Opinion ID: 6105520
Heading Depth: 3
Heading Rank: 1

Heading: Definition of “facility”

Text: Section 3(a)(2), set out above, includes several properties and property rights and services within the statutory definition of a “facility” of an exchange. In its Final Order, the SEC concluded that, for several reasons, both the Wireless Bandwidth Connection and the Wireless Data Connection satisfy the statutory definition of “facility.” We agree with the SEC that the Wireless Connections 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” that is offered “for the purpose of effecting or reporting transactions on the exchange.” 15 U.S.C. § 78c(a)(2). Start with the Wireless Bandwidth Connection. The statutory definition of facility describes it to a tee: It allows a market 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 Exchanges. Indeed, facilitating market activity is the only reason a market participant would pay a $10,000 initial fee and a recurring monthly charge of up to $45,000 for this connection. See Proposed Rule Change, 85 Fed. Reg. at 8942. The same goes for the Wireless Data Connection. It allows for transmission of proprietary market data, including information about bids, offers, and trades, from the premises of the Exchanges at Mahwah to a market participant’s equipment co-located at a data center maintained by another exchange. The market participant may use those data to route orders to the Exchanges. Therefore, a Wireless Data Connection, too, is “a system of communication to or from the exchange . . . 16 maintained by or with the consent of the exchange” that is offered “for the purpose of effecting and reporting transactions on the Exchange.” Indeed, as the SEC aptly argues in its brief, the Wireless Data Connection is the modern analogue of the ticker, which the statute gives as an example of a system of communication that is considered a “facility,” see 15 U.S.C. § 78c(a)(2). ICE quibbles with these simple observations. It argues that because the Wireless Connections are not directly connected to the Exchanges (i.e., to the matching engines) and are but a single link in the chain of communication between market participants and the matching engines, they are not systems of communication “to or from the exchange.” Further, according to ICE, unless the court “maintain[s] a strict limit on what it means to be to or from, you can quickly end up in a scenario where the SEC could claim the jurisdiction to regulate every antecedent communications link that may eventually lead to a securities transaction . . . .” Oral Arg. Rec. at 15:07-15:25. Taking its point to the extreme, ICE argues the Commission’s theory would subject to the Commission’s jurisdiction even “telecommunications providers, couriers, or any service used by broker-dealers or others that is somehow related to the later buying and selling of securities on an actual exchange,” an absurd result. ICE’s narrow reading of the statute does not withstand scrutiny, and its warning about the dire consequences of a more expansive reading rings hollow. As the petitioners conceded at oral argument, the statutory definition of “exchange” encompasses more than just the matching engine, so there is no reason to think the plain meaning of a system of communication “to or from the exchange” is limited to a system that provides a direct connection to the matching engine of an exchange. Furthermore, ICE’s reading of the statue is 17 formalistic to a fault. True enough, the Wireless Bandwidth Connection does not directly connect a market participant to equipment owned by an exchange; rather it connects the market participant’s co-located equipment at Mahwah to the participant’s co-located equipment at a third-party data center. Focusing upon this fact alone, however, ignores crucial context. The Wireless Bandwidth Connection serves no purpose other than facilitating market activity, which requires a connection to the matching engine of an exchange. Technically, the Wireless Bandwidth Connection could be used for non-market related communications, but it would make no economic sense to purchase an expensive Wireless Bandwidth Connection for that reason. Unsurprisingly, a market participant that purchases a Wireless Bandwidth Connection invariably purchases a further connection linking its equipment at Mahwah to a matching engine there. See McKay Brothers Br. at 15 n.10 (“[A]mici are unaware of any trading firm colocated in the Exchanges’ data center that does not have a connection for executing orders on the Exchanges’ system.”); see also Self-Regulatory Organizations; New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc.; Order Granting Accelerated Approval, 85 Fed. Reg. at 67049 (Oct. 2020) ( “What is required for an exchange service to be a facility is that it be provided ‘for the purpose of’ effecting or reporting a transaction on the Exchange which . . . is in fact the case.”). A Wireless Bandwidth Connection, therefore, is a vital and proximate link in a system of communication that directly connects a market participant to the matching engine of an exchange. To analyze the Wireless Bandwidth Connection without regard to the context in which it operates makes no sense. We are unmoved by ICE’s warning about the dire consequences of our reading of the statute. Holding the 18 Wireless Bandwidth Connection and the Wireless Data Connection qualify as systems of communications “for the purpose of effecting or reporting a transaction on an exchange” will not lead us down a slippery slope that ends in an irrational extension of the SEC’s jurisdiction. The differences between the Wireless Connections and, to take ICE’s own examples, a telecommunications or courier service used by a broker to communicate with a customer are legion. In contrast to those services, the Wireless Connections are very expensive, highly specialized connections, used exclusively by market participants for the sole purpose of effectuating trading strategies and facilitating market activity. Moreover, they are offered by IDS, an affiliate of the Exchanges, and could not exist without the consent of the Exchanges — in other words, they clearly are “system[s] of communication . . . maintained by or with the consent of the exchange,” 15 U.S.C. § 78c(a)(2). Communications systems that incidentally facilitate the trading of securities, by contrast, do not owe their existence to the consent of any exchange, nor are they maintained by any exchange. Finally, a Wireless Bandwidth Connection invariably forms the penultimate link in a direct connection to the matching engine of an exchange. There is thus a country mile between subjecting the Wireless Connections to the jurisdiction of the SEC and subjecting “every antecedent communications link” to the Commission’s jurisdiction.