[Federal Register Volume 84, Number 203 (Monday, October 21, 2019)]
[Notices]
[Pages 56240-56255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22838]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87304; File No. SR-CBOE-2019-082]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
its Fees Schedule in Connection With Migration
October 15, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``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 Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its Fees Schedule in connection with migration. 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 (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated
Exchanges''). The Cboe Affiliated Exchanges are working to align
certain system functionality, including with respect to connectivity,
retaining only intended differences between the Cboe Affiliated
Exchanges, in the context of a technology migration. The Exchange
intends to migrate its trading platform to the same system used by the
Cboe Affiliated Exchanges, which the Exchange expects to complete on
October 7, 2019 (the ``migration''). As a result of this migration, the
Exchange's current connectivity architecture will be rendered obsolete,
and as such, the Exchange must offer new functionality, including new
logical connectivity, and adopt corresponding fees.\3\ In determining
the proposed fee changes, the Exchange assessed the impact on market
participants to ensure that the proposed fees would not create a
financial burden and have an undue impact on any market participants,
including smaller market participants. Indeed, the Exchange notes that
it anticipates its post-migration connectivity revenue to be
approximately 1.75% lower than today. In addition to providing a
consistent technology offering across the Cboe Affiliated Exchanges,
the upcoming migration will also provide market participants a latency
equalized infrastructure, improving trading performance, and increased
sustained order and quote per second capacity, as discussed more fully
below. Accordingly, in connection with the migration and in order to
more closely align the Exchange's fee structure with that of its
Affiliated Exchanges, the
[[Page 56241]]
Exchange intends to update and simplify its fee structure with respect
to access and connectivity and adopt new access and connectivity fees,
effective October 1, 2019 (or as otherwise stated herein).\4\
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\3\ The Exchange notes that effective October 7, 2019, market
participants will no longer have connectivity to the old Exchange
architecture.
\4\ The Exchange initially filed the proposed fee changes on
October 1, 2019 (SR-CBOE-2019-077). On business date October 2,
2019, the Exchange withdrew that filing and submitted this filing.
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Physical Connectivity
A physical port is utilized by a Trading Permit Holder (``TPH'') or
non-TPH to connect to the Exchange at the data centers where the
Exchange's servers are located. The Exchange currently assesses fees
for Network Access Ports for these physical connections to the
Exchange. Specifically, TPHs and non-TPHs can elect to connect to Cboe
Options' trading system via either a 1 gigabit per second (``Gb'')
Network Access Port or a 10 Gb Network Access Port. The Exchange
currently assesses a monthly fee of $1,500 per port for 1 Gb Network
Access Ports and a monthly fee of $5,000 per port for 10 Gb Network
Access Ports for access to Cboe Options primary system. Through January
31, 2020, Cboe Options market participants will continue to have the
ability to connect to Cboe Options' trading system via the current
Network Access Ports. For the month of October 2019, the Exchange will
continue to assess the current fee for any legacy Network Access Port a
TPH or non-TPH uses during the month of October. Effective November 1,
2019, the Exchange will assess the proposed fees described below for
any physical port, regardless of whether the TPH or non-TPH connects
via the current Network Access Ports or the new Physical Ports.
Effective October 7, 2019, in connection with the migration, TPHs
and non-TPHs may alternatively elect to connect to Cboe Options via new
latency equalized Physical Ports.\5\ The new Physical Ports will
similarly allow TPHs and non-TPHs the ability to connect to the
Exchange at the data center where the Exchange's servers are located
and TPHs and non-TPHs will have the option to connect via 1 Gb or 10 Gb
Physical Ports. Effective November 1, 2019, the Exchange proposes to
continue to assess a monthly fee of $1,500 per port for 1 Gb Physical
Ports and increase the monthly fee for 10 Gb Physical Ports to $7,000
per port. The new Physical Port fees will be prorated based on the
remaining trading days in the calendar month. The proposed fee for 10
Gb Physical Ports is in line with the amounts assessed by other
exchanges for similar connections by its Affiliated Exchanges and other
Exchanges.\6\
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\5\ As previously noted, market participants will continue to
have the option of connecting to Cboe Options via a 1 Gbps or 10
Gbps Network Access Port and would be assessed current rates of
$1,500 and $5,000 per port, respectively. If a TPH replaces a legacy
Network Access Port with a new C1 latency equalized Physical Port in
October 2019, the TPH will not be billed an additional fee for the
new C1 platform physical connection until November 2019.
\6\ See Cboe EDGA U.S. Equities Exchange Fee Schedule, Physical
Connectivity Fees; Cboe EDGX U.S. Equities Exchange Fee Schedule,
Physical Connectivity Fees; Cboe BZX U.S. Equities Exchange Fee
Schedule, Physical Connectivity Fees; Cboe BYX U.S. Equities
Exchange Fee Schedule, Physical Connectivity Fees; Cboe EDGX Options
Exchange Fee Schedule, Physical Connectivity Fees; and Cboe BZX
Options Exchange Fee Schedule, Physical Connectivity Fees
(collectively, ``Affiliated Exchange Fee Schedules''). See e.g.,
Nasdaq PHLX and ISE Rules, General Equity and Options Rules, General
8. Phlx and ISE each charge a monthly fee of $2,500 for each 1Gb
connection, $10,000 for each 10Gb connection and $15,000 for each
10Gb Ultra connection. See also Nasdaq Price List--Trading
Connectivity. Nasdaq charges a monthly fee of $7,500 for each 10Gb
direct connection to Nasdaq and $2,500 for each direct connection
that supports up to 1Gb. See also NYSE American Fee Schedule,
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE
American and Arca each charge a monthly fee of $5,000 for each 1Gb
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX
circuit.
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In addition to the benefits resulting from the new Physical Ports
being latency equalized (i.e., faster connectivity), TPHs and non-TPHs
may be able to reduce their overall physical connectivity fees.
Particularly, the Fees Schedule currently provides that Network Access
Port fees are assessed for unicast (orders, quotes) and multicast
(market data) connectivity separately. More specifically, Network
Access Ports may only receive one type of connectivity each (thus
requiring a market participant to maintain two ports if that market
participant desires both types of connectivity). The new Physical Ports
however, will all allow access to both unicast and multicast
connectivity with a single physical connection to the Exchange.
Therefore, TPHs and non-TPHs that currently purchase two legacy Network
Access Ports for the purpose of receiving each type of connectivity
will have the option upon migration to purchase only one new Physical
Port to accommodate their connectivity needs, which may result in
reduced costs for physical connectivity.\7\
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\7\ The Exchange proposes to eliminate the current Cboe Command
Connectivity Charges table in its entirety and create and relocate
such fees in a new table in the Fees Schedule that addresses fees
for physical connectivity, including fees for the current Network
Access Ports, the new Physical Ports and Disaster Recovery (``DR'')
Ports. The Exchange notes that it is not proposing any changes with
respect to DR Ports other than renaming the DR ports from ``Network
Access Ports'' to ``Physical Ports'' to conform to the new Physical
Port terminology.
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Cboe Data Services--Port Fees
The Exchange proposes to amend the ``Port Fee'' under the Cboe Data
Services (``CDS'') Fees Schedule, effective October 1, 2019. Currently,
the Port Fee is payable by any Customer that receives data through a
direct connection to CDS (``direct connection'') or through a
connection to CDS provided by an extranet service provider (``extranet
connection''). The Port Fee applies to receipt of any Cboe Options data
feed but is only assessed once per data port. The Exchange proposes to
amend the monthly CDS Port Fee to provide that it is payable ``per
source'' used to receive data, instead of ``per data port''. The
Exchange also proposes to increase the fee from $500 per data port/
month to $1,000 per data source/month. In connection with the proposed
change, the Exchange also proposes to rename the ``Port Fee'' to
``Direct Data Access Fee''. As the fee will be payable ``per source''
used to receive data, instead of ``per data port'', the Exchange
believes the proposed name is more appropriate and that eliminating the
term ``port'' from the fee will eliminate confusion as to how the fee
is assessed. The Exchange notes the proposed change in assessing the
fee (i.e., per source vs per port), the proposed fee amount and the
proposed name are the same as the corresponding fee on its affiliate
C2.\8\
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\8\ See Cboe C2 Options Exchange Fee Schedule, Cboe Data
Services, LLC Fees, Section IV, Systems Fees.
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Logical Connectivity
Next, the Exchange proposes to amend its login fees. By way of
background, Cboe Options market participants may currently access Cboe
Command via either a CMI or a FIX Port, depending on how their systems
are configured. Effective October 7, 2019, market participants will no
longer be able to use CMI and FIX Login IDs. Rather, the Exchange will
utilize a variety of logical connectivity ports as further described
below. Both a legacy CMI/FIX Login ID and proposed logical port
represent a technical port established by the Exchange within the
Exchange's trading system for the delivery and/or receipt of trading
messages--i.e., orders, accepts, cancels, transactions, etc. Market
participants that wish to connect directly to the Exchange can request
a number of different types of ports, including ports that support
order entry, customizable purge functionality, or the receipt of market
data. Market participants can also choose to connect indirectly through
a number of different third-party providers, such as another broker-
[[Page 56242]]
dealer or service bureau that the Exchange permits through specialized
access to the Exchange's trading system and that may provide additional
services or operate at a lower mutualized cost by providing access to
multiple members. In light of the upcoming discontinuation of CMI and
FIX Login IDs, the Exchange proposes to eliminate the fees associated
with the CMI and FIX login IDs effective October 1, 2019 and adopt the
below pricing for logical connectivity in its place.
------------------------------------------------------------------------
Service Cost per month
------------------------------------------------------------------------
Logical Ports (BOE, FIX) 1 to 5........ $750 per port.
Logical Ports (BOE, FIX) >5............ $800 per port.
Logical Ports (Drop)................... $750 per port.
BOE Bulk Ports 1 to 5.................. $1,500 per port.
BOE Bulk Ports 6 to 30................. $2,500 per port.
BOE Bulk Ports >30..................... $3,000 per port.
Purge ports............................ $850 per port.
GRP Ports.............................. $750/primary (A or C Feed).
Multicast PITCH/Top Spin Server Ports.. $750/set of primary (A or C
feed).
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The Exchange proposes to provide for each of the logical
connectivity fees that new requests will be prorated for the first
month of service. Cancellation requests are billed in full month
increments as firms are required to pay for the service for the
remainder of the month, unless the session is terminated within the
first month of service. The Exchange notes that the proration policy is
the same on its Affiliated Exchanges.\9\ The Exchange also proposes to
make clear in the Fees Schedule that port fees for BOE, FIX, BOE Bulk
and Drop ports will be assessed the full month rates for October for
ports available for use on the new trading platform beginning October
7, 2019. The port fees for BOE, FIX, Drop and BOE Bulk ports added on
or after October 8, 2019, will be pro-rated. The Exchange notes that
BOE, FIX, Drop and BOE Bulk ports offer similar functionality as
current CMI and FIX Login Ids. As such, in lieu of assessing the
current CMI and FIX Login Id fees for the month of October, the
Exchange proposes to assess the proposed Logical Ports and BOE Bulk
Port fees at the full rate for the month of October for any of these
ports subscribed to on the date of the migration (October 7, 2019).
Fees for Purge, Spin Server and GRP will be pro-rated beginning October
7, as these ports can only be used within the new platform.
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\9\ See Affiliated Exchange Fee Schedules, Logical Port Fees.
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Logical Ports (BOE, FIX, Drop): The new Logical Ports represent
ports established by the Exchange within the Exchange's system for
trading purposes. Each Logical Port established is specific to a TPH or
non-TPH and grants that TPH or non-TPH the ability to operate a
specific application, such as order/quote \10\ entry (FIX and BOE
Logical Ports) or drop copies (Drop Logical Ports). Similar to CMI and
FIX Login IDs, each Logical Port will entitle a firm to submit message
traffic of up to specified number of orders per second.\11\ The
Exchange proposes to assess $750 per port per month for all Drop
Logical Ports and also assess $750 per port per month (which is the
same amount currently assessed per CMI/FIX Login ID per month), for the
first 5 FIX/BOE Logical Ports and thereafter assess $800 per port, per
month for each additional FIX/BOE Logical Port. While the proposed
ports will be assessed the same monthly fees as current CMI/FIX Login
IDs (for the first five logical ports), the proposed logical ports
provide for significantly more message traffic as shown below:
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\10\ Effective October 7, 2019, the definition of quote in Cboe
Options Rule 1.1 shall mean a firm bid or offer a Market-Maker (a)
submits electronically as an order or bulk message (including to
update any bid or offer submitted in a previous order or bulk
message) or (b) represents in open outcry on the trading floor.
\11\ Login Ids restrict the maximum number of orders and quotes
per second in the same way logical ports do, and Users may similarly
have multiple logical ports as they may have Trading Permits and/or
bandwidth packets to accommodate their order and quote entry needs.
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CMI/FIX Login Ids BOE/FIX Logical Ports
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Quotes Orders Quotes/Orders
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Bandwidth Limit per login........ 5,000 quotes/3 sec \12\.. 30 orders/sec........... 15,000 quotes/orders/3
sec.
Cost............................. $750 each................ $750 each............... $750/$800 each.
Cost per Quote/Order Sent @Limit. $0.15 per quote/3 sec.... $25.00 per order/sec.... $0.05/$0.053 per quote/
order/3 sec.
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Logical Port fees will be limited to Logical Ports in the
Exchange's primary data center and no Logical Port fees will be
assessed for redundant secondary data center ports. Each BOE or FIX
Logical Port will incur the logical port fee indicated in the table
above when used to enter up to 70,000 orders per trading day per
logical port as measured on average in a single month. Each incremental
usage of up to 70,000 per day per logical port will incur an additional
logical port fee of $800 per month. Incremental usage will be
determined on a monthly basis based on the average orders per day
entered in a single month across all of a market participant's
subscribed BOE and FIX Logical Ports.\13\ The Exchange believes that
the pricing implications of going beyond 70,000 orders per trading day
per Logical Port encourage users to mitigate message traffic as
necessary. The Exchange notes that the proposed
[[Page 56243]]
fee of $750 per port is the same amount assessed not only for current
CMI and FIX Login Ids, but also similar ports available on its
affiliate exchange.\14\
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\12\ Each Login ID has a bandwidth limit of 80,000 quotes per 3
seconds. However, in order to place such bandwidth onto a single
Login ID, a TPH or non-TPH would need to purchase a minimum of 15
Market-Maker Permits or Bandwidth Packets (each Market-Maker Permit
and Bandwidth Packet provides 5,000 quotes/3 sec). For purposes of
comparing ``quote'' bandwidth, the provided example assumes only 1
Market-Maker Permit or Bandwidth Packet has been purchased.
\13\ For October 2019, average daily order quantities used to
determine incremental usage will be determined based on the number
of trading days between October 7th and October 31st.
\14\ See Cboe BZX Options Exchange Fee Schedule, Options Logical
Port Fees.
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The Exchange also proposes to provide that the fee for one FIX
Logical Port connection to PULSe and one FIX Logical Port connection to
Cboe Silexx (for FLEX trading purposes) will be waived per TPH. The
Exchange notes that only one FIX Logical Port connection is required to
support a firm's access through each of PULSe and Cboe Silexx FLEX.
BOE Bulk Logical Ports: Post-migration, the Exchange will also
offer BOE Bulk Logical Ports, which provide users with the ability to
submit single and bulk order messages to enter, modify, or cancel
orders designated as Post Only Orders with a Time-in-Force of Day or
GTD with an expiration time on that trading day. While BOE Bulk Ports
will be available to all market participants, the Exchange anticipates
they will be used primarily by Market-Makers or firms that conduct
similar business activity, as the primary purpose of the proposed bulk
message functionality is to encourage market-maker quoting on
exchanges. As indicated above, BOE Bulk Logical Ports are assessed
$1,500 per port, per month for the first 5 BOE Bulk Logical Ports,
assessed $2,500 per port, per month thereafter up to 30 ports and
thereafter assessed $3,000 per port, per month for each additional BOE
Bulk Logical Port. Like CMI and FIX Login IDs, and FIX/BOX Logical
Ports, BOE Bulk Ports will also entitle a firm to submit message
traffic of up to specified number of quotes/orders per second.\15\ The
proposed BOE Bulk ports also provide for significantly more message
traffic as compared to current CMI/FIX Login IDs, as shown below:
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\15\ The Exchange notes that while technically there is no
bandwidth limit per BOE Bulk Port, there may be possible performance
degradation at 15,000 messages per second (which is the equivalent
of 225,000 quotes/orders per 3 seconds). As such, the Exchange uses
the number at which performance may be degraded for purposes of
comparison.
------------------------------------------------------------------------
CMI/FIX Login Ids BOE bulk ports
-------------------------------------------
Quotes Quotes \16\
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Bandwidth Limit............. 5,000 quotes/3 sec 225,000 quotes 3
\17\. sec.
Cost........................ $750 each........... $1,500/$2,500/$3,000
each.
Cost per Quote/Order Sent $0.15 per quote/3 $0.006/$0.011/$0.013
@Limit. sec. per quote/3 sec.
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Each BOE Bulk Logical Port will incur the logical port fee
indicated in the table above when used to enter up to 30,000,000 orders
per trading day per logical port as measured on average in a single
month. Each incremental usage of up to 30,000,000 orders per day per
BOE Bulk Logical Port will incur an additional logical port fee of
$3,000 per month. Incremental usage will be determined on a monthly
basis based on the average orders per day entered in a single month
across all of a market participant's subscribed BOE Bulk Logical
Ports.\18\ The Exchange believes that the pricing implications of going
beyond 30,000,000 orders per trading day per BOE Bulk Logical Port
encourage users to mitigate message traffic as necessary. The Exchange
notes that the proposed BOE Bulk Logical Port fees are similar to the
fees assessed for these ports by BZX Options.\19\
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\16\ See Cboe Options Rule 1.1.
\17\ Each Login ID has a bandwidth limit of 80,000 quotes per 3
seconds. However, in order to place such bandwidth onto a single
Login ID, a TPH or non-TPH would need to purchase a minimum of 15
Market-Maker Permits or Bandwidth Packets (each Market-Maker Permit
and Bandwidth Packet provides 5,000 quotes/3 sec). For purposes of
comparing ``quote'' bandwidth, the provided example assumes only 1
Market-Maker Permit or Bandwidth Packet has been purchased.
\18\ For October 2019, average daily order quantities used to
determine incremental usage will be determined based on the number
of trading days between October 7th and October 31st.
\19\ See Cboe BZX Options Exchange Fee Schedule, Options Logical
Port Fees.
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Purge Ports: As part of the migration, the Exchange will be
introducing Purge Ports to provide TPHs additional risk management and
open order control functionality. The proposed ports are designed to
assist TPHs, in the management of, and risk control over, their quotes,
particularly if the TPH is dealing with a large number of options.
Particularly, Purge Ports will allow TPHs to submit a cancelation for
all open orders, or a subset thereof, across multiple sessions under
the same Executing Firm ID (``EFID''). This would allow TPHs to
seamlessly avoid unintended executions, while continuing to evaluate
the direction of the market. While Purge Ports will be available to all
market participants, the Exchange anticipates they will be used
primarily by Market-Makers or firms that conduct similar business
activity and are therefore exposed to a large amount of risk across a
number securities. The Exchange notes that market participants will
also be able to cancel orders through the proposed FIX/BOE Logical
Ports and as such a dedicated Purge Port is not required nor necessary.
Rather, Purge Ports were specially developed as an optional service to
further assist firms in effectively managing risk. As indicated in the
table above, the Exchange proposes to assess a monthly charge of $850
per Purge Port. The Exchange notes that the proposed fee is in line
with the fee assessed by other exchanges, including its Affiliated
Exchanges, for Purge Ports.\20\
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\20\ See e.g., Nasdaq ISE Options Pricing Schedule, Section
7(C), Ports and Other Services. See also Cboe EDGX Options Exchange
Fee Schedule, Options Logical Port Fees; Cboe C2 Options Exchange
Fee Schedule, Options Logical Port Fees and Cboe BZX Options
Exchange Fee Schedule, Options Logical Port Fees.
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Multicast PITCH/Top Spin Server and GRP Ports: In connection with
the migration, the Exchange will also offer optional Multicast PITCH/
Top Spin Server (``Spin'') and GRP ports and proposes to assess $750
per month, per port. Spin Ports and GRP Ports are used to request and
receive a retransmission of data from the Exchange's Multicast PITCH/
Top data feeds. The Exchange's Multicast PITCH/Top data feeds are
available from two primary feeds, identified as the ``A feed'' and the
``C feed'', which contain the same information but differ only in the
way such feeds are received. The Exchange also offers two redundant
feeds, identified as the ``B feed'' and the ``D feed.'' All secondary
feed Spin and GRP Ports will be provided for redundancy at no
additional cost. The Exchange notes a dedicated Spin and GRP Port is
not required nor necessary. Rather, Spin ports enable a market
participant to receive a snapshot of the current book quickly in the
middle of the trading session without worry of gap request limits and
GRP Ports were specially developed to request and receive
retransmission of data in the event of missed or dropped message. The
Exchange notes that the proposed fee is
[[Page 56244]]
in line with the fee assessed for the same ports on BZX Options.\21\
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\21\ See Cboe BZX Options Exchange Fee Schedule, Options Logical
Port Fees.
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Access Credits
The Exchange next proposes to amend its Affiliate Volume Program
(``AVP'') to provide Market-Makers an opportunity to obtain credits on
their monthly BOE Bulk Port Fees.\22\ By way of background, under AVP,
if a TPH Affiliate \23\ or Appointed OFP \24\ of a Market-Maker
qualifies under the Volume Incentive Program (``VIP''), that Market-
Maker will also qualify for a discount on that Market-Maker's Liquidity
Provider (``LP'') Sliding Scale transaction fees and Trading Permit
fees. The Exchange proposes to amend AVP to provide that qualifying
Market-Makers will receive a discount on Bulk Port fees (instead of
Trading Permits). As discussed more fully below, the Exchange is
amending its Trading Permit structure, such that off-floor Market-
Makers no longer need to hold more than one Market-Maker Trading
Permit. As such, in place of credits for Trading Permits, the Exchange
will provide credits for BOE Bulk Ports.\25\ The proposed credits are
as follows:
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\22\ As noted above, while BOE Bulk Ports will be available to
all market participants, the Exchange anticipates they will be used
primarily by Market Makers or firms that conduct similar business
activity.
\23\ For purposes of AVP, ``Affiliate'' is defined as having at
least 75% common ownership between the two entities as reflected on
each entity's Form BD, Schedule A.
\24\ See Cboe Options Fees Schedule Footnote 23. Particularly, a
Market-Maker may designate an Order Flow Provider (``OFP'') as its
``Appointed OFP'' and an OFP may designate a Market-Maker to be its
``Appointed Market-Maker'' for purposes of qualifying for credits
under AVP.
\25\ The Exchange notes that Trading Permits currently each
include a set bandwidth allowance and 3 logins. Current logins and
bandwidth are akin to the proposed logical ports, including BOE Bulk
Ports which will primarily be used by Market-Makers.
------------------------------------------------------------------------
% Credit on
Market Maker Affiliate Access Credit VIP tier monthly BOE
bulk port fees
------------------------------------------------------------------------
Credit Tier............................. 1 0
2 0
3 0
4 15
5 25
------------------------------------------------------------------------
The Exchange believes the proposed change to AVP continues to allow
the Exchange to provide TPHs that have both Market-Maker and agency
operations reduced Market-Maker costs via the credits, albeit credits
on BOE Bulk Port fees instead of Trading Permit fees.
In addition to the opportunity to receive credits via AVP, the
Exchange proposes to provide an opportunity for Market-Makers to obtain
credits on their monthly BOE Bulk Port fees based on the previous
month's make rate percentage. By way of background, the Liquidity
Provider Sliding Scale Adjustment Table provides that Taker fees be
applied to electronic ``Taker'' volume and a Maker rebate be applied to
electronic ``Maker'' volume, in addition to the transaction fees
assessed under the Liquidity Provider Sliding Scale.\26\ The amount of
the Taker fee (or Maker rebate) is determined by the Liquidity
Provider's percentage of volume from the previous month that was Maker
(``Make Rate'').\27\ Market-Makers are given a Performance Tier based
on their Make Rate percentage which currently provides adjustments to
transaction fees. Thus, the program is designed to attract liquidity
from traditional Market-Makers. The Exchange proposes to additionally
provide that the Performance Tier earned will determine the percentage
credit applied to a Market-Maker's monthly BOE Bulk Port fees.
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\26\ See Cboe Options Exchange Fees Schedule, Liquidity Provider
Sliding Scale Adjustment Table.
\27\ More specifically, the Make Rate is derived from a
Liquidity Provider's electronic volume the previous month in all
symbols excluding Underlying Symbol List A using the following
formula: (i) The Liquidity Provider's total electronic automatic
execution (``auto-ex'') volume (i.e., volume resulting from that
Liquidity Provider's resting quotes or single sided quotes/orders
that were executed by an incoming order or quote), divided by (ii)
the Liquidity Provider's total auto-ex volume (i.e., volume that
resulted from the Liquidity Provider's resting quotes/orders and
volume that resulted from that LP's quotes/orders that removed
liquidity). For example, a TPH's electronic Make volume in September
2019 is 2,500,000 contracts and its total electronic auto-ex volume
is 3,000,000 contracts, resulting in a Make Rate of 83% (Performance
Tier 4). As such, the TPH would receive a 40% credit on its monthly
Bulk Port fees for the month of October 2019. For the month of
October 2019, the Exchange will be billing certain incentive
programs separately, including the Liquidity Provider Sliding Scale
Adjustment Table, for the periods of October 1-October 4 and October
7-October 31 in light of the migration of its billing system. As
such, a Market-Maker's Performance Tier for November 2019 will be
determined by the Market-Maker's percentage of volume that was Maker
from the period of October 7-October 31, 2019.
----------------------------------------------------------------------------------------------------------------
Liquidity
provider
sliding scale % Credit on
Market maker access credit adjustment Make rate (% based on prior month) monthly BOE
performance bulk port fees
tier
----------------------------------------------------------------------------------------------------------------
Credit Tier................................. 1 0-50.............................. 0
2 Above 50-60....................... 0
3 Above 60-75....................... 0
4 Above 75-90....................... 40
5 Above 90%......................... 40
----------------------------------------------------------------------------------------------------------------
The Exchange believes the proposal mitigates costs incurred by
traditional Market-Makers that focus on adding liquidity to the
Exchange (as opposed to those that provide and take, or just take). The
Exchange lastly notes that both the Market-Maker Affiliate Access
Credit and Market-Maker Access Credit both can be earned by a TPH, and
these credits will each apply to the total monthly BOE Bulk Port Fees
including any incremental BOE Bulk Port fees
[[Page 56245]]
incurred, before any credits/adjustments have been applied (i.e. an
electronic MM can earn a credit from 15% to 65%).
Bandwidth Packets
As described above, post-migration, the Exchange will utilize a
variety of logical ports. Part of this functionality is similar to
bandwidth packets currently available on the Exchange. Bandwidth
packets restrict the maximum number of orders and quotes per second.
Post-migration, market participants may similarly have multiple Logical
Ports and/or BOE Bulk Ports as they may have bandwidth packets to
accommodate their order and quote entry needs. As such, the Exchange
proposes to eliminate all of the current Bandwidth Packet fees,
effective October 1, 2019.\28\ The Exchange believes that the proposed
pricing implications of going beyond specified bandwidth described
above in the logical connectivity fees section will be able to
otherwise mitigate message traffic as necessary.
---------------------------------------------------------------------------
\28\ See Cboe Options Fees Schedule, Bandwidth Packet Fees.
---------------------------------------------------------------------------
CAS Servers
By way of background, in order to connect to Cboe Command, which
allows a TPH to trade on the Cboe Options System, a TPH must connect
via either a CMI or FIX interface (depending on the configuration of
the TPH's own systems). For TPHs that connect via a CMI interface, they
must use CMI CAS Servers. In order to ensure that a CAS Server is not
overburdened by quoting activity for Market-Makers, the Exchange
currently allots each Market-Maker a certain number of CASs (in
addition to the shared backups) based on the amount of quoting
bandwidth that they have. Post-migration, the Exchange will no longer
use CAS Servers. In light of the upcoming elimination of CAS Servers,
the Exchange proposes to eliminate the CAS Server allotment table and
extra CAS Server fee, effective October 1, 2019.
Trading Permit Fees
By way of background, the Exchange may issue different types of
Trading Permits and determine the fees for those Trading Permits.\29\
The Exchange currently issues the following three types of Trading
Permits: (1) Market-Maker Trading Permits, which are assessed a monthly
fee of $5,000 per permit; (2) Floor Broker Trading Permits, which are
assessed a monthly fee of $9,000 per permit; and (3) Electronic Access
Permits (``EAPs''), which are assessed a monthly fee of $1,600 per. The
Exchange also offers separate Market-Maker and Electronic Access Permit
for the Global Trading Hours (``GTH'') session, which are assessed a
monthly fee of $1,000 per permit and $500 per permit respectively.\30\
For further color, a Market-Maker Trading Permit currently entitles the
holder to act as a Market-Maker, including a Market-Maker trading
remotely, DPM, eDPM, or LMM, and also provides an appointment credit of
1.0, a quoting and order entry bandwidth allowance, up to three logins,
trading floor access and TPH status.\31\ A Floor Broker Trading Permit
entitles the holder to act as a Floor Broker, provides an order entry
bandwidth allowance, up to 3 logins, trading floor access and TPH
status.\32\ Lastly, an EAP entitles the holder to electronic access to
the Exchange. Holders of EAPs must be broker-dealers registered with
the Exchange in one or more of the following capacities: (a) Clearing
TPH, (b) TPH organization approved to transact business with the
public, (c) Proprietary TPHs and (d) order service firms. The permit
does not provide access to the trading floor. An EAP also provides an
order entry bandwidth allowance, up to 3 logins and TPH status.\33\ The
Exchange also provides an opportunity for TPHs to pay reduced rates for
Trading Permits via the Market Maker and Floor Broker Trading Permit
Sliding Scale Programs (``TP Sliding Scales''). Particularly, the TP
Sliding Scales allow Market-Makers and Floor Brokers to pay reduced
rates for their Trading Permits if they commit in advance to a specific
tier that includes a minimum number of eligible Market-Maker and Floor
Broker Trading Permits, respectively, for each calendar year.\34\
---------------------------------------------------------------------------
\29\ See Cboe Options Rules 3.1(a)(iv)-(v).
\30\ The fees are currently waived through September 2019 for
the first Market-Maker and Electronic Access GTH Trading Permits.
\31\ See Cboe Options Fees Schedule.
\32\ Id.
\33\ Id.
\34\ Due to the October 7 migration, the amended the TP Sliding
Scale Programs to provide that any commitment to Trading Permits
under the TP Sliding Scales shall be in place through September
2019, instead of the calendar year. See Cboe Options Fees Schedule,
Footnotes 24 and 25.
---------------------------------------------------------------------------
As noted above, Trading Permits are currently tied to bandwidth
allocation, logins and appointment costs, and as such, TPH
organizations may hold multiple Trading Permits of the same type in
order to meet their connectivity and appointment cost needs. Post-
Migration, bandwidth allocation, logins and appointment costs will no
longer be tied to a Trading Permit, and as such, the Exchange proposes
to modify its Trading Permit structure. Particularly, effective October
7, 2019, the Exchange will adopt separate on-floor and off-floor
Trading Permits for Market-Makers and Floor Brokers, adopt a new
Clearing TPH Permit, and modify the corresponding fees and discounts.
As is the case today, the proposed access fees discussed below will
continue to be non-refundable and will be assessed through the
integrated billing system during the first week of the following month.
If a Trading Permit is issued during a calendar month after the first
trading day of the month, the access fee for the Trading Permit for
that calendar month is prorated based on the remaining trading days in
the calendar month. Trading Permits will be renewed automatically for
the next month unless the Trading Permit Holder submits written
notification to the Membership Services Department by 4 p.m. CT on the
second-to-last business day of the prior month to cancel the Trading
Permit effective at or prior to the end of the applicable month.
Trading Permit Holders will only be assessed a single monthly fee for
each type of electronic Trading Permit it holds. All Trading Permits
will be assessed the full proposed monthly rates, as described below,
based on the quantity of Trading Permits a TPH maintains from October
7-October 31, 2019.\35\
---------------------------------------------------------------------------
\35\ The Exchange proposes to eliminate the current Trading
Permit fees, effective October 1, 2019 and for the month of October
2019 will instead assess the full proposed rates for the Trading
Permits held by a TPH from October 7, 2019-October 31, 2019.
---------------------------------------------------------------------------
First, as proposed, TPHs will no longer need to hold multiple
permits for each type of electronic Trading Permit (i.e., electronic
Market-Maker Trading Permits and/or and Electronic Access Permits).
Rather, the Exchange proposes to provide that for electronic access to
the Exchange, a TPH need only purchase one of the following permit
types for each trading function the TPH intends to perform: Market-
Maker Electronic Access Permit (``MM EAP'') in order to act as an off-
floor Market-Maker and which will continue to be assessed a monthly fee
of $5,000, Electronic Access Permit (``EAP'') in order to submit orders
electronically to the Exchange \36\ and which will be assessed a
monthly fee of $3,000, and a Clearing TPH Permit, for TPHs acting
solely as a Clearing TPH, which will be assessed a monthly fee of
$2,000 (and is more fully described below). For example, a TPH
organization that wishes to act as a Market-Maker and
[[Page 56246]]
also submit orders electronically in a non-Market Maker capacity would
have to purchase one MM EAP and one EAP. TPHs will be assessed the
monthly fee for each type of Permit once per electronic access
capacity.
---------------------------------------------------------------------------
\36\ EAPs may be purchased by TPHs that both clear transactions
for other TPHs (i.e., a ``Clearing TPH'') and submit orders
electronically.
---------------------------------------------------------------------------
Next, the Exchange proposes to adopt a new Trading Permit,
exclusively for Clearing TPHs that are approved to act solely as a
Clearing TPH (as opposed to those that are also approved in a capacity
that allows them to submit orders electronically). Currently any TPH
that is registered to act as a Clearing TPH must purchase an EAP,
whether or not that Clearing TPH acts solely as a Clearing TPH or acts
as a Clearing TPH and submits orders electronically. The Exchange
proposes to adopt a new Trading Permit, for any TPH that is registered
to act solely as Clearing TPH at a discounted rate of $2,000 per
month.\37\
---------------------------------------------------------------------------
\37\ Cboe Option Rules provides the Exchange authority to issue
different types of Trading Permits which allows holders, among other
things, to act in one or more trading functions authorized by the
Rules. See Cboe Options Rule 3.1(a)(iv). The Exchange notes that
currently 4 out of 38 Clearing TPHs are approved to act solely as a
Clearing TPH.
---------------------------------------------------------------------------
Additionally, the Exchange proposes to eliminate its fees for
Global Trading Hours Trading Permits. Particularly, the Exchange
proposes to provide that any Market-Maker EAP, EAP and Clearing TPH
Permit provides access (at no additional cost) to the GTH session.\38\
Additionally, the Exchange proposes to amend Footnote 37 of the Fees
Schedule regarding GTH in connection with the migration. Currently
Footnote 37 provides that separate access permits and connectivity is
needed for the GTH session. The Exchange proposes to eliminate this
language as that will no longer be the case upon migration (i.e., an
electronic Trading Permits will grant access to both sessions and
physical and logical ports may be used in both sessions, eliminating
the need to purchase separate connectivity). The Exchange also notes
that upon migration, the Book used during Regular Trading Hours
(``RTH'') will be the same Book used during GTH (as compared to today
where the Exchange maintains separate Books for each session). The
Exchange therefore also proposes to eliminate language in Footnote 37
stating that GTH is a segregated trading session and that there is no
market interaction between the two sessions.
---------------------------------------------------------------------------
\38\ The Exchange notes that Clearing TPHs must be properly
authorized by the Options Clearing Corporation (``OCC'') to operate
during the Global Trading Hours session and all TPHs must have a
Letter of Guarantee to participate in the GTH session (as is the
case today).
---------------------------------------------------------------------------
The Exchange next proposes to adopt MM EAP Appointment fees. By way
of background, a registered Market-Maker may currently create a Virtual
Trading Crowd (``VTC'') Appointment, which confers the right to quote
electronically in an appropriate number of classes selected from
``tiers'' that have been structured according to trading volume
statistics, except for the AA tier.\39\ Each Trading Permit currently
held by a Market-Maker has an appointment credit of 1.0. A Market-Maker
may select for each Trading Permit the Market-Maker holds any
combination of classes whose aggregate appointment cost does not exceed
1.0. A Market-Maker may not hold a combination of appointments whose
aggregate appointment cost is greater than the number of Trading
Permits that Market-Maker holds.\40\
---------------------------------------------------------------------------
\39\ See proposed Cboe Options Rule 5.50 (Appointment of Market-
Makers), which rule will be effective October 7, 2019.
\40\ For example, if a Market-Maker selects a combination of
appointments that has an aggregate appointment cost of 2.5, that
Market-Maker must hold at least 3 Market-Maker Trading Permits.
---------------------------------------------------------------------------
As discussed, post-migration, bandwidth allocation, logins and
appointment costs will no longer be tied to a single Trading Permit and
therefore the Exchange is proposing to provide that TPHs no longer need
to have multiple permits for each type of electronic Trading Permit. As
proposed however, upon migration, Market-Makers must still select class
appointments in the classes they seek to make markets
electronically.\41\ Particularly, a Market-Maker firm will only be
required to have one permit and will thereafter be charged for one or
more ``Appointment Units'' (which will scale from 1 ``unit'' to more
than 5 ``units''), depending on which classes they elect appointments
in. Appointment Units will replace the standard 1.0 appointment cost,
but function in the same manner. Appointment weights (formerly known as
``appointment costs'') for each appointed class will be set forth in
proposed Cboe Options Rule 5.50(g) and will be summed for each Market-
Maker in order to determine the total appointment units, to which fees
will be assessed. This is the current manner in which the tier costs
per class appointment are summed to meet the 1.0 appointment cost, the
only difference will be that if a Market-Maker exceeds this ``unit''
then their fees will be assessed under the ``unit'' that corresponds to
the total of their appointment weights, as opposed to holding another
Trading Permit because it exceeded the 1.0 ``unit''. Particularly, the
Exchange proposes to adopt a new MM EAP Appointment Sliding Scale.
Appointment Units for each assigned class will be aggregated for each
Market-Maker and Market-Maker affiliate. If the sum of appointments is
a fractional amount, the total will be rounded up to the next highest
whole Appointment Unit. The following lists the progressive monthly
fees for Appointment Units: \42\
---------------------------------------------------------------------------
\41\ See Proposed Cboe Options Rule 5.50(a), which rule will be
effective October 7, 2019.
\42\ For example, if a Market-Maker's total appointment costs
amount to 3.5 unites, the Market-Maker will be assessed a total
monthly fee of $14,000 (1 appointment unit at $0, 1 appointment unit
at $6,000 and 2 appointment units at $4,000) as and for appointment
fees and $5,000 for a Market-Maker Trading Permit, for a total
monthly sum of $19,000, where a Market-Maker currently (i.e., prior
to migration) with a total appointment cost of 3.5 would need to
hold 4 Trading Permits and would therefore be assessed a monthly fee
of $20,000.
------------------------------------------------------------------------
Monthly fees
Market-maker EAP appointments Quantity (per unit)
------------------------------------------------------------------------
Appointment Units....................... 1 $0
2 6,000
3 to 5 4,000
>5 3,100
------------------------------------------------------------------------
As noted above, upon migration the Exchange will have separate
Trading Permits for on-floor and off-floor activity. As such, the
Exchange proposes to maintain a Floor Broker Trading Permit and adopt a
new Market-Maker Floor Permit for on-floor Market-Makers. In addition,
RUT, SPX, and VIX Tier Appointment fees will be charged separately for
Permit, as discussed more fully below.
As briefly described above, the Exchange currently maintains TP
Sliding Scales, which allow Market-Makers and Floor Brokers to pay
reduced rates for their Trading Permits if they commit in advance to a
specific
[[Page 56247]]
tier that includes a minimum number of eligible Market-Maker and Floor
Broker Trading Permits, respectively, for each calendar year. The
Exchange proposes to eliminate the current TP Sliding Scales, including
the requirement to commit to a specific tier, and replace it with new
TP Sliding Scales as follows: \43\
---------------------------------------------------------------------------
\43\ In light of the proposed change to eliminate the TP Sliding
Scale, the Exchange proposes to eliminate Footnote 24 in its
entirety.
----------------------------------------------------------------------------------------------------------------
Current Proposed
Floor TPH permits Current permit qty monthly fee Proposed monthly fee
(per permit) permit qty (per permit)
----------------------------------------------------------------------------------------------------------------
Market-Maker Floor Permit............. 1-10.................... $5,000 1 $6,000
11-20................... 3,700 2 to 5 4,500
21 or more.............. 1,800 6 to 10 3,500
>10 2,000
Floor Broker Permit................... 1....................... 9,000 1 7,500
2-5..................... 5,000 2 to 3 5,700
6 or more............... 3,000 4 to 5 4,500
>5 3,200
----------------------------------------------------------------------------------------------------------------
Floor Broker ADV Discount
Footnote 25, which governs rebates on Floor Broker Trading Permits,
currently provides that any Floor Broker that executes a certain
average of customer or professional customer/voluntary customer
(collectively ``customer'') open-outcry contracts per day over the
course of a calendar month in all underlying symbols excluding
Underlying Symbol List A (except RLG, RLV, RUI, and UKXM), DJX, XSP,
and subcabinet trades (``Qualifying Symbols''), will receive a rebate
on that TPH's Floor Broker Trading Permit Fees. Specifically, any Floor
Broker Trading Permit Holder that executes an average of 15,000
customer (``C'' origin code) and/or professional customer and voluntary
customer (``W'' origin code) open-outcry contracts per day over the
course of a calendar month in Qualifying Symbols will receive a rebate
of $9,000 on that TPH's Floor Broker Trading Permit fees. Additionally,
any Floor Broker that executes an average of 25,000 customer open-
outcry contracts per day over the course of a calendar month in
Qualifying Symbols will receive a rebate of $14,000 on that TPH's Floor
Broker Trading Permit fees. The Exchange proposes to maintain, but
modify, its discount for Floor Broker Trading Permit fees. First, the
measurement criteria to qualify for a rebate will be modified to only
include customer (``C'' origin code) open-outcry contracts executed per
day over the course of a calendar month in all underlying symbols,
while the rebate amount will be modified to be a percentage of the
TPH's Floor Broker Permit total costs, instead of a straight
rebate.\44\ The criteria and corresponding percentage rebates are noted
below.\45\
---------------------------------------------------------------------------
\44\ As is the case today, the Floor Broker ADV Discount will be
available for all Floor Broker Trading Permits held by affiliated
Trading Permit Holders and TPH organizations.
\45\ In light of the proposal to eliminate the TP Sliding Scales
and the Floor Broker rebates currently set forth under Footnote 25,
the Exchange proposes to eliminate Footnote 25 in its entirety.
------------------------------------------------------------------------
Floor broker
Floor broker ADV discount tier ADV permit rebate
(percent)
------------------------------------------------------------------------
1.............................. 0 to 99,999 0
2.............................. 100,000 to 174,999 15
3.............................. >174,999 25
------------------------------------------------------------------------
Next, the Exchange proposes to modify its SPX, VIX and RUT Tier
Appointment Fees. Currently, these fees are assessed to any Market-
Maker TPH that either (i) has the respective SPX, VIX or RUT
appointment at any time during a calendar month and trades a specified
number of contracts or (ii) trades a specified number of contracts in
open outcry during a calendar month. More specifically, the $3,000 per
month SPX Tier Appointment is assessed to any Market-Maker Trading
Permit Holder that either (i) has an SPX Tier Appointment at any time
during a calendar month and trades at least 100 SPX contracts while
that appointment is active or (ii) conducts any open outcry transaction
in SPX or SPX Weeklys at any time during the month. The $2,000 per
month VIX Tier Appointment is assessed to any Market-Maker Trading
Permit Holder that either (i) has an SPX Tier Appointment at any time
during a calendar month and trades at least 100 VIX contracts while
that appointment is active or (ii) conducts at least 1000 open outcry
transaction in VIX at any time during the month. Lastly, the $1,000 RUT
Tier Appointment is assessed to any Market-Maker Trading Permit Holder
that either (i) has an RUT Tier Appointment at any time during a
calendar month and trades at least 100 RUT contracts while that
appointment is active or (ii) conducts at least 1000 open outcry
transaction in RUT at any time during the month. Because the Exchange
is separating Market-Making Trading Permits for electronic and open-
outcry market-making, the Exchange will be assessing separate Tier
Appointment Fees for each type of Market-Making Trading Permit. The
Exchange proposes, effective October 1, 2019, a MM EAP will be assessed
the Tier Appointment Fee whenever the Market-Maker executes the
corresponding specified number of contracts. The Exchange also proposes
to modify the threshold number of contracts a Market-Maker must execute
in a month to trigger the fee for VIX and RUT. Particularly, for the
VIX and RUT Tier appointments, the Exchange proposes to increase the
threshold from 100 contracts a month to 1,000 contracts a month. The
Exchange notes the Tier Appointment Fee amounts are not changing.\46\
In connection with the
[[Page 56248]]
proposed changes, the Exchange proposes to relocate the Tier
Appointment Fees to a new table and eliminate the language in the
current respective notes sections of each Tier Appointment Fee as it is
no longer necessary.
---------------------------------------------------------------------------
\46\ Floor Broker Trading Surcharges for SPX/SPXW and VIX are
also not changing. The Exchange however, is creating a new table for
Floor Broker Trading Surcharges and relocating such fees in the Fees
Schedule in connection with the proposal to eliminate fees currently
set forth in the ``Trading Permit and Tier Appointment Fees'' Table.
---------------------------------------------------------------------------
Trading Permit Holder Regulatory Fee
The Exchange currently assesses a Trading Permit Holder Regulatory
Fee of $90 per month, per RTH Trading Permit, applicable to all TPHs,
which fee helps more closely cover the costs of regulating all TPHs and
performing regulatory responsibilities. In light of the proposed
changes to the Exchange's Trading Permit structure, the Exchange
proposes to eliminate the TPH Regulatory Fee. The Exchange notes that
there is no regulatory requirement to maintain this fee.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\47\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \48\ 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
Section 6(b)(4) of the Act,\49\ which requires that Exchange rules
provide for the equitable allocation of reasonable dues, fees, and
other charges among its Trading Permit Holders and other persons using
its facilities. Additionally, the Exchange believes the proposed rule
change is consistent with the Section 6(b)(5) \50\ requirement that the
rules of an exchange not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f(b).
\48\ 15 U.S.C. 78f(b)(5).
\49\ 15 U.S.C. 78f(b)(4).
\50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange first notes that it operates in a highly competitive
environment. Indeed, there are currently 16 registered options
exchanges that trade options. There is also no regulatory requirement
that any market participant connect to any one options exchange, or
that any market participant connect at a particular connection speed or
act in a particular capacity on the 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. Even the number of members between the
Exchange and its 3 other options exchange affiliates vary. Indeed, a
number of firms currently do not participate on the Exchange, or
participate on the Exchange though sponsored access arrangements rather
than by becoming a member. Particularly, the Exchange notes that as of
August 2019, the Exchange had 97 members (TPH organizations), of which
only 45 directly connected to the Exchange. In addition, of those
market participants that do connect to the Exchange, it is the
individual needs of each market participant that determine the amount
and type of Trading Permits and physical and logical connections to the
Exchange.\51\
---------------------------------------------------------------------------
\51\ To assist market participants that are connected or
considering connecting to the Exchange, the Exchange provides
detailed information and specifications about its available
connectivity alternatives in the Cboe C1 Options Exchange
Connectivity Manual, as well as the various technical
specifications. See http://markets.cboe.com/us/options/support/technical/.
---------------------------------------------------------------------------
Moreover, the Commission has repeatedly expressed its preference
for competition over regulatory intervention in determining prices,
products, and services in the securities markets. Particularly, in
Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \52\ The number
of available exchanges to connect to ensures increased competition in
the marketplace, and constrains the ability of exchanges to charge
supracompetitive fees for access to its market. Additionally, the
Exchange notes that non-TPHs such as Service Bureaus and Extranets
resell Cboe Options connectivity.\53\ This indirect connectivity is
another viable alternative that is already being used by non-TPHs,
further constraining the price that the Exchange is able to charge for
connectivity to its Exchange. Accordingly, in the event that a market
participant views one exchange's direct connectivity and access fees as
more or less attractive than the competition they can choose to connect
to that exchange indirectly or may choose not to connect to that
exchange and connect instead to one or more of the other 15 options
markets. Moreover, the Commission has recognized that while some
exchanges may have a unique business model that is not currently
offered by competitors, it believes a competitor could create similar
business models if demand were adequate, and if they did not do so, the
Commission believes it would be likely that new entrants would do so if
the exchange with that unique business model was otherwise
profitable.\54\ The proposed fees therefore reflect a competitive
environment, as the Exchange seeks to amend its access fees in
connection with the upcoming migration of its technology platform,
while still attracting market participants to continue to be, or
become, connected to the Exchange.
---------------------------------------------------------------------------
\52\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
\53\ Currently, there are 13 firms that resell Cboe Options
connectivity. Post-migration, the Exchange anticipates that there
will be 19 firms that resell Cboe Options connectivity (both
physical and logical). 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.
\54\ See Securities Exchange Act Release No. 86901 (September 9,
2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
---------------------------------------------------------------------------
In determining the proposed fee changes discussed above, the
Exchange reviewed the current competitive landscape, considered the
fees historically paid by market participants for connectivity to the
current system, and also assessed the impact on market participants to
ensure that the proposed fees would not create a financial burden and
have an undue impact on any market participants, including smaller
market participants. The proposed connectivity structure and
corresponding fees, like the current connectivity structure and fees,
provide market participants flexibility with respect to how to connect
to the Exchange based on each market participants' respective business
needs. For example, the amount and type of physical and logical ports
are determined by factors relevant and specific to each market
participant, including its business model, costs of connectivity, how
its business is segmented and allocated and volume of messages sent to
the Exchange. Moreover, the proposed connectivity
[[Page 56249]]
structure is designed to encourage market participants to be efficient
with their physical and logical port usage. While the Exchange has no
way of predicting with certainty the amount or type of connections
market participants will in fact purchase, if any, the Exchange
anticipates that like today, some market participants will continue to
decline to connect and participate on the Exchange, some will
participate on the Exchange via indirect connectivity, some will only
purchase one physical connection and/or logical port connection, and
others will purchase multiple connections. The Exchange lastly notes
that market participants were provided advanced notice of the proposed
fee changes in August 2019 via Exchange Notice.\55\
---------------------------------------------------------------------------
\55\ See Exchange Notice ``Cboe Options Exchange Access and
Capacity Fee Schedule Changes Effective October 1, 2019 and November
1, 2019'' Reference ID C2019081900.
---------------------------------------------------------------------------
Physical Ports
The Exchange believes increasing the fee for the new 10 Gb Physical
Port is reasonable because unlike, the current 10 Gb Network Access
Ports, the new Physical Ports provides a connection through a latency
equalized infrastructure and also allows access to both unicast order
entry and multicast market data with a single physical connection. As
discussed above, legacy Network Access Ports do not permit market
participants to receive unicast and multicast connectivity. As such, in
order to receive both connectivity types, a market participant
currently needs to purchase and maintain at least two 10 Gb Network
Access Ports. The proposed Physical Ports not only provide a latency
reduction as compared to the legacy ports, improving trading
performance, but also alleviate the need to pay for two physical ports
as a result of needing unicast and multicast connectivity. Accordingly,
market participants who historically had to use two separate ports for
each of multicast and unicast activity, will be able to purchase only
one port, and consequently pay lower fees overall. For example, if a
TPH has two 10 Gb legacy Network Access Ports, one of which receives
unicast traffic and the other of which receives multicast traffic, that
TPH is currently assessed $10,000 per month ($5,000 per port). Using
the new Physical Ports, that TPH has the option of utilizing one single
port, instead of two ports, to receive both unicast and multicast
traffic, therefore paying only $7,000 per month for a port that
provides both connectivity types. The Exchange notes that currently,
approximately 50% of TPHs maintain two or more 10 Gb Network Access
Ports. While the Exchange has no way of predicting with certainty the
amount or type of connections market participants will in fact purchase
post-migration, the Exchange anticipates approximately 50% of the TPHs
with two or more 10 Gb Network Access Ports to reduce the number of 10
Gb Physical Ports that they purchase. The Exchange also expects the
remaining 50% of TPHs to maintain their current 10 Gb Physical Ports,
but reduce the number of 1 Gb Physical Ports. Particularly, a number of
TPHs currently maintain two 10 Gb Network Access Ports to receive
multicast data and two 1 Gb Network Access Ports for order entry
(unicast connectivity). As the new 10 Gb Physical Ports are able to
accommodate unicast connectivity (order entry), TPHs may choose to
eliminate their 1 Gb Network Access Ports and utilize the new 10 Gb
Physical Ports for both multicast and unicast connectivity.
As discussed above, if a TPH deems a particular exchange as
charging excessive fees for connectivity, such market participants may
opt to terminate their connectivity arrangements with that exchange,
and adopt a possible range of alternative strategies, including routing
to the applicable exchange through another participant or market center
or taking that exchange's data indirectly. Accordingly, if the Exchange
charges excessive fees, it would 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 physical connectivity. The Exchange also notes that the proposal
represents an equitable allocation of reasonable dues, fees and other
charges as its fees for physical connectivity are reasonably
constrained by competitive alternatives. The proposed amounts are in
line with, and in some cases lower than, the costs of physical
connectivity at other Exchanges,\56\ including the Exchange's
Affiliated Exchanges which will have the same connectivity
infrastructure once the Exchange has migrated.\57\ The Exchange
believes the proposed Physical Port fees are equitable and not
unreasonably discriminatory as the connectivity pricing is associated
with relative usage of the various market participants and does not
impose a barrier to entry to smaller participants.
---------------------------------------------------------------------------
\56\ See e.g., Nasdaq PHLX and ISE Rules, General Equity and
Options Rules, General 8. Phlx and ISE each charge a monthly fee of
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection. See also Nasdaq Price List--
Trading Connectivity. Nasdaq charges a monthly fee of $7,500 for
each 10Gb direct connection to Nasdaq and $2,500 for each direct
connection that supports up to 1Gb. See also NYSE American Fee
Schedule, Section V.B, and Arca Fees and Charges, Co-Location Fees.
NYSE American and Arca each charge a monthly fee of $5,000 for each
1Gb circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb
LX circuit.
\57\ See e.g., Affiliated Exchange Fee Schedules, Physical
Connectivity Fees. For example, Cboe BZX, Cboe EDGX and C2 each
charge a monthly fee of $2,500 for each 1Gb connection and $7,500
for each 10Gb connection.
---------------------------------------------------------------------------
The Exchange also believes increasing the fee for 10 Gb Physical
Ports and charging a higher fee as compared to the 1 Gb Physical Port
is equitable as the 1 Gb Physical Port is 1/10th the size of the 10 Gb
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 Gb alternative
is lower than the value of the 10 Gb alternative, when measured based
on the type of Exchange access it offers. Moreover, market participants
that purchase 10 Gb Physical Ports utilize the most bandwidth and
therefore consume the most resources from the network. As such, the
Exchange believes the proposed fees for the 1 and 10 Gb Physical Ports,
respectively are reasonably and appropriately allocated.
Data Port Fees
The Exchange believes assessing the data port fee per data source,
instead of per port, is reasonable because it may allow for market
participants to maintain more ports at a lower cost and applies
uniformly to all market participants. The Exchange believes the
proposed increase is reasonable because, as noted above, market
participants will likely still pay lower fees as a result of charging
per data source and not per data port. Indeed, while the Exchange has
no way of predicting with certainty the impact of the proposed changes,
the Exchange anticipates approximately 76% of the 51 market
participants who currently pay data port fees to pay lower fees upon
implementation of the proposed change. The Exchange anticipates that
19% of TPHs who currently pay data port fees will pay a modest increase
of only $500 per month. Additionally as discussed above, the Exchange's
affiliate C2 has the same fee which is also assessed at the proposed
rate and assessed by data source instead of per port. The proposed name
change is also appropriate in light
[[Page 56250]]
of the Exchange's proposed changes and may alleviate potential
confusion.
Logical Connectivity
Port Fees
The Exchange believes it's reasonable to eliminate certain fees
associated with legacy options for connecting to the Exchange and to
replace them with fees associated with new options for connecting to
the Exchange that are similar to those offered at its Affiliated
Exchanges. In particular, the Exchange believes it's reasonable to no
longer assess fees for CMI and FIX Login IDs because the Login IDs will
be retired and obsolete upon migration and because the Exchange is
proposing to replace them with fees associated with the new logical
connectivity options. The Exchange believes that it is reasonable to
harmonize the Exchange's logical connectivity options and corresponding
connectivity fees once the Exchange is on a common platform as its
Affiliated Exchanges. Additionally, the Exchange notes the proposed
fees are the same as, or in line with, the fees assessed on its
Affiliated Exchanges for similar connectivity.\58\ The proposed logical
connectivity fees are also equitable and not unfairly discriminatory
because the Exchange will apply the same fees to all market
participants that use the same respective connectivity options.
---------------------------------------------------------------------------
\58\ See Affiliated Exchange Fee Schedules, Logical Port Fees.
---------------------------------------------------------------------------
The Exchange believes the proposed Logical Port fees are reasonable
as it is the same fee for Drop Ports and the first five BOE/FIX Ports
that is assessed for CMI and FIX Logins, which the Exchange is
eliminating in lieu of logical ports. Additionally, while the proposed
ports will be assessed the same monthly fees as current CMI/FIX Login
IDs, the proposed logical ports provide for significantly more message
traffic. Specifically, the proposed BOE/FIX Logical Ports will provide
for 3 times the amount of quoting \59\ capacity and approximately 165
times order entry capacity. Similarly, the Exchange believes the
proposed BOE Bulk Port fees are reasonable because while the fees are
higher than the current CMI and FIX Login Id fees and the proposed
Logical Port fees, BOE Bulk Ports offer significantly more bandwidth
capacity than both CMI and FIX Login Ids and Logical Ports.
Particularly, a single BOE Bulk Port offers 45 times the amount of
quoting bandwidth than CMI/FIX Login Ids \60\ and 5 times the amount of
quoting bandwidth than Logical Ports will offer. Additionally, the
Exchange believes that its fees for logical connectivity are
reasonable, equitable, and not unfairly discriminatory as they are
designed to ensure that firms that use the most capacity pay for that
capacity, rather than placing that burden on market participants that
have more modest needs. Although the Exchange charges a ``per port''
fee for logical connectivity, it notes that this fee is in effect a
capacity fee as each FIX, BOE or BOE Bulk port used for order/quote
entry supports a specified capacity (i.e., messages per second) in the
matching engine, and firms purchase additional logical ports when they
require more capacity due to their business needs.
---------------------------------------------------------------------------
\59\ Based on the purchase of a single Market-Maker Trading
Permit or Bandwidth Packet.
\60\ Based on the purchase of a single Market-Maker Trading
Permit or Bandwidth Packet.
---------------------------------------------------------------------------
An obvious driver for a market participant's decision to purchase
multiple ports will be their desire to send or receive additional
levels of message traffic in some manner, either by increasing their
total amount of message capacity available, or by segregating order
flow for different trading desks and clients to avoid latency sensitive
applications from competing for a single thread of resources. For
example, a TPH may purchase one or more ports for its market making
business based on the amount of message traffic needed to support that
business, and then purchase separate ports for proprietary trading or
customer facing businesses so that those businesses have their own
distinct connection, allowing the firm to send multiple messages into
the Exchange's trading system in parallel rather than sequentially.
Some TPHs that provide direct market access to their customers may also
choose to purchase separate ports for different clients as a service
for latency sensitive customers that desire the lowest possible latency
to improve trading performance. Thus, while a smaller TPH that demands
more limited message traffic may connect through a service bureau or
other service provider, or may choose to purchase one or two logical
ports that are billed at a rate of $750 per month each, a larger market
participant with a substantial and diversified U.S. options business
may opt to purchase additional ports to support both the volume and
types of activity that they conduct on the Exchange. While the Exchange
has no way of predicting with certainty the amount or type of logical
ports market participants will in fact purchase post-migration, the
Exchange anticipates approximately 16% of TPHs to purchase one to two
logical ports, and approximately 22% of TPHs to not purchase any
logical ports. At the same time, market participants that desire more
total capacity due to their business needs, or that wish to segregate
order flow by purchasing separate capacity allocations to reduce
latency or for other operational reasons, would be permitted to choose
to purchase such additional capacity at the same marginal cost. The
Exchange believes the proposal to assess an additional Logical and BOE
Bulk port fee for incremental usage per logical port is reasonable
because the proposed fees are modestly higher than the proposed Logical
Port and BOE Bulk fees and encourage users to mitigate message traffic
as necessary. The Exchange notes one of its Affiliated Exchanges has
similar implied port fees.\61\
---------------------------------------------------------------------------
\61\ See e.g., Cboe C2 Options Exchange Fees Schedule, Logical
Connectivity Fees.
---------------------------------------------------------------------------
In sum, the Exchange believes that the proposed BOE/FIX Logical
Port and BOE Bulk Port fees are appropriate as these fees would ensure
that market participants continue to pay for the amount of capacity
that they request, and the market participants that pay the most are
the ones that demand the most resources from the Exchange. The Exchange
also believes that its logical connectivity fees are aligned with the
goals of the Commission in facilitating a competitive market for all
firms that trade on the Exchange and of ensuring that critical market
infrastructure has ``levels of capacity, integrity, resiliency,
availability, and security adequate to maintain their operational
capability and promote the maintenance of fair and orderly markets.''
\62\
---------------------------------------------------------------------------
\62\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13)
(Regulation SCI Adopting Release).
---------------------------------------------------------------------------
The Exchange believes waiving the FIX/BOE Logical Port fee for one
FIX Logical Port used to access PULSe and Silexx (for FLEX Trading) is
reasonable because it will allow all TPHs using PULSe and Silexx to
avoid having to pay a fee that they would otherwise have to pay. The
waiver is equitable and not unfairly discriminatory because TPHs using
PULSe are already subject to a monthly fee for the PULSe Workstation,
which the Exchange views as inclusive of fees to access the Exchange.
Moreover, while PULSe users today do not require a FIX/CMI Login Id,
post-migration, due to changes to the connectivity infrastructure,
PULSe users will be required to maintain a FIX Logical Port and as such
incur a fee they previously would not have been subject to. Similarly,
the Exchange believes that
[[Page 56251]]
the waiver for Silexx (for FLEX trading) will encourage TPHs to
transact business using FLEX Options using the new Silexx System and
encourage trading of FLEX Options. Additionally, the Exchange notes
that it currently waives the Login Id fees for Login IDs used to access
the CFLEX system.
The Exchange believes its proposed fee for Purge Ports is
reasonable as it is also in line with the amount assessed for similar
ports by both its Affiliated Exchanges and other exchanges.\63\
Moreover, the Exchange believes that offering Purge Port functionality
at the Exchange level promotes robust risk management across the
industry, and thereby facilitates investor protection. Some market
participants, and, in particular, larger firms, could build similar
risk functionality on their trading systems that permit the flexible
cancellation of orders entered on the Exchange. Offering Exchange level
protections however, ensures that such functionality is widely
available to all firms, including smaller firms that may otherwise not
be willing to incur the costs and development work necessary to support
their own customized mass cancel functionality. The Exchange operates
in a highly competitive market in which exchanges offer connectivity
and related services as a means to facilitate the trading activities of
TPHs and other participants. As the proposed Purge Ports provide
voluntary risk management functionality, excessive fees would simply
serve to reduce demand for this optional product. The Exchange also
believes that the proposed Purge Port fees are not unfairly
discriminatory because they will apply uniformly to all TPHs that
choose to use dedicated Purge Ports. The proposed Purge Ports are
completely voluntary and, as they relate solely to optional risk
management functionality, no TPH is required or under any regulatory
obligation to utilize them. The Exchange believes that adopting
separate fees for these ports ensures that the associated costs are
borne exclusively by TPHs that determine to use them based on their
business needs, including Market-Makers or similarly situated market
participants. Similar to Purge Ports, Spin and GRP Ports are optional
products that provide an alternative means for market participants to
receive multicast data and request and receive a retransmission of such
data. As such excessive fees would simply serve to reduce demand for
these products, which TPHs are under no regulatory obligation to
utilize. All TPHs that voluntarily select these service options (i.e.,
Purge Ports, Spin Ports or GRP Ports) will be charged the same amount
for the same respective services. All TPHs have the option to select
any connectivity option, and there is no differentiation among TPHs
with regard to the fees charged for the services offered by the
Exchange.
---------------------------------------------------------------------------
\63\ See Affiliated Exchange Fee Schedules, Logical Port Fees.
See also, Nasdaq ISE Pricing Schedule, Section 7(C). ISE charges a
fee of $1,100 per month for SQF Purge Ports.
---------------------------------------------------------------------------
Access Credits
The Exchange believes the proposal to adopt credits for BOE Bulk
Ports is reasonable, equitable and not unfairly discriminatory because
it provides an opportunity for TPHs to pay lower fees for logical
connectivity. The Exchange notes that the proposed credits are in lieu
of the current credits that Market-Makers are eligible to receive today
for Trading Permits fees. Although only Market-Makers may receive the
proposed BOE Bulk Port credits, Market-Makers are valuable market
participants that provide liquidity in the marketplace and incur costs
that other market participants do not incur. For example, Market-Makers
have a number of obligations, including quoting obligations and fees
associated with appointments that other market participants do not
have.
The Exchange believes the proposed BOE Bulk Port fee credits
provided under AVP will incentivize the routing of orders to the
Exchange by TPHs that have both Market-Maker and agency operations, as
well as incent Market-Makers to tighten market widths due to the
reduced costs the incentives will provide. In the options industry,
many options orders are routed by consolidators, which are firms that
have both order router and Market-Maker operations. The Exchange is
aware not only of the importance of providing credits on the order
routing side in order to encourage the submission of orders, but also
of the operations costs on the Market-Maker side. The Exchange believes
the proposed change to AVP continues to allow the Exchange to provide
relief to the Market-Maker side via the credits, albeit credits on BOE
Bulk Port fees instead of Trading Permit fees. Additionally, the
proposed credits may incentivize and attract more volume and liquidity
to the Exchange, which will benefit all Exchange participants through
increased opportunities to trade as well as enhancing price discovery.
While the Exchange has no way of predicting with certainty how many and
which TPHs will satisfy the required criteria to receive the credits,
the Exchange anticipates approximately two TPHs (out of approximately 5
TPHs that are eligible for AVP) to reach VIP Tiers 4 or 5 and
consequently earn the BOE Bulk Port fee credits for their respective
Market-Maker affiliate.
The Exchange believes the proposed BOE Bulk Port fee credits
available for TPHs that reach certain Performance Tiers under the
Liquidity Provider Sliding Scale Adjustment Table is reasonable as the
credits provide for reduced connectivity costs for those Market-Makers
that reach the required thresholds. The Exchange believe it's
reasonable, equitable and not unfairly discriminatory to provide
credits to those Market-Makers that primarily provide and post
liquidity to the Exchange, as the Exchange wants to continue to
encourage Market-Makers with significant Make Rates to continue to
participate on the Exchange and add liquidity. Greater liquidity
benefits all market participants by providing more trading
opportunities and tighter spreads.
Moreover, the Exchange notes that Market-Makers with a high Make
Rate percentage generally require higher amounts of capacity than other
Market-Makers. Particularly, Market-Makers with high Make Rates are
generally streaming significantly more quotes than those with lower
Make Rates. As such, Market-Makers with high Make Rates may incur more
costs than other Market-Makers as they may need to purchase multiple
BOE Bulk Ports in order to accommodate their capacity needs. The
Exchange believes the proposed credits for BOE Bulk Ports encourages
Market-Makers to continue to provide liquidity for the Exchange,
notwithstanding the costs incurred by purchasing multiple ports.
Particularly, the proposal is intended to mitigate the costs incurred
by traditional Market-Makers that focus on adding liquidity to the
Exchange (as opposed to those that provide and take, or just take).
While the Exchange cannot predict with certain which Market-Makers will
reach Performance Tiers 4 and 5 each month, based on historical
performance it anticipates approximately 10 Market-Makers to achieve
Tiers 4 or 5. Lastly, the Exchange notes that it is common practice
among options exchanges to differentiate fees for adding liquidity and
fees for removing liquidity.\64\
---------------------------------------------------------------------------
\64\ See e.g., MIAX Options Fees Schedule, Section 1(a), Market
Maker Transaction Fees.
---------------------------------------------------------------------------
Bandwidth Packets and CMI CAS Server Fees
The Exchange believes it's reasonable to eliminate Bandwidth Packet
fees and
[[Page 56252]]
the CMI CAS Server fee because TPHs will not pay fees for these
connectivity options and because Bandwidth Packets and CAS Servers will
be retired and obsolete upon the upcoming migration. The Exchange
believes that even though it will be discontinuing Bandwidth Packets,
the proposed incremental pricing for Logical Ports and BOE Bulk Ports
will continue to encourage users to mitigate message traffic. The
proposed change is equitable and not unfairly discriminatory because it
will apply uniformly to all TPHs.
Access Fees
The Exchange believes its proposed restructuring of its Trading
Permits is reasonable in light of the changes to the Exchange's
connectivity infrastructure in connection with the migration and the
resulting separation of bandwidth allowance, logins and appointment
costs from each Trading Permit. The Exchange also believes that it is
reasonable to harmonize the Exchange's Trading Permit structure and
corresponding connectivity options to more closely align with the
structures offered at its Affiliated Exchanges once the Exchange is on
a common platform as its Affiliated Exchanges.\65\ The proposed Trading
Permit structure and corresponding fees are also in line with the
structure and fees provided by other exchanges. The proposed Trading
Permit fees are also equitable and not unfairly discriminatory because
the Exchange will apply the same fees to all market participants that
use the same type and number of Trading Permits.
---------------------------------------------------------------------------
\65\ For example, the Exchange's affiliate, C2, similarly
provides for Trading Permits that are not tied to connectivity, and
similar physical and logical port options at similar pricings. See
Cboe C2 Options Exchange Fees Schedule. Physical connectivity and
logical connectivity are also not tied to any type of permits on the
Exchange's other options exchange affiliates.
---------------------------------------------------------------------------
With respect to electronic Trading Permits, the Exchange notes that
TPHs currently request multiple Trading Permits because of bandwidth,
login or appointment cost needs. As described above, upon migration,
bandwidth, logins and appointment costs will no longer be tied to
Trading Permits or Bandwidth Packets and as such, the need to hold
multiple permits and/or Bandwidth Packets will be obsolete. As such,
the Exchange believes the proposed structure to require only one of
each type of applicable electronic Trading Permit is appropriate.
Moreover, the Exchange believes offering separate marketing making
permits for off-floor and on-floor Market-Makers provides for a
cleaner, more streamlined approach to trading permits and corresponding
fees. Other exchanges similarly provide separate and distinct fees for
Market-Makers that operate on-floor vs off-floor and their
corresponding fees are similar to those proposed by the Exchange.\66\
---------------------------------------------------------------------------
\66\ See e.g., PHLX Section 8A, Permit and Registration Fees.
See also, BOX Options Fee Schedule, Section IX Participant Fees;
NYSE American Options Fees Schedule, Section III(A) Monthly ATP Fees
and NYSE Arca Options Fees and Charges, OTP Trading Participant
Rights. For similar Trading Floor Permits for Floor Market Makers,
Nasdaq PHLX charges $6,000; BOX charges up to $5,500 for 3
registered permits in addition to a $1,500 Participant Fee, NYSE
Arca charges up to $6,000; and NYSE American charges up to $8,000.
---------------------------------------------------------------------------
The Exchange believes the proposed fee for its MM EAP Trading
Permits is reasonable as it is the same fee it assess today for Market-
Maker Trading Permits (i.e., $5,000 per month per permit).
Additionally, the proposed fee is in line with, and in some cases even
lower than, the amounts assessed for similar access fees at other
exchanges, including its affiliate C2.\67\ The Exchange believes the
proposed EAP fee is also reasonable, and in line with the fees assessed
by other Exchanges for non-Market-Maker electronic access.\68\ The
Exchange notes that while the Trading Permit fee is increasing, TPHs
overall cost to access the Exchange may be reduced in light of the fact
that a TPH no longer must purchase multiple Trading Permits, Bandwidth
Packets and Login Ids in order to receive sufficient bandwidth and
logins to meet their respective business needs. To illustrate the value
of the new connectivity infrastructure, the Exchange notes that the
cost that would be incurred by a TPH today in order to receive the same
amount of order capacity that will be provided by a single Logical Port
post-migration (i.e., 5,000 orders per second), is approximately 98%
higher than the cost for the same capacity post-migration. The
following examples further demonstrate potential cost savings/value
added for an EAP holder with modest capacity needs and an EAP holder
with larger capacity needs:
---------------------------------------------------------------------------
\67\ See e.g., Cboe C2 Options Exchange Fees Schedule. See also,
NYSE Arca Options Fees and Charges, General Options and Trading
Permit (OTP) Fees, which assesses up to $6,000 per Market Maker OTP
and NYSE American Options Fee Schedule, Section III. Monthly ATP
Fees, which assess up to $8,000 per Market Maker ATP. See also, PHLX
Section 8A, Permit and Registration Fees, which assesses up to
$4,000 per Market Maker Permit.
\68\ See e.g., PHLX Section 8A, Permit and Registration Fees,
which assesses up to $4,000 per Permit for all member and member
organizations other than Floor Specialists and Market Makers.
TPH That Holds 1 EAP, No Bandwidth Packets and 1 CMI Login
----------------------------------------------------------------------------------------------------------------
Current fee structure Post-migration fee structure
----------------------------------------------------------------------------------------------------------------
EAP.............................. $1,600................................ $3,000.
CMI Login/Logical Port........... $750.................................. $750.
Bandwidth Packets................ 0..................................... N/A.
Total Bandwidth Available........ 30 orders/sec......................... 5,000 orders/sec.
Total Cost....................... $2,350................................ $3,750.
Total Cost per message........... $78.33/order/sec...................... $0.75/order/sec.
----------------------------------------------------------------------------------------------------------------
TPH That Holds 1 EAP, 4 Bandwidth Packets and 15 CMI Logins
----------------------------------------------------------------------------------------------------------------
Current fee structure Post-migration fee structure
----------------------------------------------------------------------------------------------------------------
EAP.............................. $1,600................................ $3,000.
CMI Login/Logical Port........... $11,250 (15@750)...................... $750.
Bandwidth Packets................ $6,400 (4@$1,600)..................... N/A.
Total Bandwidth Available........ 150 orders/sec........................ 5,000 orders/sec.
Total Cost....................... $19,250............................... $3,750.
Total Cost per message........... $128.33/order/sec..................... $0.75/order/sec.
----------------------------------------------------------------------------------------------------------------
[[Page 56253]]
The Exchange believes the proposal to adopt a new Clearing TPH
Permit is reasonable because it offers TPHs that only clear
transactions of TPHs a discount. Particularly, Clearing TPHs that also
submit orders electronically to the Exchange would purchase the
proposed EAP at $3,000 per permit. The Exchange believe it's reasonable
to provide a discount to Clearing TPHs that only clear transactions and
do not otherwise submit electronic orders to the Exchange. The Exchange
notes that another exchange similarly charges a separate fee for
clearing firms.\69\
---------------------------------------------------------------------------
\69\ See e.g., NYSE Arca Options Fees and Charges, General
Options and Trading Permit (OTP) Fees and NYSE American Options Fee
Schedule, Section III. Monthly ATP Fees.
---------------------------------------------------------------------------
The Exchange believes the proposed fee structure for on-floor
Market-Makers is reasonable as the fees are in line with those offered
at other Exchanges.\70\ The Exchange believes that the proposed fee for
MM Floor Permits as compared to MM EAPs is reasonable because it is
only modestly higher than MM EAPs and Floor MMs don't have other costs
that MM EAP holders have, such as MM EAP Appointment fees.
---------------------------------------------------------------------------
\70\ See e.g., PHLX Section 8A, Permit and Registration Fees,
which assesses $6,000 per permit for Floor Specialists and Market
Makers.
---------------------------------------------------------------------------
The Exchange believes its proposed fees for Floor Broker Permits
are reasonable because the fees are similar to, and in some cases lower
than, the fees the Exchange currently assesses for such permits.
Specifically, 60% of TPHs that hold Floor Broker Trading Permits will
be pay lower Trading Permit fees. Particularly, any Floor Broker
holding ten or less Floor Broker Trading Permits will pay lower fees
under the proposed tiers as compared to what they pay today. While the
remaining 40% of TPHs holding Floor Broker Trading Permits (who each
hold between 12-21 Floor Broker Trading Permits) will pay higher fees,
the Exchange notes the monthly increase is de minimis, ranging from an
increase of 0.6%--2.72%.\71\
---------------------------------------------------------------------------
\71\ The Floor Brokers whose fees are increasing have each
committed to a minimum number of permits and therefore currently
receive the rates set forth in the current Floor Broker TP Sliding
Scale.
---------------------------------------------------------------------------
The Exchange believes the proposed ADV Discount is reasonable
because it provides an opportunity for Floor Brokers to pay lower FB
Trading Permit fees, similar to the current rebate program offered to
Floor Brokers. The Exchange notes that while the new ADV Discount
program includes only customer volume (``C'' origin code) as compared
to Customer and Professional Customer/Voluntary Professional, the
amount of Professional Customer/Voluntary Professional volume was de
minimis and the Exchange does not believe the absence of such volume
will have a significant impact.\72\ Additionally, the Exchange notes
that while the ADV requirements under the proposed ADV Discount program
are higher than are required under the current rebate program, the
proposed ADV Discount counts volume from all products towards the
thresholds as compared to the current rebate program which excludes
volume from Underlying Symbol List A (except RLG, RLV, RUI, and UKXM),
DJX, XSP, and subcabinet trades. Moreover, the ADV Discount is designed
to encourage the execution of orders in all classes via open outcry,
which may increase volume, which would benefit all market participants
(including Floor Brokers who do not hit the ADV thresholds) trading via
open outcry (and indeed, this increased volume could make it possible
for some Floor Brokers to hit the ADV thresholds). The Exchange
believes the proposed discounts are equitable and not unfairly
discriminatory because all Floor Brokers are eligible. While the
Exchange has no way of predicting with certainty how many and which
TPHs will satisfy the various thresholds under the ADV Discount, the
Exchange anticipates approximately 3 Floor Brokers to receive a rebate
under the program.
---------------------------------------------------------------------------
\72\ Furthermore, post-migration the Exchange will not have
Voluntary Professionals.
---------------------------------------------------------------------------
The Exchange believes its proposed MM EAP Appointment fees are
reasonable in light of the Exchange's elimination of appointment costs
tied to Trading Permits. Other exchanges also offer a similar structure
with respect to fees for appointment classes.\73\ Additionally, the
proposed MM EAP Appointment fee structure results in approximately 36%
electronic MMs paying lower fees for trading permit and appointment
costs. For example, in order to have the ability to make electronic
markets in every class on the Exchange, a Market-Maker would need 1
Market-Maker Trading Permit and 37 Appointment Units post-migration.
Under, the current pricing structure, in order for a Market-Maker to
quote the entire universe of available classes, a Market-Maker would
need 33 Appointment Credits, thus necessitating 33 Market-Maker Trading
Permits. With respect to fees for Trading Permits and Appointment Unit
Fees, under the proposed pricing structure, the cost for a TPH wishing
to quote the entire universe of available classes is approximately 29%
less (if they are not eligible for the MM TP Sliding Scale) or
approximately 2% less (if they are eligible for the MM TP Sliding
Scale). To further demonstrate the potential cost savings/value added,
the Exchange is providing the following examples comparing current
Market-Maker connectivity and access fees to projected connectivity and
access fees for different scenarios. The Exchange notes that the below
examples not only compare Trading Permit and Appointment Unit costs,
but also the cost incurred for logical connectivity and bandwidth.
Particularly, the first example demonstrates the total minimum cost
that would be incurred today in order for a Market-Maker to have the
same amount of capacity as a Market-Maker post-migration that would
have only 1 MM EAP and 1 Logical Port (i.e., 15,000 quotes/3 sec). The
Exchange is also providing examples that demonstrate the costs of (i) a
Market-Maker with small capacity needs and appointment unit of 1.0 and
(ii) a Market-Maker with large capacity needs and appointment cost/unit
of 30.0:
---------------------------------------------------------------------------
\73\ See e.g., PHLX Section 8. Membership Fees, B, Streaming
Quote Trader (``SQT'') Fees and C. Remote Market Maker Organization
(RMO) Fee.
Market-Maker That Needs Capacity of 15,000/Quotes/3 Seconds
------------------------------------------------------------------------
Current fee Post-migration fee
structure structure
------------------------------------------------------------------------
MM Permit/MM EAP............ $5,000.............. $5,000.
Appointment Unit Cost....... N/A (1 appointment $0 (1 appointment
cost). unit).
CMI Login/Logical Port...... $750\74\............ $750.
Bandwidth Packets........... $5,500 (2@$2,750)... N/A.
Total Bandwidth Available... 15,000 quotes/3 sec. 15,000 quotes/3 sec.
Total Cost.................. $11,250............. $5,750.
[[Page 56254]]
Total Cost per message $0.75/quote/3 sec... $0.38/quote/3 sec.
allowed.
------------------------------------------------------------------------
Market Maker That Needs Capacity of no More Than 5,000 Quotes/3 secs
------------------------------------------------------------------------
Current fee Post-migration fee
structure structure
------------------------------------------------------------------------
MM Permit/MM EAP............ $5,000.............. $5,000.
Appointment Unit Cost....... N/A (1 appointment $0 (1 appointment
cost). unit).
CMI Login/Logical Port...... $750................ $750.
Bandwidth Packets........... 0................... N/A.
Total Bandwidth Available... 5,000 quotes/3 sec.. 15,000 quotes/3 sec.
Total Cost.................. $5,750.............. $5,750.
Total Cost per message $1.15/quote/3 sec... $0.38/quote/3 sec.
allowed.
------------------------------------------------------------------------
Market-Maker That Needs 30 Appointment Units and Capacity of 300,000
Quotes/3 sec
------------------------------------------------------------------------
Current fee Post-migration fee
structure structure
------------------------------------------------------------------------
MM Permits/MM EAP........... $105,000 (30 MM $5,000.
Permits assumes
eligible for MM TP
Sliding Scale)\75\.
Appointment Units Cost...... N/A (30 appointment $95,500 (30
costs). appointment units).
CMI Logins/BOE Bulk Port.... $3,000 (4@$750) \76\ $3,000 (2 BOE
Bulk@$1,500).
Bandwidth Packets........... $82,500(30@$2750)... N/A.
Total Bandwidth Available... 300,000 quotes/3 sec \*\450,000 quotes/3
sec.
Total Cost.................. $190,500............ $103,500.
Total Cost per message $0.63/quotes/3 sec.. $0.23/quote/3 sec.
allowed.
------------------------------------------------------------------------
* possible performance degradation at 15,000 messages per second.
The Exchange believes its proposal to provide separate fees for
Tier Appointments for MM EAPs and MM Floor Permits as the Exchange will
be issuing separate Trading Permits for on-floor and off-floor market
making as discussed above. The proposal to increase the electronic
volume thresholds for VIX and RUT are reasonable as those that do not
regularly trade VIX or RUT in open-outcry will continue to not be
assessed the fee. In fact, any TPH that executes more than 100
contracts but less than 1,000 in the respective classes will no longer
have to pay the proposed Tier Appointment fee. As noted above, the
Exchange is not proposing to change the amounts assessed for each Tier
Appointment Fee. The proposed change is equitable and not unfairly
discriminatory because it will apply uniformly to all TPHs.
---------------------------------------------------------------------------
\74\ The maximum quoting bandwidth that may be applied to a
single Login Id is 80,000 quotes/3 sec.
\75\ For simplicity of the comparison, this assumes no
appointments in SPX, VIX, RUT, XEO or OEX (which are not included in
the TP Sliding Scale).
\76\ Given the bandwidth limit per Login Id of 80,000 quotes/3
sec, example assumes Market-Maker purchases minimum amount of Login
IDs to accommodate 300,000 quotes/3 sec.
---------------------------------------------------------------------------
Trading Permit Holder Regulatory Fee
The Exchange believes it's reasonable to eliminate the Trading
Permit Holder Regulatory fee because TPHs will not pay this fee and
because the Exchange is restructuring its Trading Permit structure. The
Exchange notes that although it will less closely be covering the costs
of regulating all TPHs and performing its regulatory responsibilities,
it still has sufficient funds to do so. The proposed change is
equitable and not unfairly discriminatory because it will apply
uniformly to all TPHs.
The Exchange believes corresponding changes to eliminate obsolete
language in connection with the proposed changes described above and to
relocate and reorganize its fees in connection with the proposed
changes maintain clarity in the Fees Schedule and alleviate potential
confusion, thereby removing impediments to and perfecting the mechanism
of a free and open market and a national market system, and, in
general, protecting investors and the public interest.
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.
With respect to intra-market competition, the Exchange does not
believe that the proposed rule change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As stated above, 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 buy the
less expensive 1 Gb Physical Port and utilize only one Logical Port.
Moreover, the pricing for 1 Gb Physical Ports and FIX/BOE Logical Ports
are no different than are assessed today (i.e., $1,500 and $750 per
port, respectively), yet the capacity and access associated with each
is greatly increasing. While pricing may be increased for larger
capacity physical and logical 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, particularly since higher bandwidth
consumption translates to higher costs to the Exchange.
[[Page 56255]]
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed in the Statutory Basis section above, options market
participants are not forced to connect to (or purchase market data
from) all options exchanges, as shown by the number of TPHs at Cboe and
shown by the fact that there are varying number of members across each
of Cboe's Affiliated Exchanges. The Exchange operates in a highly
competitive environment, and its ability to price access and
connectivity is constrained by competition among exchanges and third
parties. As discussed, there are other options markets of which market
participants may connect to trade options. There is also a possible
range of alternative strategies, including routing to the exchange
through another participant or market center or taking the exchange's
data indirectly. For example, there are 15 other U.S. options
exchanges, which the Exchange must consider in its pricing discipline
in order to compete for market participants. In this competitive
environment, market participants are free to choose which competing
exchange or reseller to use to satisfy their business needs. As a
result, the Exchange believes this proposed rule change permits fair
competition among national securities exchanges. Accordingly, the
Exchange does not believe its proposed fee change imposes any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
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 \77\ and paragraph (f) of Rule 19b-4 \78\
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.
---------------------------------------------------------------------------
\77\ 15 U.S.C. 78s(b)(3)(A).
\78\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-082 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2019-082. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the 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-CBOE-2019-082 and should be submitted on
or before November 12, 2019.
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\79\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\79\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22838 Filed 10-18-19; 8:45 am]
BILLING CODE 8011-01-P