Notice2023-22014
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change To Amend Its Fee Schedule Related to Physical Port Fees
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Published
October 4, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 191 (Wednesday, October 4, 2023)</title>
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[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68852-68854]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22014]
[[Page 68852]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98651; File No. SR-CboeEDGX-2023-058]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.;
Suspension of and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule Change To Amend Its Fee Schedule
Related to Physical Port Fees
September 29, 2023.
I. Introduction
On September 1, 2023, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change (File Number SR-CboeEDGX-2023-058) to amend its
fee schedule to increase the monthly fee for 10 gigabit (``Gb'')
physical ports. The proposed rule change was immediately effective upon
filing with the Commission pursuant to Section 19(b)(3)(A) of the
Act.\3\ The proposed rule change was published for comment in the
Federal Register on September 20, 2023.\4\ Pursuant to Section
19(b)(3)(C) of the Act,\5\ the Commission is hereby: (1) temporarily
suspending the proposed rule change; and (2) instituting proceedings to
determine whether to approve or disapprove the proposed rule change.
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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). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
\4\ See Securities Exchange Act Release No. 98390 (September 14,
2023), 88 FR 64930 (``Notice'').
\5\ 15 U.S.C. 78s(b)(3)(C).
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II. Background and Description of the Proposed Rule Change
The Exchange proposes to amend its fee schedule for its equity
options platform (``EDGX Options'') relating to physical connectivity
fees. The Exchange proposes to increase the monthly fee for 10 Gb
physical ports from $7,500 to $8,500 per port. The Exchange currently
assesses the following physical connectivity fees for Members \6\ and
non-Members on a monthly basis: $2,500 per physical port for a 1 Gb
circuit and $7,500 per physical port for a 10 Gb circuit.\7\ According
to the Exchange, 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: the Exchange's
equities platform (EDGX Equities), Cboe BZX Exchange, Inc. (options and
equities platforms), Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc.,
and Cboe C2 Exchange, Inc.
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\6\ The term ``Member'' means any registered broker or dealer
that has been admitted to membership in the Exchange. See Exchange
Rule 1.5(n).
\7\ 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.
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III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\8\ at any time within
60 days of the date of filing of an immediately effective proposed rule
change pursuant to Section 19(b)(1) of the Act,\9\ the Commission
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. The Commission believes a temporary suspension of the proposed
rule change is necessary and appropriate to allow for additional
analysis of the proposed rule change's consistency with the Act and the
rules thereunder.
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\8\ 15 U.S.C. 78s(b)(3)(C).
\9\ 15 U.S.C. 78s(b)(1).
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In support of the proposal, the Exchange states its belief that the
proposed fee change is reasonable as it reflects a moderate increase in
physical connectivity fees for 10 Gb physical ports.\10\ The Exchange
states that the current 10 Gb physical port fee has remained unchanged
since June 2018.\11\ The Exchange states that during this 5-year span
there has been an average inflation rate of 3.9%, producing a
cumulative price increase of approximately 21.1% inflation since the
fee for the 10 Gb physical port was last modified.\12\ In support of
its claim of reasonableness, the Exchange compares its proposed rate
increase from the rates adopted five years ago of approximately 13% to
the cumulative inflation rate of 21.1%.\13\
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\10\ See Notice, supra note 4, at 64931.
\11\ See id.
\12\ See id.
\13\ See id.
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In further support of the proposal, the Exchange states that the
proposed fee is reasonable, fair, and equitable, and not unfairly
discriminatory.\14\ The Exchange believes that the proposed fee is
reasonable as it is still in line with, or even lower than, amounts
assessed by other exchanges for similar connections.\15\ The Exchange
also states its belief that the fee is not unfairly discriminatory,
because the fee would be assessed uniformly across all market
participants that purchase the physical ports.\16\ The Exchange states
that the fee is equitable because increasing the fee for 10 Gb physical
ports and charging a higher fee as compared to the 1 Gb physical port
as the 1 Gb physical port is 1/10 the size of the 10 Gb physical port
and does not offer access to many of the products and services offered
by the Exchange.\17\ The Exchange also states its belief the proposed
fee is reasonably and appropriately allocated because, the Exchange
states, market participants that purchase 10 Gb physical ports use the
most bandwidth and therefore consume the most resources from the
network.\18\
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\14\ See id.
\15\ See id.
\16\ See id.
\17\ See id.
\18\ See id.
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In further support of its proposed fee, the Exchange states that
Members and non-Members will continue to choose the method of
connectivity based on their specific needs and no broker-dealer is
required to become a Member of, or connect directly to, the
Exchange.\19\ The Exchange also states its belief that 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 markets.\20\
Additionally, the Exchange believes that 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.\21\ According to the Exchange, 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
[[Page 68853]]
options exchange that is expected to launch in 2023 (i.e., MEMX
LLC).\22\
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\19\ See id.
\20\ See id. The Exchange states 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; and based on publicly available information, no
single options exchange has more than approximately 19% of the
market share.
\21\ See id.
\22\ See id.
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The Exchange states its belief that 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.\23\ The Exchange states that a market participant may
submit orders to the Exchange via a Member broker or a third-party
reseller of connectivity.\24\ The Exchange notes that third-party non-
Members also resell exchange connectivity, which the Exchange states 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).\25\ The Exchange states it does not
preclude market participants from reselling its connectivity and has
not adopted fees that would be assessed to third-party resellers on a
per customer basis (i.e., fee based on number of Members that connect
to the Exchange indirectly via the third-party).\26\ The Exchange notes
that multiple Members are able to share a single physical port (and
corresponding bandwidth) with other non-affiliated Members if purchased
through a third-party reseller.\27\ The Exchange states its belief that
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.\28\
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\23\ See id. at 64932.
\24\ See id.
\25\ See id. The Exchange states this alternative is already
being used by non-Members and further constrains the price that the
Exchange is able to charge for connectivity to its Exchange.
\26\ See id. The Exchange states its belief 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.
\27\ See id.
\28\ See id.
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Finally, the Exchange states that the proposed fees would not cause
any unnecessary or inappropriate burden on intermarket competition
because proposed fee is 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.\29\ The Exchange also states that if the changes proposed
herein are unattractive to market participants, the Exchange can, and
likely will, see a decline in connectivity via 10 Gb physical ports as
a result.\30\ Furthermore, the Exchange states that it 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.\31\ The Exchange also states
that the proposed rule change would not cause any unnecessary or
inappropriate burden on intramarket competition because it will apply
to all similarly situated Members equally (i.e., all market
participants that choose to purchase the 10 Gb physical port).\32\
Additionally, the Exchange stated that it 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.\33\
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\29\ See id.
\30\ See id.
\31\ See id.
\32\ See id.
\33\ See id.
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To date, the Commission has not received any comment letters on the
proposed rule change.
When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchange's present proposal,
they are required to provide a statement supporting the proposal's
basis under the Act and the rules and regulations thereunder applicable
to the exchange.\34\ The instructions to Form 19b-4, on which exchanges
file their proposed rule changes, specify that such statement ``should
be sufficiently detailed and specific to support a finding that the
proposed rule change is consistent with [those] requirements.'' \35\
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\34\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory
Organization's Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change'').
\35\ See id.
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Section 6 of the Act, including Sections 6(b)(4), (5), and (8),
require the rules of an exchange to: (1) provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \36\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \37\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\38\
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\36\ 15 U.S.C. 78f(b)(4).
\37\ 15 U.S.C. 78f(b)(5).
\38\ 15 U.S.C. 78f(b)(8).
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In temporarily suspending the Exchange's proposed rule change, the
Commission intends to further consider whether the proposal to increase
the monthly fee for 10 Gb physical ports from $7,500 to $8,500 per port
for the Exchange is consistent with the statutory requirements
applicable to a national securities exchange under the Act. In
particular, the Commission will consider whether the proposed rule
change satisfies the standards under the Act and the rules thereunder
requiring, among other things, that an exchange's rules provide for the
equitable allocation of reasonable fees among members, issuers, and
other persons using its facilities; not permit unfair discrimination
between customers, issuers, brokers or dealers; and do not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\39\
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\39\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule change.\40\
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\40\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change
In addition to temporarily suspending the proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\41\ and 19(b)(2)(B) of the Act \42\ to determine whether the
Exchange's proposed rule change should be approved or disapproved.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
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\41\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\42\ 15 U.S.C. 78s(b)(3)(C). 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\43\ the Commission is
providing
[[Page 68854]]
notice of the grounds for possible disapproval under consideration:
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\43\ Id. Section 19(b)(2)(B) of the Act also provides that
proceedings to determine whether to disapprove a proposed rule
change must be concluded within 180 days of the date of publication
of notice of the filing of the proposed rule change. See id. The
time for conclusion of the proceedings may be extended for up to 60
days if the Commission finds good cause for such extension and
publishes its reasons for so finding, or if the exchange consents to
the longer period. See id.
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<bullet> Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(4) of the Act, which requires
that the rules of a national securities exchange ``provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities''; \44\
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\44\ 15 U.S.C. 78f(b)(4).
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<bullet> Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(5) of the Act, which requires,
among other things, that the rules of a national securities exchange
not be ``designed to permit unfair discrimination between customers,
issuers, brokers, or dealers''; \45\ and
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\45\ 15 U.S.C. 78f(b)(5).
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<bullet> Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(8) of the Act, which requires
that the rules of a national securities exchange ``not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of [the Act].'' \46\
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\46\ 15 U.S.C. 78f(b)(8).
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As discussed in Section III above, the Exchange made various
arguments in support of their proposal. The Commission believes that
there are questions as to whether the Exchange has provided sufficient
information to demonstrate that the proposed fees are consistent with
the Act and the rules thereunder.
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the [SRO]
that proposed the rule change.'' \47\ The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding,\48\ and any failure of an SRO to provide this information may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with the
Act and the applicable rules and regulations.\49\
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\47\ 17 CFR 201.700(b)(3).
\48\ See id.
\49\ See id.
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The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposed fees are consistent with the Act, and
specifically, with its requirements that exchange fees be reasonable
and equitably allocated, not be unfairly discriminatory, and not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.\50\
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\50\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by October 25, 2023.
Rebuttal comments should be submitted by November 8, 2023. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral presentation.\51\
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\51\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by an SRO. See Securities
Acts Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change.
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#ec9e998089c18f8381818982989fac9f898fc28b839a"><span class="__cf_email__" data-cfemail="f785829b92da94989a9a92998384b7849294d9909881">[email protected]</span></a>. Please include
file number SR-CboeEDGX-2023-058 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-CboeEDGX-2023-058. 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-CboeEDGX-2023-058 and should
be submitted on or before October 25, 2023. Rebuttal comments should be
submitted by November 8, 2023.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\52\ that File No. SR-CboeEDGX-2023-058, be and hereby is,
temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule change should be
approved or disapproved.
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\52\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-22014 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P
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