Notice2023-20314
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fees Schedule Related to Physical Port Fees
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Published
September 20, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 181 (Wednesday, September 20, 2023)</title>
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[Federal Register Volume 88, Number 181 (Wednesday, September 20, 2023)]
[Notices]
[Pages 64939-64942]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-20314]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98397; File No. SR-C2-2023-020]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fees Schedule Related to Physical Port Fees
September 14, 2023.
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 September 1, 2023, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') 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
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2 Options'')
proposes to amend its Fees Schedule. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/">http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/</a>), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
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 its fee schedule relating to
physical connectivity fees.\3\
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\3\ The Exchange initially filed the proposed fee changes on
July 3, 2023 (SR-C2-2023-014). On September 1, 2023, the Exchange
withdrew that filing and submitted this proposal.
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By way of background, a physical port is utilized by a Member or
non-Member to connect to the Exchange at the data centers where the
Exchange's servers are located. The Exchange currently assesses the
following physical connectivity fees for Trading Permit Holders
(``TPHs'') and non-TPHs on a monthly basis: $2,500 per physical port
for a 1 gigabit (``Gbps'') circuit and $7,500 per physical port for a
10 Gbps circuit. The Exchange proposes to increase the monthly fee for
10 Gbps physical ports from $7,500 to $8,500 per port. The Exchange
notes the proposed fee change better enables it to continue to maintain
and improve its market technology and services and also notes that the
proposed fee amount, even as amended, continues to be in line with, or
even lower than, amounts assessed by other exchanges for similar
connections.\4\ The physical ports may also be used to access the
Systems for the following affiliate exchanges and only one monthly fee
currently (and will continue) to apply per port: Cboe BZX Exchange,
Inc. (options and equities platforms), Cboe EDGX Exchange, Inc.
(options and equities platforms), Cboe BYX Exchange, Inc., and Cboe
EDGA Exchange, Inc. (``Affiliate Exchanges'').\5\
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\4\ See e.g., The Nasdaq Stock Market LLC (``Nasdaq''), General
8, Connectivity to the Exchange. Nasdaq and its affiliated exchanges
charge a monthly fee of $15,000 for each 10Gbps Ultra fiber
connection to the respective exchange, which is analogous to the
Exchange's 10Gbps physical port. See also New York Stock Exchange
LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago Inc., NYSE
National, Inc. Connectivity Fee Schedule, which provides that 10
Gbps LX LCN Circuits (which are analogous to the Exchange's 10 Gbps
physical port) are assessed $22,000 per month, per port.
\5\ The Affiliate Exchanges are also submitting contemporaneous
identical rule filings.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the
[[Page 64940]]
``Act'') and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\6\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \7\ requirements that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \8\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The Exchange also believes the
proposed rule change is consistent with Section 6(b)(4) \9\ of the Act,
which requires that Exchange rules provide for the equitable allocation
of reasonable dues, fees, and other charges among its TPHs and other
persons using its facilities.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ Id.
\9\ 15 U.S.C. 78f(b)(4).
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The Exchange believes the proposed fee change is reasonable as it
reflects a moderate increase in physical connectivity fees for 10 Gbps
physical ports. Further, the current 10 Gbps physical port fee has
remained unchanged since June 2018.\10\ Since its last increase 5 years
ago however, there has been notable inflation. Particularly, the dollar
has had an average inflation rate of 3.9% per year between 2018 and
today, producing a cumulative price increase of approximately 21.1%
inflation since the fee for the 10 Gbps physical port was last
modified.\11\ Accordingly, the Exchange believes the proposed fee is
reasonable as it represents only an approximate 13% increase from the
rates adopted five years ago, notwithstanding the cumulative rate of
21.1%.
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\10\ See Securities and Exchange Release No. 83455 (June 15,
2018), 83 FR 28892 (June 21, 2018) (SR-C2-2018-014).
\11\ See <a href="https://www.officialdata.org/us/inflation/2010?amount=1">https://www.officialdata.org/us/inflation/2010?amount=1</a>.
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The Exchange also believes the proposed fee is reasonable as it is
still in line with, or even lower than, amounts assessed by other
exchanges for similar connections.\12\ As noted above, the proposed fee
is also the same as is concurrently being proposed for its Affiliate
Exchanges. Further, TPHs are able to utilize a single port to connect
to any of the Affiliate Exchanges with no additional fee assessed for
that same physical port. Particularly, the Exchange believes the
proposed monthly per port fee is reasonable, equitable and not unfairly
discriminatory as it is assessed only once, even if it connects with
another affiliate exchange since only one port is being used and the
Exchange does not wish to charge multiple fees for the same port.
Indeed, the Exchange notes that several ports are in fact purchased and
utilized across one or more of the Exchange's affiliated Exchanges (and
charged only once).
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\12\ See e.g., The Nasdaq Stock Market LLC (``Nasdaq''), General
8, Connectivity to the Exchange. Nasdaq and its affiliated exchanges
charge a monthly fee of $15,000 for each 10Gbps Ultra fiber
connection to the respective exchange, which is analogous to the
Exchange's 10Gbps physical port. See also New York Stock Exchange
LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago Inc., NYSE
National, Inc. Connectivity Fee Schedule, which provides that 10
Gbps LX LCN Circuits (which are analogous to the Exchange's 10 Gbps
physical port) are assessed $22,000 per month, per port.
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The Exchange also believes that the proposed fee change is not
unfairly discriminatory because it would be assessed uniformly across
all market participants that purchase the physical ports. The Exchange
believes increasing the fee for 10 Gbps physical ports and charging a
higher fee as compared to the 1 Gbps physical port is equitable as the
1 Gbps physical port is \1/10\th the size of the 10 Gbps physical port
and therefore does not offer access to many of the products and
services offered by the Exchange (e.g., ability to receive certain
market data products). Thus, the value of the 1 Gbps alternative is
lower than the value of the 10 Gbps alternative, when measured based on
the type of Exchange access it offers. Moreover, market participants
that purchase 10 Gbps physical ports utilize the most bandwidth and
therefore consume the most resources from the network. As such, the
Exchange believes the proposed fee change for 10 Gbps physical ports is
reasonably and appropriately allocated.
The Exchange also notes TPHs and non-TPHs will continue to choose
the method of connectivity based on their specific needs and no broker-
dealer is required to become a TPH of, let alone connect directly to,
the Exchange. There is also no regulatory requirement that any market
participant connect to any one particular exchange. Moreover, direct
connectivity is not a requirement to participate on the Exchange. The
Exchange also believes substitutable products and services are
available to market participants, including, among other things, other
options exchanges that a market participant may connect to in lieu of
the Exchange, indirect connectivity to the Exchange via a third-party
reseller of connectivity, and/or trading of any options product, such
as within the Over-the-Counter (OTC) markets. Indeed, there are
currently 16 registered options exchanges that trade options (12 of
which are not affiliated with Cboe), some of which have similar or
lower connectivity fees.\13\ Based on publicly available information,
no single options exchange has more than approximately 19% of the
market share.\14\ Further, low barriers to entry mean that new
exchanges may rapidly enter the market and offer additional substitute
platforms to further compete with the Exchange and the products it
offers. For example, there are 3 exchanges that have been added in the
U.S. options markets in the last 5 years (i.e., Nasdaq MRX, LLC, MIAX
Pearl, LLC, and MIAX Emerald LLC) and one additional options exchange
that is expected to launch in 2023 (i.e., MEMX LLC).
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\13\ Id.
\14\ See Cboe Global Markets U.S. Options Market Volume Summary
(June 27, 2023), available at <a href="https://markets.cboe.com/us/options/market_statistics/">https://markets.cboe.com/us/options/market_statistics/</a>.
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As noted above, there is no regulatory requirement that any market
participant connect to any one options exchange, nor that any market
participant connect at a particular connection speed or act in a
particular capacity on the Exchange, or trade any particular product
offered on an exchange. Moreover, membership is not a requirement to
participate on the Exchange. Indeed, the Exchange is unaware of any one
options exchange whose membership includes every registered broker-
dealer. By way of example, while the Exchange currently has 52 TPHs,
Cboe BZX has 61 members that trade options, and Cboe EDGX has 51
members that trade options. There is also no firm that is a Member of
C2 Options only. Further, based on publicly available information
regarding a sample of the Exchange's competitors, NYSE American Options
has 71 members,\15\ and NYSE Arca Options has 69 members,\16\ MIAX
Options has 46
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members \17\ and MIAX Pearl Options has 40 members.\18\
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\15\ See <a href="https://www.nyse.com/markets/american-options/membership#directory">https://www.nyse.com/markets/american-options/membership#directory</a>.
\16\ See <a href="https://www.nyse.com/markets/arca-options/membership#directory">https://www.nyse.com/markets/arca-options/membership#directory</a>.
\17\ See <a href="https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Options_Exchange_Members_April_2023_04282023.pdf">https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Options_Exchange_Members_April_2023_04282023.pdf</a>.
\18\ See <a href="https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Pearl_Exchange_Members_01172023_0.pdf">https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Pearl_Exchange_Members_01172023_0.pdf</a>.
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A market participant may also submit orders to the Exchange via a
Member broker or a third-party reseller of connectivity. The Exchange
notes that third-party non-TPHs also resell exchange connectivity. This
indirect connectivity is another viable alternative for market
participants to trade on the Exchange without connecting directly to
the Exchange (and thus not pay the Exchange's connectivity fees), which
alternative is already being used by non-TPHs and further constrains
the price that the Exchange is able to charge for connectivity to its
Exchange. The Exchange notes that it could, but chooses not to,
preclude market participants from reselling its connectivity. The
Exchange also chooses not to adopt fees that would be assessed to
third-party resellers on a per customer basis (i.e., fee based on
number of TPHs that connect to the Exchange indirectly via the third-
party). Particularly, these third-party resellers may purchase the
Exchange's physical ports and resell access to such ports either alone
or as part of a package of services. The Exchange notes that multiple
TPHs are able to share a single physical port (and corresponding
bandwidth) with other non-affiliated TPHs if purchased through a third-
party re-seller.\19\ This allows resellers to mutualize the costs of
the ports for market participants and provide such ports at a price
that may be lower than the Exchange charges due to this mutualized
connectivity. These third-party sellers may also provide an additional
value to market participants as they may also manage and monitor these
connections, and clients of these third-parties may also be able
connect from the same colocation facility either from their own racks
or using the third-party's managed racks and infrastructure which may
provide further cost-savings. Further, the Exchange does not receive
any connectivity revenue when connectivity is resold by a third-party,
which often is resold to multiple customers, some of whom are agency
broker-dealers that have numerous customers of their own. Given the
availability of third-party providers that also offer connectivity
solutions, the Exchange believes participation on the Exchange remains
affordable (notwithstanding the proposed fee change) for all market
participants, including smaller trading firms that may be able to take
advantage of lower costs that result from mutualized connectivity.
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\19\ For example, a third-party reseller may purchase one 10
Gbps physical port from the Exchange and resell that connectivity to
three different market participants who may only need 3 Gbps each
and leverage the same single port.
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Accordingly, the vigorous competition among national securities
exchanges provides many alternatives for firms to voluntarily decide
whether direct connectivity to the Exchange is appropriate and
worthwhile, and as noted above, no broker-dealer is required to become
a Member of the Exchange, let alone connect directly to it. In the
event that a market participant views the Exchange's proposed fee
change as more or less attractive than the competition, that market
participant can choose to connect to the Exchange indirectly or may
choose not to connect to that exchange and connect instead to one or
more of the other 12 non-Cboe affiliated options markets. Moreover, if
the Exchange charges excessive fees, it may stand to lose not only
connectivity revenues but also revenues associated with the execution
of orders routed to it, and, to the extent applicable, market data
revenues. The Exchange believes that this competitive dynamic imposes
powerful restraints on the ability of any exchange to charge
unreasonable fees for connectivity. Notwithstanding the foregoing, the
Exchange still believes that the proposed fee increase is reasonable,
equitably allocated and not unfairly discriminatory, even for market
participants that determine to connect directly to the Exchange for
business purposes, as those business reasons should presumably result
in revenue capable of covering the proposed fee.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed fee change will
not impact intramarket competition because it will apply to all
similarly situated TPHs equally (i.e., all market participants that
choose to purchase the 10 Gbps physical port). Additionally, the
Exchange does not believe its proposed pricing will impose a barrier to
entry to smaller participants and notes that its proposed connectivity
pricing is associated with relative usage of the various market
participants. For example, market participants with modest capacity
needs can continue to buy the less expensive 1 Gbps physical port
(which cost is not changing) or may choose to obtain access via a
third-party re-seller. While pricing may be increased for the larger
capacity physical ports, such options provide far more capacity and are
purchased by those that consume more resources from the network.
Accordingly, the proposed connectivity fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation reflects the network
resources consumed by the various size of market participants--lowest
bandwidth consuming members pay the least, and highest bandwidth
consuming members pays the most.
The Exchange's proposed fee is also still lower than some fees for
similar connectivity on other exchanges and therefore may stimulate
intermarket competition by attracting additional firms to connect to
the Exchange or at least should not deter interested participants from
connecting directly to the Exchange. Further, if the changes proposed
herein are unattractive to market participants, the Exchange can, and
likely will, see a decline in connectivity via 10 Gbps physical ports
as a result. The Exchange operates in a highly competitive market in
which market participants can determine whether or not to connect
directly to the Exchange based on the value received compared to the
cost of doing so.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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) of the Act \20\ and paragraph (f) of Rule 19b-4 \21\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f).
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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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#89fbfce5eca4eae6e4e4ece7fdfac9faeceaa7eee6ff"><span class="__cf_email__" data-cfemail="1d6f687178307e7270707873696e5d6e787e337a726b">[email protected]</span></a>. Please include
file number SR-C2-2023-020 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-C2-2023-020. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-C2-2023-020 and should be
submitted on or before October 11, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-20314 Filed 9-19-23; 8:45 am]
BILLING CODE 8011-01-P
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