Document ID: SEC-2019-0989-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Exchange, LLC
Posted Date: 2019-07-15T04:00Z

[Federal Register Volume 84, Number 135 (Monday, July 15, 2019)]
[Notices]
[Pages 33788-33794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14891]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86335; File No. SR-BOX-2019-22]

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

July 9, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 26, 2019, BOX Exchange LLC (the ``Exchange'') filed with 
the Securities and Exchange Commission

[[Page 33789]]

(``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule on 
the BOX Options Market LLC (``BOX'') facility. The text of the proposed 
rule change is available from the principal office of the Exchange, at 
the Commission's Public Reference Room and also on the Exchange's 
internet website at http://boxexchange.com.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Section VI. (Technology Fees) of the 
BOX Fee Schedule to establish BOX Connectivity Fees for Participants 
and non-Participants who connect to the BOX network. Connectivity fees 
will be based upon the amount of bandwidth that will be used by the 
Participant or non-Participant. Further, BOX Participants or non-
Participants connected as of the last trading day of each calendar 
month will be charged the applicable Connectivity Fee for that month. 
The Connectivity Fees will be as follows:

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

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

[[Page 33790]]

suspend and institute proceedings on the proposed fee change.\16\
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    \15\ See Securities Exchange Act Release No. 85201 (February 26, 
2019), 84 FR 7146 (March 1, 2019)(SR-BOX-2019-04).
    \16\ See Letters from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''), 
Tyler Gellasch, Executive Director, Healthy Markets Association 
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of 
R2G Services, LLC, and Anand Prakash.
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    On March 29, 2019, the Commission issued its Order Disapproving 
each iteration of the BOX Proposal (``BOX Order''). In the BOX Order, 
the Commission highlighted a number of deficiencies it found in three 
separate rule filings by BOX to establish BOX's connectivity fees that 
prevented the Commission from finding that BOX's proposed connectivity 
fees were consistent with the Act.
    Finally, on May 21, 2019 the Division of Trading and Markets 
released new Guidance on SRO Rule Filings Relating to Fees.
    The Exchange is once again re-filing the proposed fees to address 
each topic raised for discussion in the BOX Order and the new guidance 
on SRO Fee Filings to ensure that the Proposed Fees are consistent with 
the Act. The proposed rule change is immediately effective upon filing 
with the Commission pursuant to Section 19(b)(3)(A) of the Act.
    As discussed herein, the Exchange believes that it is reasonable 
and appropriate to begin charging for physical connectivity fees to 
partially offset the costs associated with maintaining and enhancing a 
state-of-the-art exchange network infrastructure in the US options 
industry. There are significant costs associated with various projects 
and initiatives to improve overall network performance and stability, 
as well as costs paid to the third-party data centers for space rental, 
power used, etc.
    The Exchange has always offered physical connectivity to the 
Exchange for Participants and non-Participants to access the Exchange's 
trading platforms, market data, test systems and disaster recovery 
facilities. These physical connections consist of 10Gb and non-10Gb 
connections, where the 10Gb connection provides for faster processing 
of messages sent to it in comparison to the non-10Gb connection. Since 
becoming a self-regulated organization in 2012, the Exchange has not 
charged for physical connectivity and has instead relied on transaction 
fees as the basis of BOX's revenue. However, in recent years 
transaction fees have continually decreased across the options 
industry. At the same time these transactions fees were decreasing, the 
options exchanges except for BOX began charging physical connectivity 
fees to market participants. As such BOX began to find itself at a 
significant competitive disadvantage, and had no choice but to begin 
charging Participants and non-Participants fees for connecting directly 
to the BOX network (which the Exchange has taken considerable measures 
to maintain and enhance for the benefit of those Participants and non-
Participants) in order to remain competitive with the other options 
exchanges in the industry.
    As discussed in BOX's recent Petition for Review of the 
Commission's Order Disapproving BOX's three filings, not allowing BOX 
to charge such connectivity fees arbitrarily and inequitably treats the 
Exchange differently from each of the other exchanges that submitted 
prior immediately effective connectivity fee filings that were not 
suspended or disapproved by the Commission.\17\ The Exchange notes that 
all other options exchanges currently charge for similar physical 
connectivity.\18\
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    \17\ See Securities Exchange Act Release No. 85927. Order 
Granting Petition for Review and Scheduling Filing of Statements, 
dated May 23, 2019.
    \18\ Nasdaq PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC 
(``Nasdaq''), NYSE Arca, Inc. (``Arca''), NYSE American LLC (``NYSE 
American''), Nasdaq ISE, LLC (``ISE''), Cboe Exchange, Inc. 
(``Cboe''), Cboe BZX Exchange, Inc. (``CboeBZX''), Cboe EDGX 
Exchange, Inc. (``CboeEDGX'') and Cboe C2 Exchange, Inc. (``C2'') 
all offer a type of 10Gb and non-10Gb connectivity alternative to 
their participants. See Phlx, and ISE Rules, General Equity and 
Options Rules, General 8, Section 1(b). Phlx and ISE each charge a 
monthly fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb 
connection and $15,000 for each 10Gb Ultra connection, which is the 
equivalent of the Exchange's 10Gb ULL connection. See also Nasdaq 
Price List--Trading Connectivity. Nasdaq charges a monthly fee of 
$7,500 for each 10Gb direct connection to Nasdaq and $2,500 for each 
direct connection that supports up to 1Gb. See also NYSE American 
Fee Schedule, Section V.B, and Arca Fees and Charges, Co-Location 
Fees. NYSE American and Arca each charge a monthly fee of $5,000 for 
each 1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 
10Gb LX circuit, which is the equivalent of the Exchange's 10Gb ULL 
connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules. 
Cboe charges monthly quoting and order entry bandwidth packet fees. 
Specifically, Cboe charges $1,600 for the 1st through 5th packet, 
$800 for the 6th through 8th packet, $400 for the 9th through 13th 
packet and $200 for the 14th packet and each additional packet. 
CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for 
each 1Gb connection and $7,500 for each 10Gb connection.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act, in general, and Section 
6(b)(4) and 6(b)(5) of the Act,\19\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees, and other 
charges among BOX Participants and other persons using its facilities 
and does not unfairly discriminate between customers, issuers, brokers 
or dealers.
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    \19\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed fees in general constitute 
an equitable allocation of fees, and are not unfairly discriminatory, 
because they allow the Exchange to recover costs associated with 
offering access through the network connections. The proposed fees are 
also expected to offset the costs both the Exchange and BOX incur in 
maintaining and implementing ongoing improvements to the trading 
systems, including connectivity costs, costs incurred on software and 
hardware enhancements and resources dedicated to software development, 
quality assurance, and technology support.
    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act, in that the proposed fee changes are fair, 
equitable and not unreasonably discriminatory, because the fees for the 
connectivity alternatives available on the Exchange, as proposed, are 
competitive and market-driven. The U.S. options markets are highly 
competitive (there are currently 16 options markets) and a reliance on 
competitive markets is an appropriate means to ensure equitable and 
reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to the Exchange, or that any 
participant connect at any specific connection speed. The rule 
structure for options exchanges are, in fact, fundamentally different 
from those of equities exchanges. In particular, options market 
participants are not forced to connect to (and purchase market data 
from) all options exchanges, as shown by the number of Participants of 
BOX as compared to the much greater number of participants at other 
options exchanges. Not only does BOX have less than half the number of 
participants as certain other options exchanges, but there are also a 
number of the Exchange's Participants that do not connect directly to 
BOX. Further, of the number of Participants that connect directly to 
BOX, many such Participants do not purchase market data from BOX. In 
addition, of the market makers that are connected to BOX, it is the 
individual needs of the market maker that require whether they need one 
connection or multiple connections to the Exchange. The Exchange has 
market maker Participants that only purchase one connection (10Gb) and 
the Exchange has market maker Participants that purchase multiple 
connections. It is all driven by the business needs of the

[[Page 33791]]

market maker. Market makers that are consolidators that target resting 
order flow tend to purchase more connectivity that [sic] market makers 
that simply quote all symbols on the Exchange. Even though non-
Participants purchase and resell 10Gb and non-10Gb connections to both 
Participants and non-Participants, no market makers currently connect 
to the Exchange indirectly through such resellers.
    In SIFMA's comment letter, they argue that all broker-dealers are 
required to connect to all exchanges which is not true in the options 
markets. The options markets have evolved differently than the equities 
markets both in terms of market structure and functionality. For 
example, there are many order types that are available in the equities 
markets that are not utilized in the options markets, which relate to 
mid-point pricing and pegged pricing which require connection to the 
SIPs and each of the equities exchanges in order to properly execute 
those orders in compliance with best execution obligations. In 
addition, in the options markets there is a single SIP (OPRA) versus 
two SIPs in the equities markets, resulting in few hops and thus 
alleviating the need to connect directly to all the options exchanges. 
Additionally, in the options markets, the linkage routing and trade 
through protection are handled by the exchanges, not by the individual 
participants. Thus not connecting to an options exchange or 
disconnecting from an options exchange does not potentially subject a 
broker-dealer to violate order protection requirements as suggested by 
SIFMA. The Exchange recognizes that the decision of whether to connect 
to the Exchange is separate and distinct from the decision of whether 
and how to trade on the Exchange. The Exchange acknowledges that many 
firms may choose to connect to the Exchange, but ultimately not trade 
on it, based on their particular business needs.
    To assist prospective Participants or firms considering connecting 
to BOX, the Exchange provides information about the Exchange's 
available connectivity alternatives.\20\ The decision of which type of 
connectivity to purchase, or whether to purchase connectivity at all 
for a particular exchange, is based on the business needs of the firm. 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. 
Simple Order routing requires 128 kbps of bandwidth, which could be 
achieved with a non-10Gb connection, while receiving the five best 
limits in all classes for the HSVF requires a 10Gb connection not 
purchase such data feed products. Accordingly, purchasing market data 
is a business decision/choice, and thus the pricing for itis [sic] 
constrained by competition.
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    \20\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
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    Contrary to SIFMA's argument, there is competition for connectivity 
to BOX. BOX competes with ten (10) non-Participants who resell BOX 
connectivity or market data. Those non-Participants resell that 
connectivity to multiple market participants over that same connection, 
including both Participants and non-Participants of BOX. When 
connectivity is re-sold by a third-party, BOX does not receive any 
connectivity revenue from that sale. It is entirely between the third-
party and the purchaser, thus constraining the ability of BOX to set 
its connectivity pricing as indirect connectivity is a substitute for 
direct connectivity. There are currently ten (10) non-Participants that 
purchase connectivity to BOX. Those non-Participants resell that 
connectivity or market data to approximately twenty-seven (27) 
customers, some of whom are agency broker-dealers that have tens of 
customers of their own. Some of those twenty-seven (27) customers also 
purchase connectivity directly from BOX. Accordingly, indirect 
connectivity is a viable alternative that is already being used by non-
Participants of BOX, constraining the price that BOX is able to charge 
for connectivity to its Exchange.
    The Exchange is comprised of 51 Participants. Of those 51 
Participants, 13 Participants have purchased 10Gb or non-10Gb 
connections or some combination of multiple various connections. 
Furthermore, every Participant who has purchased at least one 
connection also trades on the Exchange with the exception of one new 
Participant who is currently in the on-boarding process. The remaining 
Participants who have not purchased any connectivity to the Exchange 
are still able to trade on the Exchange indirectly through other 
Participants or non-Participant service bureaus that are connected. 
These remaining Participants who have not purchased connectivity are 
not forced or compelled to purchase connectivity, and they retain all 
of the other benefits of membership with the Exchange. Accordingly, 
Participants and non-Participants have the choice to purchase 
connectivity and are not compelled to do so in any way.
    The Exchange believes that the proposed fees are fair, equitable 
and not unreasonably discriminatory because the connectivity pricing is 
associated with relative usage or the various market participants and 
does not impose a barrier to entry to smaller participants. 
Accordingly, the Exchange offers two direct connectivity alternatives 
and various indirect connectivity (via third party) alternatives, as 
described above. BOX recognizes that there are various business models 
and varying sizes of market participants conducting business on the 
Exchange. The non-10Gb direct connectivity alternatives \21\ are all 
comprised of bandwidth of equal to or less than 1Gb and are purchased 
by market participants that require less bandwidth. As stated above, 
Section 2.4 of the BOX Connectivity Guide details the bandwidth 
requirements depending on the type of traffic each firm requires. While 
non-10Gb connections can fully support the sending of orders and the 
consumption of BOX's HSVF Data Feed,\22\ these connections use less 
exchange resources and network infrastructure. In contrast, market 
participants that purchase 10Gb connections utilize the most bandwidth, 
and those are the participants that consume the most resources from the 
network. The 10Gb connection offers optimized connectivity for latency 
sensitive participants and is faster in round trip time for connection 
oriented traffic to the Exchange than the non-10Gb connection. This 
lower latency is achieved through more advanced network equipment, such 
as advanced hardware and switching components, which translates to 
increased costs to the Exchange. Market participants that are less 
latency sensitive can purchase non-10Gb direct connections and quote in 
all products on the Exchange and consume the HSVF Market Data Feed, and 
such non-10Gb direct connections are priced lower than the 10Gb 
connections, offering smaller sized market makers a lower cost 
alternative.
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    \21\ Non-10Gb connectivity alternatives are comprised of 
protocol types that are at or under 1Gb bandwidth. The protocol 
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel, 
OC-3, Singlemode Fiber, ISDN, POTS and T1.
    \22\ The Exchange notes that, unlike MIAX, BOX's HSVF Data Feed 
does not require a 10Gb physical connection. On BOX, the HSVF Data 
Feed cab [sic] be consumed through a non-10Gb connection. On MIAX, 
the 1Gb connection cannot support the consumption of the top of 
market data feed or the depth data feed product--both require a 10Gb 
connection.
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    A 10Gb connection uses at least ten times the network 
infrastructure as the non-10Gb connections and the Exchange has to 
scale our systems by

[[Page 33792]]

the amount and size of all connections regardless of how they are 
used.\23\ Accordingly, the Exchange believes that the allocation of the 
proposed fees ($1,000 per non-10Gb connection and $5,000 per 10Gb 
connection) are reasonable based on the network resources consumed by 
the market participants--lower bandwidth consuming market participants 
pay the least, and highest bandwidth consuming market participants pay 
the most, particularly since higher bandwidth consumption translates to 
higher costs to the Exchange.
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    \23\ The Exchange's network infrastructure requirements are 
based on the premise of all connections operating at full capacity, 
[sic].
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Participants of the Exchange if the Exchange were to establish 
unreasonable and uncompetitive price increases for its connectivity 
alternatives. Market participants choose to connect to a particular 
exchange and because it is a choice, BOX must set reasonable 
connectivity pricing, otherwise prospective participants would not 
connect and existing participants would disconnect or connect through a 
third-party reseller of connectivity. No options market participant is 
required by rule, regulation, or competitive forces to be a Participant 
of the Exchange.\24\ Several market participants choose not to be 
Participants of the Exchange and choose not to access the Exchange, and 
several market participants also access the Exchange indirectly through 
another market participant. If all market participants were required to 
be Participants of each exchange and connect directly to the Exchange, 
all exchanges would have over 200 Participants, in line with Cboe's 
total membership.
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    \24\ Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC 
has approximately 100 members, and NYSE American LLC has over 80 
members. In comparison, the BOX has 51 Participants.
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    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the proposed fees allow the Exchange to 
recover a portion of the costs incurred by the Exchange associated with 
maintaining and enhancing a state-of-the-art exchange network 
infrastructure in the US options industry. Additionally, there are 
significant costs associated with various projects and initiatives to 
improve overall network performance and stability, as well as costs 
paid to the third-party data centers for space rental, power used, etc.
    The Exchange notes that unlike its competitors, the Exchange does 
not own its own data center and therefore cannot control data center 
costs. While some of the data center expenses are fixed, much of the 
expenses are not fixed, and thus increases as the number of physical 
connections increase. For example, new non-10Gb and 10Gb connections 
require the purchase of additional hardware to support those 
connections. Further, as the total number of all connections increase, 
BOX needs to increase their data center footprint and consume more 
power, resulting in increased costs charged by their third-party data 
center provider. Accordingly, cost to BOX is not entirely fixed. In 
2018, the annual operational expense (which relates 100% to the network 
infrastructure, associated data center processing equipment required to 
support various connections, network monitoring systems and associated 
software required to support the various forms of connectivity) was 
approximately $6.4 million. This does not include additional indirect 
expenses that the Exchange incurs that are allocated to the support of 
network infrastructure of the Exchange. Additionally, every year BOX 
undertakes physical improvements to the BOX network. For example, in 
the last three years, BOX spent approximately $2 million on physical 
hardware alone. As such, BOX looks to offset those costs through the 
proposed connectivity fees.
    A more detailed breakdown of the annual operational expense in 2018 
includes over $2.8 million for space rental, power used, connections, 
etc. at the Exchange's data centers, over $1.1 million for data center 
support and management of third party vendors, over $700,000 in 
technological improvements to the data center infrastructure, over $1.4 
million for resources for technical and operational services for the 
Exchange's data centers and $400,000 in market data connectivity fees. 
Of note, regarding market data connectivity fees, this is the cost 
associated with BOX consuming connectivity/content from the equities 
markets in order to operate the Exchange, causing BOX to effectively 
pay its competitors for this connectivity.
    Further, as discussed herein, because the costs of operating a data 
center are significant and not economically feasible for the Exchange, 
the Exchange does not operate its own data centers, and instead 
contracts with a third-party data center provider. The Exchange notes 
that larger, dominant exchange operators own/operate their data 
centers, which offers them greater control over their data center 
costs. Because those exchanges own and operate their data centers as 
profit centers, the Exchange is subject to additional costs. 
Connectivity fees, which are charged for accessing the Exchange's data 
center network infrastructure, are directly related to the network and 
offset such costs.
    As discussed herein, the Exchange now believes that it is 
reasonable and appropriate to begin charging for physical connectivity 
fees to partially offset the costs associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the 
U.S. options industry. There are significant costs associated with 
various projects and initiatives to improve overall network performance 
and stability, as well as costs paid to the third-party data centers 
for space rental, power used, etc. As discussed above, the Exchange 
notes that unlike other options exchanges, the Exchange does not own 
and operate its own data center and therefore cannot control data 
center costs. As detailed herein, the Exchange has incurred substantial 
costs associated with maintaining and enhancing the BOX network. These 
costs, coupled with the Exchange's historically low transaction fees, 
place BOX at a competitive disadvantage against other options exchanges 
who charge connectivity fees to market participants. BOX has no choice 
but to begin charging Participants and non-Participants fees for 
connecting directly to the network which the Exchange has taken 
considerable measures to maintain and enhance for the benefit of those 
Participants and non-Participants in order to remain competitive with 
the other options exchanges in the industry.
    As the Exchange explained to the Division, the existence of robust 
competition between exchanges to attract order flow requires exchanges 
to keep prices for all of their joint services--including connectivity 
to the exchanges' networks at a pro-competitive level.\25\ This 
conclusion is substantiated by the report prepared by Professor Janusz 
A. Ordover and Gustavo Bamberger addressing the theory of ``Platform 
Competition'' and its application to the pricing of exchanges' 
services, including connectivity services.\26\ In the report, Ordover 
and Bamberger explain that ``the provision of connectivity services . . 
. is inextricably linked to the provision of trading services, so that, 
as

[[Page 33793]]

a matter of economics, it is not possible to appropriately evaluate the 
pricing of connectivity services in isolation from the pricing of 
trading and other `joint' services offered by'' an exchange. Ordover 
and Bamberger state that ``connectivity services are an `input' into 
trading'' and that ``excessive pricing of such services would raise the 
costs of trading on [an exchange] relative to its rivals and thus 
discourage trading on'' that exchange.
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    \25\ Letter from Lisa J. Fall, BOX, to Brent J. Fields, 
Secretary, Securities and Exchange Commission (Feb. 19, 2019), 
https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4945872-178516.pdf.
    \26\ See Attachment to Letter from Lisa J. Fall, supra note 25 
(``Ordover/Bamberger Statement'').
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    Although the Ordover/Bamberger Statement focuses on the pricing of 
connectivity services by Nasdaq-affiliated equities exchanges, its 
``overarching conclusion . . . that the pricing of connectivity 
services should not be analyzed in isolation'' applies with equal force 
to the proposed fees. Because BOX is engaged with rigorous competition 
with other exchanges to attract order flow to its platform, BOX is 
constrained in its ability to price its joint services--including 
connectivity services--at supracompetitive levels. That competition 
ensures that BOX's connectivity fees are set at levels consistent with 
the requirements of the Exchange Act.
    The Exchange again notes that other exchanges have similar 
connectivity alternatives for their participants, including similar 
low-latency connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE 
Arca, Inc. (``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq 
ISE, LLC (``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\27\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\28\. [sic]
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    \27\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the [sic] equivalent 
of the Exchange's 10Gb ULL connection. See also NYSE American Fee 
Schedule, Section V.B, and Arca Fees and Charges, Co-Location Fees. 
NYSE American and Arca each charge a monthly fee of $5,000 for each 
1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb 
LX circuit, which the [sic] equivalent of the Exchange's 10Gb ULL 
connection.
    \28\ Id.
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    Finally, the Exchange believes redefining the HSVF Connection Fee 
as a Port Fee is reasonable, equitable and not unfairly discriminatory. 
This classification is more accurate because an HSVF subscription is 
not enabled through a physical connection to the Exchange. Although 
market participant must be credentialed by BOX to receive the HSVF, 
anyone can become credentialed by submitting the required 
documentation.\29\ The Exchange does not propose to alter the amount of 
the existing HSVF fee; subscribers to the HSVF will continue to pay 
$1,500 per month. As with the Connectivity Fees, BOX's HSVF Port Fee is 
in line with industry practice.\30\
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    \29\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/.
    \30\ See Cboe Data Services, LLC (CDS) Fee Schedule Sec.  VI 
(charging $500 per month for up to five users to access the Enhanced 
Controlled Data Distribution Program).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Unilateral action by the 
Exchange in establishing fees for services provided to its Participants 
and others using its facilities will not have an impact on competition. 
As a small exchange in the already highly competitive environment for 
options trading, the Exchange does not have the market power necessary 
to set prices for services that are unreasonable or unfairly 
discriminatory in violation of the Exchange Act. The Exchange's 
proposed fees, as described herein, are comparable to and generally 
lower than fees charged by other options exchanges for the same or 
similar services. Lastly, the Exchange believes the proposed change 
will not impose a burden on intramarket competition as the proposed 
fees are applicable to all Participants and others using its facilities 
that connect to BOX.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act \31\ and Rule 19b-4(f)(2) 
thereunder,\32\ because it establishes or changes a due, or fee.
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    \31\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \32\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2019-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2019-22. 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-2019-22, and should

[[Page 33794]]

be submitted on or before August 5, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-14891 Filed 7-12-19; 8:45 am]
 BILLING CODE 8011-01-P