[Federal Register Volume 89, Number 181 (Wednesday, September 18, 2024)]
[Notices]
[Pages 76545-76552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-21173]
[[Page 76545]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101017; File No. SR-CboeBYX-2024-032]
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fees Schedule Related to Physical Port Fees
September 12, 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 August 29, 2024, Cboe BYX Exchange, Inc. (the ``Exchange'' or
``BYX'') 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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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BYX Exchange, Inc. (the ``Exchange'' or ``BYX 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/BYX/), 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-CboeBYX-2023-010). On September 1, 2023, the
Exchange withdrew that filing and submitted SR-CboeBYX-2023-013. 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 September 29, 2023, the
Exchange filed the proposed fee change (SR-CboeBYX-2023-014). On
October 13, 2023, the Exchange withdrew that filing and submitted
SR-CboeBYX-2023-015. On December 12, 2023, Exchange filed the
proposed fee change (SR-CboeBYX-2023-018). On December 12, 2023, the
Exchange withdrew that filing and submitted SR-CboeBYX-2023-019. On
February 9, 2024, the Exchange withdrew that filing and submitted
SR-CboeBYX-2024-006. On April 9, 2024, the Exchange withdrew that
filing and submitted SR-CboeBYX-2024-012. On June 7, 2024, the
Exchange withdrew that filing and submitted SR-CboeBYX-2024-021. On
August 29, 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 BZX
Exchange, Inc. (options and equities), 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
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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 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\ The Exchange also notes that Congress has
directed the Commission to ``rely on `competition, whenever possible,
in meeting its regulatory responsibilities for overseeing the'' self-
regulatory organizations (``SROs'') ``and the national market system.'
'' \16\ This is the basis for the congressional presumption that
exchanges' pricing decisions are constrained by competitive forces and
should not be impaired by excessive regulatory scrutiny or rules.
Following this mandate, the Commission and the courts have repeatedly
expressed their preference for competition over regulatory intervention
to determine prices, products, and services in the securities markets.
This notion is further supported by the Dodd-Frank amendments
authorizing immediately effective fees, not just for transactional
pricing, but for market data and other products as well.\17\ For the
reasons described further below, the Exchange believes that the
Proposal supports competition, and therefore the proposed fees are
reasonable and equitably allocated. Indeed, the Exchange believes the
considerable amount of data both qualitative and quantitative,
discussed below not only meets the Exchange's burden demonstrating that
the proposed rule change is consistent with the Exchange but goes
beyond the type of reasoned evidence that the courts and the Commission
have invited exchanges to submit in support of proposed fee changes.
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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).
\16\ NetCoalition v. SEC, 715 F.3d 342, 534-35 (D.C. Cir. 2013);
see also H.R. Rep. No. 94-229 at 92 (1975) (``[I]t is the intent of
the conferees that the national market system evolve through the
interplay of competitive forces as unnecessary regulatory
restrictions are removed.'').
\17\ 15 U.S.C. 78s(b)(3)(A).
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The Exchange also believes the proposed fee change is reasonable as
it reflects a moderate increase in physical connectivity fees for 10 Gb
physical ports. First, the Exchange believes its proposal is reasonable
as its offering, even as amended, continues to be more affordable as
compared to similar offerings at competitor exchanges.\18\ The Exchange
also notes that the current 10 Gb physical port fee has remained
unchanged since June 2018.\19\ Since its last increase over 6 years ago
however, there has been notable inflation and indeed, the proposed rate
is below the rates of inflation as measured by either the Consumer
Product Index (``CPI'') \20\ or the Producer Price Index (``PPI'').\21\
Particularly, under the CPI, the dollar has had an average inflation
rate of 3.80% per year between 2018 and today, producing a cumulative
price increase of approximately 25% inflation since the fee for the 10
Gb physical port was last modified.\22\ Moreover, a more specific and
pertinent gauge of inflation--the PPI for data processing, hosting and
related services, active services pages, and other IT infrastructure
provisioning services--increased approximately 15% from 2018 to
2024.\23\ Both the CPI and the PPI are considered ``key data releases,
meaning
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the monthly indicator is heavily scrutinized by traders, since they are
used by the Federal Reserve to assess developments in the economy.''
\24\ Further, the Employment Cost Index (``ECI''), which measures the
change in the hourly labor cost to employers over time, produced a
cumulative price increase of approximately 25%.\25\ Notwithstanding
such significant inflation, the Exchange has not increased its
connectivity fees during this time, thereby eroding the value of the
revenue it collects through such fees.\26\ The proposed fee represents
approximately 13% increase from the current fee, which is far below the
rate of inflation as measured by the CPI and on par with (and even
lower than) the rate of inflation as measured by the PPI and ECI since
2018. Although the Exchange believes it would be reasonable to increase
fees by an amount equal to the full rates of inflation, however
measured, to reestablish the initial value of the revenues it earns
through its fees, the Exchange does not propose to do this, as the
Exchange is sensitive to the sticker shock that would occur if the
Exchange raised its fees by 25%. Instead, the Exchange proposes a 13%
increase, an amount that the Exchange believes to be reasonable on its
face as it is significantly less than various measures of inflation
discussed above.
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\18\ 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.
\19\ See Securities and Exchange Release No. 83441 (June 14,
2018), 83 FR 28684 (June 20, 2018) (SR-CboeBYX-2018-006).
\20\ The Consumer Price Index (``CPI'') is a measure of the
average change over time in the prices paid by urban consumers for a
market basket of consumer goods and services. The CPI represents all
goods and services purchased for consumption by the reference
population (U or W). The Bureau of Labor Statistics (``BLS'') has
classified all expenditure items into more than 200 categories,
arranged into eight major groups (food and beverages, housing,
apparel, transportation, medical care, recreation, education and
communication, and other goods and services). Included within these
major groups are various government-charged user fees, such as water
and sewerage charges, auto registration fees, and vehicle tolls. See
https://www.bls.gov/cpi/questions-and-answers.htm.
\21\ The PPI is a family of indexes that measures the average
change over time in selling prices received by domestic producers of
goods and services. PPIs measure price change from the perspective
of the seller. This contrasts with other measures, such as the
Consumer Price Index (CPI), that measure price change from the
purchaser's perspective. See https://www.bls.gov/ppi/overview.htm.
\22\ See https://www.officialdata.org/us/inflation/2010?amount=1
(As of August 14, 2024).
\23\ See https://data.bls.gov/timeseries/PCU5182105182105 (As of
August 13, 2024). Among the industry-specific PPIs is for North
American Industry Classification System (``NAICS'') Code 518210:
``Data Processing, Hosting and Related Services: Hosting, Active
Server Pages (ASP), and Other Information Technology (IT)
Infrastructure Provisioning Services,'' NAICS index codes categorize
products and services that are common to particular industries.
According to BLS, these codes ``provide comparability with a wide
assortment of industry-based data for other economic programs,
including productivity, production, employment, wages, and
earnings.'' See https://www.bls.gov/ppi/overview.htm. BLS describes
NAICS 51820 as follows: ``The primary output of NAICS 518210 is the
provision of electronic data processing services. In the broadest
sense, computer services companies help their customers efficiently
use technology. The processing services market consists of vendors
who use their own computer systems--often utilizing proprietary
software--to process customers' transactions and data. Companies
that offer processing services collect, organize, and store a
customer's transactions and other data for record-keeping
purposes.''
\24\ See https://www.cmegroup.com/education/courses/learn-about-key-economic-events/understandingconsumer-price-index-and-producer-price-index.html.
\25\ See https://www.bls.gov/eci/tables.html (As of August 13,
2024).
\26\ Unregulated competitors providing connectivity and co-
location services often have annual price increases written into
their agreements with customers to account for inflation and rising
costs.
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The Exchange believes further that it is reasonable to increase its
fees to compensate for inflation because, over time, inflation has
degraded the value of each dollar that the Exchange collects in fees,
such that the real revenue collected today is considerably less than
that same revenue collected in 2018. The impact of this inflationary
effect is also independent of any change in the Exchange's costs in
providing its goods and services. The Exchange believes that it is
reasonable for it to offset, in part, this erosion in the value of the
revenues it collects. Additionally, 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 rates noted above. Were
the Exchange to adjust fully for inflation under the CPI, 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 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.\27\ Based
on publicly available information, no single equities exchange has more
than approximately 15% of the market share.\28\ 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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\27\ Id.
\28\ See Cboe Global Markets, U.S. Equities Market Volume
Summary, Month-to-Date (June 6, 2024), available at https://www.cboe.com/us/equities/_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,\29\ IEX has 129 members,\30\ and
MIAX Pearl has 51 members.\31\
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\29\ See https://www.nyse.com/markets/nyse/membership.
\30\ See https://www.iexexchange.io/membership.
\31\ 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.\32\ The
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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).\33\ 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.\34\ 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.\35\
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\32\ 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.
\33\ 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).
\34\ 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.
\35\ 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, 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 models.\36\ The Commission recognized
that while some exchanges may have a unique business model that is not
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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.\37\
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\36\ See Securities Exchange Act Release No. 86901 (September 9,
2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\37\ 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.\38\ 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 \39\ and vice versa.\40\ 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).\41\ 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.\42\ 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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\38\ 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.
\39\ Per-trade markout is a measure of theoretical profitability
from the perspective of a liquidity provider.
\40\ 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.
\41\ 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.
\42\ 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
innovative technology to the benefit of market participants if it
believes the Commission would later prevent that
[[Page 76550]]
exchange from recouping costs and monetizing its operational
enhancements, thus adversely impacting competition as well as the
interests of market participants and investors. 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.\43\ 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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\43\ 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, the
Exchange notes that it did not raise any arguments relating to its
profitability nor is it required to do so in order to demonstrate that
its fees are reasonable and consistent with the Act. 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. In fact, the Exchange has represented to
the Commission on numerous occasions that the type of data relating to
profit margins and return on assets that the Commission is effectively
mandating of all exchanges is not feasible for the Exchange, as its
costs are not kept in the disaggregated manner necessary for such an
analysis. Notwithstanding this fact, the Exchange has recently
undertaken the exercise of reviewing its costs and expenses relating to
connectivity to explore further cost-related justifications in an
effort to address to the best of its ability the Commission's request
for such information. The Exchange represents that it again was not
able to do so in the manner expected by the Commission. Furthermore, in
setting fees for its physical connectivity, including this current
proposed fee change, the Exchange did not perform the type of cost-
analysis that the Commission is demanding (consistent with its
inability to do so based on how it aggregates its costs and revenue).
The Exchange instead considers, as it did here, various factors in
setting fees, including the current competitive landscape, the rates
historically paid by market participants for connectivity and the
potential impact on market participants to ensure that the proposed
fees would not create an undue financial burden on any market
participants, including smaller market participants.\44\
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\44\ Regarding market participant impact, it is notable that
since the proposed fee change was first implemented over 14 months
ago, the Exchange received no comments from any individual Member
suggesting that it was unduly burdened by the proposed changes
described herein, notwithstanding the opportunity to do so on
several occasions during multiple comment periods. The only comment
letters the Exchange did receive were all submitted by the same
industry participant notorious for submitting comments opposing any
and all market data and connectivity fee filings and equally
notorious for the factual inaccuracies and conclusory statements
contained therein.
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The Exchange reiterates 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.'' \45\ 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.'' \46\
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.'' \47\ In short, the promotion of free and open competition
was a core congressional objective in creating the national market
system.\48\ 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
[[Page 76551]]
determine access fees in the vast majority of cases, subject to
oversight only in particular cases of abuse or market failure. Indeed,
the Exchange believes that classification of costs could likely not be
done without on-going debate over formulas for allocation,\49\
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.
Additionally, the manner in which one exchange defends its pricing
should not be deemed unreasonable simply because it differs from the
choices made by other exchanges (e.g., using a cost-based analysis
versus discussion on competitive forces). 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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\45\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.)
(emphasis added).
\46\ 15 U.S.C. 78f(b)(5).
\47\ 15 U.S.C. 78f(8).
\48\ 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 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.'').
\49\ 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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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.'' \50\ 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' . . . .''.\51\ 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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\50\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\51\ 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 \52\ and paragraph (f) of Rule 19b-4 \53\
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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\52\ 15 U.S.C. 78s(b)(3)(A).
\53\ 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.
[[Page 76552]]
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-CboeBYX-2024-032 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-CboeBYX-2024-032. 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-CboeBYX-2024-032 and should
be submitted on or before October 9, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-21173 Filed 9-17-24; 8:45 am]
BILLING CODE 8011-01-P