[Federal Register Volume 89, Number 154 (Friday, August 9, 2024)]
[Notices]
[Pages 65412-65420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-17685]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100656; File No. SR-CboeEDGX-2024-036]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.;
Suspension of and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule Change To Amend the Exchange's Fee
Schedule Related to Physical Port Fees
August 5, 2024.
I. Introduction
On June 7, 2024, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''),\1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change (File Number SR-
CboeEDGX-2024-036) to increase fees for 10 gigabit (``Gb'') physical
ports (``Proposal''). The proposed rule change was immediately
effective upon filing with the Commission pursuant to Section
19(b)(3)(A) of the Act.\3\ The proposed rule change was published for
comment in the Federal Register on June 25, 2024.\4\ Pursuant to
Section 19(b)(3)(C) of the Act,\5\ the Commission is hereby: (1)
temporarily suspending the proposed rule change; and (2) instituting
proceedings to determine whether to approve or disapprove the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
\4\ See Securities Exchange Act Release No. 100366 (June 18,
2024), 89 FR 53163 (``Notice'').
\5\ 15 U.S.C. 78s(b)(3)(C).
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II. Background and Description of the Proposed Rule Change
The Exchange proposes to amend its fee schedule relating to
physical connectivity fees by increasing the monthly fee for 10 Gb
physical ports from $7,500 to $8,500 per port.\6\ The Exchanges states
that, 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.\7\ Prior to this proposed rule change,
the Exchange assessed the following physical connectivity fees for
Members and non-Members on a monthly basis: $2,500 per physical port
for a 1 Gb circuit and $7,500 per physical port for a 10 Gb circuit.\8\
The Exchange states 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.\9\ The Exchange also states 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 BZX
Exchange, Inc. (options and equities platforms), Cboe EDGA Exchange,
Inc., and Cboe C2 Exchange, Inc., (``Affiliate Exchanges'').\10\ The
Exchange states that only one monthly fee applies per 10 Gb physical
port regardless of how many affiliated
[[Page 65413]]
exchanges are accessed through that one port.\11\
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\6\ See Notice, 89 FR at 53163. The Exchange initially filed the
proposed fee changes on July 3, 2023 (SR-CboeEDGX-2023-045). On
September 1, 2023, the Exchange withdrew that filing and submitted
SR-CboeEDGX-2023-058. On September 29, 2023, the Exchange states
that 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. See Notice, 89 FR at 53163 n.3. On September
29, 2023, the Exchange filed the proposed fee change (SR-CboeEDGX-
2023-063). On October 13, 2023, the Exchange withdrew that filing
and submitted SR-CboeEDGX-2023-064. On December 12, 2023, the
Exchange withdrew that filing and submitted SR-CboeEDGX-2023-080. On
February 12, 2024, the Exchange withdrew that filing and submitted
SR-CboeEDGX-2024-014. On April 9, 2024, the Exchange withdrew that
filing and submitted SR-CboeEDGX-2024-021. On June 7, 2024, the
Exchange withdrew that filing and submitted this filing.
\7\ See Notice, 89 FR at 53163.
\8\ See Notice, 89 FR at 53163.
\9\ See Notice, 89 FR at 53163 (citing 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 id.
(citing 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.)).
\10\ See Notice, 89 FR at 53163. The Affiliate Exchanges are
also submitted contemporaneous substantively similar rule filings.
\11\ See Notice, 89 FR at 53163. The Exchange states that
conversely, other exchange groups charge separate port fees for
access to separate, but affiliated, exchanges. See Notice, 89 FR at
53163 n.6 (citing Securities and Exchange Release No. 99822 (March
21, 2024), 89 FR 21337 (March 27, 2024) (SR-MIAX-2024-016)).
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III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\12\ at any time within
60 days of the date of filing of an immediately effective proposed rule
change pursuant to Section 19(b)(1) of the Act,\13\ the Commission
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. A temporary suspension of the proposed rule changes is
necessary and appropriate to allow for additional analysis of the
proposed rule change's consistency with the Act and the rules
thereunder.
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\12\ 15 U.S.C. 78s(b)(3)(C).
\13\ 15 U.S.C. 78s(b)(1).
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A. Exchange Statements In Support of the Proposal
In support of the Proposal, the Exchange states that it 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.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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.\16\
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) requirement that the rules of an
exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.\17\ The Exchange also believes
the proposed rule change is consistent with Section 6(b)(4) 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.\18\
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\14\ See Notice, 89 FR at 53163; 15 U.S.C. 78f(b).
\15\ See Notice, 89 FR at 53163; 15 U.S.C. 78f(b)(5).
\16\ See Notice, 89 FR at 53163.
\17\ See Notice, 89 FR at 53163; 15 U.S.C. 78f(b)(5).
\18\ See Notice, 89 FR at 53163; 15 U.S.C. 78f(b)(4).
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The Exchange states that it operates in a highly competitive
environment.\19\ The Exchange states that 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.\20\ As described in further detail below, the
Exchange believes substitutable products 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 options
exchanges that trade options or other off-exchange trading
platforms.\21\
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\19\ See Notice, 89 FR at 53163.
\20\ See Notice, 89 FR at 53163-64. (citing Chairman Jay
Clayton, Statement on Division of Trading and Markets Staff Fee
Guidance, June 12, 2019). The Exchange states that the Fee Guidance
also recognized that ``products need to be substantially similar but
not identical to be substitutable.'' Id.
\21\ See Notice, 89 FR at 53164. The Exchanges states that 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 id. at n.12 (citing
https://www.investopedia.com/terms/s/substitute.asp).
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The Exchange states that 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.\22\
The Exchange states that exchanges themselves are platforms.\23\
Particularly, the Exchange states that exchanges are 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.\24\ 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.\25\ The Exchange states
that nothing in the Exchange Act requires the individual examination of
specific product fees in isolation.\26\ Rather, the Exchange states
that the Act 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.''
\27\
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\22\ See Notice, 89 FR at 53164 (citing Fee Guidance).
\23\ See Notice, 89 FR at 53164. The Exchanges states that 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 id. at n.14 (citing
Ohio v. American Express Co. 138 S. Ct. 2274, 585 U.S. 529 (2018)).
\24\ See Notice, 89 FR at 53164.
\25\ See Notice, 89 FR at 53164.
\26\ See Notice, 89 FR at 53164.
\27\ See Notice, 89 FR at 53164 (citing 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.\28\ Further, the Exchange states that the current 10 Gb
physical port fee has remained unchanged since June 2018.\29\ The
Exchange explains that since its last increase over 6 years ago
however, there has been notable inflation.\30\ Particularly, the
Exchange states that 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.\31\ Moreover, the Exchange states that
it historically does not increase fees every year, notwithstanding
inflation.\32\ 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%.\33\ The Exchange states that were
the Exchange to adjust fully for inflation, it
[[Page 65414]]
would be proposing a monthly rate of $9,360, which is 10% more than the
Exchange is actually proposing.\34\ To further demonstrate, the
Exchange notes that $8,500 in 2024 is equivalent to approximately
$6,800 in 2018, when adjusted for inflation.\35\ 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.\36\ The Exchange states it 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.\37\ The
Exchange also believes its offerings are more affordable as compared to
similar offerings at competitor exchanges.\38\
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\28\ See Notice, 89 FR at 53164.
\29\ See Notice, 89 FR at 53164 (citing Securities and Exchange
Release 83430 (June 14, 2018), 83 FR 28697 (June 20, 2018) (SR-
CboeEDGX-2018-017)).
\30\ See Notice, 89 FR at 53164.
\31\ See Notice, 89 FR at 53164 (citing https://www.officialdata.org/us/inflation/2010?amount=1).
\32\ See Notice, 89 FR at 53164.
\33\ See Notice, 89 FR at 53164.
\34\ See Notice, 89 FR at 53164.
\35\ See Notice, 89 FR at 53164.
\36\ See Notice, 89 FR at 53164.
\37\ See Notice, 89 FR at 53164.
\38\ See Notice, 89 FR at 53164. The Exchange states that 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. Id. (citing The
Nasdaq Stock Market LLC (``Nasdaq''), General 8, Connectivity to the
Exchange). See also id. (citing 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.\39\ The Exchange states that there is also
no regulatory requirement that any market participant connect to any
one particular exchange.\40\ The Exchange explains that 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.\41\ Additionally, the Exchange states that 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.\42\ The
Exchange states that, moreover, direct connectivity is not a
requirement to participate on the Exchange.\43\ The Exchange also
believes substitutable products and services are available to market
participants, including, among other things, other options 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 options product, such as within the
Over-the-Counter (OTC) markets which do not require connectivity to the
Exchange.\44\ The Exchange states that there are currently 17
registered options exchanges that trade options (13 of which are not
affiliated with Cboe), some of which have similar or lower connectivity
fees.\45\ The Exchange states that, based on publicly available
information, no single options exchange has more than approximately 18%
of the market share.\46\ The Exchange states that 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.\47\ The Exchange explains that, for
example, there are 3 exchanges that have been added in the U.S. options
markets in the last 5 years (i.e., Nasdaq MRX, LLC, MIAX Pearl, LLC,
MIAX Emerald LLC, and most recently, MEMX LLC).\48\
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\39\ See Notice, 89 FR at 53164.
\40\ See Notice, 89 FR at 53164.
\41\ See Notice, 89 FR at 53164.
\42\ See Notice, 89 FR at 53164.
\43\ See Notice, 89 FR at 53164.
\44\ See Notice, 89 FR at 53164.
\45\ See Notice, 89 FR at 53164.
\46\ See Notice, 89 FR at 53164 (citing Cboe Global Markets U.S.
Options Market Volume Summary (June 6, 2024), available at https://markets.cboe.com/us/options/market_statistics/).
\47\ See Notice, 89 FR at 53164.
\48\ See Notice, 89 FR at 53164.
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The Exchange states that there is no regulatory requirement that
any market participant connect to any one options 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.\49\ The Exchange states that moreover,
membership is not a requirement to participate on the Exchange.\50\ The
Exchange states that it is unaware of any one options exchange whose
membership includes every registered broker-dealer.\51\ The Exchange
explains, by way of example, that while the Exchange has 51 members
that trade options, Cboe EDGX has 61 members that trade options, and
Cboe C2 has 52 Trading Permit Holders (``TPHs'') (i.e., members).\52\
The Exchange states that there is also no firm that is a Member of EDGX
Options only.\53\ The Exchange states that further, based on publicly
available information regarding a sample of the Exchange's competitors,
NYSE American Options has 71 members, and NYSE Arca Options has 69
members, MIAX Options has 46 members, and MIAX Pearl Options has 40
members.\54\
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\49\ See Notice, 89 FR at 53164.
\50\ See Notice, 89 FR at 53164.
\51\ See Notice, 89 FR at 53164.
\52\ See Notice, 89 FR at 53164-65.
\53\ See Notice, 89 FR at 53165.
\54\ See Notice, 89 FR at 53165 (citing https://www.nyse.com/markets/american-options/membership#directory; https://www.nyse.com/markets/arca-options/membership#directory; https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Options_Exchange_Members_April_2023_04282023.pdf; https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Pearl_Exchange_Members_01172023_0.pdf).
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The Exchange states that a market participant may also submit
orders to the Exchange via a Member broker or a third-party reseller of
connectivity.\55\ The Exchange notes that third-party non-Members also
resell exchange connectivity.\56\ The Exchange explains that 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.\57\ The Exchange notes that it could, but chooses not to,
preclude market participants from reselling its connectivity.\58\
Unlike other exchanges, the Exchange states that it 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).\59\ The Exchange states
that these
[[Page 65415]]
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.\60\ 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.\61\ The Exchange explains that 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.\62\ The Exchange states that 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.\63\ 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.\64\ That is, the
Exchange states, that 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 relates 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).\65\ The
Exchange explains that 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.\66\ The Exchange states that
these services may reevaluate reselling or offering Cboe's direct
connectivity if they deem the fees to be excessive.\67\ 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.\68\ The Exchange states, 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.\69\ The Exchange explains that 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.\70\
The Exchange states that 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.\71\ The
Exchange states that 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.\72\ The Exchange states that 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.\73\ The Exchange
explains that disincentivizing market participants from purchasing
Exchange connectivity would only serve to discourage participation on
the Exchange which ultimately does not benefit the Exchange.\74\
Further, the Exchange believes its offerings are more affordable as
compared to similar offerings at competitor exchanges.\75\
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\55\ See Notice, 89 FR at 53165.
\56\ See Notice, 89 FR at 53165.
\57\ See Notice, 89 FR at 53165. The Exchange states that third-
party resellers of connectivity play an important role in the
capital markets infrastructure ecosystem. For example, according to
the Exchange, 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. The
Exchange further states that 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. The Exchange explains that this may remove barriers that
infrastructure requirements may otherwise pose for customers looking
to access multiple markets and real-time data feeds. The Exchange
further explains that 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. See id. at n.25.
\58\ See Notice, 89 FR at 53165.
\59\ See Notice, 89 FR at 53165 (citing 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)).
\60\ See Notice, 89 FR at 53165.
\61\ See Notice, 89 FR at 53165. The Exchange states that 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. Id. at n.27.
\62\ See Notice, 89 FR at 53165.
\63\ See Notice, 89 FR at 53165.
\64\ See Notice, 89 FR at 53165.
\65\ See Notice, 89 FR at 53165.
\66\ See Notice, 89 FR at 53165.
\67\ See Notice, 89 FR at 53165.
\68\ See Notice, 89 FR at 53165.
\69\ See Notice, 89 FR at 53165.
\70\ See Notice, 89 FR at 53165.
\71\ See Notice, 89 FR at 53165.
\72\ See Notice, 89 FR at 53165.
\73\ See Notice, 89 FR at 53165.
\74\ See Notice, 89 FR at 53165.
\75\ See Notice, 89 FR at 53165 (citing 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 id.
(citing 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, the Exchange states that 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.\76\ The Exchange explains that 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 13 non-Cboe
affiliated options markets.\77\ The Exchange states that market
participants are free to choose which exchange to use to satisfy their
business needs.\78\ The Exchange states that, moreover, if the Exchange
were to assess supracompetitve rates, members and non-members alike,
may decide not to purchase, or to reduce their use of, the Exchange's
direct connectivity.\79\ The Exchange states that disincentivizing
market participants from purchasing Exchange connectivity would only
serve to discourage participation on the Exchange which ultimately does
not benefit the Exchange.\80\ The Exchange states that, 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.\81\ The Exchange believes that this competitive dynamic
imposes powerful restraints on the ability of any exchange to charge
unreasonable fees for connectivity.\82\ 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.\83\
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\76\ See Notice, 89 FR at 53165.
\77\ See Notice, 89 FR at 53165.
\78\ See Notice, 89 FR at 53165-66.
\79\ See Notice, 89 FR at 53166.
\80\ See Notice, 89 FR at 53166.
\81\ See Notice, 89 FR at 53166.
\82\ See Notice, 89 FR at 53166.
\83\ See Notice, 89 FR at 53166.
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[[Page 65416]]
The Exchange states that 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 models.\84\ The
Exchange states that 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.\85\
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\84\ See Notice, 89 FR at 53166 (citing Securities Exchange Act
Release No. 86901 (September 9, 2019), 84 FR 48458 (September 13,
2019) (File No. S7-13-19)).
\85\ See Notice, 89 FR at 53166 (citing Securities Exchange Act
Release No. 86901 (September 9, 2019), 84 FR 48458 (September 13,
2019) (File No. S7-13-19)).
---------------------------------------------------------------------------
The Exchange states that, as noted above, exchanges also compete as
platforms.\86\ The Exchange explains that in the context of the
competition among platforms, different exchanges operate a variety of
different business models.\87\ The Exchange further explains that, in
fact, there are a number of ways an exchange can differentiate itself,
such as by pricing structure, technology and functionality offerings,
and products.\88\ The Exchange states that market participants can
access the exchange without purchasing anything from an exchange,
instead using third-party routers and data.\89\ The Exchange explains
that 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.\90\ The Exchange states that further, all elements of the
platform--trade executions, market data, connectivity, membership, and
listings--operate in concert.\91\ The Exchange explains that, 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.\92\ As such, the Exchange states that 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.\93\ The Exchange
explains that 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.\94\ The Exchange states that, when
accounting for explicit and implicit costs, research has found that
competition has largely equalized all-in trading costs to users across
exchanges.\95\ The Exchange states that, 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 \96\ and
vice versa.\97\ The Exchange states that 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).\98\ The Exchange further states that
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.\99\ 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.\100\
---------------------------------------------------------------------------
\86\ See Notice, 89 FR at 53166.
\87\ See Notice, 89 FR at 53166.
\88\ See Notice, 89 FR at 53166.
\89\ See Notice, 89 FR at 53166.
\90\ See Notice, 89 FR at 53166.
\91\ See Notice, 89 FR at 53166.
\92\ See Notice, 89 FR at 53166.
\93\ See Notice, 89 FR at 53166.
\94\ See Notice, 89 FR at 53166.
\95\ See Notice, 89 FR at 53166 (citing 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
(``Mackintosh and Normyle'')).
\96\ The Exchange explains that per-trade markout is a measure
of theoretical profitability from the perspective of a liquidity
provider. See Notice, 89 FR at 53166 n.32.
\97\ See Notice, 89 FR at 53166 (citing Mackintosh and Normyle).
\98\ See Notice, 89 FR at 53166 The Exchange states that, for
example, research by Nasdaq found that it is over 60% more expensive
to trade on the costliest exchange than on the cheapest. According
to the Exchange, such a sizeable disparity suggests that there is
another factor that keeps these exchanges in competition.
Specifically, the Exchange states that when implicit costs are
considered, the difference in cost to trade is minimized. See id.
\99\ See Notice, 89 FR at 53166 (citing Bershova, Nataliya &
Jaquet, Paul. (2019). Execution Quality and Fee Structure: Passive
Lit Executions. Bernstein Electronic Trading, Execution Research).
\100\ See Notice, 89 FR at 53166.
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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.\101\ The Exchange states that it 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.\102\ The Exchange explains that 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.\103\ The Exchange states that, for example, the Exchange
recently performed switch hardware upgrades.\104\ The Exchange explains
that, particularly, the Exchange replaced existing customer access
switches with newer models, which the Exchange believes resulted in
increased determinism, and the recent switch upgrades also increased
the Exchange's capacity to accommodate more physical ports by nearly
50%.\105\ The Exchange states that network bandwidth was also increased
nearly two-fold as a result of the upgrades, which among other things,
can lead to reduce message queuing.\106\ The Exchange also believes
these newer models result in less natural variance in the processing of
messages.\107\ 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.\108\
---------------------------------------------------------------------------
\101\ See Notice, 89 FR at 53166.
\102\ See Notice, 89 FR at 53166.
\103\ See Notice, 89 FR at 53166.
\104\ See Notice, 89 FR at 53166.
\105\ See Notice, 89 FR at 53166.
\106\ See Notice, 89 FR at 53166.
\107\ See Notice, 89 FR at 53166.
\108\ See Notice, 89 FR at 53166.
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The Exchange states that 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.\109\ The Exchange states that it made NY6
available in response to customer requests in connection with their
need for additional space and capacity.\110\ The Exchange explains that
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
[[Page 65417]]
costs related to power, space, fiber, cabinets, panels, labor and
maintenance of racks.\111\ The Exchange states it also incurred a large
cost with respect to ensuring NY6 would be latency equalized, as it is
for NY4 and NY5.\112\
---------------------------------------------------------------------------
\109\ See Notice, 89 FR at 53166.
\110\ See Notice, 89 FR at 53166.
\111\ See Notice, 89 FR at 53166.
\112\ See Notice, 89 FR at 53166-67.
---------------------------------------------------------------------------
The Exchange states that it also has made various other
improvements since the current physical port rates were adopted in
2018.\113\ The Exchanges states that, 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.\114\ The Exchange explains that it 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.\115\ Accordingly, the Exchange states that it
has 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 options markets.\116\ The Exchange explains that
its ability to continue to innovate with technology and offer new
products to market participants allows the Exchange to remain
competitive in the options space which currently has 17 options markets
and potential new entrants.\117\ The Exchange states that 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.\118\ The
Exchange explains that 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 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.\119\
---------------------------------------------------------------------------
\113\ See Notice, 89 FR at 53167.
\114\ See Notice, 89 FR at 53167.
\115\ See Notice, 89 FR at 53167.
\116\ See Notice, 89 FR at 53167.
\117\ See Notice, 89 FR at 53167.
\118\ See Notice, 89 FR at 53167.
\119\ See Notice, 89 FR at 53167.
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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.\120\ Indeed, the Exchange believes
assessing fees at 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.\121\ The
Exchange states that the proposed fee is also the same as is
concurrently being proposed for its Affiliate Exchanges.\122\ Further,
the Exchange states that 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).\123\
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.\124\ 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).\125\
---------------------------------------------------------------------------
\120\ See Notice, 89 FR at 53167 (citing 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 id.
(citing 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.)).
\121\ See Notice, 89 FR at 53167.
\122\ See Notice, 89 FR at 53167.
\123\ See Notice, 89 FR at 53167.
\124\ See Notice, 89 FR at 53167.
\125\ See Notice, 89 FR at 53167.
---------------------------------------------------------------------------
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.\126\ 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).\127\ The Exchange explains that, 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.\128\ The Exchange states that, moreover, market participants
that purchase 10 Gb physical ports utilize the most bandwidth and
therefore consume the most resources from the network.\129\ 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.\130\
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.\131\ As such, the Exchange believes the proposed fee change for
10 Gb physical ports is reasonably and appropriately allocated.\132\
---------------------------------------------------------------------------
\126\ See Notice, 89 FR at 53167.
\127\ See Notice, 89 FR at 53167.
\128\ See Notice, 89 FR at 53167.
\129\ See Notice, 89 FR at 53167.
\130\ See Notice, 89 FR at 53167.
\131\ See Notice, 89 FR at 53167.
\132\ See Notice, 89 FR at 53167.
---------------------------------------------------------------------------
The Exchange states 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.\133\ The Exchange
states that, moreover, Congress's intent in enacting the 1975
Amendments to the Act was to enable competition--rather than government
order--to determine prices.\134\ The Exchange explains that the
principal purpose of the amendments was to facilitate the creation of a
national market system for the trading of securities.\135\ The Exchange
states that Congress intended that this ``national market system evolve
through the interplay of competitive forces as unnecessary regulatory
restrictions are removed,'' and that other provisions of the Act
confirm that intent.\136\ The Exchange states that, 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.'' \137\ The Exchange further states that, 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
[[Page 65418]]
appropriate in furtherance of the purposes of this chapter.'' \138\ The
Exchange explains that, in short, the promotion of free and open
competition was a core congressional objective in creating the national
market system.\139\ The Exchange states that, indeed, the Commission
has historically interpreted that mandate to promote competitive forces
to determine prices whenever compatible with a national market
system.\140\ 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.\141\ The Exchange believes that, finally,
and importantly, 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.\142\ Indeed, the Exchange
believes that classification of costs could likely not be done without
on-going debate over formulas for allocation,\143\ continual auditing,
and considerable expense.\144\ The Exchange also believes cost-based
analysis could create disincentives to reduce costs through efficient
operation or innovation.\145\ Moreover, the Exchange believes that the
industry could experience frequent rate increases based on escalating
expense levels.\146\ 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, according to the Exchange, the
Commission has historically sought to avoid \147\
---------------------------------------------------------------------------
\133\ See Notice, 89 FR at 53167.
\134\ See Notice, 89 FR at 53167.
\135\ See Notice, 89 FR at 53167.
\136\ See Notice, 89 FR at 53167 (citing H.R. Rep. No. 94-229,
at 92 (1975) (Conf. Rep.) (emphasis added)).
\137\ See Notice, 89 FR at 53167 (citing 15 U.S.C. 78f(b)(5)).
\138\ See Notice, 89 FR at 53167 (citing 15 U.S.C. 78f(8)).
\139\ See Notice, 89 FR at 53167 (citing 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.'')).
\140\ See Notice, 89 FR at 53167.
\141\ See Notice, 89 FR at 53167.
\142\ See Notice, 89 FR at 53167.
\143\ See Notice, 89 FR at 53167-68, n.41 (citing 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., 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)).
\144\ See Notice, 89 FR at 53167-68.
\145\ See Notice, 89 FR at 53168.
\146\ See Notice, 89 FR at 53168.
\147\ See Notice, 89 FR at 53168.
---------------------------------------------------------------------------
The Exchange also 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.\148\ The
Exchange states that 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).\149\ 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.\150\
For example, the Exchange states that 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.\151\ The Exchange states that 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.\152\ Accordingly, the Exchange states that
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.\153\
---------------------------------------------------------------------------
\148\ See Notice, 89 FR at 53168.
\149\ See Notice, 89 FR at 53168.
\150\ See Notice, 89 FR at 53168.
\151\ See Notice, 89 FR at 53168.
\152\ See Notice, 89 FR at 53168.
\153\ See Notice, 89 FR at 53168.
---------------------------------------------------------------------------
The Exchange states that the 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.\154\ Further, if
the changes proposed herein are unattractive to market participants,
the Exchange states that it can, and likely will, see a decline in
connectivity via 10 Gb physical ports as a result.\155\ The Exchange
states that it 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.\156\ The Exchange states that market participants have numerous
alternative venues that they may participate on and direct their order
flow, including 13 non-Cboe affiliated options markets, as well as off-
exchange venues, where competitive products are available for
trading.\157\ Moreover, the Exchange states that the Commission has
repeatedly expressed its preference for competition over regulatory
intervention in determining prices, products, and services in the
securities markets.\158\ Specifically, the Exchange states that 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.'' \159\ The
Exchange states that the fact that this market is competitive has also
long been recognized by the courts.\160\
[[Page 65419]]
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.\161\
---------------------------------------------------------------------------
\154\ See Notice, 89 FR at 53168.
\155\ See Notice, 89 FR at 53168.
\156\ See Notice, 89 FR at 53168.
\157\ See Notice, 89 FR at 53168.
\158\ See Notice, 89 FR at 53168.
\159\ See Notice, 89 FR at 53168 (citing Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29,
2005)).
\160\ See Notice, 89 FR at 53168. The Exchange states that 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'. . .
.'' (citing 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))).
\161\ See Notice, 89 FR at 53168.
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B. Suspension
When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchange's present proposal,
they are required to provide a statement supporting the proposal's
basis under the Act and the rules and regulations thereunder applicable
to the exchange.\162\ The instructions to Form 19b-4, on which
exchanges file their proposed rule changes, specify that such statement
``should be sufficiently detailed and specific to support a finding
that the proposed rule change is consistent with [those]
requirements.'' \163\
---------------------------------------------------------------------------
\162\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory
Organization's Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change'').
\163\ See id.
---------------------------------------------------------------------------
Section 6 of the Act, including Sections 6(b)(4), (5), and (8),
requires the rules of an exchange to: (1) provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \164\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \165\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\166\
---------------------------------------------------------------------------
\164\ 15 U.S.C. 78f(b)(4).
\165\ 15 U.S.C. 78f(b)(5).
\166\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's proposed rule change, the
Commission intends to further consider whether the Proposal to increase
its 10 Gb physical port connectivity fee is consistent with the
statutory requirements applicable to a national securities exchange
under the Act. The Commission will consider, among other things,
whether the Exchange has provided sufficient information to demonstrate
that the Exchange is subject to significant competitive forces when
setting the proposed port connectivity fees. In particular, the
Commission will consider whether the proposed rule change satisfies the
standards under the Act and the rules thereunder requiring, among other
things, that an exchange's rules provide for the equitable allocation
of reasonable fees among members, issuers, and other persons using its
facilities; not permit unfair discrimination between customers,
issuers, brokers or dealers; and do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\167\
---------------------------------------------------------------------------
\167\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------
Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule change.\168\
---------------------------------------------------------------------------
\168\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Changes
In addition to temporarily suspending the Proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\169\ and 19(b)(2)(B) of the Act \170\ to determine whether the
Exchange's proposed rule change should be approved or disapproved.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
---------------------------------------------------------------------------
\169\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\170\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\171\ the Commission is
providing notice of the grounds for possible disapproval under
consideration:
---------------------------------------------------------------------------
\171\ Id. Section 19(b)(2)(B) of the Act also provides that
proceedings to determine whether to disapprove a proposed rule
change must be concluded within 180 days of the date of publication
of notice of the filing of the proposed rule change. See id. The
time for conclusion of the proceedings may be extended for up to 60
days if the Commission finds good cause for such extension and
publishes its reasons for so finding, or if the exchange consents to
the longer period. See id.
---------------------------------------------------------------------------
Whether the Exchange has demonstrated how the proposed fee
is consistent with Section 6(b)(4) of the Act, which requires that the
rules of a national securities exchange ``provide for the equitable
allocation of reasonable dues, fees, and other charges among its
members and issuers and other persons using its facilities''; \172\
---------------------------------------------------------------------------
\172\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
Whether the Exchange has demonstrated how the proposed fee
is consistent with Section 6(b)(5) of the Act, which requires, among
other things, that the rules of a national securities exchange not be
``designed to permit unfair discrimination between customers, issuers,
brokers, or dealers''; \173\ and
---------------------------------------------------------------------------
\173\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Whether the Exchange has demonstrated how the proposed fee
is consistent with Section 6(b)(8) of the Act, which requires that the
rules of a national securities exchange ``not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of [the Act].'' \174\
---------------------------------------------------------------------------
\174\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
As discussed in Section III above, the Exchange made various
arguments in support of the Proposal. There are questions as to whether
the Exchange has provided sufficient information to demonstrate that
the proposed fee is consistent with the Act and the rules thereunder.
The Commission will specifically consider, among other things, whether
the Exchange has provided sufficient evidence to demonstrate that the
proposed fee is reasonable and equitably allocated, is not unfairly
discriminatory, and does not impose any burden on competition that is
not necessary or appropriate in furtherance of the purposes of the Act.
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the [SRO]
that proposed the rule change.'' \175\ The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding,\176\ and any failure of an SRO to provide this information may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with the
Act and the applicable rules and regulations.\177\
---------------------------------------------------------------------------
\175\ 17 CFR 201.700(b)(3).
\176\ See id.
\177\ See id.
---------------------------------------------------------------------------
The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposed fee is consistent with the Act, and specifically,
with its
[[Page 65420]]
requirements that exchange fees be reasonable and equitably allocated,
not be unfairly discriminatory, and not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.\178\
---------------------------------------------------------------------------
\178\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by August 30, 2024.
Rebuttal comments should be submitted by September 13, 2024. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral
presentation.\179\
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\179\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by an SRO.
See Securities Acts Amendments of 1975, Report of the Senate
Committee on Banking, Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the Proposal, in
addition to any other comments they may wish to submit about the
proposed rule changes.
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-CboeEDGX-2024-036 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-CboeEDGX-2024-036. 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-CboeEDGX-2024-036 and should
be submitted on or before August 30, 2024. Rebuttal comments should be
submitted by September 13, 2024.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\180\ that File No. SR-CboeEDGX-2024-036, be and hereby is,
temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule change should be
approved or disapproved.
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\180\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\181\
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\181\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-17685 Filed 8-8-24; 8:45 am]
BILLING CODE 8011-01-P