[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50534-50541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20706]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87014; File No. SR-BOX-2019-27]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee 
Schedule on the BOX Options Market LLC (``BOX'') Facility To Establish 
BOX Connectivity Fees for Participants and Non-Participants Who Connect 
to the BOX Network

September 19, 2019.
    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 September 5, 2019, BOX 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

[[Page 50535]]

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 on 
the BOX Options Market LLC (``BOX'') 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 website 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 VI. (Technology Fees) of the 
BOX Fee Schedule to establish BOX Connectivity Fees for Participants 
and non-Participants who connect to the BOX network. Connectivity fees 
will be based upon the amount of bandwidth that will be used by the 
Participant or non-Participant. Further, BOX Participants or non-
Participants connected as of the last trading day of each calendar 
month will be charged the applicable Connectivity Fee for that month. 
The Connectivity Fees will be as follows:

------------------------------------------------------------------------
              Connection type                       Monthly fees
------------------------------------------------------------------------
Non-10 Gb Connection......................  $1,000 per connection.
10 Gb Connection..........................  $5,000 per connection.
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The Exchange also proposes to amend certain language and numbering in 
Section VI.A to reflect the changes discussed above. Specifically, the 
Exchange proposes to add the title ``Third Party Connectivity Fees'' 
under Section VI.A. Further, the Exchange proposes to add Section 
VI.A.2, which details the proposed BOX Connectivity Fees discussed 
above. Finally the Exchange is proposing to remove Section VI.C. High 
Speed Vendor Feed (``HSVF''), and reclassify the HSVF as a Port Fee.
    The Exchange initially filed the proposed fees on July 19, 2018, 
designating the proposed fees effective July 1, 2018. The first 
proposed rule change was published for comment in the Federal Register 
on August 2, 2018.\5\ The Commission received one comment letter on the 
proposal.\6\ The proposed fees remained in effect until they were 
temporarily suspended pursuant to a suspension order (the ``Suspension 
Order'') issued by the Division of Trading and Markets, which also 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change.\7\ The Commission subsequently received one 
further comment letter on the proposed rule change, supporting the 
decision to suspend and institute proceedings on the proposed fee 
change.\8\
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    \5\ See Securities Exchange Act Release No. 83728 (July 27, 
2018), 83 FR 37853 (August 2, 2018) (SR-BOX-2018-24).
    \6\ See Letter from Tyler Gellasch, Executive Director, The 
Healthy Markets Association, to Brent J. Fields, Secretary, 
Commission, dated August 23, 2018 (``Healthy Markets Letter'').
    \7\ See Securities Exchange Act Release No. 34-84168 (September 
17, 2018).
    \8\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, and Ellen Greene, Managing Director, 
Financial Services Operations, Securities Industry and Financial 
Markets Association, dated October 15, 2018.
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    In response to the Suspension Order, the Exchange timely filed a 
Notice of Intention to Petition for Review \9\ and Petition for Review 
to vacate the Division's Order,\10\ which stayed the Division's 
suspension of the filing. On November 16, 2018 the Commission granted 
the Exchange's Petition for Review but discontinued the automatic 
stay.\11\ The Exchange then filed a statement to reiterate the 
arguments set for in its petition for review and to supplement that 
petition with additional information.\12\
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    \9\ See Letter from Amir Tayrani, Partner, Gibson, Dunn & 
Crutcher LLP, dated September 19, 2018.
    \10\ See Petition for Review of Order Temporarily Suspending BOX 
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC, 
dated September 26, 2018.
    \11\ See Securities Exchange Act Release No. 84614. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated November 16, 2018. Separately, the Securities Industry and 
Financial Markets Association filed an application under Section 
19(d) of the Exchange Act challenging the Exchange's proposed fees 
as alleged prohibitions or limitations on access. See In re 
Securities Industry and Financial Markets Association, Admin. Proc. 
File No. 3-18680 (Aug. 24, 2018). The Commission thereafter remanded 
that denial-of-access proceeding to the Exchange while 
``express[ing] no view regarding the merits'' and emphasizing that 
it was ``not set[ting] aside the challenged rule change[ ].'' In re 
Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2 
(Oct. 16, 2018) (``Remand Order''), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf. The Division's 
Suspension Order is inconsistent with the Commission's intent in the 
Remand Order to leave the challenged fees in place during the 
pendency of the remand proceedings and singles out the Exchange for 
disparate treatment because it means that the Exchange--unlike every 
other exchange whose rule changes were the subject of the Remand 
Order--is not permitted to continue charging the challenged fees 
during the remand proceedings.
    \12\ See Letter from Amir Tayrani, Partner, Gibson, Dunn & 
Crutcher LLP, dated December 10, 2018.
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    The Exchange subsequently refiled its fee proposal on November 
30th, 2018. The proposed fees were noticed and again temporarily 
suspended pursuant to a suspension order issued by the Division of 
Trading and Markets, which also instituted proceedings to determine 
whether to approve or disapprove the proposed rule change.\13\ The 
Commission received two comment letters supporting the decision to 
suspend and institute proceedings on the proposed fee change.\14\
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    \13\ See Securities Exchange Act Release No. 84823 (December 14, 
2018), 83 FR 65381 (December 20, 2018) (SR-BOX-2018-37).
    \14\ See Letters from Tyler Gellasch, Executive Director, The 
Healthy Markets Association (``Second Healthy Markets Letter''), and 
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, 
Tepper School of Business, Carnegie Mellon University (``Chester 
Spatt Letter''), to Brent J. Fields, Secretary, Commission, dated 
January 2, 2019.
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    The Exchange again refiled its fee proposal on February 13, 2019. 
The proposed fees were noticed and again temporarily suspended pursuant 
to a suspension order issued by the Division of Trading and Markets, 
which also instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\15\ The Commission received four 
comment letters supporting the decision to suspend and institute 
proceedings on the proposed fee change.\16\
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    \15\ See Securities Exchange Act Release No. 85201 (February 26, 
2019), 84 FR 7146 (March 1, 2019)(SR-BOX-2019-04).
    \16\ See Letters from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''), 
Tyler Gellasch, Executive Director, Healthy Markets Association 
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of 
R2G Services, LLC, and Anand Prakash.
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    On March 29, 2019, the Commission issued its Order Disapproving 
each

[[Page 50536]]

iteration of the BOX Proposal (``BOX Order''). In the BOX Order, the 
Commission highlighted a number of deficiencies it found in three 
separate rule filings by BOX to establish BOX's connectivity fees that 
prevented the Commission from finding that BOX's proposed connectivity 
fees were consistent with the Act.
    On May 21, 2019 the Division of Trading and Markets released new 
Guidance on SRO Rule Filings Relating to Fees. The Exchange then 
refiled the proposed fees on June 26, 2019 to incorporate the new 
guidance released by the Commission.
    The Commission received two comment letters on BOX's June 26, 2019 
Proposal.\17\ The Third SIFMA Comment Letter did not request that the 
Commission suspend BOX's Proposal, but rather requested that the 
Commission ``carefully consider whether BOX provided sufficient 
evidence to satisfy the applicable statutory standards.'' The Fourth 
Healthy Markets Letter walks through the procedural history of the BOX 
and MIAX filings and urges the Commission to propose reforms with 
regard to immediately effective rule filings.
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    \17\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA, dated August 5, 2019 (``Third 
SIFMA Comment Letter'') and Letter from Tyler Gellasch, Executive 
Director, Healthy Markets Association, dated August 5, 2019 
(``Fourth Healthy Markets Letter'').
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    The Exchange is again re-filing the fee proposal (``the Proposal'') 
to further bolster its cost-based discussion to support its claim that 
the Proposal is fair and reasonable because they will permit recovery 
of BOX costs and will not result in excessive pricing or 
supracompetitive profit. The Exchange believes that the proposed fees 
are consistent with the Act because they (i) are reasonable, equitably 
allocated, not unfairly discriminatory, and not an undue burden on 
competition; (ii) comply with the BOX Order and the Guidance; (iii) 
are, as demonstrated by this Proposal and supported by evidence 
(including data and analysis), constrained by significant competitive 
forces; and (iv) are, as demonstrated in this Proposal and supported by 
specific information (including quantitative information), fair and 
reasonable because they will permit recovery of BOX's costs and will 
not result in excessive pricing or supracompetitive profit. 
Accordingly, the Exchange believes that the Commission should find that 
the proposed fees are consistent with the Act. The proposed rule change 
is immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.
    As discussed herein, the Exchange believes that it is reasonable 
and appropriate to begin charging for physical connectivity fees to 
partially offset the costs associated with maintaining and enhancing a 
state-of-the-art exchange network infrastructure in the US options 
industry. There are significant costs associated with various projects 
and initiatives to improve overall network performance and stability, 
as well as costs paid to the third-party data centers for space rental, 
power used, etc.
    BOX has always offered physical connectivity to Participants and 
non-Participants to access the BOX's trading platforms, market data, 
test systems and disaster recovery facilities. These physical 
connections consist of 10Gb and non-10Gb connections, where the 10Gb 
connection provides for faster processing of messages sent to it in 
comparison to the non-10Gb connection. Since launching in 2012, BOX has 
not charged for physical connectivity and has instead relied on 
transaction fees as the basis of revenue. However, in recent years 
transaction fees have continually decreased across the options 
industry. At the same time these transactions fees were decreasing, the 
options exchanges, except for BOX, began charging physical connectivity 
fees to market participants. As such, BOX began to find itself at a 
significant competitive disadvantage, and had no choice but to begin 
charging Participants and non-Participants fees for connecting directly 
to the BOX network (which BOX has taken considerable measures to 
maintain and enhance for the benefit of those Participants and non-
Participants) in order to remain competitive with the other options 
exchanges in the industry.
    As discussed in the Exchange's recent Petition for Review of the 
Commission's Order Disapproving BOX's three filings, not allowing BOX 
to charge such connectivity fees arbitrarily and inequitably treats BOX 
differently from each of the other exchanges that submitted prior 
immediately effective connectivity fee filings that were not suspended 
or disapproved by the Commission.\18\ The Exchange notes that all other 
options exchanges currently charge for similar physical 
connectivity.\19\
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    \18\ See Securities Exchange Act Release No. 85927. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated May 23, 2019.
    \19\ Nasdaq PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC 
(``Nasdaq''), NYSE Arca, Inc. (``Arca''), NYSE American LLC (``NYSE 
American''), Nasdaq ISE, LLC (``ISE''), Cboe Exchange, Inc. 
(``Cboe''), Cboe BZX Exchange, Inc. (``CboeBZX''), Cboe EDGX 
Exchange, Inc. (``CboeEDGX'') and Cboe C2 Exchange, Inc. (``C2'') 
all offer a type of 10Gb and non-10Gb connectivity alternative to 
their participants. See Phlx, and ISE Rules, General Equity and 
Options Rules, General 8, Section 1(b). Phlx and ISE each charge a 
monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb 
connection and $15,000 for each 10Gb Ultra connection, which is the 
equivalent of the Exchange's 10Gb ULL connection. See also Nasdaq 
Price List--Trading Connectivity. Nasdaq charges a monthly fee of 
$7,500 for each 10Gb direct connection to Nasdaq and $2,500 for each 
direct connection that supports up to 1Gb. See also NYSE American 
Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location 
Fees. NYSE American and Arca each charge a monthly fee of $5,000 for 
each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 
10Gb LX circuit, which is the equivalent of the Exchange's 10Gb ULL 
connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules. 
Cboe charges monthly quoting and order entry bandwidth packet fees. 
Specifically, Cboe charges $1,600 for the 1st through 5th packet, 
$800 for the 6th through 8th packet, $400 for the 9th through 13th 
packet and $200 for the 14th packet and each additional packet. 
CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for 
each 1Gb connection and $7,500 for each 10Gb connection.
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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, in general, and Section 
6(b)(4) and 6(b)(5) of the Act,\20\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees, and other 
charges among BOX Participants and other persons using its facilities 
and does not unfairly discriminate between customers, issuers, brokers 
or dealers.
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    \20\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. 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.'' \21\
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    \21\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    The Exchange believes that the proposed fees in general constitute 
an equitable allocation of fees, and are not unfairly discriminatory, 
because they allow BOX to recover costs associated with offering access 
through the network connections. The proposed fees are also expected to 
offset the costs both the Exchange and BOX incur in maintaining and 
implementing ongoing improvements to the trading systems, including 
connectivity costs, costs incurred on software and hardware 
enhancements and resources dedicated

[[Page 50537]]

to software development, quality assurance, and technology support.
    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act, in that the proposed fee changes are fair, 
equitable and not unreasonably discriminatory, because the fees for the 
connectivity alternatives available on BOX, as proposed, are 
constrained by significant competitive forces. The U.S. options markets 
are highly competitive (there are currently 16 options markets) and a 
reliance on competitive markets is an appropriate means to ensure 
equitable and reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to BOX, or that any participant 
connect at any specific connection speed. The rule structure for 
options exchanges are, in fact, fundamentally different from those of 
equities exchanges. In particular, options market participants are not 
forced to connect to (and purchase market data from) all options 
exchanges, as shown by the number of Participants of BOX as compared to 
the much greater number of participants at other options exchanges. Not 
only does BOX have less than half the number of participants as certain 
other options exchanges, but there are also a number of BOX 
Participants that do not connect directly to BOX. Further, of the 
number of Participants that connect directly to BOX, many such 
Participants do not purchase market data from BOX. In addition, of the 
market makers that are connected to BOX, it is the individual needs of 
the market maker that require whether they need one connection or 
multiple connections to BOX. BOX has market maker Participants that 
only purchase one connection (10Gb) and BOX has market maker 
Participants that purchase multiple connections. It is all driven by 
the business needs of the market maker. Market makers that are 
consolidators that target resting order flow tend to purchase more 
connectivity that market makers that simply quote all symbols on BOX. 
Even though non-Participants purchase and resell 10Gb and non-10Gb 
connections to both Participants and non-Participants, no market makers 
currently connect to BOX indirectly through such resellers.
    In SIFMA's comment letter, they argue that all broker-dealers are 
required to connect to all exchanges which is not true in the options 
markets. The options markets have evolved differently than the equities 
markets both in terms of market structure and functionality. For 
example, there are many order types that are available in the equities 
markets that are not utilized in the options markets, which relate to 
mid-point pricing and pegged pricing which require connection to the 
SIPs and each of the equities exchanges in order to properly execute 
those orders in compliance with best execution obligations. In 
addition, in the options markets there is a single SIP (OPRA) versus 
two SIPs in the equities markets, resulting in few hops and thus 
alleviating the need to connect directly to all the options exchanges. 
Additionally, in the options markets, the linkage routing and trade 
through protection are handled by the exchanges, not by the individual 
participants. Thus not connecting to an options exchange or 
disconnecting from an options exchange does not potentially subject a 
broker-dealer to violate order protection requirements as suggested by 
SIFMA. The Exchange recognizes that the decision of whether to connect 
to BOX is separate and distinct from the decision of whether and how to 
trade on BOX. The Exchange acknowledges that many firms may choose to 
connect to BOX, but ultimately not trade on it, based on their 
particular business needs.
    To assist prospective Participants or firms considering connecting 
to BOX, the Exchange provides information about BOX's available 
connectivity alternatives.\22\ The decision of which type of 
connectivity to purchase, or whether to purchase connectivity at all 
for a particular exchange, is based on the business needs of the firm. 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. 
Simple Order routing requires 128 kbps of bandwidth, which could be 
achieved with a non-10Gb connection, while receiving the five best 
limits in all classes for the HSVF requires a 10Gb connection not 
purchase such data feed products. Accordingly, purchasing market data 
is a business decision/choice, and thus the pricing for it is 
constrained by competition.
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    \22\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
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    Contrary to SIFMA's argument, there is competition for connectivity 
to BOX. BOX competes with ten (10) non-Participants who resell BOX 
connectivity or market data. These are resellers of BOX connectivity--
they are not arrangements between broker dealers to share connectivity 
costs. Those non-Participants resell that connectivity to multiple 
market participants over that same connection, including both 
Participants and non-Participants of BOX. When connectivity is re-sold 
by a third-party, BOX does not receive any connectivity revenue from 
that sale. It is entirely between the third-party and the purchaser, 
thus constraining the ability of BOX to set its connectivity pricing as 
indirect connectivity is a substitute for direct connectivity. There 
are currently ten (10) non-Participants that purchase connectivity to 
BOX. Those non-Participants resell that connectivity or market data to 
approximately twenty-seven (27) customers, some of whom are agency 
broker-dealers that have tens of customers of their own. Some of those 
twenty-seven (27) customers also purchase connectivity directly from 
BOX. Accordingly, indirect connectivity is a viable alternative that is 
already being used by non-Participants of BOX, constraining the price 
that BOX is able to charge for connectivity.
    The Exchange is comprised of 51 BOX Participants. Of those 51 
Participants, 13 Participants have purchased 10Gb or non-10Gb 
connections or some combination of multiple various connections. 
Furthermore, every Participant who has purchased at least one 
connection also trades on BOX with the exception of one new Participant 
who is currently in the on-boarding process. The remaining Participants 
who have not purchased any connectivity to BOX are still able to trade 
on BOX indirectly through other Participants or non-Participant service 
bureaus that are connected. These remaining Participants who have not 
purchased connectivity are not forced or compelled to purchase 
connectivity, and they retain all of the other benefits of membership 
with the Exchange. Accordingly, Participants and non-Participants have 
the choice to purchase connectivity and are not compelled to do so in 
any way.
    The Exchange believes that the proposed fees are fair, equitable 
and not unreasonably discriminatory because the connectivity pricing is 
associated with relative usage or the various market participants and 
does not impose a barrier to entry to smaller participants. 
Accordingly, BOX offers two direct connectivity alternatives and 
various indirect connectivity (via third party) alternatives, as 
described above. BOX recognizes that there are various business models 
and varying sizes of market participants conducting business on BOX. 
The non-10Gb direct connectivity alternatives \23\ are all

[[Page 50538]]

comprised of bandwidth of equal to or less than 1Gb and are purchased 
by market participants that require less bandwidth. As stated above, 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. While 
non-10Gb connections can fully support the sending of orders and the 
consumption of BOX's HSVF Data Feed,\24\ these connections use less 
exchange resources and network infrastructure. In contrast, market 
participants that purchase 10Gb connections utilize the most bandwidth, 
and those are the participants that consume the most resources from the 
network. The 10Gb connection offers optimized connectivity for latency 
sensitive participants and is faster in round trip time for connection 
oriented traffic to BOX than the non-10Gb connection. This lower 
latency is achieved through more advanced network equipment, such as 
advanced hardware and switching components, which translates to 
increased costs to BOX. Market participants that are less latency 
sensitive can purchase non-10Gb direct connections and quote in all 
products on BOX and consume the HSVF Market Data Feed, and such non-
10Gb direct connections are priced lower than the 10Gb connections, 
offering smaller sized market makers a lower cost alternative.
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    \23\ Non-10Gb connectivity alternatives are comprised of 
protocol types that are at or under 1Gb bandwidth. The protocol 
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel, 
OC-3, Singlemode Fiber, ISDN, POTS and T1.
    \24\ The Exchange notes that, unlike MIAX, BOX's HSVF Data Feed 
does not require a 10Gb physical connection. On BOX, the HSVF Data 
Feed cab be consumed through a non-10Gb connection. On MIAX, the 1Gb 
connection cannot support the consumption of the top of market data 
feed or the depth data feed product--both require a 10Gb connection.
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    A 10Gb connection uses at least ten times the network 
infrastructure as the non-10Gb connections and BOX has to scale the 
systems by the amount and size of all connections regardless of how 
they are used.\25\ Accordingly, the Exchange believes that the 
allocation of the proposed fees ($1,000 per non-10Gb connection and 
$5,000 per 10Gb connection) are reasonable based on the network 
resources consumed by the market participants--lower bandwidth 
consuming market participants pay the least, and highest bandwidth 
consuming market participants pay the most, particularly since higher 
bandwidth consumption translates to higher costs to BOX.
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    \25\ The Exchange's network infrastructure requirements are 
based on the premise of all connections operating at full capacity,
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
BOX Participants if the Exchange were to establish unreasonable and 
uncompetitive price increases for its connectivity alternatives. Market 
participants choose to connect to a particular exchange and because it 
is a choice, BOX must set reasonable connectivity pricing, otherwise 
prospective participants would not connect and existing participants 
would disconnect or connect through a third-party reseller of 
connectivity. No options market participant is required by rule, 
regulation, or competitive forces to be a BOX Participant.\26\ Several 
market participants choose not to be BOX Participants and choose not to 
access BOX, and several market participants also access BOX indirectly 
through another market participant. If all market participants were 
required to be Participants of each exchange and connect directly to 
the exchange, all exchanges would have over 200 Participants, in line 
with Cboe's total membership.
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    \26\ Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC 
has approximately 100 members, and NYSE American LLC has over 80 
members. In comparison, the BOX has 51 Participants.
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    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the proposed fees allow the BOX to recover a 
portion of the costs incurred by BOX associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the US 
options industry. Additionally, there are significant costs associated 
with various projects and initiatives to improve overall network 
performance and stability, as well as costs paid to the third-party 
data centers for space rental, power used, etc.
    The Exchange notes that unlike its competitors, BOX does not own 
its own data center and therefore cannot control data center costs. 
While some of the data center expenses are fixed, much of the expenses 
are not fixed, and thus increases as the number of physical connections 
increase. For example, new non-10Gb and 10Gb connections require the 
purchase of additional hardware to support those connections. Further, 
as the total number of all connections increase, BOX needs to increase 
their data center footprint and consume more power, resulting in 
increased costs charged by their third-party data center provider.
    Further, as discussed herein, because the costs of operating a data 
center are significant and not economically feasible for BOX, BOX does 
not operate its own data centers, and instead contracts with a third-
party data center provider. The Exchange notes that larger, dominant 
exchange operators own/operate their data centers, which offers them 
greater control over their data center costs. Because those exchanges 
own and operate their data centers as profit centers, BOX is subject to 
additional costs. Connectivity fees, which are charged for accessing 
the BOX's data center network infrastructure, are directly related to 
the network and offset such costs.
    As discussed herein, the Exchange now believes that it is 
reasonable and appropriate to begin charging for physical connectivity 
fees to partially offset the costs associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the US 
options industry. There are significant costs associated with various 
projects and initiatives to improve overall network performance and 
stability, as well as costs paid to the third-party data centers for 
space rental, power used, etc. As discussed above, the Exchange notes 
that unlike other options exchanges, BOX does not own and operate its 
own data center and therefore cannot control data center costs. As 
detailed herein, BOX has incurred substantial costs associated with 
maintaining and enhancing the BOX network. These costs, coupled with 
BOX's historically low transaction fees, place BOX at a competitive 
disadvantage against other options exchanges who charge connectivity 
fees to market participants. BOX has no choice but to begin charging 
Participants and non-Participants fees for connecting directly to the 
network which BOX has taken considerable measures to maintain and 
enhance for the benefit of those Participants and non-Participants in 
order to remain competitive with the other options exchanges in the 
industry.
    As the Exchange explained to the Division, the existence of robust 
competition between exchanges to attract order flow requires exchanges 
to keep prices for all of their joint services--including connectivity 
to the exchanges' networks at a pro-competitive level.\27\ This 
conclusion is substantiated by the report prepared by Professor Janusz 
A. Ordover and Gustavo Bamberger addressing the theory of ``Platform 
Competition'' and its application to the pricing of exchanges' 
services, including

[[Page 50539]]

connectivity services.\28\ In the report, Ordover and Bamberger explain 
that ``the provision of connectivity services . . . is inextricably 
linked to the provision of trading services, so that, as a matter of 
economics, it is not possible to appropriately evaluate the pricing of 
connectivity services in isolation from the pricing of trading and 
other `joint' services offered by'' an exchange. Ordover and Bamberger 
state that ``connectivity services are an `input' into trading'' and 
that ``excessive pricing of such services would raise the costs of 
trading on [an exchange] relative to its rivals and thus discourage 
trading on'' that exchange.
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    \27\ Letter from Lisa J. Fall, BOX, to Brent J. Fields, 
Secretary, Securities and Exchange Commission (Feb. 19, 2019), 
https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4945872-178516.pdf.
    \28\ See Attachment to Letter from Lisa J. Fall, supra note 27 
(``Ordover/Bamberger Statement'').
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    Although the Ordover/Bamberger Statement focuses on the pricing of 
connectivity services by Nasdaq-affiliated equities exchanges, its 
``overarching conclusion . . . that the pricing of connectivity 
services should not be analyzed in isolation'' applies with equal force 
to the proposed fees. Because BOX is engaged with rigorous competition 
with other exchanges to attract order flow to its platform, BOX is 
constrained in its ability to price its joint services--including 
connectivity services--at supracompetitive levels. That competition 
ensures that BOX's connectivity fees are set at levels consistent with 
the requirements of the Exchange Act.
    As detailed in the Exchange's and BOX Market's \29\ 2018 audited 
financial statements which are publicly available as part of the 
Exchange's Form 1 Amendment, BOX only has two sources of revenue that 
it can control: Transaction fees and non-transactions fees.\30\ 
Accordingly, BOX must cover all of its expenses from these two sources 
of revenue.
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    \29\ BOX Exchange LLC (``Exchange'') and BOX Options Market LLC 
(``BOX'') are two different entities. The Exchange is a national 
securities exchange registered with the SEC under Section 6 of the 
Securities Exchange Act of 1934. The Exchange fulfills the 
regulatory functions and responsibilities and oversees BOX, the 
equity options market. Expenses associated with network connectivity 
services are born by both the Exchange and BOX.
    \30\ Options Price Authority Reporting (``OPRA'') income is not 
controlled by BOX.
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    The Proposed Fees are fair and reasonable because they will not 
result in excessive pricing or supracompetitive profit, when comparing 
the total annual expense of the Exchange and BOX associated with 
providing the network connectivity services versus the total projected 
annual revenue of the Exchange \31\ and BOX associated with providing 
the network connectivity services. For 2018, the annual expense for BOX 
and the Exchange associated with providing the network connectivity 
services was approximately $8.9 million.\32\ This amount is comprised 
of both direct and indirect expenses. The direct expense (which relates 
100% to the network infrastructure, associated data center processing 
equipment required to support various connections, network monitoring 
systems and associated software required to support the various forms 
of connectivity) was approximately $6.4 million.\33\
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    \31\ Revenues for the Exchange are limited to the Options 
Regulatory Fee (``ORF'') and fines and disgorgements.
    \32\ A more detailed breakdown of the annual operational expense 
in 2018 includes over $2.8 million for space rental, power used, 
connections, etc. at the Exchange's data centers, over $1.1 million 
for data center support and management of third party vendors, over 
$700,000 in technological improvements to the data center 
infrastructure, over $1.4 million for resources for technical and 
operational services for the Exchange's data centers and $400,000 in 
market data connectivity fees. Of note, regarding market data 
connectivity fees, this is the cost associated with BOX consuming 
connectivity/content from the equities markets in order to operate 
the Exchange, causing BOX to effectively pay its competitors for 
this connectivity.
    \33\ Direct connectivity expenses are a portion of the following 
line items in the BOX and Exchange Form 1 Financial Statements: 
Technical and Operational, Other and Communications and Data 
Processing.
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    The indirect expense (which includes expense from such areas as 
trading operations, software development, business development, 
information technology, marketing, human resources, legal and 
regulatory, finance and accounting) that the Exchange and BOX allocate 
to the maintenance and support of network connectivity services was 
approximately $2.5 million.\34\ This indirect expense amount of $2.5 
million represents approximately 10% of the total annual expenses of 
BOX and the Exchange for 2018. Total projected annualized revenue 
associated with selling the network connectivity services (reflecting 
the proposed fees on a fully-annualized basis, using July 2019 data) 
for BOX is projected to be approximately $4.6 million. This projected 
revenue amount of $4.6 million represents approximately 13% of total 
net revenue of BOX and Exchange for 2018 of approximately $35.5 
million. The Exchange believes that an indirect expense allocation of 
10% of total expense (less direct expense) to network connectivity 
services is fair and reasonable, as total projected network 
connectivity revenue represents approximately 13% of total net revenue 
for 2018. That is, direct expense of $6.4 million plus indirect expense 
of $2.5 million fairly reflects the total annual expense associated 
with providing the network connectivity services, both from the 
perspective of similar revenue and expense percentages (connectivity to 
total), as well as matching connectivity resources to connectivity 
expenses. The Exchange believes that this is a conservative allocation 
of indirect expense. Accordingly, the total projected connectivity 
revenue for BOX, reflective of the proposed fees, on an annualized 
basis, of $4.6 million, is almost half of the total annual actual BOX 
and Exchange connectivity expense (direct and indirect) for 2018 of 
$8.9 million. Further, even the direct expense associated with 
providing network connectivity ($6.4 million) exceeds expected revenue 
from connectivity.
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    \34\ Indirect expenses for connectivity are a portion of the 
following line items in the BOX and Exchange Form 1 Financial 
Statements: Employee Costs, Depreciation and Amortization, 
Consulting, Financial and Administrative, and Other.
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    The Exchange projects comparable network connectivity revenue and 
expense for 2019 for BOX. Accordingly, the Proposed Fees are fair and 
reasonable because they do not result in excessive pricing or 
supracompetitive profit, when comparing the actual network connectivity 
costs to the Exchange and BOX versus the projected network connectivity 
annual revenue. Additional information on overall revenue and expense 
can be found in the Exchange's and BOX's 2018 audited financial 
results, which is publicly available as part of the Exchange's Form 1 
filed with the Commission.
    The Exchange again notes that other exchanges have similar 
connectivity alternatives for their participants, including similar 
low-latency connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE 
Arca, Inc. (``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq 
ISE, LLC (``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\35\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\36\
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    \35\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the equivalent of the 
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule, 
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE 
American and Arca each charge a monthly fee of $5,000 for each 1Gb 
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX 
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \36\ Id.

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[[Page 50540]]

    Finally, the Exchange believes redefining the HSVF Connection Fee 
as a Port Fee is reasonable, equitable and not unfairly discriminatory. 
This classification is more accurate because an HSVF subscription is 
not enabled through a physical connection to the Exchange. Although 
market participant must be credentialed by BOX to receive the HSVF, 
anyone can become credentialed by submitting the required 
documentation.\37\ The Exchange does not propose to alter the amount of 
the existing HSVF fee; subscribers to the HSVF will continue to pay 
$1,500 per month. As with the Connectivity Fees, BOX's HSVF Port Fee is 
in line with industry practice.\38\
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    \37\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/
    \38\ See Cboe Data Services, LLC (CDS) Fee Schedule Sec.  VI 
(charging $500 per month for up to five users to access the Enhanced 
Controlled Data Distribution Program).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, the 
Exchange has received no official complaints from Participants that 
purchase the Exchange's connectivity that the Exchange's fees or the 
Proposed Fees are negatively impacting or would negatively impact their 
abilities to compete with other market participants or that they are 
placed at a disadvantage.\39\ The Exchange believes that the Proposed 
Fees do not place certain market participants at a relative 
disadvantage to other market participants because the connectivity 
pricing is associated with relative usage of the various market 
participants and does not impose a barrier to entry to smaller 
participants. As described above, the less expensive non-10Gb direct 
connection is generally purchased by market participants that utilize 
less bandwidth. The market participants that purchase 10Gb connections 
utilize the most bandwidth, and those are the participants that consume 
the most resources from the network. Accordingly, the Proposed Fees do 
not favor certain categories of market participants in a manner that 
would impose a burden on competition; rather, the allocation of the 
Proposed Fees reflect the network resources consumed by the various 
size of market participants--lowest bandwidth consuming members pay the 
least, and highest bandwidth consuming members pays the most, 
particularly since higher bandwidth consumption translates to higher 
costs to BOX.
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    \39\ The Exchange notes that it did receive one complaint from a 
non-Participant third party that, prior to the proposed fees, 
received connectivity for free and resold it to other market 
participants. This non-Participant ceased connectivity to the 
Exchange in January 2019.
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Inter-Market Competition
    The Exchange believes the Proposed Fees do not place an undue 
burden on competition on other SROs that is not necessary or 
appropriate. In particular, options market participants are not forced 
to connect to (and purchase market data from) all options exchanges, as 
shown by the number of Participants of BOX as compared to the much 
greater number of members at other options exchanges (as described 
above). Not only does BOX have less than half the number of 
Participants as certain other options exchanges, but there are also a 
number of the Exchange's Participants that do not connect directly to 
BOX. Additionally, the Exchange notes other exchanges have similar 
connectivity alternatives for their participants, including similar 
low-latency connectivity, but with much higher rates to connect.\40\ 
The Exchange is also unaware of any assertion that its existing fee 
levels or the Proposed Fees would somehow unduly impair its competition 
with other options exchanges. To the contrary, if the fees charged are 
deemed too high by market participants, they can simply disconnect.
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    \40\ See supra note 19.
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    Unilateral action by the Exchange in establishing fees for services 
provided to its Participants and others using its facilities will not 
have an impact on competition. As a small exchange in the already 
highly competitive environment for options trading, the Exchange does 
not have the market power necessary to set prices for services that are 
unreasonable or unfairly discriminatory in violation of the Exchange 
Act. The Exchange's proposed fees, as described herein, are comparable 
to and generally lower than fees charged by other options exchanges for 
the same or similar services. Lastly, the Exchange believes the 
proposed change will not impose a burden on intramarket competition as 
the proposed fees are applicable to all Participants and others using 
its facilities that connect to BOX.

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 \41\ and Rule 19b-4(f)(2) thereunder,\42\ because it 
establishes or changes a due, or fee.
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    \41\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \42\ 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 Comment

    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-2019-27 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-2019-27. 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

[[Page 50541]]

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 
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. 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-BOX-
2019-27, and should be submitted on or before October 16, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20706 Filed 9-24-19; 8:45 am]
BILLING CODE 8011-01-P


