[Federal Register Volume 85, Number 32 (Tuesday, February 18, 2020)]
[Notices]
[Pages 8968-8976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03091]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88161; File No. SR-BOX-2020-03]


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 Facility To Establish BOX 
Connectivity Fees for Participants and Non-Participants Who Connect to 
the BOX Network

February 11, 2020.
    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 January 29, 2020, 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 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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 
regarding connectivity to BOX in order to provide greater detail and 
clarity concerning BOX's costs, as they pertain to expenses for network 
connectivity services, on the BOX Options Market LLC (``BOX'') options 
facility. The text of the proposed rule change is available from the 
principal office of the Exchange, at the Commission's Public Reference 
Room and also on the Exchange's internet 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 is refiling its proposal to amend the Fee Schedule 
regarding connectivity to BOX in order to provide greater detail and 
clarity concerning BOX's costs, as they pertain to expenses for network 
connectivity services. The Exchange is now presenting more connectivity 
cost details that correspond with income statement expense line items 
to provide greater transparency into its actual costs associated with 
providing network connectivity services. The Exchange believes that its 
proposed fees are fair and reasonable because they will permit recovery 
of less than all of the Exchange's costs for providing connectivity and 
will not result in excessive pricing or supracompetitive profit, when 
comparing the Exchange's total annual expense associated with providing 
the network connectivity services versus the total projected annual 
revenue the Exchange projects to collect for providing the network 
connectivity services.
    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:

------------------------------------------------------------------------
                                                          Monthly fees
                   Connection type                      (per connection)
------------------------------------------------------------------------
Non-10 Gb Connection.................................             $1,000
10 Gb Connection.....................................              5,000
------------------------------------------------------------------------

    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

[[Page 8969]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    On March 29, 2019, the Commission issued its Order Disapproving 
each 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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    On September 5, 2019 the Exchange withdrew the proposed rule change 
and refiled the proposed fees to further bolster its cost-based 
discussion to support its claim that the Proposal is fair and 
reasonable because they will permit recovery of a portion of BOX costs 
and will not result in excessive pricing or supra-competitive profit. 
The Commission received only one comment letter on the proposed rule 
change, twelve days after the comment period ended.\18\ Of note, no 
Participant, other person, industry group, or operator of an options 
market commented on the proposed rule change. Rather, the only comment 
letter came from an operator of a single equities market (equities 
market structure and the resulting network demands are fundamentally 
different from those in the options markets) and which the operator 
also has a fundamentally different business model (and agenda) than 
does the Exchange. That letter called for, among other things, the 
Exchange to explain its basis for concluding it incurred substantially 
higher costs to provide lower-latency connections and further described 
the nature and closeness of the relationship between the identified 
costs and connectivity products and services as stated in the 
Exchange's cost allocation analysis.
---------------------------------------------------------------------------

    \18\ See Letter from John Ramsay, Chief Market Policy Officer, 
Investors Exchange LLC (``IEX'') to Vanessa Countryman, Secretary, 
Commission, dated October 9, 2019.
---------------------------------------------------------------------------

    The Exchange is again re-filing the fee proposal (``the Proposal'') 
to provide greater detail and clarity concerning the Exchange's costs, 
as they pertain to the Exchange's expense relating to the provision of 
network connectivity services. The Exchange is also refiling its 
proposal in order to clarify certain points raised in the IEX Letter.
    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, 
supported by specific information (including quantitative information), 
fair and reasonable because they will permit recovery of a portion of 
BOX's costs and will not result in excessive pricing or 
supracompetitive profit. Accordingly, the Exchange believes that

[[Page 8970]]

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 U.S. 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 10 Gb and non-10 Gb connections, where the 10 Gb 
connection provides for faster processing of messages sent to it in 
comparison to the non-10 Gb 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 due to the decreased transaction 
fees at other exchanges. To remain competitive, BOX was forced to 
follow suit and decrease its transaction fees in order to continue 
receiving order flow to the Exchange. While other exchanges lowered 
transaction fees, they were still able to rely on the connectivity fee 
revenues as a means of covering a portion of the costs to operate their 
respective exchanges. BOX 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.\19\ The Exchange notes that all other 
options exchanges currently charge for similar physical 
connectivity.\20\
---------------------------------------------------------------------------

    \19\ See Securities Exchange Act Release No. 85927. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated May 23, 2019.
    \20\ 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 10 Gb and non-10 Gb 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 1 Gb connection, $10,000 for each 10 
Gb connection and $15,000 for each 10 Gb Ultra connection, which is 
the equivalent of the Exchange's 10 Gb ULL connection. See also 
Nasdaq Price List--Trading Connectivity. Nasdaq charges a monthly 
fee of $7,500 for each 10 Gb direct connection to Nasdaq and $2,500 
for each direct connection that supports up to 1 Gb. 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 1 Gb circuit, $14,000 for each 10 Gb circuit and 
$22,000 for each 10 Gb LX circuit, which is the equivalent of the 
Exchange's 10 Gb 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 1 Gb connection and $7,500 for each 10 Gb 
connection.
---------------------------------------------------------------------------

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,\21\ 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.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    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.'' \22\
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

    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 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. As stated above, BOX instituted the 
proposed fees after finding itself at a competitive disadvantage with 
other options exchanges. As other options exchanges lowered their 
transaction fees, they were still able to rely on the connectivity fee 
revenues as a means of covering a portion of the costs to operate their 
respective exchanges. By not charging for connectivity, BOX could not 
realistically compete for order flow through reduced transaction fees 
and still remain solvent.
    Further, as the Exchange explained to the Division in previous 
filings and comment letters, 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.\23\ 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 
connectivity services.\24\ 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

[[Page 8971]]

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.
---------------------------------------------------------------------------

    \23\ 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.
    \24\ Id.
---------------------------------------------------------------------------

    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 BOX fees. As discussed herein, BOX is engaged with 
rigorous competition with other exchanges to attract order flow to its 
platform. As such, 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.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant must connect to BOX, or that any 
participant must 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 (10 Gb) 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 than market makers that simply quote all symbols on BOX. 
Even though non-Participants purchase and resell 10 Gb and non-10 Gb 
connections to both Participants and non-Participants, no market makers 
currently connect to BOX indirectly through such resellers.
    The argument that all broker-dealers are required to connect to all 
exchanges 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.
    Further, there is competition for connectivity to BOX. BOX competes 
with eleven (11) 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 eleven (11) 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.
    Prior to charging the proposed connectivity fees to market 
participants, the Exchange distributed an Informational Circular to all 
subscribers detailing the fees.\25\ The circular stated that 
Participants connected as of the last trading day of each calendar 
month would be charged the applicable connectivity fee for that month. 
In addition to the Circular, the Exchange reached out to certain non-
Participants \26\ connected to BOX to ensure they knew of the upcoming 
connectivity fees and allow them the opportunity to disconnect any old 
connections before being charged. Finally, the Exchange instituted a 
grace period where Participants could contact the Exchange and make 
modifications to their connections (i.e. disconnect, add, downsize, 
etc.) prior to being charged the new connectivity fees. This grace 
period was in effect until August 7, 2018.
---------------------------------------------------------------------------

    \25\ See IC-2018-15.
    \26\ These included past Participants who had terminated their 
membership with BOX and were no longer receiving BOX circulars, as 
well as third party network providers who were not on the Exchange's 
distribution list. The Exchange reached out to these firms 
individually to alert them of the upcoming fee change and give them 
the opportunity to disconnect any old connections to the BOX system.
---------------------------------------------------------------------------

    The Exchange is comprised of 51 BOX Participants. Of those 51 
Participants, 24 Participants have purchased 10 Gb or non-10 Gb 
connections or some combination of multiple various connections.\27\ 
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.
---------------------------------------------------------------------------

    \27\ Currently, there are a total of 119 physical connections to 
BOX: 70 10 Gb connections and 49 non-10 Gb connections.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are fair, equitable 
and not unreasonably discriminatory because

[[Page 8972]]

the connectivity pricing is directly related to the relative costs to 
BOX to provide those respective services and does not impose a barrier 
to entry to smaller participants. Accordingly, BOX offers various 
direct connectivity alternatives and various indirect connectivity (via 
third party) alternatives. BOX recognizes that there are various 
business models and varying sizes of market participants conducting 
business on BOX. 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. To assist 
prospective Participants or firms considering connecting to BOX, the 
Exchange provides information about BOX's available connectivity 
alternatives on the BOX website.\28\ Section 2.4 of the BOX 
Connectivity Guide details the bandwidth requirements depending on the 
type of traffic each firm requires.
---------------------------------------------------------------------------

    \28\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
---------------------------------------------------------------------------

    The non-10 Gb direct connectivity alternatives \29\ are all 
comprised of bandwidth of equal to or less than 1 Gb and are purchased 
by market participants that require less bandwidth. For example, a firm 
requiring only simple order routing (which requires 128 kbps of 
bandwidth) would be satisfied with a non-10 Gb connection. 
Additionally, non-10 Gb connections can fully support both the sending 
of orders and the consumption of BOX's HSVF Data Feed.\30\ By 
definition, non-10 Gb connections utilize less bandwidth and consume 
less resources from the network. Additionally, non-10 Gb connections 
and their interface modules cost considerably less than 10 Gb 
connections. Accordingly, because these connections consume the least 
resources of the Exchange and are the least costly for the Exchange to 
provide, the non-10 Gb connections are at a lower price point than the 
10 Gb connections.\31\
---------------------------------------------------------------------------

    \29\ Non-10 Gb connectivity alternatives are comprised of 
protocol types that are at or under 1 Gb bandwidth. The protocol 
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel, 
OC-3, Singlemode Fiber, ISDN, POTS and T1.
    \30\ BOX's HSVF Data Feed does not require a 10 Gb physical 
connection. However, to receive the five best limits on the HSVF, a 
10 Gb connection is required. On MIAX, the 1 Gb connection cannot 
support the consumption of the top of market data feed or the depth 
data feed product--both require a 10 Gb connection.
    \31\ Based on one trading day in January 2020, Participants with 
10 Gb connections accounted for approximately 85% of message traffic 
over the network where Participants with non-10 Gb connections 
accounted for approximately 15% of message traffic over the network. 
As discussed herein, non-10 Gb connections consume less resources 
from the network and are therefore priced lower than the 10 Gb 
connection.
---------------------------------------------------------------------------

    In contrast, market participants that purchase 10 Gb connections 
utilize the most bandwidth and consume the most resources from the 
network.\32\ The 10 Gb connection offers optimized connectivity with 
lower latency for latency sensitive participants and is faster in round 
trip time for connection oriented traffic to BOX than the non-10 Gb 
connection. In other words, 10 Gb connections carry ten times more 
gigabits than the non-10 Gb connection so information travelling over a 
10 Gb connection will generally get to the destination faster than if 
it travelled over a non-10 Gb connection. As discussed herein, this 
lower latency is achieved through more advanced network equipment, such 
as advanced hardware and switching components, which translates to 
increased costs to BOX. A 10 Gb connection uses at least ten times the 
network infrastructure as the non-10 Gb connections as BOX has to scale 
the systems by the amount and size of all connections regardless of how 
they are used.\33\ Accordingly, the Exchange believes that the 
allocation of the proposed fees ($1,000 per non-10 Gb connection and 
$5,000 per 10 Gb connection) are reasonable based on the resources 
consumed by the respective type of connection--lower resource consuming 
market participants pay the least, and highest resource consuming 
market participants pay the most, particularly since higher resource 
consumption translates to higher costs to BOX.\34\
---------------------------------------------------------------------------

    \32\ Supporting a 10 Gb connection requires larger internal 
uplinks, firewalls and sniffer devices, all of which cost 
considerably more to maintain than support for non-10 Gb 
connections. Specifically, in order to support 10 Gb connections, 
BOX must obtain switches that offer 40Gb or more of uplink speed 
which cost more than the 1 Gb alternatives. In addition, BOX must 
obtain the appropriate connectors to support the 40Gb switches. 
These connectors are also more expensive than the 1 Gb alternatives. 
It is important to note that, as evidenced above, offering 10 Gb 
connections has downstream cost impacts as BOX needs to ensure that 
there is sufficient bandwidth internally in order to support 
multiple 10 Gb connections for Participants and non-Participants 
accessing the BOX system. The Exchange also notes that in addition 
to the higher cost of the internal 40Gb switches and appropriate 
connectors to support these connections, there are higher third 
party support contract costs in order to implement and maintain 
these technology components for the benefit of Participants and non-
Participants who access the BOX system.
    \33\ The Exchange's network infrastructure requirements are 
based on the premise of all connections operating at full capacity.
    \34\ The IEX Comment Letter questioned if there were cost 
differentials between 10 Gb and non-10 Gb connections, stating that 
``the hardware components to support a 10 Gb connection are 
essentially the same as those for a non-10 Gb connection . . . there 
may be marginally higher maintenance costs in the way of 
replacements or upgrades for a 10 Gb option, but IEX believes the 
difference in exchange cost for a 10 Gb connection will certainly be 
less than twice that of a higher latency connection.'' As described 
above, this is not true for BOX.
---------------------------------------------------------------------------

    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.\35\ As 
evidence of the fact that market participants can and do disconnect 
from exchanges based on connectivity pricing, see the R2G Services LLC 
(``R2G'') letter based on BOX's proposed rule changes to increase its 
connectivity fees. The R2G letter stated, ``[w]hen BOX instituted a 
$10,000/month price increase for connectivity; we had no choice but to 
terminate connectivity into them as well as terminate our market data 
relationship. The cost benefit analysis just didn't make any sense for 
us at those new levels.'' \36\ Accordingly, this example shows that if 
an exchange sets too high of a fee for connectivity and/or market data 
services for its relevant marketplace, market participants can choose 
to disconnect from the exchange. The Exchange notes that no other 
Participant or non-Participant disconnected from the exchange as a 
result of the connectivity fees.
---------------------------------------------------------------------------

    \35\ 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.
    \36\ The Exchange notes that R2G was a non-Participant service 
provider who connected to BOX at no cost and then sold BOX 
connectivity and market data to its customers. The $10,000 charge 
referenced in the R2G Letter was for two (2) 10 Gb connections.
---------------------------------------------------------------------------

    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.

[[Page 8973]]

    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-10 Gb and 10 Gb 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 detailed in the Exchange's and BOX Market's \37\ 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.\38\ 
Accordingly, BOX must cover all of its expenses from these two sources 
of revenue.
---------------------------------------------------------------------------

    \37\ 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. A summary of the 
Form 1 Statement of Income and Expense for both the Exchange and BOX 
is included as an Exhibit 3 of this filing. The Exchange notes that 
the Non-Transaction Fees for BOX Options Market LLC are now broken 
down further into three additional categories: Access Fees, Market 
Data Fees, and Participant Fees.
    \38\ Options Price Authority Reporting (``OPRA'') income is not 
controlled by BOX.
---------------------------------------------------------------------------

    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 \39\ and BOX associated with providing 
the network connectivity services.
---------------------------------------------------------------------------

    \39\ Revenues for the Exchange are limited to the Options 
Regulatory Fee (``ORF'') and fines and disgorgements.
---------------------------------------------------------------------------

    The Exchange conducted an extensive review of the Exchange and BOX 
expenses to determine whether such expenses relate to the provision of 
network connectivity services, and, if such expense did so relate, what 
portion of such expense actually supports the provision of network 
connectivity services, and thus bears a relationship that is, ``in 
nature and closeness,'' directly related to network connectivity 
services. The sum of all such portions of expenses represents the total 
actual baseline cost of the Exchange and BOX to provide 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. This amount is comprised of both direct and indirect expenses. 
The financial information below is meant to provide greater detail and 
clarity concerning BOX's cost allocations as they pertain to expenses 
for network connectivity services; and further describe the nature and 
closeness of the relationship between the identified costs and 
connectivity services where possible.
    The direct expense (which relates 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.\40\ The Exchange notes the $6.4 million 
direct expense is only a portion of the overall technology costs for 
BOX and the Exchange. The $6.4 million direct expense does not include 
technology items such as the Exchange and BOX technological 
improvements and upkeep to the BOX trading and matching system,\41\ 
third party technology security expenses for the BOX trading and 
matching system, technology license contract costs for the BOX trading 
and matching system, and third party billing expenses associated with 
the BOX trading and matching system. Further, the direct expense of 
$6.4 million does not include the indirect expenses detailed below. A 
more detailed breakdown of the direct annual operational expense in 
2018 includes the following:
---------------------------------------------------------------------------

    \40\ 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. The Exchange notes that these direct expenses include 
all expenses associated with the Exchanges' data centers. BOX's 
infrastructure design does not distinguish network connectivity 
expenses from other data center expenses. In other words, network 
connectivity is intertwined with the overall infrastructure of the 
BOX system.
    \41\ In determining the $6.4 million direct cost for network 
connectivity, the Exchange did not include any expenses related to 
business development initiatives. For example, the technological 
cost for adding complex order functionality to certain order types 
would not be included in the technological improvement costs 
outlined in the direct expense for network connectivity. The total 
cost for technological improvements in 2018, including business 
development initiatives and other initiatives not related to network 
connectivity was $3.86 million.
---------------------------------------------------------------------------

     Over $2.8 million for space rental, power usage, 
connections, etc. at the Exchanges data centers; \42\
---------------------------------------------------------------------------

    \42\ This cost can be found in three line items in the Statement 
of Income of the BOX and Exchange Form 1 documents: ``Professional 
Services: Other,'' ``Professional Services: Technical and 
Operational''; and ``Communications and data processing.'' The 
Exchange notes that the $2.8 million figure includes, but is not 
limited to, the fees paid to: Equinix and 365 Services LLC, the data 
centers that host the Exchange's network infrastructure, Secure 
Financial Transaction Infrastructure (``SFTI''), which supports 
connectivity and fees for the entire US options industry, various 
other service providers (including Cogent, Lightower and Activ 
Financial Systems, Inc) which provide content, connectivity 
services, and infrastructure services for critical components of 
options connectivity; and various other hardware and software 
providers which support the production environment in which 
Participants and non-Participants connect to the network to trade, 
receive market data, etc. The Exchange believes that without the 
technology services of the all providers discussed above, the 
Exchange would not be able to operate and support the BOX network 
and provide network connectivity services to Participants and non-
Participants. The Exchange believes that including the costs of 
these services is reasonable as they represent the Exchange's cost 
to operate and support the BOX network and ultimately provide 
optimal network connectivity to market participants.
---------------------------------------------------------------------------

     Over $1.1 million for data center support and management 
of third party vendors; \43\
---------------------------------------------------------------------------

    \43\ These costs include annual service and support contracts 
with a large number of third party vendors to support the data 
centers and trading platform. These costs appear in the 
``Professional Services: Technical and Operational'' line item of 
the Statement of Income of the BOX and Exchange Form 1 documents.

---------------------------------------------------------------------------

[[Page 8974]]

     Over $700,000 in technological improvements to the data 
center infrastructure; \44\
---------------------------------------------------------------------------

    \44\ This cost is represented on the BOX's Financial Statement 
document under the ``Computer equipment and software and leasehold 
improvements'' line item. The associated amortization in 2018 was 
excluded from the indirect depreciation outlined herein.
---------------------------------------------------------------------------

     Over $1.4 million for resources for technical and 
operational services for the Exchange's data centers; \45\ and
---------------------------------------------------------------------------

    \45\ These costs are included in the ``Professional Services: 
Technical and Operational'' line item of the Statement of Income of 
the BOX and Exchange Form 1 documents.
---------------------------------------------------------------------------

     $400,000 in market data connectivity fees.\46\
---------------------------------------------------------------------------

    \46\ A portion can be tied to the ``Communications and data 
processing'' line item of the BOX and Exchange Statement of Income. 
The remaining portion is in the ``Professional Services: Other'' 
line item of the BOX and the Exchange Statement of Income. 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.
---------------------------------------------------------------------------

    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.\47\ Included in this indirect expense total 
are the following:
---------------------------------------------------------------------------

    \47\ Indirect expenses for connectivity are a portion of the 
following line items in the BOX and Exchange Form 1 Financial 
Statements: Employee, facilities, and other, Depreciation and 
Amortization, Consulting and Financial and Administrative. The 
Exchange notes that these indirect expenses represent approximately 
10% of the total annual expenses for BOX and the Exchange in 2018.
---------------------------------------------------------------------------

     Over $1 million in employee compensation and benefits for 
full-time employees that support network connectivity services; \48\
---------------------------------------------------------------------------

    \48\ This cost includes employees in network operations, trading 
operations, development, system operations, business, etc., as well 
as staff in general corporate departments (such as legal, 
regulatory, and finance) that support those employees and functions. 
BOX's employee compensation and benefits expense relating to 
providing network connectivity services was a portion of the total 
expense for employee compensation and benefits that is stated in the 
Employee, facilities, and other line item in the 2018 Financial 
Statements for BOX and the Exchange.
---------------------------------------------------------------------------

     Over $1 million in software and hardware depreciation; 
\49\
---------------------------------------------------------------------------

    \49\ This cost includes depreciation and amortization of 
hardware and software used to provide network connectivity services, 
including equipment, servers, cabling, purchased software and 
internally developed software used in the production environment to 
support the provision of network connectivity for trading. BOX's 
depreciation and amortization expense relating to providing network 
connectivity services was a portion of the total expense for 
depreciation and amortization that is stated in the 2018 Financial 
Statements for BOX and the Exchange.
---------------------------------------------------------------------------

     Over $100,000 in office space and rent to support 
employees related to network connectivity; \50\ and
---------------------------------------------------------------------------

    \50\ This cost includes occupancy costs for leased office space 
for staff that support the provision of network connectivity 
services. BOX and Exchange's combined occupancy expense relating to 
providing network connectivity services is a portion of the total 
expense for occupancy that is stated in the Employee, facilities, 
and other line item in the 2018 Financial Statements for BOX and the 
Exchange.
---------------------------------------------------------------------------

     Over $200,000 in miscellaneous data, communications, 
external IT, and regulatory audit costs relate to expenses that support 
general connectivity for trading and personnel support.\51\
---------------------------------------------------------------------------

    \51\ The combined miscellaneous expense relating to trading 
connectivity and personnel support was a portion of multiple line 
items in the 2018 Financial Statements for BOX and the Exchange.
---------------------------------------------------------------------------

    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.
    The Exchange projects comparable network connectivity revenue and 
expense for 2020 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.
    For the avoidance of doubt, none of the expenses included herein 
relating to the provision of network connectivity services relate to 
the provision of any other services offered by BOX. Stated differently, 
no expense amount of the Exchange or BOX is allocated twice.
    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 1 Gb, 10 Gb and 10 Gb low latency 
ethernet connectivity alternatives to each of their participants.\52\ 
The Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\53\
---------------------------------------------------------------------------

    \52\ 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 1 Gb connection, $10,000 for each 10 Gb connection 
and $15,000 for each 10 Gb Ultra connection, which the equivalent of 
the Exchange's 10 Gb 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 
1 Gb circuit, $14,000 for each 10 Gb circuit and $22,000 for each 10 
Gb LX circuit, which the equivalent of the Exchange's 10 Gb ULL 
connection.
    \53\ Id.
---------------------------------------------------------------------------

    The financials above show that 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.
    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

[[Page 8975]]

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.\54\ 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.\55\
---------------------------------------------------------------------------

    \54\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/.
    \55\ 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).
---------------------------------------------------------------------------

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.\56\ 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-10 Gb direct 
connection is generally purchased by market participants that utilize 
less bandwidth. The market participants that purchase 10 Gb 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.
---------------------------------------------------------------------------

    \56\ 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.
---------------------------------------------------------------------------

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.\57\ 
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.
---------------------------------------------------------------------------

    \57\ See supra note 20.
---------------------------------------------------------------------------

    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 \58\ and Rule 19b-4(f)(2) 
thereunder,\59\ because it establishes or changes a due, or fee.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \59\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2020-03 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-2020-03. 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

[[Page 8976]]

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-2020-03, and should be submitted on 
or before March 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
---------------------------------------------------------------------------

    \60\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-03091 Filed 2-14-20; 8:45 am]
 BILLING CODE 8011-01-P


