[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88080-88088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101491; File No. SR-CBOE-2024-008]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To Adopt a New Rule Regarding Order 
and Execution Management Systems

October 31, 2024.

I. Introduction

    On February 13, 2024, Cboe Exchange, Inc. (``Cboe'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Exchange Act'' or ``Act''),\1\ and Rule 
19b-4 thereunder,\2\ a proposal to adopt a new rule regarding order and 
execution management systems (``OEMSs''). The proposed rule change was 
published for comment in the Federal Register on March 5, 2024.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99620 (Feb. 28, 
2024), 89 FR 15907 (Mar. 5, 2024) (``Notice''). Comments received 
can be found on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2024-008/srcboe2024008.htm.
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    On April 16, 2024, pursuant to section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On May 31, 2024, the Commission instituted 
proceedings under section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
The Commission received comment letters in response to the Notice and 
the OIP. On August 30, 2024, the Commission issued a notice of 
designation of a longer period of time within which to approve or 
disapprove the proposed rule change.\8\ For the reasons discussed 
below, this order disapproves the proposed rule change.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99963 (Apr. 16, 
2024), 89 FR 29389 (Apr. 22, 2024).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 100256 (May 31, 
2024), 89 FR 48463 (June 6, 2024) (``OIP'').
    \8\ See Securities Exchange Act Release No. 100880 (Aug. 30, 
2024), 89 FR 72537 (Sept. 5, 2024).
    \9\ In disapproving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). See infra notes 130-138 
and accompanying text.
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II. Description of the Proposed Rule Change

    Nine years ago, the Exchange's parent company, Cboe Global Markets, 
Inc, first acquired an OEMS, followed by another OEMS approximately two 
years later.\10\ Since the acquisition of these assets, Cboe has 
submitted filings for each OEMS (which can be used to route orders to 
the Exchange).\11\ Now, as described in more detail in the Notice, the 
Exchange seeks Commission approval of a rule providing that any OEMS 
\12\ that meets the conditions in proposed Rule 3.66 will not be deemed 
a facility of the Exchange as that term is defined in the Act. Section 
3(a)(2) of the Act defines ``facility'' as follows:
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    \10\ See Notice, 89 FR 15907 n.5.
    \11\ Id.
    \12\ ``OEMSs generally permit users to route orders to other 
market participants that use the same OEMS platform or directly to 
trading venues. OEMS platforms generally provide their users with 
the capability to create orders, route them for execution, and input 
parameters to control the size, timing, and other variables of their 
trades.'' Notice, 89 FR 15907-08. For additional description of the 
functionalities of an OEMS, see id.

    The term ``facility'' when used with respect to an exchange 
includes its premises, tangible or intangible property whether on 
the premises or not, any right to the use of such premises or 
property or any service thereof for the purpose of effecting or 
reporting a transaction on an exchange (including, among other 
things, any system of communication to or from the exchange, by 
ticker or otherwise, maintained by or with the consent of the 
exchange), and any right of the exchange to the use of any property 
or service.\13\
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    \13\ 15 U.S.C. 78c(a)(2). Section 3(a)(1) defines an 
``exchange'' as ``any organization, association, or group of persons 
. . . which constitutes, maintains, or provides a market place or 
facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange.'' The statute 
then specifically provides that an exchange ``includes . . . the 
market facilities maintained by such exchange.'' 15 U.S.C. 
78c(a)(1).

    The Exchange's proposal would apply to, among others, the Exchange-
affiliated OEMS known as Silexx.\14\ Silexx is developed, offered, and 
maintained by Cboe Silexx, LLC. The Exchange and Cboe Silexx, LLC are 
each a wholly-owned subsidiary of Cboe Global Markets, Inc.\15\
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    \14\ See infra note 19 and accompanying text defining the term 
``Exchange-affiliated OEMS''.
    \15\ References to ``Silexx'' are to the OEMS Silexx (the Silexx 
system) that is provided by the legal entity, Cboe Silexx, LLC.
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    The Exchange states that a function of OEMSs (such as Silexx) is to 
allow market participants to enter and route orders to trade securities 
for execution on any U.S. exchange, including the Exchange.\16\ The 
Exchange

[[Page 88081]]

acknowledges that this function of Silexx has been subject to the rule 
filing requirements of section 19(b) of the Exchange Act since 
2017.\17\ The Exchange seeks to remove certain OEMSs, including Silexx, 
from the rule filing requirements of section 19(b), and therefore 
Commission oversight, if the Exchange and any affiliated OEMS are 
``ultimately operated as a separate business.'' \18\
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    \16\ See Notice, 89 FR 15907 and n.3.
    \17\ See Notice, 89 FR 15907, n.4-5 (distinguishing use of an 
OEMS to enter and route orders from use of an OEMS to manage 
executions and perform other tasks); See also id. at 15910 (stating 
``market participants may, among other things, use OEMS platforms to 
enter and route orders for ultimate execution at a trading venue, 
which may cause an OEMS to be deemed to be used for the ``purpose of 
effecting or reporting a transaction on an exchange'' under the 
facility definition).
    \18\ See Notice, 89 FR 15908.
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    To accomplish this, the Exchange proposes new Rule 3.66, which 
would provide that, ``for so long as the Exchange provides or is 
affiliated with any entity that provides, or the Exchange or an 
affiliate has a contractual relationship with any entity that provides, 
an OEMS platform'', such OEMS (hereafter an ``Exchange-affiliated 
OEMS'') will not be regulated as a ``facility'' of the Exchange and 
thus not subject to section 6 of the Act if it meets certain 
conditions.\19\ The proposed conditions would provide that:
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    \19\ Id. at 15909.
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    (a) use of the OEMS is voluntary (i.e., solely within the 
discretion of a Trading Permit Holder (``TPH'') \20\) and not required 
for a TPH to access to the Exchange (i.e., the OEMS is a nonexclusive 
means of access to the Exchange); \21\
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    \20\ See Cboe By-Laws Section 1.1 (defining the term to mean any 
individual, corporation, partnership, limited liability company or 
other entity authorized by the Rules that holds a Trading Permit. 
Pursuant to Cboe Rule 1.1, a Trading Permit is a license issued by 
the Exchange that grants the holder the right to access one or more 
of the facilities of the Exchange for the purpose of effecting 
transactions in securities traded on the Exchange without the 
services of another person acting as broker, and otherwise to access 
the facility of the Exchange for purposes of trading or reporting 
transactions or transmitting orders or quotations in securities 
traded on the Exchange.).
    \21\ See proposed Rule 3.66(a).
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    (b) if a TPH using the OEMS establishes a direct connection to the 
Exchange via an Exchange port, that connection is established in the 
same manner and in accordance with the same terms, conditions, and fees 
as any third-party OEMS as set forth in the Exchange's rules, technical 
specifications, and fees schedule; \22\
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    \22\ See proposed Rule 3.66(b).
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    (c) the OEMS (or the entity that owns the OEMS) is not a registered 
broker-dealer; \23\
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    \23\ See proposed Rule 3.66(c).
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    (d) for any orders ultimately routed through the OEMS to the 
Exchange:
    (1) users and their brokers are solely responsible for routing 
decisions; and
    (2) the Exchange processes those orders in the same manner as any 
other orders received by the Exchange (i.e., orders submitted through 
the OEMS to the Exchange receive no preferential treatment on the 
Exchange); \24\
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    \24\ See proposed Rule 3.66(d).
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    (e) any fees charged to a user of the OEMS are unrelated to that 
user's Exchange activity or to Exchange fees set forth on the 
Exchange's fees schedule; \25\
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    \25\ See proposed Rule 3.66(e).
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    (f) the OEMS uses any premises or service from the Exchange that is 
a facility, such as market data, pursuant to the same terms, 
conditions, and fees as any other user of Exchange premises and 
services as set forth in the Exchange's rules, technical 
specifications, and fees schedule; \26\
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    \26\ See proposed Rule 3.66(f).
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    (g) a third-party not required to register as a national securities 
exchange under section 6 of the Act can offer a similar OEMS; \27\ and
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    \27\ See proposed Rule 3.66(g).
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    (h) the Exchange has established and maintains procedures and 
internal controls reasonably designed to prevent the OEMS from 
receiving any competitive advantage or benefit as a result of its 
affiliation/relationship with the Exchange, including the provision of 
information to the entity or personnel operating the OEMS regarding 
updates to the system (such as technical specifications) until such 
information is available generally to similarly situated market 
participants.\28\
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    \28\ See proposed Rule 3.66(h).
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    In the Notice, the Exchange states that unaffiliated OEMSs are 
generally not subject to the rule filing requirements of section 19(b) 
of the Act, and further states that when the Exchange or an Exchange 
affiliate owns an OEMS platform, the Exchange has been advised by 
Commission staff that Exchange affiliation with an OEMS causes the OEMS 
routing functionality to be considered a ``facility'' under the Act and 
thus subject to the rule filing requirements under section 19(b) of the 
Act.\29\ The Exchange states that this should not be so: that even if 
an OEMS is offered by the Exchange, an Exchange affiliate, or pursuant 
to a contractual relationship, if it is operated as a separate business 
from the Exchange and is operated on the same terms as third-party 
OEMSs, it is not a facility as defined by the Act.\30\ The Exchange 
seeks to incorporate in its rulebook its interpretation of the 
definitions of a ``facility'' of an ``exchange'' as set forth in 
sections 3(a)(2) and (3)(a)(1) of the Act, respectively.
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    \29\ See Notice, 89 FR 15908-15914.
    \30\ See Notice, 89 FR 15908-09. Since 2017, however, the 
Exchange has been submitting rule filings pursuant to the 
requirements of section 19(b) of the Act in connection with its OEMS 
Silexx and in connection with another previously-offered OEMS 
platform. See Securities Exchange Act Release Nos. 82088 (Nov. 15, 
2017), 82 FR 55443 (Nov. 21, 2017) (SR-CBOE-2017-068); and 75302 
(June 25, 2015), 80 FR 37685 (July 1, 2015) (SR-CBOE-2015-062).
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    The Exchange states that an OEMS that is offered by the Exchange, 
an Exchange affiliate, or pursuant to a contractual relationship with 
the Exchange, and that is operated as a separate business from the 
Exchange, receives no competitive advantage over other OEMS platforms 
as a result of its affiliation with the Exchange as long as the 
conditions of proposed Rule 3.66 are followed.\31\ The Exchange also 
``notes it currently offers certain port fee waivers to users of 
Silexx.'' \32\ However, the Exchange does not provide fee waivers to 
third party OEMS users that are not Silexx customers.\33\
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    \31\ See Notice, 89 FR 15908-09.
    \32\ Notice, 89 FR 15908, n.13.
    \33\ Pursuant to the Exchange's fee schedule, port fee waivers 
are only available to Silexx users. See Cboe Options Exchange Fee 
Schedule at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf. (last visited Oct. 16, 2024).
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III. Discussion and Commission Findings

A. The Applicable Standard for Review

    Under Section 19(b)(2)(C) of the Exchange Act, \34\ the Commission 
shall approve a proposed rule change of a self-regulatory organization 
(``SRO'') if it finds that such proposed rule change is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to such organization.\35\ The Commission 
shall disapprove a proposed rule change if it does not make such a 
finding.\36\ Rule 700(b)(3) of the Commission's Rules of Practice 
states that the ``burden to demonstrate that a proposed rule change is 
consistent with the [Exchange Act] and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not sufficient.'' 
\37\

[[Page 88082]]

Rule 700(b)(3) also states that ``the description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding.'' 
\38\ Any failure of an SRO to provide this information may result in 
the Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange Act 
and the applicable rules and regulations.\39\ Moreover, ``unquestioning 
reliance'' on an SRO's representations in a proposed rule change is not 
sufficient to justify Commission approval of a proposed rule 
change.\40\
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    \34\ 15 U.S.C. 78s(b)(2)(C).
    \35\ 15 U.S.C. 78s(b)(2)(C)(i).
    \36\ 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700(b)(3).
    \37\ 17 CFR 201.700(b)(3).
    \38\ Id.
    \39\ See id.
    \40\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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B. Overview

    Whether an Exchange-affiliated OEMS is a facility of the Exchange 
is a threshold question.\41\ If an Exchange-affiliated OEMS satisfies 
the statutory definitions of ``facility'' of an ``exchange'' in section 
3 of the Exchange Act, then the facility is a part of the Exchange and 
is subject to Commission oversight.\42\ When it enacted section 6 of 
the Exchange Act, Congress required exchanges to register with the 
Commission in order to ensure more oversight than had previously 
existed.\43\ Section 19(b) of the Exchange Act \44\ requires that an 
SRO file with the Commission proposed rules or any proposed changes in, 
additions to, or deletions from its rules, and establishes the process 
and standard for Commission review of these rule filings. During that 
process, the Commission reviews whether such rule filings, including 
rule filings regarding exchange facilities, are consistent with the 
requirements of the Exchange Act, particularly section 6.\45\ Section 
6(b)(4) requires that the rules of an exchange ``provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities;'' 
section 6(b)(5) requires, among other things, that the rules of an 
exchange be designed to ``remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest; and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers''; and section 6(b)(8) requires that the rules of 
the exchange not ``impose any burden on competition not necessary or 
appropriate in furtherance of the purposes'' of the Exchange Act.\46\
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    \41\ See Intercontinental Exch., Inc. (ICE), et al. v. SEC, 23 
F.4th 1013 (D.C. Cir. 2022), at 1026 (``ICE Decision'').
    \42\ See 15 U.S.C 78(c)(a)(2) and (1) (defining ``facility'' and 
``exchange'').
    \43\ See 4 T. Hazen, Law of Securities Regulation, section 14.8 
(2024); S. Rep. No. 73-792, at 4, 6 (Apr. 17, 1934).
    \44\ See 15 U.S.C. 78s(b)(1) (governing the requirements for 
Commission process and review of proposed rule changes); 17 CFR 
240.19b-4 (setting forth the requirements for submitting proposed 
rule changes).
    \45\ See 15 U.S.C. 78f(b)(4), (b)(5), and (b)(8) (setting forth 
some of the requirements applicable to a national securities 
exchange).
    \46\ 15 U.S.C. 78f(b)(4), (5) and (b)(8).
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    The Exchange has previously filed proposed rule changes in 
connection with its affiliated OEMSs,\47\ but here proposes a rule that 
would provide that its affiliated OEMSs are not subject to regulation 
by the Commission under section 6(b) or section 19(b) of the Act.\48\ 
As such, the instant proposal presents three questions: (1) whether the 
Exchange-affiliated OEMS (Silexx) for which the Exchange has been 
submitting rule filings is a ``facility'' of the Exchange; (2) if so, 
whether proposed Rule 3.66 alters that conclusion; and (3) whether 
proposed Rule 3.66 is consistent with the Exchange Act, including 
section 6(b). We conclude that the Exchange-affiliated OEMS Silexx is a 
facility of the Exchange under section 3 of the Exchange Act. We also 
conclude that the Exchange has not met its burden to demonstrate that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with section 6(b) of 
the Exchange Act.
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    \47\ See, e.g., Securities Exchange Act Release Nos. 82088 (Nov. 
15, 2017), 82 FR 55443 (Nov. 21, 2017) (SR-CBOE-2017-068) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to 
Describe Functionality of and Adopt Fees for a New Front-End Order 
Entry and Management Platform); and 75302 (June 25, 2015), 80 FR 
37685 (July 1, 2015) (SR-CBOE-2015-062) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change Relating to Front-
End Order Entry and Management Tools in Connection With Purchase of 
Livevol Assets). These filings were submitted pursuant to section 
19(b)(3)(A) of the Act for immediate effectiveness. Relatedly, the 
Commission has long considered the relationship between services 
offered by affiliates of a registered national securities exchange. 
See Regulation of Exchanges and Alternative Trading Systems, 
Securities Exchange Act No. 40760 (Dec. 8, 1998), 63 FR 70844 at 
70891 (Dec. 22, 1998) (``A subsidiary or affiliate of a registered 
exchange could not integrate, or otherwise link the alternative 
trading system with the exchange, including using the premises or 
property of such exchange for effecting or reporting a transaction, 
without being considered a `facility of the exchange.'''). See also 
infra note 59 (citing other examples where the Commission has 
considered services offered by affiliates of a registered national 
securities exchange).
    \48\ See Notice at 89 FR 15909.
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    As discussed further below, because the Commission has determined 
that the Exchange-affiliated OEMS Silexx is a facility of the Exchange, 
the terms on which it is offered to market participants are ``rules of 
an exchange,'' subject to the rule filing requirement under section 
19(b) of the Exchange Act.\49\ Because the Exchange proposes a rule 
that improperly would remove the Exchange-affiliated OEMS Silexx from 
the statutory rule filing requirement, the Commission cannot conclude 
that the proposed rule is consistent with the Act, and in particular, 
with section 6(b) of the Act.\50\
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    \49\ 15 U.S.C. 78s(b).
    \50\ 15 U.S.C. 78f(b).
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C. Exchange-Affiliated OEMSs as Facilities

    Cboe is proposing a rule change that would have the effect of 
interpreting section 3(a)(2) of the Act to place certain Exchange-
affiliated OEMSs outside the statutory definition of facility.\51\ The 
Commission received several comments stating that an Exchange-
affiliated OEMS is within the statutory definition of a ``facility'' of 
an ``exchange,'' and opposing Cboe's proposal.\52\
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    \51\ See proposed Rule 3.66.
    \52\ See Letter from Tyler Gellasch, President and CEO, Healthy 
Markets Association, to Vanessa Countryman, Secretary, Securities 
and Exchange Commission (Mar. 25, 2024) (``Healthy Markets 
Letter''); Letter from Gregory Babyak, Global Head of Regulatory 
Affairs, Bloomberg L.P., to Vanessa Countryman, Secretary, 
Securities and Exchange Commission (Mar. 26, 2024) (``Bloomberg 
Letter I''); Letter from Jim Considine, Chief Financial Officer, 
McKay Brothers, LLC, to Vanessa Countryman, Secretary, Securities 
and Exchange Commission (Mar. 26, 2024) (``McKay Brothers Letter''); 
Letter from Gregory Babyak, Global Head of Regulatory Affairs, 
Bloomberg L.P., to Vanessa Countryman, Secretary, Securities and 
Exchange Commission (May 24, 2024) (``Bloomberg Letter II''); Letter 
from Ellen Greene, Managing Director, Equities and Options Market 
Structure, and Joseph Corcoran, Managing Director, Associate General 
Counsel, SIFMA, to Vanessa Countryman, Secretary, Securities and 
Exchange Commission (Jun. 18, 2024) (``SIFMA Letter I''); Letter 
from Gregory Babyak, Global Head of Regulatory Affairs, Bloomberg 
L.P., to Vanessa Countryman, Secretary, Securities and Exchange 
Commission (Jun. 27, 2024) (``Bloomberg Letter III''); Letter from 
Ellen Greene, Managing Director, Equities and Options Market 
Structure, and Joseph Corcoran, Managing Director, Associate General 
Counsel, SIFMA, to Vanessa Countryman, Secretary, Securities and 
Exchange Commission (Oct. 14, 2024) (``SIFMA Letter II''); and 
Letter from Gregory Babyak, Global Head of Regulatory Affairs, 
Bloomberg L.P., to Vanessa Countryman, Secretary, Securities and 
Exchange Commission (Oct. 17, 2024) (``Bloomberg Letter IV'').
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    One commenter states that the definition of a ``facility'' is a key 
pillar of the Commission's regulatory framework and a vital component 
in

[[Page 88083]]

setting the Commission's scope of authority over exchanges.\53\ The 
commenter states that the proposal falls squarely within a history of 
the exchanges' efforts to limit the Commission's authority to oversee 
core exchange functions \54\ and that this proposal, if approved, would 
redefine the well-established definitions of a ``facility'' and 
``exchange'' that were recently affirmed by the D.C. Circuit.\55\ The 
commenter further states that the Exchange essentially seeks to ``re-
define `facility' in a manner that removes these Exchange-affiliated 
OEMSs from the ambit of `facility,' '' \56\ and that exchanges cannot 
effectively ``exempt themselves'' out of the statutory definition, as 
doing so would ``change the contours of the statute'' with broad 
implications.\57\ Another commenter states that ``allowing exchanges to 
craft rules to adopt overly narrow interpretations of what constitutes 
an exchange facility would enable exchanges to shift functionality that 
has traditionally been considered part of the exchange outside of the 
exchange and beyond the Commission's oversight.'' \58\
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    \53\ See Bloomberg Letter I at 3 (stating the services provided 
by Silexx (i.e., allowing users to enter and route order to trade 
securities) fall under the ``facility'' definition). See also 
Bloomberg Letter III at 3, 4.
    \54\ See Bloomberg Letter I at 6.
    \55\ See Bloomberg Letter I at 2-3.
    \56\ Bloomberg Letter II at 2-3.
    \57\ See Bloomberg Letter II at 5.
    \58\ See SIFMA Letter I at 4. See also McKay Brothers Letter at 
2.
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    Whether a service or other product is a facility of an exchange 
requires an analysis of the particular facts and circumstances,\59\ and 
the D.C. Circuit's ICE Decision provides a recent example of this 
analysis.\60\
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    \59\ See Securities Exchange Act Release No. 76127 (Oct. 9, 
2015), 80 FR 62584, 62586, n.9 (Oct. 16, 2015) (SR-NYSE-2015-36) 
(Order Approving Proposed Rule Change amending Section 907.00 of the 
Listed Company Manual). In addition, the Commission has found that 
where a system of communication occupies a ``special position'' with 
respect to the exchange, such that it is ``uniquely linked to and 
endorsed by'' that exchange to provide such function, then that 
function will constitute a ``facility'' under the Act. See, e.g., 
Securities Exchange Act Release No. 44983 (Oct. 25, 2001), 66 FR 
55225 (Nov. 1, 2001) (``PCX Order'') (considering the introducing 
broker function, order routing function, and electronic 
communications network (``ECN'') for trading securities ineligible 
for trading on ArcaEx provided by Wave, a broker-dealer in which the 
PCX exchange had an indirect ownership interest and that was 
affiliated with PCX's ArcaEx electronic trading facility, and 
determining that the optional order-routing functionality was a 
facility of PCX, but the introducing broker and ECN functions were 
not). See also Securities Exchange Act Release No. 63241 (Nov. 3, 
2010), 75 FR 69792 (Nov. 15, 2010) (stating that, in general, the 
outbound order routing service provided to exchanges by broker-
dealers is regulated as a facility of the exchange); 90209 (Oct. 15, 
2020), 85 FR 67044 (Oct. 21, 2020) (concluding that certain wireless 
connections are facilities because they represent premises and 
property of the exchanges). But compare Securities Exchange Act 
Release No. 44201 (Apr. 18, 2001), 66 FR 21025, 21029 (Apr. 26, 
2001) (File No. 79-9) (Order Granting Application for a Conditional 
Exemption by the National Association of Securities Dealers, Inc. 
Relating to the Acquisition and Operation of a Software Development 
Company by the Nasdaq Stock Market, Inc.).
    \60\ See ICE, et al. v. SEC, 23 F.4th 1013.
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    In the ICE Decision, the D.C. Circuit, reviewing a Commission 
order, analyzed whether a service or property provided by a corporate 
affiliate of a registered national securities exchange was a facility 
of that exchange subject to the rule filing requirements of section 
19(b) of the Act.\61\ Consistent with the Commission's analysis of the 
facts in that order,\62\ the D.C. Circuit assessed whether an exchange-
affiliate's service offering was: (1) a service or property that falls 
within the definition of ``facility'' in section 3(a)(2) of the Act; 
and (2) the type of facility that is part of the definition of 
``exchange'' in section 3(a)(1) of the Act (i.e., a market 
facility).\63\ The D.C. Circuit found two types of wireless 
connectivity services offered by three data service affiliates 
(``IDS'') of the New York Stock Exchange LLC, and its affiliated 
registered national securities exchanges (collectively, the ``NYSE 
Exchanges'' or ``NYSE'') to be facilities of the NYSE Exchanges.\64\
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    \61\ See id. at 1022-1024.
    \62\ See Securities Exchange Act Release No. 90209 (October 15, 
2020), 85 FR 67044, 67049 (October 21, 2020) (SR-NYSE-2020-05, SR-
NYSEAMER-2020-05, SR-NYSEARCA-2020-08, SR-NYSECHX-2020-02, SR-
NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-
2020-15, SR-NYSECHX-2020-05, SR-NYSENAT-2020-08) (Order Granting 
Accelerated Approval to Establish a Wireless Fee Schedule Setting 
Forth Available Wireless Bandwidth Connections and Wireless Market 
Data Connections) (``Wireless Approval Order'').
    \63\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1022-1024.
    \64\ Specifically, and as discussed further below, the Court 
found that each wireless connectivity service was within the 
definition of ``facility'' in section 3(a)(2) of the Act; and, 
further, the Court agreed with the Commission that IDS and the NYSE 
Exchanges form a ``group of persons'' that together ``maintains or 
provides a market place or facilities,'' rendering the wireless 
connectivity services to be within the definition of an ``exchange'' 
in section 3(a)(1) of the Act. See ICE, et al. v. SEC, 23 F.4th 
1013, at 1022-1024.
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Statutory Analysis
    As stated above, section 3(a)(2) of the Act provides that the term 
``facility'' when used with respect to an exchange includes its 
premises, tangible or intangible property whether on the premises or 
not, any right to the use of such premises or property or any service 
thereof for the purpose of effecting or reporting a transaction on an 
exchange (including, among other things, any system of communication to 
or from the exchange, by ticker or otherwise, maintained by or with the 
consent of the exchange), and any right of the exchange to the use of 
any property or service.\65\
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

    Section 3(a)(1) defines an ``exchange'' as ``any organization, 
association, or group of persons . . . which constitutes, maintains, or 
provides a market place or facilities for bringing together purchasers 
and sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange.'' \66\ 
The statute then specifically provides that an exchange ``includes . . 
. the market facilities maintained by such exchange.'' \67\
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78c(a)(1).
    \67\ Id.
---------------------------------------------------------------------------

    Consistent with the text of the statute and the ICE Decision 
interpreting that text, an OEMS owned or operated by a national 
securities exchange or its affiliate is a facility of an exchange 
within the meaning of section 3 of the Act when it enables users to 
enter or route orders to the exchange for execution or receive market 
data from the exchange. This is because the OEMS is a ``system of 
communication to or from the exchange . . . maintained by or with the 
consent of the exchange'' offered ``for the purpose of effecting or 
reporting a transaction'' on the exchange. A national securities 
exchange and its affiliated OEMS provider, when the OEMS enables users 
to enter or route orders to the exchange for execution or receive 
market data from the exchange, together constitute a ``group of 
persons'' that ``maintains, or provides a market place or facilities 
for bringing together purchasers and sellers of securities. . . .''
    In the ICE Decision, the D.C. Circuit first considered whether 
wireless connectivity services offered by a corporate affiliate of the 
NYSE Exchanges satisfied the definition of facility, and concluded that 
such services are ``facilities of an exchange'' because they are 
``system[s] of communication to or from the exchange . . . maintained 
by or with the consent of the exchange'' offered ``for the purpose of 
effecting or reporting transactions on the exchange.'' \68\ In 
particular, the Court stated that the statutory definition of facility 
describes the Wireless Bandwidth Connections ``to a tee,'' \69\ as they 
``allow[] a market

[[Page 88084]]

participant to transmit data, including price quotes and orders, 
between the participant's co-located equipment at the Mahwah data 
center and the participant's co-located equipment at a third-party data 
center, and thus to effect or report transactions on the [NYSE] 
Exchanges.'' \70\ The Court focused on the purpose of the service, 
unpersuaded by the NYSE Exchanges' view that it was meaningful that the 
service was offered separately from other services needed to access the 
matching engine.\71\ Specifically, it was not important that the 
connections ran between NYSE's Mahwah data center and a third-party 
data center, or that the connections did not connect a market 
participant's equipment directly to the NYSE Exchanges' matching 
engines.\72\ Considering the statutory language in section 3(a)(2) of 
the Act, which provides that a facility is ``for the purpose of 
effecting or reporting a transaction on an exchange'' and includes 
``any system of communication to or from the exchange . . . maintained 
by or with the consent of the exchange,'' the D.C. Circuit focused on 
``system of communication,'' ``consent of the exchange'' and ``for the 
purpose of effecting or reporting transactions.'' \73\ Regarding 
``consent of the exchange,'' the Court reasoned that because the 
wireless connectivity services were offered by an affiliate of the NYSE 
Exchanges, these services, ``could not exist without the consent of the 
[NYSE] Exchanges.'' \74\
---------------------------------------------------------------------------

    \68\ ICE, et al. v. SEC, 23 F.4th 1013, at 1022.
    \69\ Id. In the ICE matter, there were two types of wireless 
connections under consideration: (i) bandwidth connections 
(``Wireless Bandwidth Connections'') that enable market participants 
to send trading orders and relay market data between their equipment 
in the Mahwah data center and third party data centers; and (ii) 
market data connections (``Wireless Market Data Connections'') that 
enable market participants in a third party data center to receive 
connectivity to certain proprietary market data feeds from one or 
more of the NYSE Exchanges. See id. at 1018.
    \70\ Id. at 1022.
    \71\ See id.
    \72\ Id.
    \73\ Id.
    \74\ Id. at 1023. Regarding ``system of communication'' and 
``for the purpose of effecting or reporting transactions,'' see text 
accompanying supra notes 68-69 (summarizing why the D.C. Circuit 
concluded that the definition of facility described the Wireless 
Bandwidth Connection ``to a tee.''). See also text accompanying 
infra notes 76-77.
---------------------------------------------------------------------------

    Next, the D.C. Circuit considered whether the subject wireless 
connectivity services were ``the type of facility'' that section 
3(a)(1) of the Exchange Act includes in the definition of ``exchange.'' 
Even though the wireless connections were provided and maintained by a 
corporate affiliate of the NYSE Exchanges (IDS), and not by the NYSE 
Exchanges themselves, the Court observed that IDS and the NYSE 
Exchanges are ``closely connected corporate affiliates'' and 
``certainly'' were a ``group of persons'' that together ``maintains or 
provides a market place or facilities.'' \75\
---------------------------------------------------------------------------

    \75\ Id. at 1024.
---------------------------------------------------------------------------

    Using the framework from the ICE Decision, we consider whether the 
Exchange-affiliated OEMS Silexx is a facility of Cboe based on the 
facts presented and conclude that it is. As an OEMS offered by a 
corporate affiliate of Cboe, Silexx allows a market participant to 
``create orders, route them for execution, and input parameters to 
control the size, timing, and other variables of their trades.'' \76\ 
Market participants may use Silexx to, among other things, enter and 
route orders to Cboe and other exchanges, as well as access and 
transmit exchange and market data.\77\ Silexx therefore provides 
functionality that is for the purpose of ``effecting or reporting'' 
transactions in securities on Cboe. The fact that the OEMS can also be 
used for the purpose of effecting or reporting transactions on other 
exchanges does not change this outcome. Therefore, Silexx is a system 
of communication, maintained by or with the consent of an exchange, 
namely Cboe, which can be used for the purpose of effecting or 
reporting a transaction on Cboe. It fits squarely within the definition 
of a facility.
---------------------------------------------------------------------------

    \76\ See Notice, 89 FR 15907.
    \77\ See Notice, 89 FR 15907, 15909. See also e.g., Cboe 
[verbar] Silexx, FAQ, https://help.silexx.com/faq (``SILEXX OEMS 
Obsidian API offers a complete solution for data and execution 
services for a low monthly fee. This allows traders to maintain full 
control of their proprietary strategy, while giving them full access 
to market data and execution.'') (last visited Oct. 30, 2024).
---------------------------------------------------------------------------

    The Exchange states that Rule 3b-16, which further defines the 
statutory definition of ``exchange,'' contains an express exemption for 
``activities'' that should not be considered exchange functions (and 
therefore should not be deemed to be facilities), including for 
``rout[ing] orders to a national securities exchange.'' \78\ Contrary 
to the Exchange's view that an Exchange-affiliated OEMS such as Silexx 
is not a facility since it only routes orders and therefore falls under 
Rule 3b-16's exception, Rule 3b-16 states that an ``organization, 
association, or group of persons shall not be considered to constitute, 
maintain, or provide `a market place or facilities for bringing 
together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange,' solely because,'' inter alia, it ``[r]outes 
orders to a national securities exchange, a market operated by a 
national securities association, or a broker-dealer for execution.'' 
\79\
---------------------------------------------------------------------------

    \78\ See Letter from Laura G. Dickman, Vice President, Associate 
General Counsel, Cboe Global Markets, Inc., to Vanessa Countryman, 
Secretary, Securities and Exchange Commission (Sept. 3, 2024) 
(``Exchange Response II'') at 7.
    \79\ Rule 3b-16, 17 CFR 240.3b-16(b) (emphasis added).
---------------------------------------------------------------------------

    The qualifier ``solely because'' means that engaging in order 
routing is not by itself sufficient to render a service provider an 
exchange. As the D.C. Circuit observed, ``[where services] are included 
in the statutory definition of exchange because they are part of a 
group of persons that together perform and facilitate exchange 
functions going far beyond merely routing orders . . ., [it is not 
required that] every part of an exchange, nor every person that is part 
of a group that constitutes an exchange, must have all [the 
characteristics of] an exchange.'' \80\ The Court stated further, 
``[t]hat the Wireless Connections lack [all] these characteristics, 
therefore, does not preclude their being regulated as part of an 
exchange.'' \81\ Further, while the NYSE Exchanges suggested to the 
D.C. Circuit that the Commission's position could lead to a result in 
which all property of and services provided by any corporate affiliate 
of a registered exchange are facilities because of affiliation with a 
registered exchange, the D.C. Circuit rejected this concern, instead 
finding that the closely connected corporate affiliates' activities 
were the relevant consideration.\82\ In this case, there similarly can 
be closely connected activity between the Exchange-affiliated OEMS 
Silexx and Cboe. As discussed below, the Cboe group markets Silexx to 
its market participants (i.e., traders) as a data and access system, 
describing it as a system to ``easily trade equities, options, futures, 
and options on futures from a single platform--giving you speed to 
market with powerful order-entry tools.'' \83\ Accordingly, Cboe itself 
describes Silexx as providing more than solely order routing. As a 
result, Cboe cannot avail itself of Rule 3b-16's order

[[Page 88085]]

routing exception to claim that Silexx is not a facility under the 
Exchange Act.
---------------------------------------------------------------------------

    \80\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1027. See also 
SIFMA Letter II at 3 (stating that any analysis under section 
3(a)(1) and Rule 3b-16 requires a review of the relationships among 
the ``organization, association, or group of persons'' involved to 
determine whether, acting together, they ``constitute, maintain, or 
provide'' a service that facilitates securities transactions or the 
communication of market data).
    \81\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1027.
    \82\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1024-25.
    \83\ Cboe Silexx: Global markets at your fingertips, https://www.cboe.com/services/silexx/ (last visited Oct. 1, 2024).
---------------------------------------------------------------------------

Proposed Rule 3.66 Fails To Ensure That the Exchange and Exchange-
Affiliated OEMS are Separate Businesses That Operate in a Manner 
Independent From One Another
    Cboe maintains that proposed Rule 3.66, if approved, would alter 
the section 3 analysis because its requirements would establish 
sufficient separation between the Exchange-affiliated OEMS and Cboe, 
and that it would render the businesses ``independent'' from one 
another.\84\ According to Cboe, because of the Rule 3.66 conditions, an 
Exchange-affiliated OEMS provider would not be part of the group of 
persons providing an exchange (and therefore the OEMS would not be a 
facility). As described further below, with reference to the ICE 
Decision, Rule 3.66 fails to achieve its purported goal of ensuring 
that the Exchange and Exchange-affiliated OEMS are separate businesses 
that operate in a manner independent from one another.
---------------------------------------------------------------------------

    \84\ Notice, 89 FR 15909. ``[T]he Exchange proposes to adopt 
Rule 3.66 to provide that an OEMS platform operated in a manner 
independent from the Exchange despite affiliation with the Exchange 
will not be deemed a facility of the Exchange.'' Id.
---------------------------------------------------------------------------

    In the Notice, Cboe states that in the case of a ``Rule 3.66 
OEMS,'' \85\ Cboe would not have any right to use a Rule 3.66 OEMS for 
the purpose of effecting or reporting a transaction on an exchange; nor 
would a Rule 3.66 OEMS be a system of communication to or from Cboe 
maintained by or with the consent of the Cboe.\86\ In support of these 
views, Cboe states that use of a Rule 3.66 OEMS for purposes of 
effecting or reporting a transaction on Cboe is solely within the 
discretion of the OEMS user, and the OEMS offers a non-exclusive means 
to access the Exchange.\87\ Cboe states that the need for a TPH to 
purchase a port to connect the Exchange-affiliated OEMS to the 
Exchange's core trading system delinks the OEMS and the Exchange core 
trading system and therefore the OEMS is not a system of communication 
to or from the Exchange maintained by or with the consent of the 
Exchange.\88\ These arguments are not persuasive for the same reason 
that the D.C. Circuit rejected similar arguments in the ICE Decision. 
For instance, the Wireless Bandwidth Connection was characterized by 
NYSE and IDS as optional, as not providing exclusive access to any 
exchange, and as a system solely within the discretion of a market 
participant choosing to connect its equipment in two data centers.\89\ 
Yet, the D.C. Circuit determined that the connection was an important 
link (in fact, a ``vital and proximate link'') in a chain to the NYSE 
matching engines and that this was the case though a market participant 
would require additional connections from a NYSE Exchange in order to 
access the matching engine.\90\ Similarly, a Rule 3.66 OEMS such as 
Silexx would provide to its users a vital and proximate link in a chain 
to the Cboe matching engine \91\ even though a market participant would 
require ports from Cboe to access the matching engine and could use 
alternatives to do so.
---------------------------------------------------------------------------

    \85\ Herein, the term ``Rule 3.66'' OEMS refers to an 
``Exchange-affiliated OEMS'' that meets the proposed Rule 3.66 
conditions.
    \86\ See Notice, 89 FR 15910.
    \87\ Id.
    \88\ See Notice, 89 FR 15911; See Letter from Laura G. Dickman, 
Vice President, Associate General Counsel, Cboe Global Markets, 
Inc., to Vanessa Countryman, Secretary, Securities and Exchange 
Commission (Apr. 19, 2024) (``Exchange Response I'') at 4-6.
    \89\ See Wireless Approval Order, supra note 62, 85 FR 67044 at 
n.23 (citing the notice of NYSE's proposal in which NYSE described 
the Wireless Bandwidth Connection as part of a chain of connections: 
``At either end of a Wireless Bandwidth Connection, a market 
participant uses a cross connect or other cable to connect its 
equipment to the wireless equipment in the Mahwah Data Center and 
Third Party Data Center. Cross connects in the Mahwah Data Center 
lead to the market participant's server in co-location, [and from 
there to the trading and execution systems of the NYSE 
Exchanges]'').
    \90\ See ICE, et al. v. SEC, 23 F.4th 1013 at 1023-1024.
    \91\ Bloomberg Letter IV at 7 (observing ``the universal 
adoption of Silexx among Cboe TPHs.'').
---------------------------------------------------------------------------

    Several commenters state that Cboe's arguments about delinking are 
not persuasive. As one commenter states, a direct connection to an 
exchange is not required by the definitions in sections 3(a)(1) or 
(a)(2).\92\ We agree. Rather, what matters is whether market 
participants purchasing the services of an Exchange-affiliated OEMS are 
doing so for the purpose of creating orders that will be entered or 
routed to exchanges, including the Exchange, for execution, and for 
receiving market data from the Exchange, even if they also trade 
elsewhere.\93\ While Cboe characterizes an OEMS as having a range of 
uses, it downplays Silexx's role as a system to create and route orders 
to and access liquidity on Cboe and other exchanges, particularly 
options exchanges.\94\ While Cboe rejects the idea that Silexx has been 
and will be used as a system of communication,\95\ as already 
discussed, its functions include the routing of orders and providing 
access to liquidity on Cboe.\96\
---------------------------------------------------------------------------

    \92\ See SIFMA Letter II at 3. See also SIFMA Letter I at 3 
(``[T]he Exchange argues that an affiliated OEMS is not a facility . 
. . by focusing on whether there is a direct technological 
connection between the affiliated OEMS and the Exchange's `core 
trading system' and downplaying an affiliated OEMS's importance in 
the overall chain of connection to an exchange.'') See SIFMA Letter 
I at 3.
    \93\ See also SIFMA Letter I at 5 (stating (i) the Exchange and 
affiliated OEMSs (such as Silexx) are closely connected by virtue of 
their ownership by the same parent company; (ii) the facts and 
circumstances indicate that ``affiliated OEMSs have the ability to 
function as `systems of communication' to or from the Exchange `for 
the purpose of effecting or reporting a transaction' on the 
Exchange'' (satisfying section 3(a)(2)); (iii) this makes clear that 
the Exchange and affiliated OEMSs constitute a ``group of persons'' 
(within the meaning of section 3(a)(1)).
    \94\ It should be noted that ``The Option Chain is the most 
widely utilized module within the SILEXX OEMS Platform.'' Cboe 
[verbar] Silexx, Option Chain, https://help.silexx.com/modules/option-chain (last visited Oct. 27, 2024). Meanwhile, ``Cboe is the 
largest U.S. options market operator'' according to Cboe. Cboe U.S. 
Options, https://www.cboe.com/market_data_services/us/options/ (last 
visited Oct. 27, 2024).
    \95\ See Notice, 89 FR 15910.
    \96\ See supra note 94.
---------------------------------------------------------------------------

    Cboe states that even if provided directly by the Exchange (as 
opposed to an exchange affiliate or contractor), an OEMS would not be a 
facility if an OEMS and an Exchange port are independently maintained 
and operated systems.\97\ As already discussed, NYSE argued that IDS 
was independent of the NYSE Exchanges to no avail. The D.C. Circuit 
determined that the ``closely connected corporate affiliates'' were a 
group of persons within the meaning of the definition of exchange in 
section 3(a)(1) of the Act; \98\ and that IDS was part of a group that 
directly brings together purchasers and sellers of securities, and was 
offering services in the form of a system of communication (wireless 
connections) for the purpose of bringing together purchasers and 
sellers of securities.\99\ The provision of a system of communication 
by an affiliate for the purpose of bringing together purchasers and 
sellers of securities on the NYSE Exchanges (and elsewhere) was 
sufficient to satisfy the statutory definition of ``facility'' of an 
``exchange.'' Cboe attempts to distinguish OEMSs and thereby avoid a 
similar conclusion. But its arguments are not persuasive.
---------------------------------------------------------------------------

    \97\ See Notice, 89 FR 15911.
    \98\ ICE, et al. v. SEC, 23 F.4th 1013, at 1024.
    \99\ ICE, et al. v. SEC, 23 F.4th 1013, at 1025 (emphasis in 
original).
---------------------------------------------------------------------------

    First, Cboe seeks to distinguish an OEMS from wireless connections 
like those at issue in the ICE Decision, stating that ``an OEMS 
platform is a software tool that allows users to manage trading 
activity, but does not on its own provide a user the ability to 
transmit information (including orders)

[[Page 88086]]

to or from an exchange.'' \100\ According to Cboe, an OEMS is 
``fundamentally different from transmission facilities that connect to 
or near an exchange, such as the wireless services at issue in [the 
D.C. Circuit decision]. . . .'' \101\ While an OEMS is not the same as 
a wireless connection, it is comparable in terms of how it fits within 
the statutory definition of facility. As previously stated, Cboe 
markets Silexx as a data and access system to ``easily trade equities, 
options, futures, and options on futures from a single platform--giving 
you speed to market with powerful order-entry tools.'' \102\ Like a 
wireless connection, an OEMS is a system of communication that requires 
a market participant to make other purchases of equipment and services 
to reach an exchange's matching engine. Neither a Wireless Bandwidth 
Connection, a Wireless Market Data connection, nor an OEMS is 
sufficient on its own to enable a market participant to conduct trading 
on an exchange. What each has in common, however, is that it exists to 
enable market participants to enter and route orders to trade 
securities efficiently on a variety of U.S. exchanges, including the 
affiliated exchange. In short, while the Exchange-affiliated OEMS has 
multiple uses, one of those uses is ``effecting or reporting 
transactions'' on Cboe, which places it within the definition of a 
facility.\103\
---------------------------------------------------------------------------

    \100\ Exchange Response II at 3.
    \101\ Id. at 4.
    \102\ Cboe Silexx: Global markets at your fingertips, https://www.cboe.com/services/silexx/ (last visited Oct. 1, 2024).
    \103\ See, e.g., Bloomberg Letter I at 6-7; Bloomberg Letter II 
at 6; SIFMA Letter I at 3.
---------------------------------------------------------------------------

    Second, the Exchange states that its proposal is supported by 
Commission precedent. The Exchange points to the PCX Order in which 
``the Commission . . . recognized a national securities exchange's 
affiliation with an entity providing services related to the exchange 
does not necessarily equate to the affiliate being deemed a facility of 
the exchange.'' \104\ While it is correct that not every affiliate 
providing exchange-related services has been determined to be a 
facility of that exchange, affiliates providing routing services (which 
enable market participants to enter and route orders to trade 
securities efficiently on a variety of U.S. exchanges) routinely 
have.\105\ As explained further by a commenter, Cboe's reliance on the 
PCX Order is misplaced because an affiliated OEMS's functions are more 
akin to an optional order routing function--which was determined to be 
an exchange facility, than to an introducing broker-function--which was 
determined not to be an exchange facility.\106\
---------------------------------------------------------------------------

    \104\ See Exchange Response II at 12 (discussing the PCX Order 
establishing the Archipelago Exchange trading facility). See id. at 
12-15.
    \105\ See supra note 59 (discussing the PCX Order and outbound 
router examples).
    \106\ See SIFMA Letter II at 5 (stating that the PCX Order is 
distinguishable because an affiliated OEMS does not function in a 
manner similar to an introducing broker providing sponsored access 
to an exchange which did not ``route'' orders but merely allowed 
sponsored non-members to electronically connect to exchange trading 
facility ArcaEx to enter their own orders through broker-dealer 
Wave's membership in the exchange, whereas affiliated OEMS's 
functions are more akin to Wave's optional order routing function, 
which the Commission found to be an exchange facility.)
---------------------------------------------------------------------------

    The Exchange also points to two examples where the Commission 
determined that services offered by the Nasdaq Stock Market 
(``Nasdaq'') were not facilities of an exchange because they were not 
providing an exchange function.\107\ With respect to Nasdaq ACES, that 
system was designed to permit the routing of orders to a broker-dealer 
for handling consistent with that broker-dealer's best execution and 
other regulatory obligations; it was not designed to enable access to 
the exchange.\108\ In contrast, Silexx is designed to enable users to 
enter or route orders to the Exchange for execution or receive market 
data from the Exchange, even though that may not be its only use. With 
respect to Nasdaq's index dissemination service, Cboe focuses on the 
Commission's statement that if Nasdaq were to ``tie pricing'' of the 
service to Nasdaq exchange services, or condition a company's inclusion 
in an index on a Nasdaq listing, then the index dissemination service 
would become a Nasdaq facility.\109\ However, the Commission did not 
say the inverse, that for a service to be a facility, there must be a 
pricing or some other explicit linkage to the exchange. As discussed 
above, the particular facts and circumstances are key. Like a wireless 
connection, the services provided by an OEMS are purchased for the 
purpose of effecting transactions on exchanges, including Cboe.
---------------------------------------------------------------------------

    \107\ See Exchange Response I at 4; See also Exchange Response 
II at 13-15. The Exchange discusses two separate Nasdaq proposed 
rule changes where Nasdaq proposed to remove from its rulebook 
references to fees charged for index and ETF values disseminated 
through its index dissemination service and where Nasdaq proposed to 
delete references to its ACES communication system from its 
rulebook.
    \108\ See generally Securities Exchange Act Release No. 56237 
(Aug. 9, 2007), 72 FR 46118 (Aug. 16, 2007) (SR-NASDAQ-2007-043).
    \109\ See Exchange Response II at 14 (quoting from Securities 
Exchange Act Release No. 58897 (Nov 3, 2008), 73 FR 66952 (Nov. 12, 
2008) (SR-NASDAQ-2007-018).
---------------------------------------------------------------------------

Proposed Rule 3.66 Fails To Achieve it Purported Goal Because Its 
Conditions Are Insufficient To Establish Independence
    Cboe states that Rule 3.66 would provide for the independence of 
the OEMS from the Exchange.\110\ One commenter states ``[t]he 
Exchange's central factual argument[,] that the exchange-owned OEMSs 
are independently operated from the interests and control of the 
Exchange appears to be without merit and contrary to the facts provided 
in the proposal.'' \111\ We agree.
---------------------------------------------------------------------------

    \110\ Exchange Response II at 8. The Exchange states that the 
proposed Rule 3.66 guardrails operate to take the Cboe affiliate 
outside the Act's ``group of persons'' provision--which is the only 
possible basis for regulating OEMSs as an exchange facility. Id.
    \111\ Bloomberg Letter II at 12-13. See also Bloomberg Letter 
III at 4-5 (adding that independence from the Exchange at an 
operational level ``cannot be a basis for simply excluding the 
facility from oversight entirely''). The commenter went on to state 
that the affiliation with the corporate group that operates the 
exchange ``provides ample incentive and opportunity for the exchange 
to exploit the OEMS unfairly to its benefit, and the detriment of 
investors.'' Bloomberg Letter III at 5.
---------------------------------------------------------------------------

    Cboe states that in the ICE Decision whether there is a `` `unity 
of interests' was perhaps the key statutory criterion.'' \112\ More 
specifically, Cboe states that its proposal is consistent with the 
following statement in the ICE Decision: ``[O]ne corporation that is 
affiliated with but not controlled by another may or may not, depending 
upon the circumstances, be considered a `group of persons' for the 
purposes of the statute.'' \113\ According to Cboe, Rule 3.66 would 
establish ``concrete, enforceable structural separations between Cboe 
and any affiliated OEMS (including Silexx) that are designed to prevent 
anticompetitive conduct'' and would ``render[ ] the D.C. Circuit's 
statement about `closely connected corporate affiliates' inapplicable 
here.'' \114\ Cboe states that because the proposed Rule 3.66 
conditions would establish that the Exchange and affiliated OEMS are 
not ``closely connected corporate affiliates,'' they are not a ``group 
of persons'' within the meaning of section 3(a)(1) of the Act.\115\ 
After careful consideration, including consideration of the comments 
received, proposed Rule 3.66 fails at its purported goal of 
establishing the independence of an affiliated OEMS from the Exchange 
business.
---------------------------------------------------------------------------

    \112\ Exchange Response II at 11.
    \113\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1024.
    \114\ See Exchange Response II at 11-12.
    \115\ See Exchange Response II at 8-9.
---------------------------------------------------------------------------

    The stated purpose of proposed Rule 3.66 is ``to provide that [the 
Exchange-

[[Page 88087]]

affiliated] OEMS platform operate[s] in a manner independent from the 
Exchange despite affiliation with the Exchange.'' \116\ We understand 
that the goal of proposed Rule 3.66 is to establish that corporate 
affiliation notwithstanding, if Cboe and an affiliated OEMS (e.g., 
Silexx) comply with the proposed rule they could not ``act in 
concert,'' and therefore the OEMS would not be a ``facility'' of Cboe. 
As a result, according to the Exchange, an Exchange-affiliated OEMS 
should be able to operate without being subjected to Commission 
oversight, including rule filing requirements.\117\ But proposed Rule 
3.66 does not establish that an affiliated OEMS and the Exchange are 
prevented from acting in concert.
---------------------------------------------------------------------------

    \116\ Notice, 89 FR 15909.
    \117\ Id.
---------------------------------------------------------------------------

    Historically, there has been a close connection in the operation of 
the Exchange and Exchange-affiliated OEMSs. For example, since 2019, 
the Exchange has provided for a logical port fee waiver for Exchange-
affiliated OEMS users and has not provided a similar waiver for users 
of other OEMSs. In justifying this fee waiver in 2019, the Exchange 
viewed OEMS subscription fees as ``inclusive of fees to access the 
exchange.'' \118\ The Exchange has traditionally considered the 
relationship it has with customers as inclusive of both their use of 
Exchange and Exchange-affiliated OEMS services, demonstrating the close 
connection between the affiliates. In its proposal, the Exchange offers 
a new and different rationale from that used in its 2019 filing, but 
the implication of this rationale is the same: the Exchange and 
Exchange-affiliated OEMSs enjoy a close connection and work with each 
other to achieve their aligned interests. In the proposal, the Exchange 
explains that the fee waiver exists to ``offset'' the ``competitive 
disadvantage'' of the Exchange-affiliated OEMS having to comply with 
section 19(b) rule filing requirements.\119\ In the Exchange's view, 
disadvantages borne by an Exchange-affiliated OEMS can be offset by a 
subsidy in the form of a fee waiver borne by the Exchange.\120\
---------------------------------------------------------------------------

    \118\ See Securities Exchange Act Release No. 87727 (Dec. 12, 
2019), 84 FR 69428, 69439 (Dec. 18, 2019).
    \119\ Notice, 89 FR 15908, n.13.
    \120\ We do not find compelling the Exchange's argument that the 
Exchange-affiliated OEMS operate at a competitive disadvantage. 
First, the Exchange has been submitting rule filings for several 
years, and it has not demonstrated that its affiliated OEMS has been 
disadvantaged compared to unaffiliated OEMSs that operate in the 
same market. See Notice, 89 FR 15907, n.4-5. Second, the Exchange 
provided no information that would indicate that its efforts to 
mitigate this concern through the Exchange's Silexx user logical 
port fee waiver is inadequate. Id. at n.13. Finally, the Exchange 
did not demonstrate that a burden on competition on a ``facility'' 
or unregulated affiliate is a material consideration under section 
6(b) of the Act. A commenter opines that ``nothing in Section 6 of 
the Exchange Act contemplates that exchange rules should address 
competition between unregistered and unregulated entities such as 
OEMSs.'' SIFMA Letter II at 7. Moreover, as the D.C. Circuit states 
in the ICE Decision: ``The SEC is not tasked with deciding whether 
subjecting an organization to the rule-approval process would burden 
its ability to compete. That decision was made by the Congress [and 
b]ecause the Wireless Connections satisfy the statutory definitions 
in Sections 3(a) and (b), its rules must be filed with and approved 
by the SEC--full stop.'' ICE, et al. v. SEC, 23 F.4th 1013, at 1026.
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    If, however, the Exchange and OEMS operated independently, there 
would be separate and independent relationships between the Exchange 
and its customers on the one hand and the Exchange-affiliated OEMS and 
its customers on the other. In its second comment letter, the Exchange 
has offered to ``discontinue this fee waiver [for] off-floor 
Silexx'',\121\ because Silexx on-floor users, i.e., floor brokers, are 
utilizing a facility of the Exchange while off-floor Silexx users are 
not. The distinction between on-floor and off-floor versions of the 
Exchange-affiliated OEMS is not explained in the proposed rule \122\ 
and the impact of the withdrawal discussed in the Exchange's second 
response letter on the Exchange and the Exchange-affiliated OEMS and 
their mutual customers appears to be limited.\123\ This retention of 
the fee waiver for on-floor users provides further indication of a 
close connection between the Exchange and Silexx. Moreover the 
Exchange's intention to preserve, at least in large part,\124\ this 
preferential fee waiver for on-floor Silexx customers provides an 
example of how the two entities would continue to ``act in concert'' 
even if the proposed rule were approved.\125\ The impact of the 
Exchange's fee waiver has been and is likely to remain (if the proposed 
rule is approved) significant with one commenter stating this fee 
waiver ``undoubtedly contributed to the universal adoption of Silexx 
among Cboe TPHs.'' \126\
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    \121\ See Exchange Response II at 13, n.78. It appears the 
Exchange changed its position on the Silexx fee waiver during the 
course of the proceedings related to the proposal. In the proposal, 
the Exchange concedes that ``the ability to provide this pricing may 
demonstrate that the Exchange's ability to act with Cboe Silexx,'' 
but because it was subject to section 19(b) rule filing it would be 
permissible, i.e., ``if the Exchange adopted procedures and internal 
controls in accordance with proposed Rule 3.66, those barriers would 
prevent Cboe Silexx [sic] or any other Exchange-affiliated OEMS 
[sic] to adopt such fees without submission of a rule filing.'' 
Notice, 89 FR 15908, n.13. Meanwhile, in its second comment letter, 
the Exchange indicates that it ``intends to continue to operate the 
on-floor version of Silexx as a facility of the exchange'' if the 
proposal is approved without any proposed rule text mentioning, let 
alone distinguishing between, the on-floor and off-floor Silexx 
versions. See Exchange Response II at 11, n.63.
    \122\ A commenter observed the Exchange's changing positions on 
the Silexx fee waiver represents a ``materially different 
application of the original Proposal and a distinction that has not 
been fully articulated or explained'' in the proposal. Bloomberg 
Letter IV at 3. If the Exchange's intention is to change its 
position, we agree with the commenter that the Exchange failed to 
meet its burden to provide a proposed rule change ``sufficiently 
detailed and specific to support an affirmative Commission 
finding.'' Id. (citing 17 CFR 201.700(b)(3)(i)).
    \123\ See Exchange Response II at 13, n.78. Notably, Cboe states 
that ``with respect to Silexx, the majority of off-floor users are 
not associated with a TPH'' and are therefore generally not subject 
to logical port fees. See Exchange Response II at 14, n.85.
    \124\ See Exchange Response II at 13, n.78.
    \125\ See ICE, et al. v. SEC, 23 F.4th 1013, at 1025. In the ICE 
Decision the D.C. Circuit commented that in the case of ``one 
corporation that is affiliated with but not controlled by another'' 
these affiliates ``may or may not, depending upon the circumstances, 
be considered a `group of persons' for the purposes of the 
statute.'' Id. at 1025. ``Whether two or more persons are or may be 
acting in concert is likely the key consideration. These, however, 
are possibilities we need not confront in the present case.'' Id. We 
note that the Exchange's intention to retain a fee waiver to benefit 
solely on-floor customers it shares with the affiliated OEMS is an 
indication that the proposed rule is not designed to prevent further 
acts in concert of the two affiliates' mutual commercial interests. 
As mentioned above, no other third-party OEMS' customers enjoy a 
similar waiver from the Exchange.
    \126\ Bloomberg Letter IV at 7. See also Bloomberg Letter II at 
11 (stating, ``[N]ot only do these fee waivers undercut the central 
argument that the OEMS service is operating at a competitive 
disadvantage, it also undercuts the entire premise of the Proposal--
that the OEMS is operated in a manner that is independent from the 
Exchange. This fee waiver also raises concerns surrounding how the 
existing fees are not `designed to permit unfair discrimination' and 
`not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of the Act.' '').
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    The Exchange's view that the Silexx for on-floor users is a 
facility of the Exchange while Silexx for off-floor users is not a 
facility of the Exchange is not the only inconsistency in the proposed 
rule. Many of the proposed rule's conditions run counter to its 
purported goal of independence. For example, proposed Rule 3.66(b) 
provides that if a TPH using the OEMS establishes a direct connection 
to the Exchange via an Exchange port, that connection is established in 
the same manner and in accordance with the same terms, conditions, and 
fees as any third-party OEMS as set forth in the Exchange's rules, 
technical specifications, and fees schedule.\127\ Relatedly, proposed 
Rule 3.66(g) would provide that a third-party not required to register 
as a national securities exchange under section 6 of the Act can offer 
a similar OEMS.\128\

[[Page 88088]]

These provisions fall short of addressing how users of a third party 
OEMS would be assured that their access to the Exchange is not 
disadvantaged by choosing a third-party OEMS over an affiliated OEMS. 
Additionally, the requirement that a third-party OEMS is similar would 
not necessarily mean the user of the third party OEMS would not be 
disadvantaged as compared to the user of an affiliated OEMS.
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    \127\ See Exchange Response II at 8.
    \128\ Id. at 17.
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    In addition, proposed Rule 3.66(e) would require that ``any fees 
charged to a user of the OEMS are unrelated to that user's Exchange 
activity or to Exchange fees set forth on the Exchange's fees 
schedule.'' \129\ Nothing in this provision would preclude an Exchange-
affiliated OEMS from charging a different price to each user, thereby 
effectively establishing different prices to access the Exchange, and 
potentially unfairly discriminating against certain users without being 
required to provide any justification.\130\ As one commenter states, 
under the proposed rule, the Exchange-affiliated OEMS becomes ``an 
unregulated entity that, among other things, can separately negotiate 
terms with each user.'' \131\ The commenter observes that as a 
consequence ``each OEMS user would not necessarily be `on precisely the 
same terms' with the Exchange as other users and would not be protected 
by Exchange Act `standards that prohibit denials of access and other 
unfair discrimination against any member regarding access to' Cboe's 
services.'' \132\
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    \129\ Id. at 16.
    \130\ See 15 U.S.C. 78f(b)(5). Should this differential pricing 
benefit the Exchange with additional trading resulting in increased 
liquidity and fees, this would be an advantage to the Exchange 
resulting from business ties to, or enterprise relationship with the 
Exchange-affiliated OEMS.
    \131\ SIFMA Letter II at 4.
    \132\ Id. at 4-5.
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    Further, proposed Rule 3.66(h) would require that ``the Exchange 
has established and maintains procedures and internal controls 
reasonably designed to prevent the OEMS from receiving any competitive 
advantage or benefit as a result of its affiliation/relationship with 
the Exchange, the provision of information to the entity or personnel 
operating the OEMS regarding updates to the system (such as technical 
specifications) until such information is available generally to 
similarly situated market participants.'' \133\ However, this provision 
runs in only one direction. It does not similarly require that there be 
policies and procedures in place to prevent the Exchange from receiving 
any competitive advantage as a result of its affiliation/relationship 
with the OEMS thus failing to satisfy the requirements of section 6(b) 
that the rules of an exchange not impose a burden on competition that 
is not necessary or appropriate.\134\
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    \133\ Notice, 89 FR 15909 (emphasis added).
    \134\ See 15 U.S.C. 78f(b)(8). For example, as written, proposed 
Rule 3.66 would not preclude the Exchange-affiliated OEMS from 
offering discounts on its pricing to incentivize routing of orders 
to the Exchange or prevent the Exchange-affiliated OEMS from 
providing lower fees or rebates for large market makers that happen 
to represent significant proportions of Exchange volumes. See 
generally, proposed Rule 3.66.
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    Commenters observe that it is not just the Exchange-affiliated OEMS 
that can benefit from the affiliation with the Exchange, but the 
Exchange can benefit from the affiliation with the OEMS as well.\135\ 
As one commenter states, ``Exchange-affiliated OEMSs not subject to the 
SRO rule filing process could adopt rules, create new order types, 
raise fees, or implement new or different tiers of service to benefit 
the Exchange.'' \136\ The commenter further states ``[t]hrough these or 
other mechanisms, the affiliated OEMS and the Exchange, together as a 
group, could effectively force market participants, including broker-
dealers which are obligated to obtain best execution for customer 
orders, to purchase and use (regardless of the cost or other 
conditions) the Exchange's affiliated OEMS to maintain access to the 
Exchange . . . [s]uch preferential treatment or other barriers to 
accessing the Exchange could result in inequitable allocations of fees 
among members, impediments to a free and open market and national 
market system, unfair discrimination among customers, and unnecessary 
burdens on competition, in violation of Section 6(b) of the Exchange 
Act.'' \137\
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    \135\ See e.g., Bloomberg Letter II at 13.
    \136\ SIFMA Letter I at 7.
    \137\ SIFMA Letter I at 7. See also Bloomberg Letter II at 13 
(citing Q2 2019 Earnings Call, CBOE Global Markets, Inc. (Aug. 2, 
2019) stating, ``Aside from the Proposal, the facts on the ground 
indicate the two entities attempt to leverage a competitive 
advantage through their unique relationship. For example, the 
Exchange has stated in the past that Silexx has been promoted as the 
avenue through which people will trade certain exchange products and 
there have been efforts to more fully integrate these within the 
operating segments of the overall business.'').
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    The proposal's elimination of a publicly available Exchange-
affiliated OEMS fee schedule could permit the Exchange-affiliated OEMS 
to engage in unfair discrimination among Exchange customers. This is 
because the Commission would not be reviewing whether any differences 
in the application of a fee or rebate are based on meaningful 
distinctions between customers, issuers, brokers or dealers and whether 
those meaningful distinctions are unfairly discriminatory between 
customers, issuers, brokers or dealers.\138\ In sum, we agree with 
commenters that because proposed Rule 3.66 does not aim to prevent the 
Exchange from receiving any competitive advantage from its affiliation/
relationship with the OEMS it would not establish the independence as 
purported.
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    \138\ See 15 U.S.C. 78f(b)(5). As such, we cannot conclude that 
the proposed rule is not designed to permit unfair discrimination 
customers, issuers, brokers or dealer as required by section 
6(b)(5).
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    Additionally, proposed Rule 3.66 requires reliance on the 
Exchange's enforcement of the conditions of Rule 3.66 against a 
proposed-to-be unregulated Exchange-affiliated OEMS. One commenter 
states that ``it is unclear how the Exchange would enforce the proposed 
rule or even monitor for compliance with it[,].'' \139\ Cboe did not 
address this concern directly and it remains unclear how Cboe would 
monitor for compliance.
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    \139\ SIFMA Letter II at 6 (citing 15 U.S.C. 78f(b)(1), which 
requires that a registered exchange have ``the capacity to be able 
to carry out the purposes of [the Exchange Act] and to comply, and . 
. . to enforce compliance by its members and persons associated with 
its members, with the provision of [the Exchange Act], the rules and 
regulations thereunder, and the rules of the exchange.'').
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    For all of the foregoing reasons, we cannot find that the proposal 
to allow the Exchange-affiliated OEMSs to not be regulated as a 
facility of the Exchange and not be subject to section 6 of the Act is 
consistent with the requirements of section 6 of the Act.

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to section 19(b)(2) of the Exchange Act,\140\ that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with sections 3(a)(1), 
3(a)(2), and 6(b) of the Exchange Act.\141\
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    \140\ 15 U.S.C. 78s(b)(2).
    \141\ 15 U.S.C. 78c(a)(1), (a)(2), and 15 U.S.C. 78f(b).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\142\ that proposed rule change (SR-CBOE-2024-008) be, and 
it hereby is, disapproved.
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    \142\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25724 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P