
[Federal Register Volume 81, Number 160 (Thursday, August 18, 2016)]
[Notices]
[Pages 55251-55254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19687]



[[Page 55251]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78565; File No. SR-BOX-2016-40]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Its Fee Schedule To Adopt a New Fee in Section V (Technology 
Fees) of the BOX Fee Schedule

August 12, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 3, 2016, BOX Options Exchange LLC (the ``Exchange'') 
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 Exchange filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule to 
adopt a new fee in Section V (Technology Fees) of the BOX Fee Schedule 
on the BOX Market LLC (``BOX'') options facility. The text of the 
proposed rule change is available from the principal office of the 
Exchange, at the Commission's Public Reference Room and also on the 
Exchange's Internet Web site at http://boxexchange.com.

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 Section V (Technology Fees) in the 
Fee Schedule. Specifically, the Exchange proposes to establish Section 
V.B. (High Speed Vendor Feed (``HSVF'') in the BOX Fee Schedule and 
adopt a fee of $750.00 per month for all market participants for 
receiving the HSVF. This fee will be payable by any market participant 
that receives the HSVF through a direct connection to BOX and will be 
assessed once per market participant.
    In February 2013, the Exchange made its proprietary direct market 
data product, the HSVF, available to all market participants at no 
cost.\5\ The BOX HSVF is a proprietary product that provides: (i) 
Trades and trade cancelation information; (ii) best-ranked price level 
to buy and the best-ranked price level to sell; (iii) instrument 
summaries (including information such as high, low, and last trade 
price and traded volume); (iv) the five best limit prices for each 
option instrument; (v) request for Quote messages; \6\ (vi) PIP Order, 
Improvement Order and Block Trade Order (Facilitation and Solicitation) 
information; \7\ (vii) orders exposed at NBBO; \8\ (viii) instrument 
dictionary (e.g., strike price, expiration date, underlying symbol, 
price threshold, and minimum trading increment for instruments traded 
on BOX); (ix) options class and instrument status change notices (e.g., 
whether an instrument or class is in pre-opening, continuous trading, 
closed, halted, or prohibited from trading); and (x) options class 
opening time.
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    \5\ See Securities Exchange Act Release No. 68833 (February 5, 
2013), 78 FR 9758 (February 11, 2013) (SR-BOX-2013-04).
    \6\ See Exchange Rules 100(a)(57), 7070(h) and 8050.
    \7\ As set forth in Exchange Rules 7150 and 7270, respectively.
    \8\ As set forth in Exchange Rules 7130(b)(3) and 8040(d)(6), 
respectively.
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    The Exchange notes that data connection fees are charged by other 
options markets such as International Securities Exchange (``ISE''), 
Bats BZX Exchange (``BATS''), Chicago Board Options Exchange 
(``CBOE''), The NASDAQ Options Market (``NOM''), Miami International 
Securities Exchange LLC (``MIAX''), NASDAQ BX, Inc. (``BX''), and 
NASDAQ PHLX LLC (``Phlx'').\9\
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    \9\ See the ISE Fee Schedule, available at: https://www.ise.com/assets/documents/OptionsExchange/legal/fee/ISE_fee_schedule.pdf, the 
BATS Fee Schedule, available at: https://batstrading.com/support/fee_schedule/bzx/, the CBOE Fee Schedule, available at https://www.cboe.org/framed/pdfframed.aspx?content=/publish/mdxfees/mdxfeescheduleforcboedatafeeds.pdf§ion=SEC_MDX_CSM&title=CBOE 
MDX Fees Schedule; the NOM Fee Schedule, available at http://www.nasdaqtrader.com/Micro.aspx?id=optionsPricing, the MIAX Fee 
Schedule, available at: https://www.miaxoptions.com/content/fees and 
the Phlx Fee Schedule, available at: http://www.nasdaqtrader.com/Micro.aspx?id=phlxpricing.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\10\ in general, and Section 
6(b)(4) and (5) of the Act,\11\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees, and other charges 
among BOX Participants and other persons using the Exchange's 
facilities and is not designed to permit unfair discrimination among 
them.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4) and (5).
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations and broker-dealers increased authority and flexibility to 
offer new and unique market data to the public.
    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\12\
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    \12\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    By removing ``unnecessary regulatory restrictions'' on the ability 
of exchanges to sell their own data, Regulation NMS advanced the goals 
of the Act and the principles reflected in its legislative history. If 
the free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well. The HSVF is precisely the 
sort of market data product that the Commission envisioned when it 
adopted Regulation NMS.
    The decision of the United States Court of Appeals for the District 
of

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Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010) 
(``NetCoalition I''), upheld the Commission's reliance upon competitive 
markets to set reasonable and equitably allocated fees for market data. 
``In fact, the legislative history indicates that the Congress intended 
that the market system `evolve through the interplay of competitive 
forces as unnecessary regulatory restrictions are removed' and that the 
SEC wield its regulatory power `in those situations where competition 
may not be sufficient,' such as in the creation of a `consolidated 
transactional reporting system.' NetCoalition I, at 535 (quoting H.R. 
Rep. No. 94-229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 
323). The court agreed with the Commission's conclusion that ``Congress 
intended that `competitive forces should dictate the services and 
practices that constitute the U.S. national market system for trading 
equity securities.' \13\
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    \13\ NetCoalition I, at 535.
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    The Court in NetCoalition I, while upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSE Arca's data product at issue 
in that case. As explained below in BOX's Statement on Burden on 
Competition, however, BOX believes that there is substantial evidence 
of competition in the marketplace for data that was not in the record 
in the NetCoalition I case, and that the Commission is entitled to rely 
upon such evidence in concluding fees are the product of competition, 
and therefore in accordance with the relevant statutory standards.\14\ 
Accordingly, any findings of the court with respect to that product may 
not be relevant to the product at issue in this filing.
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    \14\ It should also be noted that Section 916 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges.
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    BOX believes that the allocation of the proposed fee is fair and 
equitable in accordance with Section 6(b)(4) of the Act, and not 
unreasonably discriminatory in accordance with Section 6(b)(5) of the 
Act. As described above, the proposed fee is based on pricing 
conventions and distinctions that exist in BOX's current fee schedule. 
These distinctions are each based on principles of fairness and equity 
that have helped for many years to maintain fair, equitable, and not 
unreasonably discriminatory fees, and that apply with equal or greater 
force to the current proposal.
    As described in greater detail below, if BOX has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can discontinue the 
use of their data because the proposed product is entirely optional to 
all parties. Firms are not required to purchase data and BOX is not 
required to make data available or to offer specific pricing 
alternatives for potential purchases. BOX can discontinue offering a 
pricing alternative (as it has in the past) and firms can discontinue 
their use at any time and for any reason (as they often do), including 
due to their assessment of the reasonableness of fees charged. BOX 
continues to establish and revise pricing policies aimed at increasing 
fairness and equitable allocation of fees among subscribers.
    The Exchange's proprietary HSVF is currently available to all 
market participants at no cost; however, the Exchange now proposes to 
adopt a new fee of $750.00 per month for all market participants who 
receive the HSVF. The Exchange believes that adopting such a fee is 
reasonable and appropriate as it is within the range that is charged by 
other options exchanges.\15\
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    \15\ See supra, note 9. CBOE's data distributor MDX charges a 
$500 port fee per month; NOM charges a port fee between $500 and 
$750 a month depending on the port. The Exchange notes the CBOE and 
NOM charge these fees per port, while the Exchange proposes to 
assess the fee once per market participant.
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    In addition, the Exchange believes that its fees are equitable and 
not unfairly discriminatory because all market participants are charged 
the same fee for access to the HSVF. Further, the Exchange notes that 
all market participants who wish to receive the feed may, as the feed 
is available to anyone willing to pay the proposed $750 monthly fee.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
change to the Fee Schedule will simply allow the Exchange to charge all 
market participants equally for the costs incurred by connecting to the 
BOX Network. The HSVF is similar to proprietary data products currently 
offered by other exchanges, and these other exchanges charge comparable 
monthly fees.\16\ While connection to the HSVF is required to receive 
the broadcasts for and participate in the Exchange's auction 
mechanisms,\17\ the Exchange does not believes the proposed monthly fee 
will impede competition within these auctions. As discussed above, the 
Exchange believes that fees for connectivity are constrained by the 
robust competition for order flow among exchanges and non-exchange 
markets. Further, excessive fees for connectivity would serve to impair 
ability to compete for order flow rather than burdening competition. As 
such, the Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \16\ See supra note 9.
    \17\ BOX's auction mechanisms include the Price Improvement 
Period (``PIP''), Complex Order Price Improvement Period 
(``COPIP''), Facilitation Auction and Solicitation Auction.
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    Notwithstanding its determination that the Commission may rely upon 
competition to establish fair and equitably allocated fees for market 
data, the NetCoalition court found that the Commission had not, in that 
case, compiled a record that adequately supported its conclusion that 
the market for the data at issue in the case was competitive. BOX 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. Data products 
are valuable to many end subscribers only insofar as they provide 
information that end Subscribers expect will assist them or their 
customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
Participant's view the

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costs of transaction executions and of data as a unified cost of doing 
business with the exchange. A broker-dealer (``BD'') will direct orders 
to a particular exchange only if the expected revenues from executing 
trades on the exchange exceed net transaction execution costs and the 
cost of data that the BD chooses to buy to support its trading 
decisions (or those of its customers). The choice of data products is, 
in turn, a product of the value of the products in making profitable 
trading decisions. If the cost of the product exceeds its expected 
value, the BD will choose not to buy it. Moreover, as a BD chooses to 
direct fewer orders to a particular exchange, the value of the product 
to that BD decreases, for two reasons. First, the product will contain 
less information, because executions of the BD's orders will not be 
reflected in it. Second, and perhaps more important, the product will 
be less valuable to that BD because it does not provide information 
about the venue to which it is directing its orders. Data from the 
competing venue to which the BD is directing orders will become 
correspondingly more valuable.
    Thus, an increase in the fees charged for either transactions or 
data has the potential to impair revenues from both products. ``No one 
disputes that competition for order flow is `fierce'.'' NetCoalition at 
24. However, the existence of fierce competition for order flow implies 
a high degree of price sensitivity on the part of BDs with order flow, 
since they may readily reduce costs by directing orders toward the 
lowest-cost trading venues. A BD that shifted its order flow from one 
platform to another in response to order execution price differentials 
would both reduce the value of that platform's market data and reduce 
its own need to consume data from the disfavored platform. Similarly, 
if a platform increases its market data fees, the change will affect 
the overall cost of doing business with the platform, and affected BDs 
will assess whether they can lower their trading costs by directing 
orders elsewhere and thereby lessening the need for the more expensive 
data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. Some exchanges pays rebates to attract orders, charges 
relatively low prices for market information and charges relatively 
high prices for accessing posted liquidity. Other platforms may choose 
a strategy of paying lower liquidity rebates to attract orders, setting 
relatively low prices for accessing posted liquidity, and setting 
relatively high prices for market information. Still others may provide 
most data free of charge and rely exclusively on transaction fees to 
recover their costs. Finally, some platforms may incentivize use by 
providing opportunities for equity ownership, which may allow them to 
charge lower direct fees for executions and data.
    In this environment, there is no economic basis for regulating 
maximum prices for one of the joint products in an industry in which 
suppliers face competitive constraints with regard to the joint 
offering. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including eleven SRO markets, as well as internalizing BDs and various 
forms of alternative trading systems (``ATSs''), including dark pools 
and electronic communication networks (``ECNs''). Each SRO market 
competes to produce transaction reports via trade executions, and two 
FINRA-regulated TRFs compete to attract internalized transaction 
reports. It is common for BDs to further and exploit this competition 
by sending their order flow and transaction reports to multiple 
markets, rather than providing them all to a single market. Competitive 
markets for order flow, executions, and transaction reports provide 
pricing discipline for the inputs of proprietary data products.
    The large number of SROs, TRFs, BDs, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ATS, and BD is currently permitted to produce proprietary 
data products, and many currently do or have announced plans to do so, 
including BOX, NYSE, NYSE MKT, NYSE Arca, and BATS/Direct Edge.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple BDs' 
production of proprietary data products. The potential sources of 
proprietary products are virtually limitless. Notably, the potential 
sources of data include the BDs that submit trade reports to TRFs and 
that have the ability to consolidate and distribute their data without 
the involvement of FINRA or an exchange-operated TRF.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and NYSE Arca did before registering as exchanges by 
publishing proprietary book data on the internet. Second, because a 
single order or transaction report can appear in a core data product, a 
SRO proprietary product, and/or a non-SRO proprietary product, the data 
available in proprietary products is exponentially greater than the 
actual number of orders and transaction reports that exist in the 
marketplace.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and BATS/Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has

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increased the contestability of that market. While BDs have previously 
published their proprietary data individually, Regulation NMS 
encourages market data vendors and BDs to produce proprietary products 
cooperatively in a manner never before possible. Multiple market data 
vendors already have the capability to aggregate data and disseminate 
it on a profitable scale, including Bloomberg and Thomson Reuters. In 
Europe, Cinnober aggregates and disseminates data from over 40 brokers 
and multilateral trading facilities.\18\
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    \18\ See http://www.cinnober.com/boat-trade-reporting.
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    In this environment, a super-competitive increase in the fees 
charged for either transactions or data has the potential to impair 
revenues from both products. ``No one disputes that competition for 
order flow is `fierce'.'' NetCoalition I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD that shifted its order flow from one platform to another in 
response to order execution price differentials would both reduce the 
value of that platform's market data and reduce its own need to consume 
data from the disfavored platform. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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)(ii) of the Exchange Act \19\ and Rule 19b-4(f)(2) 
thereunder,\20\ because it establishes or changes a due, or fee.
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    \19\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \20\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-40 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-BOX-2016-40. 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 Web site (http://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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2016-40, and should be 
submitted on or before September 8, 2016.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19687 Filed 8-17-16; 8:45 am]
 BILLING CODE 8011-01-P


