
[Federal Register Volume 84, Number 21 (Thursday, January 31, 2019)]
[Notices]
[Pages 830-833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00474]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84963; File No. SR-CboeBZX-2018-095]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the BZX Equities Fee Schedule

December 26, 2018.
    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 December 21, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. is proposing a rule change to change the 
nomenclature associated with the current logical port fees charged for 
order entry ports to reflect a new match capacity fee that better 
captures the service offering of these products. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange offers two types of logical ports that permit members 
to enter orders into its trading system--i.e., Financial Information 
eXchange (``FIX'') and Binary Order Entry (``BOE''). The purpose of the 
proposed rule change is to amend the BZX Equities fee schedule to 
change the nomenclature associated with the current logical port fees 
charged for these offerings to reflect a new match capacity fee that 
better captures the service offering of these products. As communicated 
to members, although the Exchange is changing its nomenclature to 
better reflect the services provided to market participants, the 
proposed capacity allocations described in this proposed rule change 
would continue to operate in the same manner as logical ports currently 
used to connect to the Exchange. The Exchange believes, however, that 
properly characterizing these fees as ``capacity fees,'' and specifying 
the actual levels of message traffic supported by these products, will 
increase transparency and clarity around its charges and reduce 
confusion about the value of the services being provided to market 
participants that choose to access these services.
    Today, the Exchange charges all logical connectivity fees on a 
``per port'' basis. A logical port represents a technical port 
established by the Exchange within the Exchange's trading system for 
the delivery and/or receipt of trading messages--i.e., orders, accepts, 
cancels, transactions, etc.\3\ Market participants that wish to connect 
directly to the Exchange can request a number of different types of 
ports, including ports that support order entry, customizable purge 
functionality, or the receipt of market data. Firms can also choose to 
connect indirectly through a number of different third party providers, 
such as another broker-dealer or service bureau that the Exchange 
permits through specialized access to the Exchange's trading system and 
that may provide additional services or operate at a lower mutualized 
cost by providing access to multiple members.\4\ Each logical port that 
supports order entry entitles a firm to submit message traffic of up to 
5,000 messages per second, an amount equivalent to 117 million messages 
daily, and is currently charged at a rate of $550 per month.\5\
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    \3\ The Exchange separately offers physical ports that grant 
access to the Exchange's physical connectivity infrastructure.
    \4\ 24% of members that traded equities on BZX in November 
determined that their business does not require direct order entry 
access, and instead connect indirectly to the Exchange today through 
a service bureau or other service provider.
    \5\ Logical port fees are limited to logical ports within the 
primary data center. No logical port fees are assessed for redundant 
secondary data center ports. See BZX Equities Fee Schedule, Logical 
Port Fees. New requests are prorated for the first month of service. 
Cancellation requests are billed in full month increments as firms 
are required to pay for the service for the remainder of the month, 
unless the session is terminated within the first month of service. 
Id.
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    An obvious driver for a member's decision to purchase multiple 
ports is their desire to send or receive additional levels of message 
traffic in some manner, either by increasing the member's total amount 
of message capacity available, or by segregating order flow for 
different trading desks and clients to avoid latency sensitive 
applications from competing for a single thread of resources. For 
example, a member may purchase one or more ports for its market making 
business based on the amount of message traffic needed to support that 
business, and then purchase separate ports for proprietary trading or 
customer facing businesses so that those businesses have their own 
distinct connection, allowing the firm to send multiple messages into 
the Exchange's trading system in parallel rather than sequentially. 
Some members that provide direct market access to their customers also 
purchase separate ports for different clients as a service for latency 
sensitive customers that desire the lowest possible latency to improve 
trading performance. Thus, while a smaller firm with a simple business 
model may be able to transact on the Exchange using one or two FIX or 
BOE ports that are billed at a modest rate of $550 per month each,\6\ a 
larger

[[Page 831]]

market participant with a substantial and diversified U.S. equities 
business may purchase additional order entry ports to support both the 
volume and types of activity that they conduct on the Exchange.
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    \6\ 18% of members that traded equities on BZX in November 
purchased only one or two order entry ports.
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    Based on data analyzed by the Exchange, the top ten BZX members, 
which account as a group for nearly two-thirds of BZX equities volume, 
have chosen to purchase 47% of order entry ports. More simply put, the 
top ten BZX members have purchased the ability to use 47% of the 
capacity of the BZX trading system. In addition to the Exchange's 
commercial obligations to maintain resilient systems capable of 
efficiently processing the message traffic that originates from those 
firms, the Exchange is now also under regulatory obligations to 
maintain resilient systems while receiving messages at the peak 
capacity of those ports. While the Exchange does not know the trading 
results of its members, it is clear that the members with larger 
businesses, based on volume executed, have larger demands for the 
capacity of the Exchange's systems. It should also be noted that half 
of those top ten members are net positive in terms of total revenue 
flows as the trading rebates provided to these firms for liquidity and 
order flow exceed the sum of all non-transaction and transaction fees 
collected from them.
    In addition to volume, the types of trading strategies employed by 
a particular member may also impact the amount of message traffic 
delivered to Exchange systems, and hence the number of ports purchased 
to support their equities trading business. As a national securities 
exchange, the Exchange is tasked with cultivating a vibrant and 
competitive market that facilitates fair and orderly trading between a 
wide range of market participants that employ a wide range of trading 
strategies. These market participants together help cultivate the 
equities trading ecosystem, and both support that ecosystem in 
different ways and use different amounts of resources (i.e., capacity) 
in doing so. Some simple trading strategies such as those employed by 
investors seeking to source available liquidity at the national best 
bid or offer may require a modest amount of capacity. Other trading 
strategies used by professional market makers or algorithmic traders 
that involve the frequent entry, modification, and cancellation of 
orders, may require additional capacity, including potentially higher 
peak capacity when multiple trading strategies or algorithms across 
multiple logical ports attempt to access the Exchange at similar and 
granular time intervals due to anticipated changes in the market. The 
Exchange believes that charging for capacity ensures that firms that 
demand the most resources are charged appropriately, while firms that 
demand relatively less capacity can connect and trade on the Exchange 
at a low cost.
    Charging fees based on allocated capacity thus ensures that the 
cost of access is equitably apportioned between market participants 
based on their business needs. Nevertheless, the Exchange believes that 
there is some confusion in the industry surrounding how the Exchange 
and other national securities exchanges charge for connectivity, 
including the burden on smaller firms that actually benefit from the 
current structure where market participants are charged based on the 
number of ports (i.e., capacity) that they request. In the interest of 
transparency, the Exchange is therefore proposing to replace its ``per 
port'' fees with capacity fees that more accurately capture the intent 
this fee. While the Exchange's logical connectivity offerings will 
continue to operate in the same manner as they do today, the Exchange 
believes that the proposed changes in terminology, which connect the 
fees charged for logical connectivity to the capacity requested by 
market participants, would shed additional light on this service 
offering. As proposed, fees would be explicitly assessed based on the 
capacity allocation (i.e., messages per second) requested for order 
entry in the Exchange's primary data center.\7\ Specifically, the match 
capacity fee would be $550 per month for an allocation of 5,000 
messages per second.\8\ Members that require more capacity due to the 
size of their U.S. equities business, the trading strategies that they 
employ, the desire to reduce latency by maintaining multiple separate 
logical connections, or any other reason, would be able to continue 
purchasing additional capacity allocations in the primary data center 
at the same monthly rate. As is the case today, no fee would be 
assessed for redundant capacity in the secondary data center thus 
providing members with free, identical capacity allocations in the 
secondary data center based on their capacity requests in the primary.
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    \7\ Firms that already connect through logical ports would have 
uninterrupted service across the established connections and would 
not need to re-request capacity allocations.
    \8\ New requests would continue to be prorated for the first 
month of service, and cancellation requests would be billed in full 
month increments. See note 5 supra.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\9\ in general, and furthers the requirements 
of Section 6(b)(4),\10\ in particular, as it is designed to provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its members and other persons using its facilities. In light of 
recent debate and calls for transparency around exchange charges for 
market access, the Exchange believes that the proposed changes to how 
fees for logical connectivity are reflected on the fee schedule would 
shed additional light on how market participants are charged for 
connectivity. The Exchange believes that its fees for logical 
connectivity, which would now be reflected as a match capacity fee, 
continue to be reasonable, equitable, and not unfairly discriminatory 
as they are designed to ensure that firms that use the most capacity 
pay for that capacity, rather than placing that burden on market 
participants that have more modest needs.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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    Today, the Exchange charges a ``per port'' fee for logical 
connectivity. This fee is in effect a capacity fee as each FIX or BOE 
port used for order entry supports a specified capacity (i.e., messages 
per second) in the matching engine, and firms purchase additional 
logical ports when they require more capacity due to their business 
needs. Smaller members that demand more limited message traffic may 
connect through a service bureau or other service provider, as chosen 
by 24% of members,\11\ or may choose to purchase one or two order entry 
ports, as chosen by 18% of members.\12\ At the same time, firms with 
more order flow, or that employ unique trading strategies that result 
in increased message traffic throughout the trading day or at times of 
higher peak traffic, may choose to purchase additional ports to support 
their business. The Exchange believes that the proposed match capacity 
fees are appropriate as these fees would ensure that market 
participants continue to pay for the amount of capacity that they 
request. The Exchange therefore believes that its logical connectivity 
fees are aligned with the goals of the Commission in facilitating a 
competitive

[[Page 832]]

market for all firms that trade on the Exchange.
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    \11\ See supra note 4.
    \12\ See supra note 6. Altogether, a significant percentage of 
members (42%) that trade equities on BZX purchase two or fewer order 
entry ports--i.e., including members that purchase no ports and 
connect indirectly instead.
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    The proposed match capacity fee would not change the services 
provided to market participants, and would be billed at the same 
monthly rate as currently charged today on a per port basis, but would 
ensure that the way the Exchange's fees are described is more closely 
aligned with the goal of those fees. Specifically, each match capacity 
fee paid by a member would allow that firm to continue to submit up to 
5,000 messages per second to the Exchange for processing in accordance 
with the Exchange's trading rules.\13\ For only $550 per month a member 
would therefore be able submit as many as 117 million messages daily 
into the Exchange's trading system. In addition, market participants 
that desire more total capacity due to their business needs, or that 
wish to segregate order flow by purchasing separate capacity 
allocations to reduce latency or for other operational reasons, would 
be permitted to choose to purchase such additional capacity at the same 
marginal cost. The Exchange believes that it is reasonable, equitable, 
and not unfairly discriminatory to charge for connectivity in this 
manner as this structure ensures that the firms can choose based on 
their needs, and the firms that pay the most are the ones that demand 
the most resources from the Exchange.
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    \13\ The Exchange has invested considerable time and resources 
in designing and maintaining a resilient trading system that is 
capable of handling the message traffic produced by members in a 
manner that complies with its obligations as a national securities 
exchange.
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    To illustrate the large variance in message traffic used by BZX 
members, the Exchange compiled statistics on the average message 
traffic generated during November 2018 by each firm across three 
periods: (1) The open (9:30 a.m.-9:35 a.m.), (2) regular trading (9:35 
a.m.-3:55 p.m.), and (3) the close (3:55 p.m.-4:00 p.m.).\14\ The 
summary table below shows the average order rate/second for firms,\15\ 
bucketed in groups based on their rank in the distribution. 
Significantly higher message traffic is generated by firms at the top 
of the distribution, which represents the firms with the largest U.S. 
equities businesses, with firms at the bottom of the distribution 
accounting for a small percentage of traffic generated.
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    \14\ The dataset includes all firms that have purchased order 
entry ports, including BZX members or non-members that provide 
indirect access to the Exchange.
    \15\ The order rate includes, for each firm, all new orders, 
modifies, and cancel messages submitted into the trading system. The 
average order rate is calculated by dividing the number of messages 
by the number of seconds for the period.

                                    Summary Table--Average Order Rate/Second
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                                                                                      Regular
                              Rank                                     Open           trading          Close
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1-5.............................................................           4,693           2,059           3,904
6-10............................................................           1,743             739           1,173
11-20...........................................................             666             296             437
21-30...........................................................             176              99             207
31-40...........................................................             123              42              68
41-50...........................................................              68              12              28
51+.............................................................               2               1               2
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    While message traffic for individual market participants typically 
peaks at higher levels during certain periods of greater market 
activity, not a single firm had an average order rate that exceeded the 
5,000 messages per second permitted over a single port for the period 
of regular trading that accounts for the substantial majority of the 
trading day. In fact, only five firms exceeded an average of greater 
than 1,000 messages per second, and these firms collectively generated 
more message traffic than every other firm combined.\16\ In the first 
and last five minutes of the trading day around the open and close of 
trading, where volatility and therefore message traffic is typically 
higher, only three firms had an average order rate that exceeded 5,000 
messages per second, with the top five again accounting for more 
message traffic than all other market participants combined in both of 
these periods. A number of sophisticated market participants may also 
have higher peak traffic intraday if their business involves the 
frequent modification or cancellation of a large number of orders at 
very granular millisecond or microsecond time intervals, particularly 
when multiple trading strategies or algorithms that come through 
different logical connections attempt to access the market 
simultaneously. The Exchange must build resilient trading systems that 
are able support significant bursts in message traffic from such firms, 
including most recently on October 18, 2018 when the Exchange 
successfully processed a historical high burst in message traffic of 
1,140,183 messages per second.
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    \16\ Individually, all but one of the firms in the top five 
generated more message traffic than the total message traffic 
generated by all firms outside of the top 20 combined, and the firm 
with the highest order rate alone generated almost twice as much as 
such firms.
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    Thus, although certain broker-dealers with large and profitable 
U.S. equities businesses may purchase multiple order entry ports, the 
Exchange believes that this is appropriately driven by the amount of 
message traffic that they generate throughout the day and at periods 
where more message traffic is generated. Furthermore, the data shows 
that market participants with modest capacity needs can access the 
Exchange at a very low cost. While the Exchange believes that 
encouraging order flow and liquidity from a diverse set of market 
participants facilitates price discovery and improves the quality of 
our markets, the Exchange also believes that firms that desire 
additional capacity to support trading strategies with higher peak 
traffic should continue to be charged for the capacity that they 
request rather than have this cost mutualized across firms with a much 
smaller footprint.
    With the proposed fees, firms with modest capacity needs could 
continue to pay for and operate their business with the baseline 
capacity of 5,000 messages per second, which represents the equivalent 
of one logical port today. Furthermore, large and sophisticated market 
participants that require significantly more capacity than their 
smaller counterparts would be able to purchase that capacity from the 
Exchange at a reasonable marginal cost and thereby satisfy their 
business needs, including the need for higher peak traffic. The 
Exchange therefore believes that the proposed match capacity fee both 
appropriately reflects the benefits

[[Page 833]]

to different firms of being able to send messages into the Exchange's 
trading system, and facilitates the Commission's goal of ensuring that 
critical market infrastructure has ``levels of capacity, integrity, 
resiliency, availability, and security adequate to maintain their 
operational capability and promote the maintenance of fair and orderly 
markets.'' \17\
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    \17\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13) 
(Regulation SCI Adopting Release).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As explained 
herein, the proposed rule change is designed to increase transparency 
around the Exchange's fees by changing the nomenclature associated with 
``per port'' fees for order entry logical ports to reflect a capacity 
fee. The Exchange believes that charging logical connectivity fees 
based on the capacity used by a market participant is pro-competitive 
because it ensures that firms with the largest U.S. equities market 
share, or that employ trading strategies that result in increased 
message traffic, continue to pay for the capacity that they request, 
while smaller firms can connect and trade at a low cost.

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) of the Act \18\ and paragraph (f) of Rule 19b-4 \19\ 
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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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2018-095 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2018-095. 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 (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 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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-095 and should be submitted 
on or before February 21, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-00474 Filed 1-30-19; 8:45 am]
BILLING CODE P


