Notice2022-10520
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule on the BOX Options Market LLC Facility To Adopt Electronic Market Maker Trading Permit Fees
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 17, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 95 (Tuesday, May 17, 2022)</title>
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[Federal Register Volume 87, Number 95 (Tuesday, May 17, 2022)]
[Notices]
[Pages 29987-29992]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10520]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94894; File No. SR-BOX-2022-17]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee
Schedule on the BOX Options Market LLC Facility To Adopt Electronic
Market Maker Trading Permit Fees
May 11, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 27, 2022, BOX Exchange LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the Exchange. The Exchange filed the proposed rule
change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-
4(f)(2) thereunder,\4\ which renders the proposal effective upon filing
with the Commission. The Commission is publishing this notice to
solicit
[[Page 29988]]
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 to
establish a new monthly Participant Fee on the BOX Options Market LLC
(``BOX'') options facility. The text of the proposed rule change is
available from the principal office of the Exchange, at the
Commission's Public Reference Room and also on the Exchange's internet
website at <a href="http://boxexchange.com">http://boxexchange.com</a>.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to establish a new
monthly Participant Fee. Specifically, the Exchange proposes to adopt
electronic Market Maker Trading Permit Fees as follows: (i) $4,000 per
month for Market Maker Appointments in up to and including 10 classes;
(ii) $6,000 per month for Market Maker Appointments in up to and
including 40 classes; (iii) $8,000 per month for Market Maker
Appointments in up to and including 100 classes; and (iv) $10,000 per
month for Market Maker Appointments for over 100 classes. For the
calculation of the monthly electronic Market Maker Trading Permit fees,
the number of classes is defined as the greatest number of classes the
Market Maker was appointed to quote in on any given day within the
calendar month. The Exchange notes that the proposed electronic Market
Maker Trading Permit fees are lower than fees assessed at competing
options exchanges.\5\ The Exchange notes the current monthly
Participant Fee of $1,500 per month will not apply to electronic Market
Makers. Under this proposal, electronic Market Makers will pay the
applicable monthly electronic Market Maker Trading Permit fee only. All
other electronic Participants \6\ will continue to pay the monthly
Participant Fee in Section I.B of the BOX Fee Schedule.
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\5\ See NYSE Arca, Inc. (``NYSEArca'') Fee Schedule (assessing
Market Makers $6,000 for up to 175 option issues, an additional
$5,000 for up to 350 option issues, an additional $4,000 for up to
1,000 option issues, and an additional $3,000 for all option issues
traded on the Exchange). The Exchange notes that these fees are
compounded, so Market Makers who trade in all option issues on the
exchange are assessed $18,000 per month. See also Miami
International Securities Exchange, LLC (``MIAX'') Fee Schedule
(assessing Market Makers $7,000 for up to 10 classes or up to 20% of
classes by volume, $12,000 for up to 40 classes or up to 35% of
classes by volume, $17,000 for up to 100 classes or up to 50% or
classes by volume, and $22,000 for over 100 classes or over 50% of
classes by volume up to all classes listed on MIAX).
\6\ The Exchange notes the following Participant types on BOX:
Public Customers, Professional Customers, Broker Dealers, and Market
Makers. Pursuant to this proposal, Public Customers, Professional
Customers, and Broker Dealers will continue to be charged the $1,500
Participant Fee detailed in Section I.B of the BOX Fee Schedule.
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The Exchange initially filed the proposed fee change on January 3,
2022 (SR-BOX-2022-01) (the ``Original Filing''). BOX withdrew the
Original Filing and submitted SR-BOX-2022-04 (the ``Second Proposed
Rule Change''). BOX withdrew the Second Proposed Rule Change and
submitted the SR-BOX-2022-06 (the ``Third Proposed Rule Change''). On
February 1, 2022, BOX withdrew the Third Proposed Rule Change and
submitted SR-BOX-2022-07 (the ``Fourth Proposed Rule Change'') to lower
the fees detailed in the past filings after industry feedback. On April
5, 2022, BOX withdrew and submitted SR-BOX-2022-12 (the ``Fifth
Proposed Rule Change''). On April 11, 2022, BOX withdrew and submitted
SR-BOX-2022-15 (the ``Sixth Proposed Rule Change''). The Exchange is
now withdrawing the Sixth Proposed Rule Change and submitting this
filing (the ``Seventh Proposed Rule Change'').
The Exchange notes that the proposed electronic Market Maker
Trading Permit fees have been effective, and thus paid by BOX Market
Makers, since January 1, 2022.\7\ The Exchange believes it is notable
that during this time, there have been no comment letters submitted to
the Commission arguing that the Exchange's new fees are unreasonable.
The Exchange also believes it's significant and notable that, due to
industry feedback received in January from BOX Market Makers, the
Exchange withdrew its proposed fee change and refiled to decrease the
proposed fees in response to the feedback.
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\7\ The Exchange notes that the higher fees from the Original
Filing were assessed for the month of January 2022, however the
proposed fees were assessed for February 2022 and will continue to
be assessed.
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As discussed herein, the Exchange believes the proposed changes are
consistent with the Act because they are reasonable, equitably
allocated, and not unfairly discriminatory, and not an undue burden on
competition, as they are supported by evidence (including data and
analysis) and are constrained by significant competitive forces. The
Exchange also believes the proposed fees are reasonable as they are in
line with the amounts assessed to Market Makers by other exchanges for
similar permits. Accordingly, the Exchange believes 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.
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,\8\ 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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\8\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange established the $1,500 monthly Participant Fee in
October 2016 for all Participants regardless of account type.\9\ At the
time BOX established this Participant Fee, BOX's market share was 2.45%
and the total volume of options contracts traded on BOX in September
2016 was 8,737,707. The Exchange established this lower (when compared
to other options exchanges in the industry) Participant Fee in order to
encourage market participants to become Participants of BOX and
register as BOX Market Makers. Since 2016, BOX has grown its market
share and membership base significantly. Specifically, in September
2021, BOX's market share was 5.19% and the total volume of option
contracts traded on BOX in September 2021 was 42,098,287. BOX recently
reviewed its current Participant Fees detailed in Section I of the BOX
Fee Schedule. In its review, BOX determined that
[[Page 29989]]
Participant Fees would need to be raised, and a flat fee for all
Participant types is no longer appropriate. Specifically, BOX found
that electronic Market Makers had been benefitting from a flat
Participant Fee rate while (1) consuming the most bandwidth and
resources of the network; (2) transacting the vast majority of the
volume on BOX; and (3) requiring the high touch network support
services provided by BOX and its staff. The Exchange notes that Broker
Dealers, Professional Customers, and Public Customers take up
significantly less BOX resources and costs as discussed further below.
Further, BOX notes that Market Makers account for greater than 99% of
message traffic over the network, while other non-Market Maker market
participants account for less than 1% of message traffic over the
network. In BOX's experience, most BOX Participants do not have a
business need for the high performance network solutions required by
Market Makers. BOX's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 3 million
quote messages per second. On an average day, the BOX Trading Host
handles over 1.6 billion total messages. Of those 1.6 billion daily
messages, BOX Market Makers generate 1.59 billion of those messages,
while other BOX Participants generate 9.5 million messages.
Additionally, in order to achieve consistent, premium network
performance, BOX must build out and maintain a network that has the
capacity to handle the message rate requirements beyond those 1.6
billion daily messages. These billions of messages per day consume
BOX's resources and significantly contribute to the overall expense for
storage and network transport capabilities. Given this difference in
network utilization rate, the Exchange believes that it is reasonable,
equitable, and not unfairly discriminatory that Market Makers begin to
pay for a higher portion of the access costs (compared to other BOX
Participant types).
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\9\ See Securities Exchange Act Release No. 79038 (October 4,
2016), 81 FR 70214 (October 11, 2016) (SR-BOX-2016-47).
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BOX notes that while Market Makers continue to account for a vast
majority of the increased costs and resources placed on BOX and its
systems (as discussed herein), Market Makers continue to be valuable
market participants on the exchanges as the options market is a quote
driven industry. BOX recognizes the value that Market Makers bring to
the Exchange. In fact, BOX provides Market Makers volume-based
discounts and rebates to incentivize Market Makers to direct order flow
to the Exchange to obtain the benefit of the rebate, which will in turn
benefit all market participants by increasing liquidity on the
Exchange. Additionally, for certain transactions, BOX also assesses a
lower fee for Market Makers compared to the fee for Broker Dealers or
Professional Customers for the same reason.\10\ The proposed Trading
Permit fees discussed herein are meant to strike a balance between
offsetting the costs to which Market Makers place on BOX and continuing
to incentivize Market Makers to access and make a market on BOX.
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\10\ For example, in Section IV.A (Non-Auction Transactions) of
the BOX Fee Schedule, Market Makers are assessed a lower fee than
Broker Dealers and Professional Customers when their orders interact
with Public Customers, Professional Customers, Broker Dealers, and
Market Makers. They are also eligible for rebates under the Tiered
Volume Rebate for Non-Auction Transactions in Section IV.A.1 of the
BOX Fee Schedule. Additionally, Market Makers are assessed lower
fees on opening or re-opening transactions than Professional
Customers and Broker Dealers under Section IV.A.2 of the BOX Fee
Schedule.
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In its review of Participant Fees, BOX found that since 2016,
Market Makers have had the luxury of paying the same Participant Fees
as other account types despite Market Makers consuming the most
resources on the BOX system and contributing to increased costs for
BOX. As such, the Exchange proposes to establish higher, separate
electronic Trading Permit fees for Market Makers that are more aligned
with the costs and resources that Market Makers continue to place on
BOX and its systems. Additionally, the Exchange believes that the
proposed change will better align BOX Participant Fees with rates
charged by competing options exchanges in the industry for similar
Trading Permits for such market participants. As such, BOX believes the
proposed electronic Market Maker Trading Permit fees are reasonable in
that they are lower than comparable fees at other options
exchanges.\11\ Further, the Exchange believes that the proposal is
reasonably designed to continue to compete with other options exchanges
by incentivizing market participants to register as Market Makers on
BOX in a manner than enables BOX to improve its overall competitiveness
and strengthen market quality for all market participants. As stated
above, the Exchange believes the proposed Market Maker Trading Permit
fees are an appropriate balance between offsetting the costs to which
Market Makers cost BOX and continuing to incentivize Market Makers to
access and make a market on BOX.
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\11\ See supra note 5.
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The proposed fees are equitable and not unfairly discriminatory as
the fees apply equally to all electronic Market Makers. As such, all
similarly situated electronic Market Makers, with the same number of
appointments, will be subject to the same electronic Market Maker
Trading Permit fee. The Exchange also believes that assessing lower
fees to electronic Market Makers that quote in fewer classes is
reasonable and appropriate as it will allow BOX to retain and attract
smaller-scale electronic Market Makers, which are an integral component
of the options industry marketplace. Since these smaller electronic
Market Makers utilize less bandwidth and capacity on the BOX network
due to the lower number of quoted classes, the Exchange believes it is
reasonable and appropriate to offer such electronic Market Makers a
lower fee. The Exchange also notes that other options exchanges assess
permit fees at different rates, based upon a member's participation on
that exchange,\12\ and, as such, this concept is not new or novel.
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\12\ See e.g., NYSE Arca Options Fees and Charges, p.1
(assessing market makers $6,000 for up to 175 option issues, an
additional $5,000 for up to 350 option issues, an additional $4,000
for up to 1,000 option issues, an additional $3,000 for all option
issues on the exchange, and an additional $1,000 for the fifth
trading permit and for each trading permit thereafter); NYSE
American Options Fee Schedule, p. 23 (assessing market makers $8,000
for up to 60 plus the bottom 45% of option issues, an additional
$6,000 for up to 150 plus the bottom 45% of option issues, an
additional $5,000 for up to 500 plus the bottom 45% of option
issues, and additional $4,000 for up to 1,100 plus the bottom 45% of
option issues, an additional $3,000 for all issues traded on the
exchange, and an additional $2,000 for 6th to 9th ATPs; plus an
addition fee for premium products). See also Cboe BZX Options
Exchange (``BZX Options'') assesses the Participant Fee, which is a
membership fee, according to a member's ADV. See Cboe BZX Options
Exchange Fee Schedule under ``Membership Fees''. The Participant Fee
is $500 if the member ADV is less than 5000 contracts and $1,000 if
the member ADV is equal to or greater than 5000 contracts.
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Further, the Exchange believes the proposed tiered structure of the
electronic Market Maker Trading Permit fees is reasonable and
appropriate. Under the proposal, electronic Market Makers will be
charged monthly fees based on the greatest number of classes quoted on
any given trading day in a calendar month. Under the proposed fee
structure, the fees increase as the number of classes quoted by a
Market Maker increases. The Exchange believes this structure is
reasonable because the BOX system requires increased performance and
capacity in order to provide the opportunity for Market Makers to quote
in a higher number of options classes on BOX. Specifically, the more
classes that are actively quoted
[[Page 29990]]
on BOX by a Market Maker requires increased memory for record
retention, increased bandwidth for optimized performance, increased
functionalities on each application layer, and increased optimization
with regard to surveillance and monitoring of such classes quoted. As
such, basing the Market Maker Trading Permit fee on the greatest number
of classes quoted in on any given day in a calendar month is reasonable
and appropriate when taking into account how the increased number of
quoted classes directly impact the costs and resources required for
BOX. Further, the Exchange believes that the proposed tiered structure
is equitable and not unfairly discriminatory as all similarly situated
Market Makers will be charged the same fee. The Exchange notes that
another options exchange in the industry calculates Market Maker Permit
Fees in the same manner.\13\
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\13\ See Nasdaq Phlx LLC (``Phlx'') Fee Schedule, Section 8(B)
detailing the tiered structure for Streaming Quote Trader (``SQT'')
Fees.
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The Exchange notes that there is no regulatory requirement that
market makers connect and access any one options exchange. Moreover, a
Market Maker membership is not a requirement to participate on the
Exchange and participation on an exchange is completely voluntary. BOX
reviewed membership details at three options exchanges and found that
there are 62 market making firms across these three exchanges.\14\
Further, BOX found that 42 of the 62 market making firms access only
one of the three exchanges. Additionally, BOX has identified numerous
market makers that are members of other options exchanges, but not the
Exchange. For example, BOX identified 47 market makers that are members
of Cboe Exchange Inc. (an exchange that only lists options), but not
the Exchange (which also lists only options). Not only is there not an
actual regulatory requirement to connect to every options exchange, the
Exchange believes there is also no ``de facto'' or practical
requirement as well, as further evidenced by the market maker
membership analysis of three options exchanges discussed above. Indeed,
Market Makers choose if and how to access a particular exchange and
because it is a choice, BOX must set reasonable pricing, otherwise
prospective market makers would not connect and existing Market Makers
would disconnect from the Exchange.
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\14\ BOX reviewed membership lists at Cboe Exchange Inc.
(``Cboe''), Miami International Securities Exchange, LLC (``MIAX''),
and BOX--all of which detail the firms registered as making makers
on their respective exchanges. The Nasdaq and NYSE exchange groups
do not provide this level of detail in their membership lists. As
such, BOX has not included the Nasdaq and NYSE exchanges in this
analysis.
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As discussed above, BOX responded to Market Maker feedback to the
proposed fees in January 2022 and due to this valuable feedback, BOX
lowered the proposed fees. The Exchange believes that this reduction
demonstrates that competitive constraints do not depend on showing that
a Market Maker walked away, or threatened to walk away, from BOX due to
a pricing change. Rather, the absence of negative feedback (in and of
itself, and particularly when coupled with valuable feedback suggesting
modifications or alternatives) is indicative that the proposed fees
are, in fact, reasonable and consistent with BOX being subject to
competitive forces in setting fees. Accordingly, the Exchange believes
the Commission has a sufficient basis to determine that BOX was subject
to significant competitive forces in setting the terms of its proposed
fees. Moreover, the Commission has found that, if an exchange meets the
burden of demonstrating it was subject to significant competitive
forces in setting its fees, the Commission ``will find that its fee
rule is consistent with the Act unless `there is a substantial
countervailing basis to find that the terms' of the rule violate the
Act or the rules thereunder.'' \15\ The Exchange is not aware of, nor
has the Commission articulated, a substantial countervailing basis for
finding the proposal violates the Act or the rules thereunder.
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\15\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74781 (December 9, 2008) (``2008 ArcaBook
Approval Order'') (approving proposed rule change to establish fees
for a depth-of-book market data product).
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In order to provide more detail and to quantify BOX's costs
associated with providing access to the BOX network in general, BOX
notes that there are material costs associated with providing the
infrastructure and headcount to fully-support access to BOX. BOX incurs
technology expenses related to establishing and maintaining Information
Security services, enhanced network monitoring and customer reporting
associated with its network technology. While some of the expense is
fixed, much of the expense is not fixed, and thus increases as the
expenses associated with access services for electronic Market Makers
increases. For example, new Market Makers to BOX may require the
purchase of additional hardware to support those Participants as well
as enhanced monitoring and reporting of customer performance that BOX
provides. Further, as the total number of Market Makers increase, BOX
may need to increase their data center footprint and consume more
power, resulting in increased costs charged by their third-party data
center provider. Accordingly, the cost to BOX to provide access to its
electronic Market Makers is not fixed. BOX believes the proposed
electronic Market Maker Trading Permit fees are reasonable in order to
offset a portion of the costs to BOX associated with providing access
to Market Makers to its network infrastructure.
As discussed above, BOX Market Makers have and continue to account
for the vast majority of network capacity utilization and trading
activity on BOX and thus account for the majority of expenses placed on
BOX systems. Specifically, in 2017 (the year after BOX established the
flat Participant Fee), the total expense for providing access services
for all Participant types was approximately $819,000. Broken down
further, in 2017, the total expense for providing access services to
non-Market Maker Participants was approximately $117,000 and the total
expense for providing access services to Market Makers was
approximately $702,000. The Exchange has seen this disparity in access
expenses between non-Market Makers and Market Makers year after year
since the establishment of the Participant Fee in 2016. In 2018, the
total expense for providing access services for all Participant types
was approximately $763,000--approximately $109,000 allocated to non-
Market Maker expenses and approximately $654,000 allocated to Market
Maker expenses. In 2019, the total expense for providing access
services for all Participant types was approximately $722,000--
approximately $103,000 allocated to non-Market Maker expenses and
approximately $619,000 allocated to Market Makers. In 2020, the total
expense for providing access services for all Participant types was
approximately $1.1 million--approximately $161,000 allocated to non-
Market Maker expenses and approximately $971,000 allocated to Market
Makers. Further, as discussed herein, BOX experienced a material
increase in costs in 2021 and projects a similar material increase for
2022 due to projects to make its network environment more transparent
and deterministic, and increased order flow seen throughout the
industry. Specifically, in 2021, the total expense for providing access
services for all Participant types was approximately $1.29 million--
approximately $190,000 allocated to non-Market Maker expenses
[[Page 29991]]
and approximately $1.1 million allocated to Market Makers. Further, in
the projected expenses for 2022, the total projected expense for
providing access services for all Participant types is approximately
$1.89 million--approximately $270,000 allocated to non-Market Maker
expenses and $1.62 million allocated to Market Makers. As illustrated
by these access expenses year over year, it is clear that BOX Market
Makers account for the majority of expenses related to the provision of
access services for BOX Participants. Accordingly, BOX believes that it
is reasonable and appropriate to charge electronic Market Makers more
than other BOX Participants for electronic Trading Permits to access
the BOX network.
The Exchange believes that the proposed electronic Market Maker
Trading Permit fees are reasonable, equitable, and not unfairly
discriminatory. The Exchange believes that the reasonableness of its
proposed fees is demonstrated by the very fact that such fees are in
line with, and in some cases lower than, the costs of similar access
fees at other exchanges.\16\ The Exchange notes these fees were
similarly filed with the Commission and neither suspended nor
disapproved.\17\ The proposed fees are fair and equitable and not
unfairly discriminatory because they apply equally to all Market Makers
and access to BOX is offered on terms that are not unfairly
discriminatory. BOX designed the fee rates in order to provide
objective criteria for Market Makers of different sizes and business
models that best matches their quoting activity on BOX. BOX believes
that the proposed fee rates and criteria provide an objective and
flexible framework that will encourage Market Makers to be appointed
and quote in option classes while also equitably allocating the fees in
a reasonable manner amongst Market Maker appointments to account for
quoting and trading activity.\18\
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\16\ See supra note 5.
\17\ The Exchange presumes that the fees of other exchanges are
reasonable, as required by the Exchange Act in the absence of any
suspension or disapproval order by the Commission providing
otherwise.
\18\ Prior to filing the Original Proposal, the Exchange notes
that BOX Market Makers were made aware of the proposed tier
structure and fee change. BOX received feedback from Market Makers
and adjusted the fees accordingly based on their feedback. Market
Makers are not required to quote on every options exchange. BOX
Market Makers choose to quote and transact business on BOX because
BOX is providing increased trading opportunities for these firms.
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The Exchange again notes that it operates in a highly competitive
market in which market makers can readily favor competing venues if
they deem fee levels at a particular venue to be excessive. In such an
environment, BOX must continually adjust its fees for services and
products, in addition to order flow, to remain competitive with other
exchanges. BOX believes that the proposed changes reflect this
competitive environment.
The Exchange again notes it is not aware of any reason why Market
Makers could not simply drop their access to an exchange (or not
initially access an exchange) if an exchange were to establish prices
for its non-transaction fees that, in the determination of such Market
Maker, did not make business or economic sense for such Market Maker to
access such exchange. The Exchange again notes that no market makers
are required by rule, regulation, or competitive forces to be a Market
Maker on the Exchange.
Furthermore, the Exchange wishes to highlight that one Market Maker
modified their access to BOX since the implementation of the proposed
fee change. This Market Maker was approved as an electronic Market
Maker in 2017 but never underwent the process of provisioning itself to
access the BOX systems.\19\ After the Market Maker reviewed the notice
the Exchange issued describing the proposed fees, the Market Maker
informed the Exchange that it would terminate its Market Maker status
on BOX as it had no intention to provision itself for access. The
Exchange believes this further demonstrates competition within the
market for exchange access, which as a result constrains fees the
Exchange may charge for that access. The Exchange believes the fact
that this Participant chose to terminate its Market Maker status on BOX
but retained its status as an Order Flow Provider on BOX demonstrates
that market participants can and do alter their membership statuses at
exchanges if the market participant deems any fees as too high for its
relevant marketplace. In BOX's case, the Participant determined that
the Exchange's proposed fees for electronic Market Makers did not make
business sense for itself, however it retained its membership as a BOX
Participant in a different capacity.
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\19\ The Exchange notes that the Participant is also currently
an Order Flow Provider on BOX.
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In sum, the Exchange believes the proposed fees are reasonable and
reflect a competitive environment, as BOX seeks to amend its Trading
Permit fees for Market Makers, while still attracting Market Makers to
continue to, or seek to, access BOX. The Exchange further believes the
proposed Trading Permit fees discussed herein are an appropriate
balance between offsetting the costs to which Market Makers cost BOX
and continuing to incentivize Market Makers to access and make a market
on BOX.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes that the proposed electronic Market Maker
Trading Permit fees do not place certain market participants at a
relative disadvantage to other market participants because the proposed
fees do not favor certain categories of market participants in a manner
that would impose a burden on competition; rather, the fee rates are
designed in order to provide objective criteria for Market Makers of
different sizes and business models that best matches their quoting
activity on BOX. Further, the Exchange believes that the proposed
electronic Market Maker Trading Permit fees will not impose a burden on
intramarket competition because, when these fees are viewed in the
context of the overall activity on BOX, Market Makers: (1) Consume the
most bandwidth and resources of the network; (2) transact the vast
majority of the volume on BOX; and (3) require the high touch network
support services provided by BOX and its staff, including more costly
network monitoring, reporting and support services, resulting in a much
higher cost to BOX. The Exchange notes that the majority of customer
demand comes from Market Makers, whose transactions make up a majority
of the volume on BOX. Further, as discussed herein, other Participant
types (Broker Dealers, Professional Customers, and Public Customers)
take up significantly less BOX resources and costs. As such, the
Exchange does not believe charging electronic Market Makers higher
Trading Permit fees than other Participant types will impose a burden
on intramarket competition.
The Exchange believes that the tiered structure of the proposed
electronic Market Maker Trading Permit fees will not impose a burden on
intramarket competition because the tiered structure takes into account
the number of classes quoted by each individual Market Maker. As
discussed herein, the BOX system requires increased performance and
capacity in order to provide the opportunity for each Market Maker to
quote in a higher number of options classes on BOX. Specifically, the
more
[[Page 29992]]
classes that are actively quoted on BOX by a Market Maker requires
increased memory for record retention, increased bandwidth for
optimized performance, increased functionalities on each application
layer, and increased optimization with regard to surveillance and
monitoring of such classes quoted. As such, basing the Market Maker
Trading Permit fee on the greatest number of classes quoted in on any
given day in a calendar month is reasonable and appropriate when taking
into account how the increased number of quoted classes directly impact
the costs and resources for BOX.
Inter-Market Competition
The Exchange believes the proposed Market Maker Trading Permit Fees
do not place an undue burden on competition on other SROs that is not
necessary or appropriate. In particular, market making firms are not
forced to become market makers on all options exchanges. The Exchange
notes that it has far less Market Makers as compared to the much
greater number of market makers at other options exchanges. There are a
number of large market makers that are participants of other options
exchange but not Participants of BOX. The Exchange is also unaware of
any assertion that its existing fee levels or the proposed electronic
Market Maker Fees would somehow unduly impair its competition with
other options exchanges. To the contrary, if the fees charged are
deemed too high by a market making firm, they can simply discontinue
their membership with BOX.
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than 17% market share. Therefore,
no exchange possesses significant pricing power in the execution of
multiply-listed equity and ETF options order flow. For the month of
November 2021, BOX had a market share of approximately 5.58% of
executed multiply-listed equity options \20\ and BOX believes that the
ever-shifting market share among exchanges from month to month
demonstrates that market participants can discontinue or reduce use of
certain categories of products, or shift order flow, in response to fee
changes. In such an environment, BOX must continually adjust its fees
and fee waivers to remain competitive with other exchanges and to
attract order flow to the facility.
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\20\ See Options Volume by Exchange available at <a href="https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange">https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange</a>.
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Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues. In such an environment, the Exchange must continually
review, and consider adjusting, its fees and credits to remain
competitive with other exchanges. For the reasons described above, the
Exchange believes that the proposed rule change reflects this
competitive environment.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act \21\ and Rule 19b-4(f)(2)
thereunder,\22\ because it establishes or changes a due, or fee.
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\21\ 15 U.S.C. 78s(b)(3)(A)(ii).
\22\ 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4a383f262f67292527272f243e390a392f29642d253c"><span class="__cf_email__" data-cfemail="780a0d141d551b1715151d160c0b380b1d1b561f170e">[email protected]</span></a>. Please include
File Number SR-BOX-2022-17 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2022-17. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BOX-2022-17, and should be submitted on
or before June 7, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10520 Filed 5-16-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 17, 2022.
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