[Federal Register Volume 89, Number 120 (Friday, June 21, 2024)]
[Notices]
[Pages 52165-52172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13543]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100341; File No. SR-CboeBZX-2024-051]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fees Schedule Related to Physical Port Fees

June 14, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 7, 2024, Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The 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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[[Page 52166]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Equities'') 
proposes to amend its Fees Schedule. 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://markets.cboe.com/us/equities/regulation/rule_filings/BZX/), 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 amend its fee schedule relating to 
physical connectivity fees.\3\
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    \3\ The Exchange initially filed the proposed fee changes on 
July 3, 2023 (SR-CboeBZX-2023-046). On September 1, 2023, the 
Exchange withdrew that filing and submitted SR-CboeBZX-2023-067. On 
September 29, 2023, the Securities and Exchange Commission issued a 
Suspension of and Order Instituting Proceedings to Determine whether 
to Approve or Disapprove a Proposed Rule Change to Amend its Fees 
Schedule Related to Physical Port Fees (the ``OIP'') in anticipation 
of a possible U.S. government shutdown. On October 2, 2023, the 
Exchange filed the proposed fee change (SR-CboeBZX-2023-080). On 
October 13, 2023, the Exchange withdrew that filing and on business 
date October 16, 2023 submitted SR-CboeBZX-2023-084. On December 12, 
2023, the Exchange withdrew that filing and submitted SR-CboeBZX-
2023-103. On February 9, 2024, the Exchange withdrew that filing and 
submitted SR-CboeBZX-2024-016. On April 9, 2024, the Exchange 
withdrew that filing and submitted SR-CboeBZX-2024-027. On June 7, 
2024, the Exchange withdrew that filing and submitted this filing.
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    By way of background, a physical port is utilized by a Member or 
non-Member to connect to the Exchange at the data centers where the 
Exchange's servers are located. The Exchange currently assesses the 
following physical connectivity fees for Members and non-Members on a 
monthly basis: $2,500 per physical port for a 1 gigabit (``Gb'') 
circuit and $7,500 per physical port for a 10 Gb circuit. The Exchange 
proposes to increase the monthly fee for 10 Gb physical ports from 
$7,500 to $8,500 per port. The Exchange notes the proposed fee change 
better enables it to continue to maintain and improve its market 
technology and services and also notes that the proposed fee amount, 
even as amended, continues to be in line with, or even lower than, 
amounts assessed by other exchanges for similar connections.\4\ The 
Exchange also notes that a single 10 Gb physical port can be used to 
access the Systems of the following affiliate exchanges: the Cboe BYX 
Exchange, Inc., Cboe EDGX Exchange, Inc. (options and equities 
platforms), Cboe EDGA Exchange, Inc., and Cboe C2 Exchange, Inc., 
(``Affiliate Exchanges'').\5\ Notably, only one monthly fee currently 
(and will continue) to apply per 10 Gb physical port regardless of how 
many affiliated exchanges are accessed through that one port.\6\
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    \4\ See e.g., The Nasdaq Stock Market LLC (``Nasdaq''), General 
8, Connectivity to the Exchange. Nasdaq and its affiliated exchanges 
charge a monthly fee of $15,000 for each 10Gb Ultra fiber connection 
to the respective exchange, which is analogous to the Exchange's 
10Gb physical port. See also New York Stock Exchange LLC, NYSE 
American LLC, NYSE Arca, Inc., NYSE Chicago Inc., NYSE National, 
Inc. Connectivity Fee Schedule, which provides that 10 Gb LX LCN 
Circuits (which are analogous to the Exchange's 10 Gb physical port) 
are assessed $22,000 per month, per port.
    \5\ The Affiliate Exchanges are also submitting contemporaneous 
identical rule filings.
    \6\ The Exchange notes that conversely, other exchange groups 
charge separate port fees for access to separate, but affiliated, 
exchanges. See e.g., Securities and Exchange Release No. 99822 
(March 21, 2024), 89 FR 21337 (March 27, 2024) (SR-MIAX-2024-016).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ 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) \9\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange also believes the proposed rule 
change is consistent with Section 6(b)(4) \10\ of the Act, which 
requires that Exchange rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among its Members and other 
persons using its facilities.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
    \10\ 15 U.S.C. 78f(b)(4).
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    The Exchange operates in a highly competitive environment. On May 
21, 2019, the SEC Division of Trading and Markets issued non-rulemaking 
fee filing guidance titled ``Staff Guidance on SRO Rule Filings 
Relating to Fees'' (``Fee Guidance''), which provided, among other 
things, that in determining whether a proposed fee is constrained by 
significant competitive forces, the Commission will consider whether 
there are reasonable substitutes for the product or service that is the 
subject of a proposed fee.\11\ As described in further detail below, 
the Exchange believes substitutable products \12\ are in fact available 
to market participants, including by third-party resellers of the 
Exchange's physical connectivity, and the availability to trade all of 
the products offered at the Exchange at one of the 16 other equities 
exchanges that trade equities or other off-exchange trading platforms.
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    \11\ See Chairman Jay Clayton, Statement on Division of Trading 
and Markets Staff Fee Guidance, June 12, 2019 (``Fee Guidance''). 
The Fee Guidance also recognized that ``products need to be 
substantially similar but not identical to be substitutable.''
    \12\ A substitute, or substitutable good, in economics and 
consumer theory refers to a product or service that consumers see as 
essentially the same or similar-enough to another product. See 
https://www.investopedia.com/terms/s/substitute.asp.
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    The 2019 Fee Guidance also acknowledged that platform competition 
may demonstrate a competitive environment and therefore constrain 
aggregate returns, regardless of the pricing of individual products, 
and that platforms often have joint products.\13\ Exchanges themselves 
are platforms.\14\ Particularly, exchanges are

[[Page 52167]]

multi-sided platforms that facilitate interactions between multiple 
sides of the market--buyers and sellers, companies and investors, and 
traders and market watchers--and their value is dependent on attracting 
users to the multiple sides of the platform. As described in further 
detail below, the Exchange believes that competition among exchanges as 
trading platforms (and between exchanges and alternative trading 
venues) constrain exchanges from charging excessive fees for any 
exchange products, including trading, listings, connectivity and market 
data. As such, fees need not be analyzed from only one side, but rather 
can, and should, be considered within the larger context of the 
platform to test for anti-competitive behavior. And indeed, nothing in 
the Exchange Act requires the individual examination of specific 
product fees in isolation. Rather, the Exchange generally requires the 
rules of an exchange to provide for the ``equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using its facilities.'' \15\
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    \13\ See Fee Guidance.
    \14\ The Supreme Court in Ohio v. American Express Co. 
recognized that, as platforms facilitate transactions between two or 
more sides of a market, their value is dependent on attracting users 
to both sides of the platform (i.e., network effects). See Ohio v. 
American Express Co. 138 S. Ct. 2274, 585 U.S.__(2018).
    \15\ See 15 U.S.C. 78f(b)(4).
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    The Exchange believes the proposed fee change is reasonable as it 
reflects a moderate increase in physical connectivity fees for 10 Gb 
physical ports. Further, the current 10 Gb physical port fee has 
remained unchanged since June 2018.\16\ Since its last increase over 6 
years ago however, there has been notable inflation. Particularly, the 
dollar has had an average inflation rate of 3.76% per year between 2018 
and today, producing a cumulative price increase of approximately 24.8% 
inflation since the fee for the 10 Gb physical port was last 
modified.\17\ Moreover, the Exchange historically does not increase 
fees every year, notwithstanding inflation. Accordingly, the Exchange 
believes the proposed fee of $8,500 is reasonable as it only represents 
an approximate 13% increase from the rate adopted six years ago, 
notwithstanding the cumulative inflation rate of inflation of 24.8%. 
Were the Exchange to adjust fully for inflation, it would be proposing 
a monthly rate of $9,360, which is 10% more than the Exchange is 
actually proposing. To further demonstrate, the Exchange notes that 
$8,500 in 2024 is equivalent to approximately $6,800 in 2018, when 
adjusted for inflation. Accordingly, the Exchange believes the proposed 
rate is also reasonable as it is nearly 20% lower than the rate adopted 
in 2018 (i.e., $7,500) when adjusted for inflation. The Exchange is 
also unaware of any standard that suggests any fee proposal that 
exceeds a certain yearly or cumulative inflation rate is unreasonable, 
and in any event, in this instance the increase is well below the 
cumulative rate. The Exchange also believes its offerings are more 
affordable as compared to similar offerings at competitor 
exchanges.\18\
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    \16\ See Securities and Exchange Release No. 83442 (June 14, 
2018), 83 FR 28675 (June 20, 2018) (SR-CboeBZX-2018-037).
    \17\ See https://www.officialdata.org/us/inflation/2010?amount=1.
    \18\ See e.g., See e.g., The Nasdaq Stock Market LLC 
(``Nasdaq''), General 8, Connectivity to the Exchange. Nasdaq and 
its affiliated exchanges charge a monthly fee of $15,000 for each 
10Gbps Ultra fiber connection to the respective exchange, which is 
analogous to the Exchange's 10Gbps physical port. See also New York 
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago 
Inc., NYSE National, Inc. Connectivity Fee Schedule, which provides 
that 10 Gbps LX LCN Circuits (which are analogous to the Exchange's 
10 Gbps physical port) are assessed $22,000 per month, per port.
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    The Exchange also notes Members and non-Members will continue to 
choose the method of connectivity based on their specific needs and no 
broker-dealer is required to become a Member of, let alone connect 
directly to, the Exchange. There is also no regulatory requirement that 
any market participant connect to any one particular exchange. Market 
participants may voluntarily choose to become a member of one or more 
of a number of different exchanges, of which, the Exchange is but one 
choice. Additionally, any Exchange member that is dissatisfied with the 
proposal is free to choose not to be a member of the Exchange and send 
order flow to another exchange. Moreover, direct connectivity is not a 
requirement to participate on the Exchange. The Exchange also believes 
substitutable products and services are available to market 
participants, including, among other things, other equities exchanges 
that a market participant may connect to in lieu of the Exchange, 
indirect connectivity to the Exchange via a third-party reseller of 
connectivity, and/or trading of any equities product, such as within 
the Over-the-Counter (OTC) markets which do not require connectivity to 
the Exchange. Indeed, there are currently 16 registered equities 
exchanges that trade equities (12 of which are not affiliated with 
Cboe), some of which have similar or lower connectivity fees.\19\ Based 
on publicly available information, no single equities exchange has more 
than approximately 15% of the market share.\20\ Further, low barriers 
to entry mean that new exchanges may rapidly enter the market and offer 
additional substitute platforms to further compete with the Exchange 
and the products it offers. For example, in 2020 alone, three new 
exchanges entered the market: Long Term Stock Exchange (LTSE), Members 
Exchange (MEMX), and Miami International Holdings (MIAX Pearl).
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    \19\ Id.
    \20\ See Cboe Global Markets, U.S. Equities Market Volume 
Summary, Month-to-Date (June 6, 2024), available at https://www.cboe.com/us/equities/market_statistics/.
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    As noted above, there is no regulatory requirement that any market 
participant connect to any one equities exchange, nor that any market 
participant connect at a particular connection speed or act in a 
particular capacity on the Exchange, or trade any particular product 
offered on an exchange. Moreover, membership is not a requirement to 
participate on the Exchange. Indeed, the Exchange is unaware of any one 
equities exchange whose membership includes every registered broker-
dealer. By way of example, as of April 2024 Cboe BYX has 110 members 
that trade equities, Cboe EDGX has 124 members that trade equities, 
Cboe EDGA has 103 members and Cboe BZX has 132 members. There is also 
no firm that is a Member of the Exchange only. Further, based on 
publicly available information regarding a sample of the Exchange's 
competitors, NYSE has 143 members,\21\ IEX has 129 members,\22\ and 
MIAX Pearl has 51 members.\23\
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    \21\ See https://www.nyse.com/markets/nyse/membership.
    \22\ See https://www.iexexchange.io/membership.
    \23\ See https://www.miaxglobal.com/sites/default/files/page-files/20230630_MIAX_Pearl_Equities_Exchange_Members_June_2023.pdf.
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    A market participant may also submit orders to the Exchange via a 
Member broker or a third-party reseller of connectivity. The Exchange 
notes that third-party non-Members also resell exchange connectivity. 
This indirect connectivity is another viable alternative for market 
participants to trade on the Exchange without connecting directly to 
the Exchange (and thus not pay the Exchange connectivity fees), which 
alternative is already being used by non-Members and further constrains 
the price that the Exchange is able to charge for connectivity to its 
Exchange.\24\ The

[[Page 52168]]

Exchange notes that it could, but chooses not to, preclude market 
participants from reselling its connectivity. Unlike other exchanges, 
the Exchange also chooses not to adopt fees that would be assessed to 
third-party resellers on a per customer basis (i.e., fee based on 
number of Members that connect to the Exchange indirectly via the 
third-party).\25\ Particularly, these third-party resellers may 
purchase the Exchange's physical ports and resell access to such ports 
either alone or as part of a package of services. The Exchange notes 
that multiple Members are able to share a single physical port (and 
corresponding bandwidth) with other non-affiliated Members if purchased 
through a third-party re-seller.\26\ This allows resellers to mutualize 
the costs of the ports for market participants and provide such ports 
at a price that may be lower than the Exchange charges due to this 
mutualized connectivity. These third-party sellers may also provide an 
additional value to market participants in addition to the physical 
port itself as they may also manage and monitor these connections, and 
clients of these third-parties may also be able to connect from the 
same colocation facility either from their own racks or using the 
third-party's managed racks and infrastructure which may provide 
further cost-savings. The Exchange believes such third-party resellers 
may also use the Exchange's connectivity as an incentive for market 
participants to purchase further services such as hosting services. 
That is, even firms that wish to utilize a single, dedicated 10 Gb port 
(i.e., use one single 10 Gb port themselves instead of sharing a port 
with other firms), may still realize cost savings via a third-party 
reseller as it relate to a physical port because such reseller may be 
providing a third-party reseller as it relate to a physical port 
because such reseller may be providing a discount on the physical port 
to incentivize the purchase of additional services and infrastructure 
support alongside the physical port offering (e.g., providing space, 
hosting, power, and other long-haul connectivity options). This is 
similar to cell phone carriers offering a new iPhone at a discount (or 
even at no cost) if purchased in connection with a new monthly phone 
plan. These services may reevaluate reselling or offering Cboe's direct 
connectivity if they deem the fees to be excessive. Further, as noted 
above, the Exchange does not receive any connectivity revenue when 
connectivity is resold by a third-party, which often is resold to 
multiple customers, some of whom are agency broker-dealers that have 
numerous customers of their own. For example, there are approximately 
12 third parties who resell Exchange connectivity across the 7 
Affiliated Exchanges, which are all accessible on the same network. 
These third-party resellers collectively maintain approximately 48 
physical ports from the Exchange, but have collectively almost 200 
unique customers downstream, connected through these multi-Exchange 
ports. Therefore, given the availability of third-party providers that 
also offer connectivity solutions, the Exchange believes participation 
on the Exchange remains affordable (notwithstanding the proposed fee 
change) for all market participants, including trading firms that may 
be able to take advantage of lower costs that result from mutualized 
connectivity and/or from other services provided alongside the physical 
port offerings. Because third-party resellers also act as a viable 
alternative to direct connectivity to the Exchange, the price that the 
Exchange is able to charge for direct connectivity to its Exchange is 
constrained. Moreover, if the Exchange were to assess supracompetitve 
rates, members and non-members (such as third-party resellers) alike, 
may decide not to purchase, or to reduce its use of, the Exchange's 
direct connectivity. Disincentivizing market participants from 
purchasing Exchange connectivity would only serve to discourage 
participation on the Exchange which ultimately does not benefit the 
Exchange. Further, the Exchange believes its offerings are more 
affordable as compared to similar offerings at competitor 
exchanges.\27\
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    \24\ Third-party resellers of connectivity play an important 
role in the capital markets infrastructure ecosystem. For example, 
third-party resellers can help unify access for customers who want 
exposure to multiple financial markets that are geographically 
dispersed by establishing connectivity to all of the different 
exchanges, so the customers themselves do not have to. Many of the 
third-party connectivity resellers also act as distribution agents 
for all of the market data generated by the exchanges as they can 
use their established connectivity to subscribe to, and 
redistribute, data over their networks. This may remove barriers 
that infrastructure requirements may otherwise pose for customers 
looking to access multiple markets and real-time data feeds. This 
facilitation of overall access to the marketplace is ultimately 
beneficial for the entire capital markets ecosystem, including the 
Exchange, on which such firms transact business.
    \25\ See, e.g., Nasdaq Price List--U.S. Direct Connection and 
Extranet Fees, available at, US Direct-Extranet Connection 
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) 
(SR-NASDAQ-2017-114).
    \26\ For example, a third-party reseller may purchase one 10 Gb 
physical port from the Exchange and resell that connectivity to 
three different market participants who may only need 3 Gb each and 
leverage the same single port.
    \27\ See e.g., See e.g., The Nasdaq Stock Market LLC 
(``Nasdaq''), General 8, Connectivity to the Exchange. Nasdaq and 
its affiliated exchanges charge a monthly fee of $15,000 for each 
10Gbps Ultra fiber connection to the respective exchange, which is 
analogous to the Exchange's 10Gbps physical port. See also New York 
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago 
Inc., NYSE National, Inc. Connectivity Fee Schedule, which provides 
that 10 Gbps LX LCN Circuits (which are analogous to the Exchange's 
10 Gbps physical port) are assessed $22,000 per month, per port.
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    Accordingly, vigorous competition among national securities 
exchanges provides many alternatives for firms to voluntarily decide 
whether direct connectivity to the Exchange is appropriate and 
worthwhile, and as noted above, no broker-dealer is required to become 
a Member of the Exchange, let alone connect directly to it. In the 
event that a market participant views the Exchange's proposed fee 
change as more or less attractive than the competition, that market 
participant can choose to connect to the Exchange indirectly or may 
choose not to connect to that exchange and connect instead to one or 
more of the other 12 non-Cboe affiliated equities markets. Indeed, 
market participants are free to choose which exchange to use to satisfy 
their business needs. Moreover, Moreover, if the Exchange were to 
assess supracompetitve rates, members and non-members alike, may decide 
not to purchase, or to reduce its use of, the Exchange's direct 
connectivity. Disincentivizing market participants from purchasing 
Exchange connectivity would only serve to discourage participation on 
the Exchange which ultimately does not benefit the Exchange. For 
example, if the Exchange charges excessive fees, it may stand to lose 
not only connectivity revenues but also revenues associated with the 
execution of orders routed to it, and, to the extent applicable, market 
data revenues. The Exchange believes that this competitive dynamic 
imposes powerful restraints on the ability of any exchange to charge 
unreasonable fees for connectivity. Notwithstanding the foregoing, the 
Exchange still believes that the proposed fee increase is reasonable, 
equitably allocated and not unfairly discriminatory, even for market 
participants that determine to connect directly to the Exchange for 
business purposes, as those business reasons should presumably result 
in revenue capable of covering the proposed fee.
    Additionally, in connection with a proposed amendment to the 
National Market System Plan Governing the Consolidated Audit Trail 
(``CAT NMS Plan'') the Commission again discussed the existence of 
competition in the marketplace generally, and particularly for 
exchanges with unique business

[[Page 52169]]

models.\28\ The Commission recognized that while some exchanges may 
have a unique business model that is not currently offered by 
competitors, a competitor could create similar business models if 
demand were adequate, and if a competitor did not do so, the Commission 
believes it would be likely that new entrants would do so if the 
exchange with that unique business model was otherwise profitable.\29\
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    \28\ See Securities Exchange Act Release No. 86901 (September 9, 
2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
    \29\ Id.
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    As noted above, exchanges also compete as platforms. In the context 
of the competition among platforms, different exchanges operate a 
variety of different business models. In fact, there are a number of 
ways an exchange can differentiate itself, such as by pricing 
structure, technology and functionality offerings, and products. As 
discussed above, market participants can access the exchange without 
purchasing anything from an exchange, instead using third-party routers 
and data. For those whose business models necessitate the purchase of 
some mix of trading, connectivity, and data services, there are a 
variety of options at different price points, allowing market 
participants to exercise choice, and forcing exchanges to compete on 
their offerings and prices. Further, all elements of the platform--
trade executions, market data, connectivity, membership, and listings--
operate in concert. For example, trade executions increase the value of 
market data; market data functions as an advertisement for on-exchange 
trading; listings increase the value of trade executions and market 
data; and greater liquidity on the exchange enhances the value of ports 
and connectivity services. As such, demand for one set of platform 
services depends on the demand for other services and therefore to make 
its platform attractive to multiple constituencies, an exchange must 
consider inter-side externalities. In assessing competition for 
exchange services, exchanges must also consider not only explicit 
costs, such as fees for trading, market data, and connectivity, but the 
implicit costs, such as realized spreads, of trading on an exchange. 
When accounting for explicit and implicit costs, research has found 
that competition has largely equalized all-in trading costs to users 
across exchanges.\30\ For example, data has shown that venues with the 
highest explicit costs (typically inverted and fee-fee venues) have the 
lowest implicit costs from markouts \31\ and vice versa.\32\ Implicit 
costs explain how venues with higher explicit costs manage to compete 
with seemingly much cheaper venues (and conversely, how exchanges with 
higher implicit costs use lower fees to compete).\33\ Additional 
research also confirms that market participants route trades in a way 
that not only accounts for explicit and implicit costs--but also very 
efficiently values opportunity costs, like lower odds of getting a fill 
on inverted venues.\34\ As such, the Exchange believes the proposed fee 
change is reasonable as exchanges are constrained from charging 
excessive fees for any exchange product, including physical 
connectivity.
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    \30\ Mackintosh, Phil & Normyle, Michael. ``How Exchanges 
Compete: An Economic Analysis of Platform Competition.'' Nasdaq, 
March 2024, https://www.nasdaq.com/How-Exchanges-Compete-An-Economic-Analysis-of-Platform-Competition
    \31\ Per-trade markout is a measure of theoretical profitability 
from the perspective of a liquidity provider.
    \32\ Mackintosh, Phil & Normyle, Michael. ``How Exchanges 
Compete: An Economic Analysis of Platform Competition.'' Nasdaq, 
March 2024, https://www.nasdaq.com/How-Exchanges-Compete-An-Economic-Analysis-of-Platform-Competition
    \33\ See id. For example, research by Nasdaq found that it is 
over 60% more expensive to trade on the costliest exchange than on 
the cheapest. As Nasdaq noted, such a sizeable disparity suggests 
that there is another factor that keeps these exchanges in 
competition. Specifically, when implicit costs are considered, the 
difference in cost to trade is minimized.
    \34\ Bershova, Nataliya & Jaquet, Paul. (2019). Execution 
Quality and Fee Structure: Passive Lit Executions. Bernstein 
Electronic Trading, Execution Research.
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    The Exchange also believes the proposed fee increase is reasonable 
in light of recent and anticipated connectivity-related upgrades and 
changes. The Exchange and its affiliated exchanges recently launched a 
multi-year initiative to improve Cboe Exchange Platform performance and 
capacity requirements to increase competitiveness, support growth and 
advance a consistent world class platform. The goal of the project, 
among other things, is to provide faster and more consistent order 
handling and matching performance for options, while ensuring quicker 
processing time and supporting increasing volumes and capacity needs. 
For example, the Exchange recently performed switch hardware upgrades. 
Particularly, the Exchange replaced existing customer access switches 
with newer models, which the Exchange believes resulted in increased 
determinism. The recent switch upgrades also increased the Exchange's 
capacity to accommodate more physical ports by nearly 50%. Network 
bandwidth was also increased nearly two-fold as a result of the 
upgrades, which among other things, can lead to reduce message queuing. 
The Exchange also believes these newer models result in less natural 
variance in the processing of messages. The Exchange notes that it 
incurred costs associated with purchasing and upgrading to these newer 
models, of which the Exchange has not otherwise passed through or 
offset.
    As of April 1, 2024, market participants also having the option of 
connecting to a new data center (i.e., Secaucus NY6 Data Center 
(``NY6'')), in addition to the current data centers at NY4 and NY5. The 
Exchange made NY6 available in response to customer requests in 
connection with their need for additional space and capacity. In order 
to make this space available, the Exchange expended significant 
resources to prepare this space, and will also incur ongoing costs with 
respect to maintaining this offering, including costs related to power, 
space, fiber, cabinets, panels, labor and maintenance of racks. The 
Exchange also incurred a large cost with respect to ensuring NY6 would 
be latency equalized, as it is for NY4 and NY5.
    The Exchange also has made various other improvements since the 
current physical port rates were adopted in 2018. For example, the 
Exchange has updated its customer portal to provide more transparency 
with respect to firms' respective connectivity subscriptions, enabling 
them to better monitor, evaluate and adjust their connections based on 
their evolving business needs. The Exchange also performs proactive 
audits on a weekly basis to ensure that all customer cross connects 
continue to fall within allowable tolerances for Latency Equalized 
connections. Accordingly, the Exchange expended, and will continue to 
expend, resources to innovate and modernize technology so that it may 
benefit its Members and continue to compete among other equities 
markets. The ability to continue to innovate with technology and offer 
new products to market participants allows the Exchange to remain 
competitive in the equities space which currently has 16 equities 
markets and potential new entrants. If the Exchange were not able to 
assess incrementally higher fees for its connectivity, it would 
effectively impact how the Exchange manages its technology and hamper 
the Exchange's ability to continue to invest in and fund access 
services in a manner that allows it to meet existing and anticipated 
access demands of market participants. Disapproval of fee changes such 
as the proposal herein, could also have the adverse effect of 
discouraging an exchange from improving its operations and implementing

[[Page 52170]]

innovative technology to the benefit of market participants if it 
believes the Commission would later prevent that exchange from 
recouping costs and monetizing its operational enhancements, thus 
adversely impacting competition.
    The Exchange also believes the proposed fee is reasonable as it is 
still in line with, or even lower than, amounts assessed by other 
exchanges for similar connections.\35\ Indeed, the Exchange believes 
assessing fees that are a lower rate than fees assessed by other 
exchanges for analogous connectivity (which were similarly adopted via 
the rule filing process and filed with the Commission) is reasonable. 
As noted above, the proposed fee is also the same as is concurrently 
being proposed for its Affiliate Exchanges. Further, Members are able 
to utilize a single port to connect to all of its Affiliate Exchanges 
and will only be charged one single fee (i.e., a market participant 
will only be assessed the proposed $8,500 even if it uses that physical 
port to connect to the Exchange and another (or even all 6) of its 
Affiliate Exchanges. Particularly, the Exchange believes the proposed 
monthly per port fee is reasonable, equitable and not unfairly 
discriminatory since as the Exchange has determined to not charge 
multiple fees for the same port. Indeed, the Exchange notes that 
several ports are in fact purchased and utilized across one or more of 
the Exchange's affiliated Exchanges (and charged only once).
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    \35\ See e.g., The Nasdaq Stock Market LLC (``Nasdaq''), General 
8, Connectivity to the Exchange. Nasdaq and its affiliated exchanges 
charge a monthly fee of $15,000 for each 10Gb Ultra fiber connection 
to the respective exchange, which is analogous to the Exchange's 
10Gb physical port. See also New York Stock Exchange LLC, NYSE 
American LLC, NYSE Arca, Inc., NYSE Chicago Inc., NYSE National, 
Inc. Connectivity Fee Schedule, which provides that 10 Gb LX LCN 
Circuits (which are analogous to the Exchange's 10 Gb physical port) 
are assessed $22,000 per month, per port.
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    The Exchange also believes that the proposed fee change is not 
unfairly discriminatory because it would be assessed uniformly across 
all market participants that purchase the physical ports. The Exchange 
believes increasing the fee for 10 Gb physical ports and charging a 
higher fee as compared to the 1 Gb physical port is equitable as the 1 
Gb physical port is 1/10th the size of the 10 Gb physical port and 
therefore does not offer access to many of the products and services 
offered by the Exchange (e.g., ability to receive certain market data 
products). Thus, the value of the 1 Gb alternative is lower than the 
value of the 10 Gb alternative, when measured based on the type of 
Exchange access it offers. Moreover, market participants that purchase 
10 Gb physical ports utilize the most bandwidth and therefore consume 
the most resources from the network. The Exchange also anticipates that 
firms that utilize 10 Gb ports will benefit the most from the 
Exchange's investment in offering NY6 as the Exchange anticipates there 
will be much higher quantities of 10 Gb physical ports connecting from 
NY6 as compared to 1 Gb ports. Indeed, the Exchange notes that 10 Gb 
physical ports account for approximately 90% of physical ports across 
the NY4, NY5, and NY6 data centers, and to date, 80% of new port 
connections in NY6 are 10 Gb ports. As such, the Exchange believes the 
proposed fee change for 10 Gb physical ports is reasonably and 
appropriately allocated.
    The Exchange lastly notes that it is not required by the Exchange 
Act, nor any other rule or regulation, to undertake a cost-of-service 
or rate-making approach with respect to fee proposals. Moreover, 
Congress's intent in enacting the 1975 Amendments to the Act was to 
enable competition--rather than government order--to determine prices. 
The principal purpose of the amendments was to facilitate the creation 
of a national market system for the trading of securities. Congress 
intended that this ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.'' \36\ Other provisions of the Act confirm that intent. 
For example, the Act provides that an exchange must design its rules 
``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.'' \37\ Likewise, the Act grants the 
Commission authority to amend or repeal ``[t]he rules of [an] exchange 
[that] impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of this chapter.'' \38\ In short, the 
promotion of free and open competition was a core congressional 
objective in creating the national market system.\39\ Indeed, the 
Commission has historically interpreted that mandate to promote 
competitive forces to determine prices whenever compatible with a 
national market system. Accordingly, the Exchange believes it has met 
its burden to demonstrate that its proposed fee change is reasonable 
and consistent with the immediate filing process chosen by Congress, 
which created a system whereby market forces determine access fees in 
the vast majority of cases, subject to oversight only in particular 
cases of abuse or market failure. Finally, and importantly, the 
Exchange believes that, even if it were possible as a matter of 
economic theory, cost-based pricing for the proposed fee would be so 
complicated that it could not be done practically. Indeed, the Exchange 
believes that classification of costs could likely not be done without 
on-going debate over formulas for allocation,\40\ continual auditing, 
and considerable expense. The Exchange also believes cost-based 
analysis could create disincentives to reduce costs through efficient 
operation or innovation. Moreover, the industry could experience 
frequent rate increases based on escalating expense levels. The 
Exchange lastly cautions that as disputes arise regarding the 
appropriate measure and calculation of relevant costs and allocation of 
common costs, the Commission could find itself engaging in the kind of 
rigid ratemaking not contemplated by Section 11A of the Exchange Act 
and which the Commission has historically sought to avoid.
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    \36\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.) 
(emphasis added)
    \37\ 15 U.S.C. 78f(b)(5).
    \38\ 15 U.S.C. 78f(8).
    \39\ See also 15 U.S.C. 78k-l(a)(1)(C)(ii) (purposes of Exchange 
Act include to promote ``fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets 
other than exchange markets''); Order, 73 FR at 74781 (``The 
Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the SROs and the 
national market system.'').
    \40\ See e.g., letter from Brian Sopinsky, General Counsel, 
Susquehanna International Group, LLP (``SIG''), to Vanessa 
Countryman, Secretary, Commission, dated February 7, 2023, letters 
from Gerald D. O'Connell, SIG, to Vanessa Countryman, Secretary, 
Commission, dated March 21, 2023, May 24, 2023, July 24, 2023 and 
September 18, 2023, and letters from John C. Pickford, SIG, to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2024, 
and March 1, 2024 and letters from Thomas M. Merritt, Deputy General 
Counsel, Virtu Financial, Inc. (``Virtu''), to Vanessa Countryman, 
Secretary, Commission, dated November 8, 2023 and January 2, 2024. 
See also Securities Exchange Act Release No. 93883 (December 30, 
2021), 87 FR 523 (January 5, 2022) (SR-IEX-2021-14) (Suspension of 
and Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend Its Fee Schedule for 
Market Data Fees) and Securities Exchange Act Release No. 94888 (May 
11, 2022), 87 FR 29892 (May 17, 2022) (SR-PEARL-2022-18) (Notice of 
Filing of a Proposed Rule Change To Amend the MIAX PEARL Options Fee 
Schedule To Increase Certain Connectivity Fees and To Increase the 
Monthly Fees for MIAX Express Network Full Service Port; Suspension 
of and Order Instituting Proceedings To Determine Whether To Approve 
or Disapprove the Proposed Rule Change).

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[[Page 52171]]

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 proposed fee change will 
not impact intramarket competition because it will apply to all 
similarly situated Members equally (i.e., all market participants that 
choose to purchase the 10 Gb physical port). Additionally, the Exchange 
does not believe its proposed pricing will impose a barrier to entry to 
smaller participants and notes that its proposed connectivity pricing 
is associated with relative usage of the various market participants. 
For example, market participants with modest capacity needs can 
continue to buy the less expensive 1 Gb physical port (which cost is 
not changing) or may choose to obtain access via a third-party re-
seller. While pricing may be increased for the larger capacity physical 
ports, such options provide far more capacity and are purchased by 
those that consume more resources from the network. Accordingly, the 
proposed connectivity fees do not favor certain categories of market 
participants in a manner that would impose a burden on competition; 
rather, the allocation reflects the network resources consumed by the 
various size of market participants--lowest bandwidth consuming members 
pay the least, and highest bandwidth consuming members pays the most.
    The Exchange's proposed fee is also still lower than some fees for 
similar connectivity on other exchanges and therefore may stimulate 
intermarket competition by attracting additional firms to connect to 
the Exchange or at least should not deter interested participants from 
connecting directly to the Exchange. Further, if the changes proposed 
herein are unattractive to market participants, the Exchange can, and 
likely will, see a decline in connectivity via 10 Gb physical ports as 
a result. The Exchange operates in a highly competitive market in which 
market participants can determine whether or not to connect directly to 
the Exchange based on the value received compared to the cost of doing 
so. Indeed, market participants have numerous alternative venues that 
they may participate on and direct their order flow, including 12 non-
Cboe affiliated equities markets, as well as off-exchange venues, where 
competitive products are available for trading. Moreover, the 
Commission has repeatedly expressed its preference for competition over 
regulatory intervention in determining prices, products, and services 
in the securities markets. Specifically, in Regulation NMS, the 
Commission highlighted the importance of market forces in determining 
prices and SRO revenues and, also, recognized that current regulation 
of the market system ``has been remarkably successful in promoting 
market competition in its broader forms that are most important to 
investors and listed companies.'' \41\ The fact that this market is 
competitive has also long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .''.\42\ Accordingly, the Exchange 
does not believe its proposed change imposes any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
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    \41\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \42\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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 comments on the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \43\ and paragraph (f) of Rule 19b-4 \44\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \43\ 15 U.S.C. 78s(b)(3)(A).
    \44\ 17 CFR 240.19b-4(f).
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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-CboeBZX-2024-051 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-CboeBZX-2024-051. 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-CboeBZX-2024-051 and should 
be submitted on or before July 12, 2024.


[[Page 52172]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-13543 Filed 6-20-24; 8:45 am]
BILLING CODE 8011-01-P