[Federal Register Volume 84, Number 137 (Wednesday, July 17, 2019)]
[Notices]
[Pages 34210-34217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15138]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86360; File No. SR-NYSE-2019-39]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Its Price List To Adopt Transition Pricing To Support the 
Introduction of Ports That Connect to the Exchange Using Pillar 
Technology

July 11, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on July 3, 2019, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 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

    The Exchange proposes to amend its Price List to adopt transition 
pricing to support the introduction of ports that connect to the 
Exchange using Pillar technology. The Exchange proposes to implement 
these changes to its Price List effective July 3, 2019. The proposed 
rule change is available on the Exchange's website at www.nyse.com, at 
the principal office of the Exchange, 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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to amend its Price List to adopt transition 
pricing to support the introduction of ports that connect to the 
Exchange using Pillar technology. With the proposed transition fee 
pricing, the Exchange would (1) adopt a cap on monthly fees for the use 
of certain ports connecting to the Exchange for the billing months July 
2019 through March 2020; (2) adopt a Decommission Extension Fee 
applicable for the billing months April 2020 through September 2020 for 
legacy port connections; and (3) prorate the monthly fee for certain 
ports activated after July 1, 2019, effective April 1, 2020. Without 
this proposed rule change, the Exchange would be required to charge a 
member organization for all of its ports--both legacy ports and the new 
ports using Pillar technology--during the transition period, which 
could significantly increase costs to member organizations.
    This filing does not to propose to increase the rates charged for 
ports. Rather, the purpose of this filing is to incent the transition 
from older to newer and more efficient Pillar technology with no fee 
increase. Moreover, the Exchange proposes to do so in essentially the 
same way that the Exchange's affiliate, NYSE Arca, Inc. (``NYSE 
Arca''), did in 2017 \4\ by, first, providing a cap on how much member 
organizations would be charged for ports for a nine-month period so 
that they would not incur additional charges during the transition to 
Pillar communication protocols and, second, providing that the fees for 
the few firms that do not transition during the nine-month period 
offset the Exchange's continuing costs of supporting legacy ports.
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    \4\ See Securities Exchange Act Release No. 81901 (October 19, 
2017), 82 FR 49426 (SR-NYSArca-2017-121) (adopting decommission 
extension fee for initial three months of March-May 2018); 
Securities Exchange Act Release No. 83410 (June 12, 2018), 83 FR 
28300 (SR-NYSArca-2018-42) (extending decommission extension fee for 
the additional three months of June-September 2018).
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    The Exchange proposes to implement these changes to its Price List 
effective July 3, 2019.\5\
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    \5\ The Exchange originally filed to amend the Schedule of Fees 
and Rebates on June 28, 2019 (SR-NYS-2019-36). SR-NYSE-2019-36 was 
subsequently withdrawn and replaced by this filing.
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Overview of the Proposed Fee Changes
    Member organizations enter orders and order instructions and 
receive information from the Exchange by establishing a connection to a 
gateway that uses communication protocols that map to the order types 
and modifiers described in Exchange rules. These gateway connections, 
also known as logical port connections, are referred to as ``ports'' on 
the Exchange's Price List.
    The Exchange currently makes available ports that provide this 
connectivity to the Exchange's trading systems (i.e., ports for entry 
of orders and/or quotes (``order/quote entry ports'')) and charges $550 
per port per month for such ports.\6\ Designated

[[Page 34211]]

Market Makers (``DMMs'') connect via ``DMM Gateways'' and are not 
charged for the first 12 ports per month that connect to the 
Exchange.\7\ The Exchange also currently makes ports available for drop 
copies and charges $550 per port per month,\8\ except that DMMs are not 
charged for drop copy ports that connect to the Exchange via the DMM 
Gateway. Fees for order/quote entry ports and drop copy ports have 
remained relatively stable over time and have not increased since 2015, 
and not since 2017 for DMMs.\9\
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    \6\ All ports on the Exchange currently connect via a Common 
Customer Gateway (``CCG'') that accesses its equity trading systems. 
See, e.g., Securities Exchange Act Release No. 64542 (May 25, 2011), 
76 FR 31659 (June 1, 2011) (SR-NYSE-2011-13).
    \7\ See Securities Exchange Act Release No. 68229 (November 14, 
2012), 77 FR 69688 (November 20, 2012) (SR-NYSE-2012-60) (Notice).
    \8\ Only one fee per drop copy port applies, even if receiving 
drop copies from multiple order/quote entry ports.
    \9\ See Securities Exchange Act Release No. 76072 (October 5, 
2015), 80 FR 61258 (October 9, 2015) (SR-NYSE-2015-43) (Notice); 
Securities Exchange Act Release No. 79748 (January 6, 2017), 82 FR 
3828 (January 12, 2017) (SR-NYSE-2016-93) (Notice).
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    The Exchange is undergoing a multi-phase transition to the Pillar 
trading platform that began in April 2018, when the Exchange introduced 
trading of UTP Securities on the Pillar trading platform.\10\ Because 
Exchange-listed securities are not yet on the Pillar trading platform, 
all ports currently communicate with the Exchange using CCG (``Phase I 
ports''), regardless of whether trading UTP securities or Exchange-
listed securities.
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    \10\ The term ``UTP Security'' is defined under Rule 1.1(aa) to 
mean a security that is listed on a national securities exchange 
other than the Exchange and that trades on the Exchange pursuant to 
unlisted trading privileges. The Exchange began trading UTP 
Securities on the Pillar trading platform on April 9, 2018. See also 
Securities Exchange Act Release No. 82945 (March 26, 2018), 83 FR 
13553 (March 29, 2018) (SR-NYSE-2017-36) (Order approving trading 
rules to support trading of UTP Securities on the Pillar trading 
platform).
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    The Exchange next plans to transition Exchange-listed securities to 
the Pillar trading platform.\11\ In anticipation of the transition of 
Exchange-listed securities to the Pillar trading platform, the Exchange 
will be introducing new technology to support how all member 
organizations, including DMMs, will communicate with the Exchange when 
trading on the Pillar trading platform. The Exchange plans to make 
available ports using Pillar gateways (``Phase II ports'') beginning 
July 1, 2019, at which time such ports will be available for trading 
UTP Securities on the Exchange. The Phase II ports will also be 
available for trading Exchange-listed securities once they transition 
to the Pillar trading platform. Once Exchange-listed securities 
transition to Pillar, DMMs will communicate with the Exchange using 
Phase II ports and will no longer use DMM Gateways.\12\
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    \11\ The Exchange has announced that, subject to rule approvals, 
it will begin transitioning Exchange-listed securities to Pillar on 
August 5, 2019, available here: https://www.nyse.com/publicdocs/nyse/markets/nyse/Revised_Pillar_Migration_Timeline.pdf. See also 
Securities Exchange Act Release No. 85962 (May 29, 2019), 84 FR 
26188 (June 5, 2019) (SR-NYSE-2019-05) (Order approving rules to 
support the transition of Exchange-listed securities to Pillar).
    \12\ The Exchange accordingly proposes to refer generally to DMM 
ports that connect to the Exchange by deleting the phrase ``via the 
DMM Gateway'' in the sections of the Price List describing order/
quote entry ports and drop copy ports.
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    As the experience of the Exchange's affiliates that trade on the 
Pillar trading platform and use the Phase II ports shows, the Phase II 
ports constitute a significant performance improvement over current 
ports, with an expected reduction in average latency up to 80% over 
Phase I ports.\13\ The Phase II ports will provide member organizations 
with a low-latency connection that will provide a more deterministic 
trading experience on the Exchange. Because of the latency improvements 
of the Phase II ports and because Exchange member organizations that 
are members of one or more of the Affiliated Exchanges already use 
Phase II ports, the Exchange expects its member organizations to 
transition expeditiously to using Phase II ports. However, because of 
the technology changes that a member organization would need to make to 
connect to Phase II ports, the Exchange anticipates that there will be 
a period of time before all member organization will be fully 
transitioned to the Phase II ports. During that transition period, a 
member organization may choose to maintain its Phase I ports while it 
replaces them with Phase II ports. Accordingly, during this 
implementation, there will be a period when both the Phase I and Phase 
II ports will be available to member organizations.\14\
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    \13\ Latency statistics for the Pillar gateways are available at 
https://www.nyse.com/pillar. These gateways are currently available 
on NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE 
Arca''), and NYSE National, Inc. (``NYSE National'') (collectively, 
the ``Affiliated Exchanges'').
    \14\ The Exchange's affiliate NYSE Arca similarly offered a 
parallel period when both Pillar phase I and Pillar phase II 
protocols were available to its members. See Securities Exchange Act 
Release No. 79588 (December 23, 2016), 81 FR 96534 (December 30, 
2016) (SR-NYSEArca-2016-170) (Notice of filing and immediate 
effectiveness of proposed rule change).
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    In connection with this transition, the Exchange proposes 
transition pricing that has two distinct phases.
     The first phase would be a transition period during which 
the fees charged for both order/quote entry and drop copy ports would, 
with certain exceptions, be capped at, and thus not charged for more 
than, the total number of both order/quote entry and drop copy ports 
that the member organization has activated as of its June 2019 invoice. 
The first phase would last nine months, from July 2019 through March 
2020, during which the Exchange will be making both the Phase I and 
Phase II ports available to member organizations.
     The second phase would encompass a six-month decommission 
period between April 2020 and September 2020 during which the 
Exchange's proposed pricing would provide increased costs to member 
organizations that did not transition in the nine-month transition 
period. Effective April 1, 2020, the Exchange would also prorate the 
monthly fee for certain ports activated on or after July 1, 2019.
Competitive Environment
    The Exchange operates in a highly competitive market. 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.'' \15\
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    \15\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37495, 37499 (June 29, 2005) (S7-10-04) (``Regulation 
NMS'').
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    As the Commission itself recognized, the market for trading 
services in NMS stocks has become ``more fragmented and competitive.'' 
\16\ Indeed, equity trading is currently dispersed across 13 
exchanges,\17\ 31 alternative trading systems,\18\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available 
information, no single exchange has more than 18% of the market share 
of executed volume of equity trades (whether excluding or

[[Page 34212]]

including auction volume).\19\ The Exchange believes that the ever-
shifting market share among the exchanges from month to month 
demonstrates that market participants can shift order flow, or 
discontinue or reduce use of certain categories of products, including 
ports, in response to fee changes. Accordingly, the Exchange's fees, 
including port fees, are reasonably constrained by competitive 
alternatives and market participants can readily trade on competing 
venues if they deem pricing levels at those other venues to be more 
favorable.
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    \16\ See Securities Exchange Act Release No. 51808, 84 FR 5202, 
5253 (February 20, 2019) (File No. S7-05-18) (Transaction Fee Pilot 
for NMS Stocks Final Rule) (``Transaction Fee Pilot'').
    \17\ See Cboe Global Markets, U.S. Equities Market Volume 
Summary (June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
    \18\ See FINRA ATS Transparency Data (June 3, 2019), available 
at https://otctransparency.finra.org/otctransparency/AtsIssueData. 
Although 54 alternative trading systems were registered with the 
Commission as of May 31, 2019, only 31 are currently trading. A list 
of alternative trading systems registered with the Commission is 
available at https://www.sec.gov/foia/docs/atslist.htm.
    \19\ See Cboe Global Markets U.S. Equities Market Volume Summary 
(June 27, 2019), available at http://markets.cboe.com/us/equities/market_share/.
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    The Exchange is proposing this transition pricing in the context of 
a competitive environment in which market participants can and do shift 
order flow, or discontinue or reduce use of certain categories of 
products, in response to fee changes. Because ports are used by member 
organizations to trade electronically on the Exchange, fees associated 
with ports are subject to these same competitive forces. The Exchange 
believes that the proposal represents a reasonable attempt to provide 
member organizations with an orderly transition to upgraded technology 
without needing to incur any additional costs. If a member organization 
is unable to complete this transition within the nine-month period, the 
pricing is designed to offset the Exchange's continuing costs of 
supporting the Phase I ports.
Proposed Rule Change
    As noted above, the Exchange proposes to introduce transition 
pricing designed to provide member organizations an extended transition 
period to connect to Phase II ports without subjecting them to fee 
increases as they transition and once that transition period ends, to 
prorate fees for order/quote entry and drop copy ports, as follows.
    The Exchange proposes to set forth the proposed ``Pillar Port 
Transition Fee Pricing'' as a separate entry on its Price List, to be 
added after the entry for Ports for drop copies. As proposed, the 
Pillar Port Transition Fee Pricing would be applicable to both order/
quote entry and drop copy ports. Accordingly, all references to ports 
in this proposed pricing refer to both types of ports.
Proposed Transition Period Pricing
    During the billing months of July 2019 through March 2020 (the 
``Transition Period''), the Exchange proposes that the total number of 
ports charged per member organization would be capped at the total 
number of such ports that the member organization has activated as of 
the June 2019 invoice, which is the last full month prior to the 
introduction of the new gateways (the ``Transition Cap'').
    As further proposed, the Transition Cap pricing would be available 
until the earlier of (1) the end of the Transition Period, i.e., March 
2020, or (2) the billing month during which a member organization has 
fully transitioned to using only ports that communicate using Pillar 
phase II protocols. For example, if in June 2019, Firm A has 10 ports, 
that firm's Transition Cap would be 10 ports. At any time during the 
Transition Cap period, if Firm A keeps those 10 Phase I ports and adds 
10 Phase II ports, Firm A would only be charged for 10 ports. If, 
during the Transition Period, Firm A no longer had any Phase I ports 
and had eight Phase II ports, it would no longer be eligible for the 
Transition Cap pricing and would be charged for those eight ports.
    As an exception to the cap, the Exchange proposes that if, during 
the Transition Period, a member organization increases the number of 
Phase I ports above the Transition Cap, those ports would be charged at 
the current rates for order/quote entry ports and drop copy ports. The 
purpose of the Transition Cap is to facilitate the transition to Phase 
II ports. If this were not a transition period, and a member 
organization increased its number of ports, it would be charged 
accordingly. The Exchange therefore believes that if a member 
organization increases the number of Phase I ports, i.e., is not 
transitioning to the new technology, it should be charged for those 
additional ports no differently than during periods when the Transition 
Cap pricing is not in effect.
    The Exchange further proposes that if, during the Transition 
Period, a member organization has a total number of ports below the 
Transition Cap, the Exchange would charge a member organization for 
their actual number of ports. For example, if during the Transition 
Period, Firm A with a Transition Cap of 10 ports had four Phase I ports 
and five Phase II ports that firm would be charged for only nine ports, 
which is under its Transition Cap.
    As proposed, the charge per port (order/quote entry and drop copy) 
will not be changing, and would remain at $550 per port per month for 
all ports. DMMs would continue not to be charged for drop copy ports 
and for their first 12 order/quote entry ports per month that connect 
to the Exchange and then $550 per order/quote entry port that connects 
to the Exchange per month thereafter.\20\
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    \20\ See note 12, supra.
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Application and Impact of Transition Period Pricing
    The purpose of Transition Period Pricing is to cap port fees to 
allow member organizations sufficient time to implement technology 
changes necessary to connect to the Exchange using the Phase II ports 
without incurring any additional Exchange fees. Based on the experience 
of the Exchange's affiliate NYSE Arca, the Exchange believes that nine 
months provides sufficient time for all member organizations, 
regardless of size, to be able to complete the necessary changes. The 
Exchange proposes to extend the Transition Pricing through March 2020 
so that if a member organization is unable to complete its changes in 
2019, it would have sufficient time in 2020 to plan for and implement 
the changes.
    The proposed cap would have the effect of waiving the port fees 
during the Transition Period of any new Phase II ports that a member 
organization may use. Without this proposed rule change, the Exchange 
would be required to charge a member organization for all of its 
ports--both Phase I and Phase II ports--during the transition period, 
which could significantly increase costs to member organizations.
Proposed Decommission Extension Fee
    The Exchange proposes to amend the Price List to adopt a 
Decommission Extension Fee that would apply during the billing months 
of April 2020 through September 2020 (the ``Decommission Period''). As 
proposed, during the Decommission Period, in addition to the current 
port fees, member organizations would be charged a Decommission 
Extension Fee of $500 per port per month, increasing by $500 per port 
for each month for any ports that communicate using Pillar phase I 
protocols. The proposed Decommission Extension Fee would apply only to 
member organizations that use Phase I ports during the Decommission 
Period. The Exchange proposes that ports using Pillar phase I protocols 
would no longer be available beginning October 1, 2020.
    For example, in June 2019, Firm A has 10 Phase I ports and a 
Transition Cap of 10 ports. By April 2020, the first month of the 
Decommission Period, Firm A still has four Phase I ports. In this 
scenario, Firm A would be charged the standard port rate for the four 
Phase I ports plus $500 per port for the Decommission Extension Fee.

[[Page 34213]]

    If Firm A has the same four Phase I ports in May 2020, Firm A would 
be charged the standard port rate for the four Phase I ports plus 
$1,000 per port for the Decommission Extension Fee.
    If Firm A retains the four Phase I ports until September 2020, the 
final month of the Decommission Extension Pricing, Firm A would be 
charged the standard port rate for the four Phase I ports plus $3,000 
per port for the Decommission Extension Fee.
Application and Impact of the Proposed Decommission Extension Fee
    As noted above, the Exchange believes that a nine-month Transition 
Period is sufficient time for member organizations to fully transition 
to Phase II ports and eliminate their use of Phase I ports. To the 
extent that member organizations do not complete the transition during 
the Transition Period, the Exchange will offer member organizations the 
ability to choose to continue using Phase I ports until September 2020. 
To cover the costs associated with maintaining and supporting both 
Phase I ports and Phase II ports beyond the nine-month Transition 
Period, the Exchange proposes that such costs would be paid by the 
expected very small number of member organizations that would need 
longer to transition than the nine-month Transition Period. 
Specifically, to support the continued availability of the Phase I 
ports, the Exchange would have to maintain additional hardware and 
devote technology resources to maintain and operate those ports, which 
is a cost to the Exchange. While these costs cannot be specifically 
quantified and it is unknown how many (if any) member organizations 
would need to continue to access the Exchange using Phase I ports after 
the Transition Period, the Exchange believes that the proposed 
Decommission Extension Fee would, in part, cover the costs associated 
with continuing to support the Phase I port infrastructure for use by a 
dwindling number of member organizations.
    The proposed Decommission Extension Fee is not novel. As noted 
previously, the Exchange's affiliate NYSE Arca previously adopted a 
decommission extension fee and was successful in using the fee to 
incent its members to fully transition to the phase II ports within a 
seven-month transition period.\21\ Specifically, NYSE Arca introduced 
its Phase II ports in August 2017. Beginning March 1, 2018, NYSE Arca 
began charging a decommission extension fee. Accordingly, NYSE Arca 
members had seven months to transition before the decommission 
extension fee was to be charged. During March 2018, the first month 
that NYSE Arca charged a decommission extension fee, 29 members of the 
139 members that had Phase I ports prior August 2017, or 21% of the 
total, were subject to the decommission extension fee. In other words, 
79% of NYSE Arca members had fully transitioned to the Phase II ports 
before NYSE Arca began charging its decommission extension fee. Sixteen 
of those firms were relatively large firms with at least ten ports that 
choose to absorb the cost rather than to transition to Phase II ports 
within the seven-month transition period.
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    \21\ See note 4, supra.
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    By September 2018, the last month that NYSE Arca charged a 
decommission extension fee, only five NYSE Arca members out of 139 (4% 
of the total), were subject to the decommission extension fee. Of those 
five members, three were relatively large firms with at least 10 ports.
    Based on NYSE Arca's experience, the Exchange believes that a 
similarly small number of larger firms will be subject to the proposed 
Decommission Extension Fee because they choose not to fully move to 
Phase II ports during the Transition Period. The Exchange notes that it 
proposes a Transition Period of nine months, which will provide firms 
two more months to transition as compared to NYSE Arca. The Exchange 
believes that these additional two months will provide more than 
sufficient time for the transition and that fewer member organizations 
will choose to pay the proposed Decommission Fee because they do not 
transition within the nine months, as compared to the number of firms 
that paid the NYSE Arca's decommission extension fee.
Proration of Port Fees
    Effective April 1, 2020, the fee for order/quote entry and drop 
copy ports activated after July 1, 2019, will be prorated to the number 
of trading days that a port is eligible for production trading with the 
Exchange, including any scheduled early closing days.\22\
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    \22\ Cboe BZX prorates port fees for the first month of service. 
See Cboe BZX U.S. Equities Exchange Fee Schedule, available at 
https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
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Application and Impact of Proration of Port Fees
    The purpose of prorating the fees for order/quote entry and drop 
copy ports activated after July 1, 2019 is to charge member 
organizations port fees only for the days in which the member 
organization's port is connected to the Exchange.
    For example, in June 2019, Firm A has 10 Phase I ports and a Pillar 
Transition Cap of 10 ports. If, in the first month after the Transition 
Cap, April 2020, Firm A has 10 Phase II ports and adds 2 Phase II ports 
on April 15, 2020, Firm A would be charged the standard port rate for 
the 10 Phase II ports, plus a prorated rate for the 2 additional Phase 
II ports added mid-month. The prorated rate would be calculated by 
dividing the number of trading days that a port is eligible for 
production trading with the Exchange by the total number of trading 
days in that month, then multiplying by the standard port rate.
    The Exchange does not propose to introduce such pro-rated pricing 
until after the Transition Period because during the Transition Period, 
member organizations will be subject to the Transition Cap pricing, 
which will cap the total port costs as member organizations add Phase 
II ports and drop Phase I ports.
    The proposed changes are not otherwise intended to address any 
other issues, and the Exchange is not aware of any problems that member 
organizations would have in complying with the proposed change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\23\ in general, and furthers the 
objectives of Sections 6(b)(4) and 6(b)(5) of the Act,\24\ in 
particular, because it provides for the equitable allocation of 
reasonable dues, fees, and other charges among its members, issuers and 
other persons using its facilities and does not unfairly discriminate 
between customers, issuers, brokers or dealers.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(4) & (5).
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The Proposed Change Is Reasonable
    The Exchange operates in a highly competitive market. 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

[[Page 34214]]

broader forms that are most important to investors and listed 
companies.'' \25\
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    \25\ See Regulation NMS, 70 FR at 37499.
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    As the Commission itself recognized, the market for trading 
services in NMS stocks has become ``more fragmented and competitive.'' 
\26\ Indeed, equity trading is currently dispersed across 13 
exchanges,\27\ 31 alternative trading systems,\28\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available 
information, no single exchange has more than 18% of the market share 
of executed volume of equity trades (whether excluding or including 
auction volume).\29\ The Exchange believes that the ever-shifting 
market share among the exchanges from month to month demonstrates that 
market participants can shift order flow, or discontinue or reduce use 
of certain categories of products, including ports, in response to fee 
changes. Accordingly, the Exchange's fees, including port fees, are 
reasonably constrained by competitive alternatives and market 
participants can readily trade on competing venues if they deem pricing 
levels at those other venues to be more favorable.
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    \26\ See Transaction Fee Pilot, 84 FR at 5253.
    \27\ See Cboe Global Markets, U.S. Equities Market Volume 
Summary (June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
    \28\ See FINRA ATS Transparency Data (June 3, 2019), available 
at https://otctransparency.finra.org/otctransparency/AtsIssueData. 
Although 54 alternative trading systems were registered with the 
Commission as of May 31, 2019, only 31 are currently trading. A list 
of alternative trading systems registered with the Commission is 
available at https://www.sec.gov/foia/docs/atslist.htm.
    \29\ See Cboe Global Markets U.S. Equities Market Volume Summary 
(June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/.
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    If a particular exchange charges excessive fees for connectivity, 
impacted members and non-members may opt to terminate their 
connectivity arrangements with that exchange, and adopt a possible 
range of alternative strategies, including routing to the applicable 
exchange through another participant or market center or taking that 
exchange's data indirectly. Accordingly, if the Exchange charges 
excessive fees, it would 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.
    Given this competitive environment, the proposal represents a 
reasonable method of providing member organizations with a means to 
make an orderly transition to upgraded technology without increasing 
their costs. As noted, the purpose of this filing is not to change the 
rates charged for ports. Rather the proposal would provide a cap on how 
much member organizations would be charged for ports during a nine-
month period so that they would not incur additional charges during the 
transition to Pillar communication protocols. Accordingly, the Exchange 
believes that the proposal is a fair and reasonable way for member 
organizations to transition to upgraded technology without needing to 
incur any additional Exchange fees. If a member organization is unable 
to complete this transition within the nine-month period, the pricing 
is designed so that only those few member organizations that may not 
transition within the nine-month period pay for the Exchange to 
continue to support the Phase I ports.
Transition Period Pricing
    The Exchange believes that the proposed Transition Cap for the 
billing months of July 2019 through March 2020, which will be available 
until the earlier of the end of the Transition Period or the billing 
month during which a member organization has fully transitioned to 
using only ports that communicate using Pillar phase II protocols, is 
reasonable.
    The proposed change is designed to permit member organizations an 
extended transition period to adjust to the new gateways. The Exchange 
believes that a nine-month transition period is reasonable and provides 
sufficient notice of the changeover. The proposed pricing is designed 
to provide all member organizations with no fee increases while they 
transition, and provides certainty for when this transition pricing 
ends so that firms can plan when and how to fully transition to the new 
gateways. Without such Transition Period pricing, member organizations 
costs would increase because, without this proposed rule change, the 
Exchange would be required to charge a member organization for all of 
its ports--both Phase I and Phase II ports--during the transition 
period, which could significantly increase costs to member 
organizations. In this regard, absent similar transition pricing, the 
Exchange's affiliate NYSE Arca's transition to Phase II protocols would 
have increased the average firms' port fees by 67.5% in the first month 
of the migration. Thus, the proposed cap balances the Exchange's desire 
to improve technology without increasing Exchange fees for member 
organizations.
Decommission Extension Fee
    The Exchange believes that the proposed Decommission Extension Fee 
for member organizations that choose to continue to connect to the 
Exchange through the use of Phase I ports after the Transition Period, 
which is scheduled to end at the close of trading on September 30, 
2020, is also reasonable.
    As noted above, the Exchange will incur ongoing costs in 
maintaining Phase I ports during the Decommission Period, including 
costs to maintain servers and their physical location, monitoring order 
activity, and other support, with no real benefit. The Exchange 
believes that it is reasonable to require member organizations to pay 
the proposed Decommission Extension Fee because a small number of 
member organizations would need longer to transition than the nine-
month Transition Period. Due to the additional costs that the Exchange 
would continue incur to support Phase I ports after the Transition 
Period, the Exchange believes that it is fair and reasonable to charge 
those member organizations that choose not to fully transition during 
the Transition Period, fees to defray the costs of such support during 
the Decommission Period because it is expected that the number of 
member organizations that do not transition to Phase II ports by March 
31, 2020 will be small. Further, the Exchange believes that it is 
reasonable for the Decommission Extension Fee to increase for each 
month for any ports that communicate using Pillar phase I protocols 
once the Decommission Period begins because the number of member 
organizations not fully migrated from legacy technology to the Phase II 
ports will be expected to diminish over time. Member organizations can 
avoid or mitigate the impact of the proposed increase of the 
Decommission Extension Fee by migrating to the new ports before or 
earlier in the Decommission Period.
Proration of Port Fees
    The Exchange believes that the proposal to prorate the monthly fee 
for ports activated on or after July 1, 2019 to the number of trading 
days in a billing month the port is connected to the Exchange is fair 
and reasonable because it would allow all Exchange participants to 
subscribe to the most effective connectivity according to their trading 
requirements and as a result will only be assessed fees for the 
connectivity they utilize during any trading month beginning April 1, 
2020

[[Page 34215]]

for ports activated after July 1, 2019.\30\ The Exchange does not 
propose to introduce pro-rated pricing until after the Transition 
Period because during the Transition Period, member organizations will 
be subject to the Transition Cap pricing, which will cap the total port 
costs as member organizations add Phase II ports and drop Phase I 
ports.
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    \30\ The level of activity with respect to a particular port 
does not affect the assessment of monthly fees, so even if a 
particular port that is available to a participant is not used, the 
participant is still billed for that port.
---------------------------------------------------------------------------

    The Exchange believes the proposed proration of fees for ports 
activated after July 1, 2019 would serve only to charge member 
organizations port fees for the actual days a member organization's 
ports are connected to the Exchange. The Exchange further notes that 
billing for ports activated before July 1, 2019 will continue to be 
based on the number of ports on the third business day prior to the end 
of the month consistent with the Exchange's billing policy, and so 
firms that cancel ports before the third business day prior to the end 
of the month will not be billed for those ports.
    Moreover, as noted above, Cboe BZX currently charges new ports on a 
prorated basis for the first month of service. The Exchange notes, 
however, that fees for ports activated before July 1, 2019 would not be 
pro-rated. The Exchange believes it is reasonable to charge flat fees 
for ports activated before July 1, 2019 as such ports are expected to 
be phased out within a short period of time after the introduction of 
the Phase II ports and would be subject to the proposed Decommission 
Fee, described above.
The Proposal is an Equitable Allocation of Fees
    The Exchange believes its proposal equitably allocates its fees 
among its market participants. The Exchange is not proposing to adjust 
the amount of the port fees, which will remain at the current level for 
all market participants. Rather, the proposal would provide an 
additional fee for those few member organizations that choose not to 
transition to Phase II ports during the Transition Period and to adopt 
a fee cap and pro-rata billing for ports without any change to the fees 
currently charged by the Exchange for the use of ports to connect to 
the Exchange's trading systems.
    The Exchange believes that the proposal constitutes an equitable 
allocation of fees because all similarly situated member organizations 
and other market participants would be charged the same rates.
    Specifically, the Transition Cap constitutes an equitable 
allocation of fees because it would be applied to all similarly 
situated member organizations, who would be eligible for the Transition 
Cap in equal measure and would thereby all be eligible to not be 
charged for more than the total number of both order/quote entry and 
drop copy ports that the member organization has activated as of its 
June 2019 invoice. The Exchange further believes that the proposal is 
an equitable allocation of fees because the Exchange will be making 
both the Phase I and Phase II ports available to all member 
organizations during the Transition Period on an equal basis. 
Accordingly, no member organization already operating on the Exchange 
would be disadvantaged by this allocation of fees.
    Similarly, the proposed Decommission Extension Fee would apply 
equally to all member organizations that choose to connect to the 
Exchange through the use of Phase I ports during the Decommission 
Period. Moreover, as noted above, the experience of the Exchange's 
affiliate NYSE Arca with a decommission extension fee suggests that 
most member organizations would complete the transition before the 
decommission extension fee goes into effect, and that many of the firms 
that were subject to the NYSE Arca fee were larger firms that choose to 
absorb the additional cost. The Exchange proposes a longer transition 
period than was available on NYSE Arca, which the Exchange expects 
should be more than sufficient for all member organizations, regardless 
of their size, to be able to transition Phase II ports before the 
proposed Decommission Fee goes into effect.
    The proposal to pro-rate port fees is also equitable since it would 
also apply equally to all member organizations that connect to the 
Exchange, who would equally receive the benefit of being charged only 
for the connectivity utilized during any trading month beginning April 
1, 2020. As noted above, to the extent a member organization continues 
to use ports activated before July 1, 2019 to connect to the Exchange 
during April 1, 2020 and any subsequent months, the Exchange believes 
it is fair and equitable to continue to charge flat fees for such ports 
until such time that connection to the Exchange through the use of 
Phase I ports is no longer available beginning October 1, 2020. 
Moreover, as noted above, Cboe BZX currently charges new ports on a 
prorated basis for the first month of service. The Exchange notes, 
however, that fees for ports activated before July 1, 2019 would not be 
pro-rated (consistent with current practice). The Exchange believes it 
is reasonable to charge flat fees for ports activated before July 1, 
2019 as such ports are expected to be phased out within a short period 
of time after the introduction of the new gateways.
The Proposal is Not Unfairly Discriminatory
    The Exchange believes that the proposal is not unfairly 
discriminatory. In the prevailing competitive environment, member 
organizations are free to disfavor the Exchange's pricing if they 
believe that alternatives offer them better value, and are free to 
discontinue to connect to the Exchange through its ports. As noted, the 
Exchange is offering upgraded connections in an effort to keep pace 
with changes in the industry and evolving customer needs as new 
technologies emerge and products continue to develop and change.
    The proposal neither targets nor will it have a disparate impact on 
any particular category of market participant. The Exchange believes 
that the proposal does not permit unfair discrimination because the 
proposal would be applied to all similarly situated member 
organizations and other market participants would be charged the same 
rates.
    The Exchange believes that the proposed Transition Cap is not 
unfairly discriminatory because all member organizations would be 
eligible for the Transition Cap in equal measure and would thereby all 
be eligible to not be charged for more than the total number of ports 
that the member organization has activated as of its June 2019 invoice.
    The Exchange further believes that the proposal does not permit 
unfair discrimination because the Exchange will be making available 
both the Phase I and Phase II ports available to all member 
organizations during the Transition Period on an equal basis. 
Accordingly, no member organization already operating on the Exchange 
would be disadvantaged by this allocation of fees. For the same 
reasons, the Exchange believes that the proposal would not permit 
unfair discrimination between member organizations.
    Similarly, the proposal does not permit unfair discrimination 
between member organizations because the proposed Decommission 
Extension Fee would apply equally to all member organizations that 
choose to connect to the Exchange through the use of such ports during 
the Decommission Period. If a member organizations becomes subject to 
the Decommission Fee, it would only be because such firm chose

[[Page 34216]]

not to complete its transition to the Phase II ports by the end of the 
Transition Period. While the Exchange cannot predict with certainty 
whether any firms would be subject to the Decommission Fee, and if so, 
which ones, based on NYSE Arca's experience with its decommission fee, 
the Exchange anticipates that it would be a limited set of member 
organizations that would incur such fees. Moreover, the Exchange 
believes that increasing the Decommission Extension Fee for each month 
for ports that communicate using Pillar phase I protocols once the 
Decommission Period begins would also apply equally to all member 
organizations that continue to choose to connect to the Exchange 
utilizing legacy ports.
    The Exchange believes that the proposal to pro-rate port fees does 
not permit unfair discrimination because it would apply equally to all 
member organizations that connect to the Exchange, who would equally 
receive the benefit of being charged only for the connectivity utilized 
during any trading month beginning April 1, 2020. As noted, to the 
extent a member organization continues to use ports activated before 
July 1, 2019 to connect to the Exchange during April 1, 2020 and any 
subsequent months, the Exchange believes it is fair, equitable and not 
unfairly discriminatory to continue to charge flat fees for such ports 
until such time that connection to the Exchange through the use of old 
ports is no longer available beginning October 1, 2020.
    Finally, the Exchange believes that it is subject to significant 
competitive forces, as described below in the Exchange's statement 
regarding the burden on competition.
    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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

    In accordance with Section 6(b)(8) of the Act,\31\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Instead, as discussed above, the Exchange believes 
that the proposed changes would offset the Exchange's continuing costs 
of supporting the Phase I ports for the few firms that do not 
transition to during the nine-month period and to adopt a fee cap and 
pro-rata billing for ports without any change to the fees currently 
charged by the Exchange for the use of ports to connect to the 
Exchange's trading systems.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    Intramarket Competition. The Exchange does not believe the proposed 
rule change would impose any burden on intramarket competition that is 
not necessary or appropriate because it would apply to all member 
organizations equally that connect to the Exchange. All member 
organizations, regardless of size, will be eligible for the Transition 
Pricing for the billing months July 2019 through March 2020 and will be 
eligible to connect via either Phase I or Phase II ports during this 
period. In addition, all member organizations will be subject to the 
proposed Decommission Fee on an equal basis if they do complete the 
transition to Phase II ports by the end of March 2020. Based on the 
experience of the Exchange's affiliate, the Exchange anticipates that a 
low percentage of member organizations would be subject to the proposed 
Decommission Fee, and the firms likely to be subject to such fee would 
be larger firms that could more easily absorb the cost of that fee. The 
Exchange further believes that by providing nine months' notice of the 
Decommission Fee, all member organizations have an equal opportunity to 
timely transition to Phase II ports before the Decommission Fee would 
take effect.
    Intermarket Competition. The Exchange does not believe the proposed 
rule change would impose any burden on intermarket competition that is 
not necessary or appropriate because the Exchange operates in a highly 
competitive market in which market participants can readily choose to 
send their orders to other exchange and off-exchange venues if they 
deem fee levels at those other venues to be more favorable. The 
Exchange believes that fees for connectivity are constrained by the 
robust competition for order flow among exchanges and non-exchange 
markets.
    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.'' \32\
---------------------------------------------------------------------------

    \32\ See Regulation NMS, 70 FR at 37499.
---------------------------------------------------------------------------

    As the Commission itself recognized, the market for trading 
services in NMS stocks has become ``more fragmented and competitive.'' 
\33\ Indeed, equity trading is currently dispersed across 13 
exchanges,\34\ 31 alternative trading systems,\35\ and numerous broker-
dealer internalizers and wholesalers. Based on publicly-available 
information, no single exchange has more than 18% of the market share 
of executed volume of equity trades (whether excluding or including 
auction volume).\36\ The Exchange believes that the ever-shifting 
market share among the exchanges from month to month demonstrates that 
market participants can shift order flow, or discontinue or reduce use 
of certain categories of products, including ports, in response to fee 
changes. Accordingly, the Exchange's fees, including port fees, are 
reasonably constrained by competitive alternatives and market 
participants can readily trade on competing venues if they deem pricing 
levels at those other venues to be more favorable.
---------------------------------------------------------------------------

    \33\ See Transaction Fee Pilot, 84 FR at 5253.
    \34\ See Cboe Global Markets, U.S. Equities Market Volume 
Summary (June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
    \35\ See FINRA ATS Transparency Data (June 3, 2019), available 
at https://otctransparency.finra.org/otctransparency/AtsIssueData. 
Although 54 alternative trading systems were registered with the 
Commission as of May 31, 2019, only 31 are currently trading. A list 
of alternative trading systems registered with the Commission is 
available at https://www.sec.gov/foia/docs/atslist.htm.
    \36\ See Cboe Global Markets U.S. Equities Market Volume Summary 
(June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/.
---------------------------------------------------------------------------

    The Exchange is proposing this transition pricing for ports in the 
context of a competitive environment in which market participants can 
and do shift order flow, or discontinue or reduce use of certain 
categories of products in response to fee changes. Because ports are 
used by member organizations to trade on the Exchange, fees associated 
with ports are subject to these same competitive forces. If a 
particular exchange charges excessive fees for connectivity, impacted 
members and non-members may opt to terminate their connectivity 
arrangements with that exchange, and adopt a possible range of 
alternative strategies, including routing orders to the applicable 
exchange through another participant or market center.
    The Exchange therefore believes that the proposal would not impose 
an undue burden on intermarket competition because the purpose of this 
filing is not to change the rates charged for ports but rather to, 
first, to provide a cap on how much member organizations would be 
charged for ports for a nine-month period so that they would not incur 
additional charges

[[Page 34217]]

during the transition to Pillar communication protocols, and second, to 
provide that the fees for the few firms that do not transition to 
during the nine-month period offset the Exchange's continuing costs of 
supporting the Phase I ports. The Exchange believes that the proposal 
represents a reasonable attempt to provide member organizations with an 
orderly transition to upgraded technology without needing to incur any 
additional costs. If a member organization is unable to complete this 
transition within the nine-month period, the pricing is designed to 
offset the Exchange's continuing costs of supporting the Phase I ports.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \37\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \38\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(3)(A).
    \38\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 shall institute proceedings under 
Section 19(b)(2)(B) \39\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-NYSE-2019-39 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-NYSE-2019-39. 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-NYSE-2019-39 and should be submitted on 
or before August 7, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15138 Filed 7-16-19; 8:45 am]
BILLING CODE 8011-01-P


