[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10268-10274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03763]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94264; File No. SR-BOX-2022-07]


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 Adopt Electronic 
Market Maker Trading Permit Fees

February 16, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 1, 2022, BOX Exchange LLC (``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 to 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 proposes to amend the Fee Schedule to establish a new 
monthly Participant Fee. Specifically, the Exchange proposes to adopt 
electronic Market Maker Trading Permit Fees as follows: (i) $4,000 per 
month for Market Maker Appointments in up to and including 10 classes; 
(ii) $6,000 per month for Market Maker Appointments in up to and 
including 40 classes; (iii) $8,000 per month for Market Maker 
Appointments in up to and including 100 classes; and (iv) $10,000 per 
month for Market Maker Appointments for over 100 classes. For the 
calculation of the monthly electronic Market Maker Trading Permit fees, 
the number of classes is defined as the greatest number of classes the 
Market Maker was appointed to quote in on any given day within the 
calendar month. The Exchange notes that the proposed electronic Market 
Maker Trading Permit fees are lower than fees assessed at competing 
options exchanges.\5\ The Exchange notes the current monthly 
Participant Fee of $1,500 per month will not apply to electronic Market 
Makers. Under this proposal, electronic Market Makers will pay the 
applicable monthly electronic Market Maker Trading Permit fee only. All 
other electronic Participants \6\ will continue to pay the monthly 
Participant Fee in Section VIII.B of the BOX Fee Schedule.
---------------------------------------------------------------------------

    \5\ See NYSE Arca, Inc. (``NYSEArca'') Fee Schedule (assessing 
Market Makers $6,000 for up to 175 option issues, an additional 
$5,000 for up to 350 option issues, an additional $4,000 for up to 
1,000 option issues, and an additional $3,000 for all option issues 
traded on the Exchange). The Exchange notes that these fees are 
compounded, so Market Makers who trade in all option issues on the 
exchange are assessed $18,000 per month. See also Miami 
International Securities Exchange, LLC (``MIAX'') Fee Schedule 
(assessing Market Makers $7,000 for up to 10 classes or up to 20% of 
classes by volume, $12,000 for up to 40 classes or up to 35% of 
classes by volume, $17,000 for up to 100 classes or up to 50% or 
classes by volume, and $22,000 for over 100 classes or over 50% of 
classes by volume up to all classes listed on MIAX).
    \6\ The Exchange notes the following Participant types on BOX: 
Public Customers, Professional Customers, Broker Dealers, and Market 
Makers. Pursuant to this proposal, Public Customers, Professional 
Customers, and Broker Dealers will continue to be charged the $1,500 
Participant Fee detailed in Section VIII.B of the BOX Fee Schedule.
---------------------------------------------------------------------------

    The Exchange believes that it is important to demonstrate that 
these fees are based on its costs and reasonable business needs that 
have grown substantially since the Exchange implemented the Participant 
Fee for all BOX Participants in 2016. The Exchange also believes the 
proposed electronic Market Maker Trading Permit Fees will allow BOX to 
offset expenses that BOX has and will incur, and that BOX is providing 
sufficient transparency (as described below) into how BOX determined to 
charge such fees. Accordingly, BOX is providing an analysis of its 
revenues, costs, and profitability associated with the proposed 
electronic Market Maker Trading Permit Fees. This analysis includes 
information regarding its methodology for determining the costs and 
revenues associated with providing access services to electronic Market 
Makers.\7\
---------------------------------------------------------------------------

    \7\ BOX notes that the structure of BOX is different from other 
options exchanges in the industry. Specifically, BOX Exchange LLC 
(``Exchange'') is a fully separate legal entity from BOX Options 
Market LLC, the equity options facility of the Exchange. All of the 
Exchange's expenses support the regulatory function as the Exchange. 
Further, the Exchange fulfills the regulatory functions and 
responsibilities as a national securities exchange registered with 
the SEC under Section 6 of the Securities Exchange Act of 1934, and 
oversees the BOX Options Market. Exchange expenses are solely 
regulatory in nature because, due to the unique structure between 
the Exchange and the BOX Options Market facility, the Exchange 
expenses are separate from the BOX Options Market facility expenses 
and there can be no commingling of the funds. As such, the expenses 
discussed herein are solely those of BOX Options Market and not the 
Exchange.

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

[[Page 10269]]

    In order to determine BOX's costs to provide the access services to 
electronic Market Makers, BOX conducted an extensive cost review in 
which BOX analyzed all expenses in BOX's general expense ledger to 
determine whether each such expense relates to Market Maker access 
services, and, if such expense did so relate, what portion (or 
percentage) of such expense actually supports the access services. The 
sum of all such portions of expenses represents the total cost for BOX 
to provide the access services to electronic Market Makers. For the 
avoidance of doubt, no expense amount was allocated twice.
    In order to determine BOX's projected revenues associated with the 
proposed Market Maker Permit Fees, BOX analyzed the number of 
Participants currently utilizing the Trading Permits, and, utilizing a 
recent monthly billing cycle representative of 2021 monthly revenue, 
extrapolated annualized revenue on a going-forward basis utilizing the 
proposed Market Maker Permit Fees discussed herein. BOX does not 
believe it is possible or appropriate to factor into its analysis 
future revenue growth or decline into its projections for purposes of 
these calculations, given the uncertainty of such projections due to 
the continually changing access needs of market participants and 
general market participant behavior. BOX does, however, believe that it 
is reasonable and appropriate to factor into its analysis future cost 
growth or decline for expenses related to providing access services 
associated with the proposed electronic Market Maker Trading Permit 
fees. The Exchange is presenting its revenue and expense associated 
with providing access services to electronic Market Makers in this 
filing in a manner that is consistent with how BOX presents its revenue 
and expense in its Audited Financial Statements. BOX's most recent 
Audited Financial Statement is for 2020. However, since the revenues 
and expenses associated with the proposed electronic Market Maker 
Trading Permit fees were not in place in 2020, the Exchange believes 
its 2020 Audited Financial Statement is not representative of its 
current total annualized revenue and costs associated with the proposed 
electronic Market Maker Trading Permit fees. Accordingly, BOX believes 
it is more appropriate to analyze the proposed electronic Market Maker 
Trading Permit fees utilizing its 2021 revenue and costs, as described 
herein, which utilize the same presentation methodology as set forth in 
BOX's previously-issued Audited Financial Statements.\8\ Based on the 
analysis discussed herein, the Exchange believes that the proposed 
electronic Market Maker Trading Permit fees are fair and reasonable 
because they will not result in excessive pricing or supra-competitive 
profit when comparing BOX's total annual expense associated with 
providing the access services to electronic Market Makers versus the 
total projected annual revenue BOX will collect for providing those 
services.
---------------------------------------------------------------------------

    \8\ For example, BOX previously noted that direct and indirect 
expenses described in a prior fee filing were contained in the 
following line items in BOX's 2018 Form 1: Technical and 
Operational, External IT Services, Data Processing & Communication, 
Depreciation, Personnel, Amortization, Rent of facilities, Office-
related, Professional Services, Other. See Securities Exchange Act 
Release No. 88161 (February 11, 2020), 85 FR 8968 (February 18, 
2020) (SR-BOX-2020-03). Accordingly, the direct and indirect 
expenses described in this filing is attributed to the same line 
items for BOX's 2021 Form 1 Amendment, which will be filed in 2022. 
The Exchange notes that another exchange has utilized a similar 
presentation methodology in a recent filing and such filing was 
noticed and not suspended by the Commission when the exchange 
adopted Trading Permit fees. See Securities Exchange Act Release 
Nos. 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03). See also SR-PEARL-2021-59.
---------------------------------------------------------------------------

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,\9\ 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Exchange established the current $1,500 monthly Participant Fee 
in October 2016 for all Participants regardless of account type.\10\ At 
the time BOX established this Participant Fee, BOX's market share was 
2.45% and the total volume of options contracts traded on BOX in 
September 2016 was 8,737,707. The Exchange established this lower (when 
compared to other options exchanges in the industry) Participant fee in 
order to encourage market participants to become Participants of BOX 
and register as BOX Market Makers. Since 2016, BOX has grown its market 
share and membership base significantly. Specifically, in September 
2021, BOX's market share was 5.19% and the total volume of option 
contracts traded on BOX in September 2021 was 42,098,287. BOX recently 
reviewed its current Participant Fees detailed in Section VIII of the 
BOX Fee Schedule. In its review, BOX determined that Participant fees 
would need to be raised, and a flat fee for all Participant types is no 
longer appropriate. Specifically, BOX found that electronic Market 
Makers had been benefitting from a flat Participant Fee rate while (1) 
consuming the most bandwidth and resources of the network; (2) 
transacting the vast majority of the volume on BOX; and (3) requiring 
the high touch network support services provided by BOX and its staff. 
The Exchange notes that Broker Dealers, Professional Customers, and 
Public Customers take up significantly less BOX resources and costs as 
discussed further below. In its review, BOX found that since 2016, 
Market Makers have had the luxury of paying the same Participant Fees 
as other account types despite Market Makers consuming the most 
resources on the BOX system and contributing to increased costs for 
BOX. As such, the Exchange proposes to establish higher, separate 
electronic Trading Permit fees for Market Makers that are more aligned 
with the costs and resources that Market Makers continue to place on 
BOX and its systems. Additionally, the Exchange believes that the 
proposed change will better align BOX Participant Fees with rates 
charged by competing options exchanges in the industry for similar 
Trading Permits for such market participants. As such, BOX believes the 
proposed electronic Market Maker Trading Permit fees are reasonable in 
that they are lower than comparable fees at other options 
exchanges.\11\ Further, the Exchange believes that the proposal is 
reasonably designed to continue to compete with other options exchanges 
by incentivizing market participants to register as Market Makers on 
BOX in a manner than enables BOX to improve its overall competitiveness 
and strengthen market quality for all market participants.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 79038 (October 4, 
2016), 81 FR 70214 (October 11, 2016) (SR-BOX-2016-47).
    \11\ See supra note 5.
---------------------------------------------------------------------------

    The proposed fees are equitable and not unfairly discriminatory as 
the fees apply equally to all electronic Market Makers. As such, all 
similarly situated

[[Page 10270]]

electronic Market Makers, with the same number of appointments, will be 
subject to the same electronic Market Maker Trading Permit fee. The 
Exchange also believes that assessing lower fees to electronic Market 
Makers that quote in fewer classes is reasonable and appropriate as it 
will allow BOX to retain and attract smaller-scale electronic Market 
Makers, which are an integral component of the options industry 
marketplace. Since these smaller electronic Market Makers utilize less 
bandwidth and capacity on the BOX network due to the lower number of 
quoted classes, the Exchange believes it is reasonable and appropriate 
to offer such electronic Market Makers a lower fee. The Exchange also 
notes that other options exchanges assess permit fees at different 
rates, based upon a member's participation on that exchange,\12\ and, 
as such, this concept is not new or novel.
---------------------------------------------------------------------------

    \12\ See e.g., NYSE Arca Options Fees and Charges, p.1 
(assessing market makers $6,000 for up to 175 option issues, an 
additional $5,000 for up to 350 option issues, an additional $4,000 
for up to 1,000 option issues, an additional $3,000 for all option 
issues on the exchange, and an additional $1,000 for the fifth 
trading permit and for each trading permit thereafter); NYSE 
American Options Fee Schedule, p. 23 (assessing market makers $8,000 
for up to 60 plus the bottom 45% of option issues, an additional 
$6,000 for up to 150 plus the bottom 45% of option issues, an 
additional $5,000 for up to 500 plus the bottom 45% of option 
issues, and additional $4,000 for up to 1,100 plus the bottom 45% of 
option issues, an additional $3,000 for all issues traded on the 
exchange, and an additional $2,000 for 6th to 9th ATPs; plus an 
addition fee for premium products). See also Cboe BZX Options 
Exchange (``BZX Options'') assesses the Participant Fee, which is a 
membership fee, according to a member's ADV. See Cboe BZX Options 
Exchange Fee Schedule under ``Membership Fees''. The Participant Fee 
is $500 if the member ADV is less than 5,000 contracts and $1,000 if 
the member ADV is equal to or greater than 5,000 contracts.
---------------------------------------------------------------------------

    Further, the Exchange believes the proposed tiered structure of the 
electronic Market Maker Trading Permit fees is reasonable and 
appropriate. Under the proposal, electronic Market Makers will be 
charged monthly fees based on the greatest number of classes quoted on 
any given trading day in a calendar month. Under the proposed fee 
structure, the fees increase as the number of classes quoted by a 
Market Maker increases. The Exchange believes this structure is 
reasonable because the BOX system requires increased performance and 
capacity in order to provide the opportunity for Market Makers to quote 
in a higher number of options classes on BOX. Specifically, the more 
classes that are actively quoted on BOX by a Market Maker requires 
increased memory for record retention, increased bandwidth for 
optimized performance, increased functionalities on each application 
layer, and increased optimization with regard to surveillance and 
monitoring of such classes quoted. As such, basing the Market Maker 
Trading Permit fee on the greatest number of classes quoted in on any 
given day in a calendar month is reasonable and appropriate when taking 
into account how the increased number of quoted classes directly impact 
the costs and resources for BOX. Further, the Exchange believes that 
the proposed tiered structure is equitable and not unfairly 
discriminatory as all similarly situated Market Makers will be charged 
the same fee. The Exchange notes that another options exchange in the 
industry calculates Market Maker Permit Fees in the same manner.\13\
---------------------------------------------------------------------------

    \13\ See Nasdaq Phlx LLC (``Phlx'') Fee Schedule, Section 8(B) 
detailing the tiered structure for Streaming Quote Trader (``SQT'') 
Fees.
---------------------------------------------------------------------------

    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the proposed fees will not result in 
excessive or supra-competitive profit. The costs associated with 
providing access to Participants and non-Participants are extensive, 
have increased year-over-year, and are projected to increase year-over-
year in the future. In particular, BOX has experienced a material 
increase in its costs in the last several years, in connection with 
projects to make its network environment more transparent and 
deterministic, based on customer demand. In order to provide this for 
BOX Participants and non-Participants, in 2021 alone BOX has made 
significant capital expenditures (``CapEx''), incurred increased 
ongoing operational expenditures (``OpEx''), and undertaken additional 
engineering research and development (``R&D'') in the following areas: 
(i) Implementing an improved network design to ensure equalized cabling 
between Participants; (ii) introducing designated gateways for BOX 
Market Makers; and (iii) optimization of network and systems to better 
handle the increased quote and order flow seen through 2020 and 2021. 
The CapEx in 2021 was approximately $720,000 for BOX. This expense does 
not include the significant increase in employee time and other 
resources necessary to maintain and service this network, which expense 
is captured in the operating expense discussed below. These projects, 
which resulted in a material increase in expense to BOX, are, among 
other things, intended to enhance the overall trading experience at 
BOX, making it a venue that market participants want to access.
    Given these increased costs, BOX determined that access fees must 
be increased and believes the proposed electronic Market Maker Trading 
Permit fees are equitably allocated between other BOX Participants and 
Market Makers, when these fees are viewed in the context of the overall 
activity on BOX, as Market Makers: (1) Consume the most bandwidth and 
resources of the network; (2) transact the vast majority of the volume 
on BOX; and (3) require the high touch network support services 
provided by BOX and its staff, including more costly network 
monitoring, reporting and support services, resulting in a much higher 
cost to BOX. The proposed electronic Market Maker Trading Permit fees 
are equitably allocated in this regard because the majority of customer 
demand comes from Market Makers, whose transactions make up a majority 
of the volume on BOX. Accordingly, the Exchange believes it is 
reasonable, equitably allocated, and not unfairly discriminatory to 
recoup a portion of its costs associated with providing electronic 
Market Makers access services. BOX believes that the proposed 
electronic Market Maker Trading Permit fees are equitably allocated 
between other BOX Participants and Market Makers, as Market Makers 
consume the most bandwidth and resources of the network because only 
Market Makers submit quotes on BOX. Specifically, BOX notes that these 
market participants account for greater than 99% of message traffic 
over the network, while other non-Market Maker market participants 
account for less than 1% of message traffic over the network. In BOX's 
experience, most BOX Participants do not have a business need for the 
high performance network solutions required by Market Makers. BOX's 
high performance network solutions and supporting infrastructure 
(including employee support), provides unparalleled system throughput 
and the capacity to handle approximately 3 million quote messages per 
second. On an average day, BOX handles over 1.6 billion total messages. 
Of those, Market Makers generate approximately 1.59 billion messages, 
and other BOX Participants generate 9.5 million messages. However, in 
order to achieve consistent, premium network performance, BOX must 
build out and maintain a network that has the capacity to handle the 
message rate requirements of its most heavy network consumers. These 
billions of messages per day consume BOX's resources and significantly 
contribute to the overall expense for storage and network transport 
capabilities. Given this difference in network utilization rate, the 
Exchange believes that it is

[[Page 10271]]

reasonable, equitable, and not unfairly discriminatory that Market 
Makers pay for a higher portion of the access costs (compared to other 
Participant types) designed to be recovered via the proposed electronic 
Market Maker Trading Permit fees.
    In order to provide more detail and to quantify BOX's costs 
associated with providing access to the BOX network in general, BOX 
notes that there are material costs associated with providing the 
infrastructure and headcount to fully-support access to BOX. BOX incurs 
technology expenses related to establishing and maintaining Information 
Security services, enhanced network monitoring and customer reporting 
associated with its network technology. While some of the expense is 
fixed, much of the expense is not fixed, and thus increases as the 
expenses associated with access services for electronic Market Makers 
increase. For example, new Market Makers to BOX may require the 
purchase of additional hardware to support those Participants as well 
as enhanced monitoring and reporting of customer performance that BOX 
provides. Further, as the total number of Market Makers increase, BOX 
may need to increase their data center footprint and consume more 
power, resulting in increased costs charged by their third-party data 
center provider. Accordingly, the cost to BOX to provide access to its 
Participants is not fixed. BOX believes the proposed electronic Market 
Maker Trading Permit fees are reasonable in order to offset a portion 
of the costs to BOX associated with providing access to Market Makers 
to its network infrastructure.
    BOX Market Makers have and continue to account for the vast 
majority of network capacity utilization and trading activity on BOX 
and thus account for the majority of expenses placed on BOX systems. 
Specifically, in 2017 (the year after BOX established the flat 
Participant Fee), the total expense for providing access services for 
all Participant types was approximately $819,000. Broken down further, 
in 2017, the total expense for providing access services to non-Market 
Maker Participants was approximately $117,000 and the total expense for 
providing access services to Market Makers was approximately $702,000. 
The Exchange has seen this disparity in access expenses between non-
Market Makers and Market Makers year after year since the establishment 
of the Participant Fee in 2016. In 2018, the total expense for 
providing access services for all Participant types was approximately 
$763,000--approximately $109,000 allocated to non-Market Maker expenses 
and approximately $654,000 allocated to Market Maker expenses. In 2019, 
the total expense for providing access services for all Participant 
types was approximately $722,000--approximately $103,000 allocated to 
non-Market Maker expenses and approximately $619,000 allocated to 
Market Makers. In 2020, the total expense for providing access services 
for all Participant types was approximately $1.1 million--approximately 
$161,000 allocated to non-Market Maker expenses and approximately 
$971,000 allocated to Market Makers. Further, as discussed herein, BOX 
experienced a material increase in costs in 2021 and projects a similar 
material increase for 2022 due to projects to make its network 
environment more transparent and deterministic, and increased order 
flow seen throughout the industry. These increased costs are reflected 
in the expenses related to providing access services to all BOX 
Participants. Specifically, in 2021, the total expense for providing 
access services for all Participant types was approximately $1.29 
million--approximately $190,000 allocated to non-Market Maker expenses 
and approximately $1.1 million allocated to Market Makers. Further, in 
the projected expenses for 2022, the total projected expense for 
providing access services for all Participant types is approximately 
$1.89 million--approximately $270,000 allocated to non-Market Maker 
expenses and $1.62 million allocated to Market Makers. As illustrated 
by these access expenses year over year, it is clear that BOX Market 
Makers account for the majority of expenses related to the provision of 
access services for BOX Participants. Accordingly, BOX believes that it 
is reasonable and appropriate to charge electronic Market Makers more 
than other BOX Participants for electronic Trading Permits to access 
the BOX network.
    BOX believes that the proposed Market Maker Fees are fair and 
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that BOX 
projects to incur in connection with providing these access services 
versus the total annual revenue that BOX projects it will collect in 
connection with the associated electronic Market Maker Trading Permit 
fees.
    As discussed herein, BOX conducted an extensive cost review in 
which BOX analyzed all expenses in BOX's general expense ledger to 
determine whether each such expense relates to the access services for 
electronic Market Makers, and, if such expense did so relate, what 
portion (or percentage) of such expense actually supports those 
services, and thus bears a relationship that is, ``in nature and 
closeness,'' directly related to those services. While BOX undertook 
this review of its expenses from 2019 through 2021, it focused on the 
2021 expenses as these are the most recent and clearly demonstrate why 
BOX determined that access fees needed to be raised for certain 
Participants. The sum of all such portions of expenses represents the 
total cost to BOX to provide Market Makers access to the BOX network.
    For 2021,\14\ the total annual expense for providing access 
services to Market Makers was approximately $1.1 million. The $1.1 
million in projected total annual expense is comprised of direct and 
indirect expenses. For 2021, total 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 access services for Market 
Makers) was $770,749.\15\ It is important to note that BOX did not 
allocate the entirety of its overall direct expense in 2021 to 
providing access services for Market Makers. Specifically, the $770,749 
direct expense is only a portion of the overall direct expenses for 
access service incurred by BOX as overall direct expenses in 2021 
totaled approximately $8.2 million.\16\ To reiterate, the Exchange did 
not allocate all of the direct expenses toward the cost of providing 
access services to Market Makers, only that portion which BOX 
identified as being specifically mapped to providing the access 
services to Market Makers, approximately 10% of the total direct 
expense for access services. The Exchange believes this allocation is 
reasonable because it represents BOX's actual cost to provide access 
services to its Market Makers, and not any other service, as supported 
by its cost review.
---------------------------------------------------------------------------

    \14\ BOX has not yet finalized its 2021 year end results.
    \15\ The direct expenses detailed herein are contained in the 
following line items: Technical and Operational, External IT 
Services, Data Processing & Communication, and Depreciation.
    \16\ This overall direct expense total includes all expenses 
related to space rental, power usage, connections, etc., at the 
Exchange's data centers, trading technology support, software and 
hardware depreciation, and intermarket linkage and third party 
market data connectivity fees.
---------------------------------------------------------------------------

    The indirect expense (which includes expenses related to employee 
compensation and benefits for full-time

[[Page 10272]]

employees, legal expenses and other professional services, and office 
space and rent and other miscellaneous expenses) that BOX allocates to 
providing access services to electronic Market Makers in 2021 was 
approximately $370,435.\17\ BOX notes that the overall indirect expense 
in 2021 totaled approximately $18.5 million. To reiterate, the Exchange 
did not allocate all of the indirect expenses incurred in 2021 toward 
the cost of providing the access services to Market Makers. 
Specifically, BOX allocated approximately 2% of the total indirect 
expense incurred in 2021 to Market Maker access services. The Exchange 
notes that it took a conservative approach with regard to the 
allocation of indirect expenses related to providing access services to 
Market Makers. As such, this may result in BOX under allocating an 
expense to the provision of access services for Market Makers and such 
expenses may actually be higher or increase above what BOX utilizes 
within this proposal. The Exchange believes this allocation is 
reasonable and appropriate when compared to other exchanges' 
allocations of similar indirect costs.\18\
---------------------------------------------------------------------------

    \17\ The indirect expenses detailed herein are contained in the 
following line items in the BOX 2021 Form 1: Personnel, 
Amortization, Rent of facilities, Office-related, Professional 
Services, Other expenses.
    \18\ With regard to their proposed access fees, MIAX Emerald 
allocated approximately 15% of the total employee compensation and 
benefits expense, approximately 15% of the total depreciation and 
amortization expense, and approximately 15% of the total occupancy 
expense. MIAX Pearl allocated approximately 6% of the total 
applicable employee compensation and benefits expense, approximately 
5% of the total applicable depreciation and amortization expense, 
and approximately 8% of the total applicable occupancy expense. As 
such, BOX believes its conservative allocation percentage is 
reasonable and appropriate.
---------------------------------------------------------------------------

    Further, BOX analyzed projected expenses for 2022 with regard to 
providing access services to Market Makers. The projected total expense 
for providing access services to Market Makers in 2022 is approximately 
$1.6 million.\19\ BOX notes that direct expenses associated with 
providing access services to Market Makers will increase 61%, while 
indirect expenses associated with providing access services to Market 
Makers are not projected to exceed 2021 costs.\20\ BOX expects 
significant increases in costs for space rental, power usage, 
connections, etc., at the Exchange's data centers and trading 
technology support. These increased costs are attributed to projects 
including, but not limited to redesign and migration to an equalized 
cabling infrastructure, the optimization of order entry protocol, and 
upgrades to the trading servers and production network in connection 
with the increased order flow seen in 2020 and 2021 and expected in 
2022.\21\
---------------------------------------------------------------------------

    \19\ The Exchange notes that these numbers are projections based 
on BOX's projected 2022 budget expenditures. These costs are subject 
to change depending on the nature of the project or service, however 
BOX does not expect material changes to the projected expenses.
    \20\ Expenses for 2022 are based off of BOX projected expenses 
and budget. These expenses are subject to change.
    \21\ As discussed above, the costs of these projects are 
included in the total direct expenses for access services, of which 
only a portion were allocated to the direct expenses associated with 
providing access services to Market Makers.
---------------------------------------------------------------------------

    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision of access services (including 
connectivity for all BOX Participants and ports).\22\ The Exchange 
believes this is reasonable and in line, as BOX operates a technology-
based business that differentiates itself from its competitors based on 
its trading systems that rely on access to a high-performance network, 
resulting in significant technology expense. The majority of BOX's 
expense is technology-based. As such, the Exchange believes it is 
reasonable to allocate a portion of its total overall expense towards 
the proposed electronic Market Maker Trading Permit fees.
---------------------------------------------------------------------------

    \22\ No expenses related to connectivity or ports were included 
in BOX's overall expense calculation for purposes of this proposal.
---------------------------------------------------------------------------

    Accordingly, based on the facts and circumstances presented above, 
the Exchange believes that the proposed electronic Market Maker Trading 
Permit Fees will not result in excessive pricing or supra-competitive 
profit. To illustrate, beginning January 1, 2022, on a fully annualized 
basis, BOX projects that its annualized revenue associated with the 
proposed electronic Market Maker Trading Permit Fees would be 
approximately $1.23 in 2022 based on a recent billing cycle. As noted 
above, BOX projects that its annualized expense for providing the 
access services to electronic Market Makers would be approximately 
$1.62 million in 2022. Accordingly, on a fully-annualized basis, the 
Exchange believes its total projected revenue from the proposed 
electronic Market Maker Trading Permit fees will not result in any 
profit for BOX, rather the projected revenue will only recoup a portion 
of the 2022 expense for providing access services to electronic Market 
Makers (approximately $1.23 million revenue minus approximately $1.62 
million in expense = approximately $388,000 loss in 2022).\23\ The 
Exchange notes that the fee charged to each Market Maker for electronic 
Trading Permits may vary from month to month depending on the number of 
classes in which the Market Maker was appointed to quote on any given 
day within the calendar month. As such, the revenue projection is not a 
static number, with monthly Trading Permit fees likely to fluctuate 
month to month.
---------------------------------------------------------------------------

    \23\ The Exchange notes that other exchanges that recently 
amended access fees resulted in a 24% and 10% profit margin, 
respectively. See Securities Exchange Act Release Nos. 93555 
(November 10, 2021), 86 FR 64254 (November 17, 2021) (SR-PEARL-2021-
54) and 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03). The Exchange notes that similar access fees are 
currently charged at these exchanges today.
---------------------------------------------------------------------------

    For the avoidance of doubt, none of the expenses included herein 
relating to providing access services to electronic Market Makers 
relate to the provision of any other services offered by BOX. Stated 
differently, no expense amount on BOX was allocated more than once. The 
Exchange notes that, with respect to the BOX expenses included herein, 
those expenses only cover the BOX Options Market; expenses associated 
with the Exchange, BOX Exchange LLC, are accounted for separately and 
are not included within the scope of this filing.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to allocate the respective figures of each expense 
category described above towards the total cost to BOX of operating and 
supporting the network, including providing access services to 
electronic Market Makers because BOX performed a line-by-line item 
analysis of all the expenses of BOX, and has determined the expenses 
that directly relate to providing Market Makers access to BOX. Further, 
the Exchange notes that, without the specific direct and indirect items 
listed above, BOX would not be able to provide the access services to 
its Market Makers. Each of these expense items, including physical 
hardware, software, employee compensation and benefits, occupancy 
costs, and the depreciation and amortization of equipment, have been 
identified through a line-by-line item analysis to be integral to 
providing access services to its Market Makers. The proposed fees are 
intended to recover BOX's costs of providing Market Makers access to 
the BOX network. Accordingly, the Exchange believes that the proposed 
electronic Market Maker Trading Permit fees are fair and reasonable 
because they do not result in excessive pricing or supra-competitive 
profit, when comparing the actual costs to BOX versus the projected 
annual

[[Page 10273]]

revenue from the proposed electronic Market Maker Trading Permit fees.
    The Exchange believes that the proposed electronic Market Maker 
Trading Permit fees are reasonable, equitable, and not unfairly 
discriminatory because they are lower than comparable fees at other 
competing options exchanges.\24\ The proposed fees are fair and 
equitable and not unreasonably discriminatory because they apply 
equally to all Market Makers and access to BOX is offered on terms that 
are not unfairly discriminatory. BOX designed the fee rates in order to 
provide objective criteria for Market Makers of different sizes and 
business models that best matches their quoting activity on BOX. BOX 
believes that the proposed fee rates and criteria provide an objective 
and flexible framework that will encourage Market Makers to be 
appointed and quote in option classes while also equitably allocating 
the fees in a reasonable manner amongst Market Maker appointments to 
account for quoting and trading activity.\25\
---------------------------------------------------------------------------

    \24\ See supra note 5.
    \25\ Prior to filing this proposal, the Exchange notes that BOX 
Market Makers were made aware of the proposed tier structure and fee 
change. BOX received feedback from these Market Makers and adjusted 
the fees accordingly based on their feedback. Market Makers are not 
required to quote on every options exchange. BOX Market Makers 
choose to quote and transact business on BOX because BOX is 
providing increased trading opportunities for these firms.
---------------------------------------------------------------------------

    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive. In such an 
environment, BOX must continually adjust its fees for services and 
products, in addition to order flow, to remain competitive with other 
exchanges. BOX believes that the proposed changes reflect this 
competitive environment.
    Finally, the Exchange notes it is not aware of any reason why 
Market Makers could not simply drop their access to an exchange (or not 
initially access an exchange) if an exchange were to establish prices 
for its non-transaction fees that, in the determination of such Market 
Maker, did not make business or economic sense for such Market Maker to 
access such exchange. No options market participant--including Market 
Makers--are required by rule, regulation, or competitive forces to be a 
Participant of the Exchange. As evidence of the fact that market 
participants can and do drop their access to exchanges based on non-
transaction fee pricing, R2G Services LLC (``R2G'') filed a comment 
letter after BOX's proposed rule changes to increase its connectivity 
fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-BOX-2019-04). 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.'' Accordingly, this example shows that if an exchange sets a 
certain fee for connectivity and/or other non-transaction fees for its 
relevant marketplace that are too high or deemed unreasonable by such 
market participant, market participants can choose to drop their access 
to such exchange if they so choose.

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 believes that the proposed electronic Market Maker 
Trading Permit fees do not place certain market participants at a 
relative disadvantage to other market participants because the proposed 
fees do not favor certain categories of market participants in a manner 
that would impose a burden on competition; rather, the fee rates are 
designed in order to provide objective criteria for Market Makers of 
different sizes and business models that best matches their quoting 
activity on BOX. Further, the Exchange believes that the proposed 
electronic Market Maker Trading Permit fees will not impose a burden on 
intramarket competition because, when these fees are viewed in the 
context of the overall activity on BOX, Market Makers: (1) Consume the 
most bandwidth and resources of the network; (2) transact the vast 
majority of the volume on BOX; and (3) require the high touch network 
support services provided by BOX and its staff, including more costly 
network monitoring, reporting and support services, resulting in a much 
higher cost to BOX. The Exchange notes that the majority of customer 
demand comes from Market Makers, whose transactions make up a majority 
of the volume on BOX. Further, as discussed herein, other Participant 
types (Broker Dealers, Professional Customers, and Public Customers) 
take up significantly less BOX resources and costs. As such, the 
Exchange does not believe charging electronic Market Makers higher 
Trading Permit fees than other Participant types will impose a burden 
on intramarket competition.
    The Exchange believes that the tiered structure of the proposed 
electronic Market Maker Trading Permit fees will not impose a burden on 
intramarket competition because the tiered structure takes into account 
the number of classes quoted by each individual Market Maker. As 
discussed herein, the BOX system requires increased performance and 
capacity in order to provide the opportunity for each Market Maker to 
quote in a higher number of options classes on BOX. Specifically, the 
more classes that are actively quoted on BOX by a Market Maker requires 
increased memory for record retention, increased bandwidth for 
optimized performance, increased functionalities on each application 
layer, and increased optimization with regard to surveillance and 
monitoring of such classes quoted. As such, basing the Market Maker 
Trading Permit fee on the greatest number of classes quoted in on any 
given day in a calendar month is reasonable and appropriate when taking 
into account how the increased number of quoted classes directly impact 
the costs and resources for BOX.
Inter-Market Competition
    The Exchange believes the proposed Market Maker 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 become participants of all options exchanges. The Exchange notes 
that it has far less Participants as compared to the much greater 
number of participants at other options exchanges. There are a number 
of large market makers and broker-dealers that are participants of 
other options exchange but not Participants of BOX. The Exchange is 
also unaware of any assertion that its existing fee levels or the 
proposed electronic Market Maker 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 
discontinue their membership with BOX.
    The Exchange operates in a highly competitive market in which 
market participants can readily favor one of the 15 competing options 
venues if they deem fee levels at a particular venue to be excessive. 
Based on publicly-available information, and excluding index-based 
options, no single exchange has more than 16% market share. Therefore, 
no exchange possesses significant pricing power in the execution of 
multiply-listed equity and

[[Page 10274]]

ETF options order flow. For the month of November 2021, BOX had a 
market share of approximately 5.58% of executed multiply-listed equity 
options \26\ and BOX believes that the ever-shifting market share among 
exchanges from month to month demonstrates that market participants can 
discontinue or reduce use of certain categories of products, or shift 
order flow, in response to fee changes. In such an environment, BOX 
must continually adjust its fees and fee waivers to remain competitive 
with other exchanges and to attract order flow to the facility.
---------------------------------------------------------------------------

    \26\ See Options Volume by Exchange available at https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange.
---------------------------------------------------------------------------

    Finally, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues. In such an environment, the Exchange must continually 
review, and consider adjusting, its fees and credits to remain 
competitive with other exchanges. For the reasons described above, the 
Exchange believes that the proposed rule change reflects this 
competitive environment.

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 \27\ and Rule 19b-4(f)(2) 
thereunder,\28\ because it establishes or changes a due, or fee.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 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 [email protected]. Please include 
File Number SR-BOX-2022-07 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-2022-07. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of 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-2022-07, and should be submitted on 
or before March 16, 2022.
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03763 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P


