Rule 3.66 OEMS are ultimately not
aligned and
[[Page 15914]]
thus demonstrate a lack of unity of interests between the Exchange and
an OEMS affiliate. Under these circumstances, a Rule 3.66 OEMS would
not be an integral part of the Exchange's system and, in fact, would be
merely one of many options available for customers to use for execution
and management of orders for securities.
Pursuant to proposed Rule 3.66, a Rule 3.66 OEMS would operate on a
level-playing field with other OEMSs. Specifically:
a user of a Rule 3.66 OEMS would establish connectivity to
the Exchange in the same manner as a user of another OEMS;
to the extent an order entered into a Rule 3.66 OEMS
ultimately executes on the Exchange, the Exchange would process that
order in the same manner as all other orders (the Exchange's order
handling system and matching engine have no way to determine through
what OEMS an order was entered);
fees charged to the user of a Rule 3.66 OEMS would be
unrelated to activity on the Exchange;
access to Exchange market data through the OEMS would
occur in accordance with the same terms and conditions applicable to
any other user of that market data; and
the Exchange would adopt information barriers designed to
prevent the Rule 3.66 OEMS from receiving a competitive advantage or
benefit based on its affiliation or relationship with the Exchange.\56\
---------------------------------------------------------------------------
\56\ See proposed Rule 3.66(b), (d)-(f), and (h). Information
barriers are generally viewed as sufficient for TPHs to maintain
different businesses. See, e.g., Rule 8.10 (which requires TPHs to
establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the misuse of material, nonpublic
information by such TPH or persons associated with such TPH). The
Exchange notes it already has such information barriers in place
with respect to Silexx.
---------------------------------------------------------------------------
The proposed criteria set forth in proposed Rule 3.66 would prevent
the Exchange from acting in concert with a Rule 3.66 OEMS.\57\ Despite
being under the same corporate umbrella, these vastly different
businesses would not be acting in concert, as they have completely
different objectives.\58\
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\57\ If the Commission approves this proposed rule change, Rule
3.66 would be subject to SEC oversight. As a result, the Commission
would have the ability to confirm that the Exchange is complying
with the requirements set forth in Rule 3.66 with respect to any
affiliated OEMSs and thus ensure that the Exchange is operating with
respect to such OEMSs in the same manner as it would with respect to
any third-party OEMS.
\58\ See ICE, 23 F.4th at 1024.
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Elimination of Unfair Discrimination
Finally, the Exchange believes the proposed rule change is designed
to prevent unfair discrimination between customers, issuers, brokers,
and dealers. As noted above, requiring the Exchange to submit rule
filings for a Rule 3.66 OEMS causes operation of the OEMS to operate at
a competitive disadvantage within the market. Elimination of this rule
filing requirement will eliminate this discrimination against such an
OEMS operator to the benefit of OEMS customers based on nothing more
than corporate affiliation, despite such OEMS interacting with the
Exchange in the same manner as any other OEMS that is subject to no
rule filing requirement. The Exchange would ultimately treat a Rule
3.66 OEMS operator (and any messages it receives from that OEMS) in the
same manner as any other OEMS operator.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as it has no impact on TPHs' or any market
participants' ability to submit and execute orders on the Exchange.
Market participants that are users of a Rule 3.66 OEMS would be able to
use that platform in the same manner as they would if the OEMS were
otherwise deemed a facility. As set forth in proposed Rule 3.66, the
Exchange will handle all orders it receives in a nondiscretionary
manner as set forth in its Rules, regardless of through which OEMSs the
orders were submitted to the Exchange. Only TPHs will continue to be
able to submit orders directly to the Exchange (using any OEMSs they
choose) by purchasing ports in the same manner and in accordance with
the Exchange Fees Schedule to establish a direct connection to the
Exchange.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the Exchange
believes it would improve competition among OEMSs and permit similarly
situated products to compete on equal footing, ultimately benefitting
all market participants that use these important tools. Other exchanges
may adopt similar rules to establish the same clarity regarding
affiliated OEMSs. This would ensure that all exchanges with affiliated
OEMSs will be subject to the same rule filing, or lack of rule filing,
requirements.
The Exchange believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition. Other market
participants (such as broker-dealers and market participants) generally
offer OEMS platforms in the market. If an OEMS platform is deemed a
facility of the Exchange solely because of its affiliation or
relationship with the Exchange but is otherwise operating on equal
terms as other OEMS platforms available in the market, that facility
determination ultimately burdens competition within the OEMS market.
The Exchange would be required to submit rule filings with respect to
the OEMS platform's functionality and fees despite receiving no benefit
from its relationship with the OEMS platform nor having any right to
use the OEMS platform. However, other providers of OEMS platforms that
compete with the Exchange-affiliated OEMS platform would not be subject
to rule filing requirements or the other obligations to which exchanges
are subject. The Exchange believes this competitive disadvantage for
Exchange-affiliated OEMS platforms harms competition within the OEM
market to the detriment of customers of these products. The Exchange
believes the proposed rule change will level the playing field among
OEMS platforms that are operating with respect to the Exchange in
accordance with the same terms and conditions, which ultimately
benefits customers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 15915]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CBOE-2024-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CBOE-2024-008. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CBOE-2024-008 and should be
submitted on or before March 26, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-04548 Filed 3-4-24; 8:45 am]
BILLING CODE 8011-01-P