Federal Register, Volume 84 Issue 223 (Tuesday, November 19, 2019)

[Federal Register Volume 84, Number 223 (Tuesday, November 19, 2019)]
[Notices]
[Pages 63919-63926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24976]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87516; File No. SR-BOX-2019-32]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee
Schedule on the BOX Options Market LLC Facility To Establish BOX
Connectivity Fees for Participants and Non-Participants Who Connect to
the BOX Network

November 13, 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 31, 2019, BOX Exchange LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Exchange filed the
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

The Exchange is filing with the Securities and Exchange Commission
(``Commission'') a proposed rule change to amend the Fee Schedule on
the BOX Options Market LLC (``BOX'') facility. The text of the proposed
rule change is available from the principal office of the Exchange, at
the Commission's Public Reference Room and also on the Exchange's
internet website at http://boxexchange.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange is refiling its proposal to amend the Fee Schedule
regarding connectivity to BOX in order to provide greater detail and
clarity concerning BOX's costs, as they pertain to expenses for network
connectivity services. The Exchange is now presenting more connectivity
cost details that correspond with income statement expense line items
to provide greater transparency into its actual costs associated with
providing network connectivity services. The Exchange believes that its
proposed fees are fair and reasonable because they will permit recovery
of less than all of the Exchange's costs for providing connectivity and
will not result in excessive pricing or supracompetitive profit, when
comparing the Exchange's total annual expense associated with providing
the network connectivity services versus the total projected annual
revenue the Exchange projects to collect for providing the network
connectivity services.
The Exchange proposes to amend Section VI. (Technology Fees) of the
BOX Fee Schedule to establish BOX Connectivity Fees for Participants
and non-Participants who connect to the BOX network. Connectivity fees
will be based upon the amount of bandwidth that will be used by the
Participant or non-Participant. Further, BOX Participants or non-
Participants connected as of the last trading day of each calendar
month will be charged the applicable Connectivity Fee for that month.
The Connectivity Fees will be as follows:

------------------------------------------------------------------------
Connection type Monthly fees
------------------------------------------------------------------------
Non-10 Gb Connection...................... $1,000 per connection.
10 Gb Connection.......................... $5,000 per connection.
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[[Page 63920]]

The Exchange also proposes to amend certain language and numbering in
Section VI.A to reflect the changes discussed above. Specifically, the
Exchange proposes to add the title ``Third Party Connectivity Fees''
under Section VI.A. Further, the Exchange proposes to add Section
VI.A.2, which details the proposed BOX Connectivity Fees discussed
above. Finally the Exchange is proposing to remove Section VI.C. High
Speed Vendor Feed (``HSVF''), and reclassify the HSVF as a Port Fee.
The Exchange initially filed the proposed fees on July 19, 2018,
designating the proposed fees effective July 1, 2018. The first
proposed rule change was published for comment in the Federal Register
on August 2, 2018.\5\ The Commission received one comment letter on the
proposal.\6\ The proposed fees remained in effect until they were
temporarily suspended pursuant to a suspension order (the ``Suspension
Order'') issued by the Division of Trading and Markets, which also
instituted proceedings to determine whether to approve or disapprove
the proposed rule change.\7\ The Commission subsequently received one
further comment letter on the proposed rule change, supporting the
decision to suspend and institute proceedings on the proposed fee
change.\8\
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\5\ See Securities Exchange Act Release No. 83728 (July 27,
2018), 83 FR 37853 (August 2, 2018) (SR-BOX-2018-24).
\6\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated August 23, 2018 (``Healthy Markets Letter'').
\7\ See Securities Exchange Act Release No. 34-84168 (September
17, 2018).
\8\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director,
Financial Services Operations, Securities Industry and Financial
Markets Association, dated October 15, 2018.
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In response to the Suspension Order, the Exchange timely filed a
Notice of Intention to Petition for Review \9\ and Petition for Review
to vacate the Division's Order,\10\ which stayed the Division's
suspension of the filing. On November 16, 2018 the Commission granted
the Exchange's Petition for Review but discontinued the automatic
stay.\11\ The Exchange then filed a statement to reiterate the
arguments set for in its petition for review and to supplement that
petition with additional information.\12\
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\9\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated September 19, 2018.
\10\ See Petition for Review of Order Temporarily Suspending BOX
Exchange LLC's Proposal to Amend the Fee Schedule on BOX Market LLC,
dated September 26, 2018.
\11\ See Securities Exchange Act Release No. 84614. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated November 16, 2018. Separately, the Securities Industry and
Financial Markets Association filed an application under Section
19(d) of the Exchange Act challenging the Exchange's proposed fees
as alleged prohibitions or limitations on access. See In re
Securities Industry and Financial Markets Association, Admin. Proc.
File No. 3-18680 (Aug. 24, 2018). The Commission thereafter remanded
that denial-of-access proceeding to the Exchange while
``express[ing] no view regarding the merits'' and emphasizing that
it was ``not set[ting] aside the challenged rule change[ ].'' In re
Applications of SIFMA & Bloomberg, Exchange Act Rel. No. 84433, at 2
(Oct. 16, 2018) (``Remand Order''), available at https://www.sec.gov/litigation/opinions/2018/34-84433.pdf. The Division's
Suspension Order is inconsistent with the Commission's intent in the
Remand Order to leave the challenged fees in place during the
pendency of the remand proceedings and singles out the Exchange for
disparate treatment because it means that the Exchange--unlike every
other exchange whose rule changes were the subject of the Remand
Order--is not permitted to continue charging the challenged fees
during the remand proceedings.
\12\ See Letter from Amir Tayrani, Partner, Gibson, Dunn &
Crutcher LLP, dated December 10, 2018.
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The Exchange subsequently refiled its fee proposal on November
30th, 2018. The proposed fees were noticed and again temporarily
suspended pursuant to a suspension order issued by the Division of
Trading and Markets, which also instituted proceedings to determine
whether to approve or disapprove the proposed rule change.\13\ The
Commission received two comment letters supporting the decision to
suspend and institute proceedings on the proposed fee change.\14\
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\13\ See Securities Exchange Act Release No. 84823 (December 14,
2018), 83 FR 65381 (December 20, 2018) (SR-BOX-2018-37).
\14\ See Letters from Tyler Gellasch, Executive Director, The
Healthy Markets Association (``Second Healthy Markets Letter''), and
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance,
Tepper School of Business, Carnegie Mellon University (``Chester
Spatt Letter''), to Brent J. Fields, Secretary, Commission, dated
January 2, 2019.
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The Exchange again refiled its fee proposal on February 13, 2019.
The proposed fees were noticed and again temporarily suspended pursuant
to a suspension order issued by the Division of Trading and Markets,
which also instituted proceedings to determine whether to approve or
disapprove the proposed rule change.\15\ The Commission received four
comment letters supporting the decision to suspend and institute
proceedings on the proposed fee change.\16\
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\15\ See Securities Exchange Act Release No. 85201 (February 26,
2019), 84 FR 7146 (March 1, 2019) (SR-BOX-2019-04).
\16\ See Letters from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA (``Second SIFMA Comment Letter''),
Tyler Gellasch, Executive Director, Healthy Markets Association
(``Third Healthy Markets Letter''), Stefano Durdic, Former Owner of
R2G Services, LLC, and Anand Prakash.
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On March 29, 2019, the Commission issued its Order Disapproving
each iteration of the BOX Proposal (``BOX Order''). In the BOX Order,
the Commission highlighted a number of deficiencies it found in three
separate rule filings by BOX to establish BOX's connectivity fees that
prevented the Commission from finding that BOX's proposed connectivity
fees were consistent with the Act.
On May 21, 2019 the Division of Trading and Markets released new
Guidance on SRO Rule Filings Relating to Fees. The Exchange then
refiled the proposed fees on June 26, 2019 to incorporate the new
guidance released by the Commission.
The Commission received two comment letters on BOX's June 26, 2019
Proposal.\17\ The Third SIFMA Comment Letter did not request that the
Commission suspend BOX's Proposal, but rather requested that the
Commission ``carefully consider whether BOX provided sufficient
evidence to satisfy the applicable statutory standards.'' The Fourth
Healthy Markets Letter walks through the procedural history of the BOX
and MIAX filings and urges the Commission to propose reforms with
regard to immediately effective rule filings.
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\17\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA, dated August 5, 2019 (``Third
SIFMA Comment Letter'') and Letter from Tyler Gellasch, Executive
Director, Healthy Markets Association, dated August 5, 2019
(``Fourth Healthy Markets Letter'').
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On September 5, 2019 the Exchange withdrew the proposed rule change
and refiled the proposed fees to further bolster its cost-based
discussion to support its claim that the Proposal is fair and
reasonable because they will permit recovery of a portion of BOX costs
and will not result in excessive pricing or supra-competitive profit.
The Commission received only one comment letter on the proposed rule
change, twelve days after the comment period ended.\18\ Of note, no
Participant, other person, industry group, or operator of an options
market commented on the proposed rule change. Rather, the only comment
letter came from an operator of a single equities market (equities
market structure and the resulting network demands are fundamentally
different from those in the options markets) and which the operator
also has a fundamentally different business model (and agenda) than
does the Exchange. That letter called for, among other things, the
Exchange to explain its basis for concluding it incurred substantially

[[Page 63921]]

higher costs to provide lower-latency connections and further described
the nature and closeness of the relationship between the identified
costs and connectivity products and services as stated in the
Exchange's cost allocation analysis.
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\18\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC (``IEX'') to Vanessa Countryman, Secretary,
Commission, dated October 9, 2019.
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The Exchange is again re-filing the fee proposal (``the Proposal'')
to provide greater detail and clarity concerning the Exchange's costs,
as they pertain to the Exchange's expense relating to the provision of
network connectivity services. The Exchange is also refiling its
proposal in order to clarify certain points raised in the IEX Letter.
The Exchange believes that the proposed fees are consistent with
the Act because they (i) are reasonable, equitably allocated, not
unfairly discriminatory, and not an undue burden on competition; (ii)
comply with the BOX Order and the Guidance; (iii) are, as demonstrated
by this Proposal and supported by evidence (including data and
analysis), constrained by significant competitive forces; and (iv) are,
supported by specific information (including quantitative information),
fair and reasonable because they will permit recovery of a portion of
BOX's costs and will not result in excessive pricing or
supracompetitive profit. Accordingly, the Exchange believes that the
Commission should find that the proposed fees are consistent with the
Act. The proposed rule change is immediately effective upon filing with
the Commission pursuant to Section 19(b)(3)(A) of the Act.
As discussed herein, the Exchange believes that it is reasonable
and appropriate to begin charging for physical connectivity fees to
partially offset the costs associated with maintaining and enhancing a
state-of-the-art exchange network infrastructure in the US options
industry. There are significant costs associated with various projects
and initiatives to improve overall network performance and stability,
as well as costs paid to the third-party data centers for space rental,
power used, etc.
BOX has always offered physical connectivity to Participants and
non-Participants to access the BOX's trading platforms, market data,
test systems and disaster recovery facilities. These physical
connections consist of 10Gb and non-10Gb connections, where the 10Gb
connection provides for faster processing of messages sent to it in
comparison to the non-10Gb connection. Since launching in 2012, BOX has
not charged for physical connectivity and has instead relied on
transaction fees as the basis of revenue. However, in recent years
transaction fees have continually decreased across the options
industry. At the same time these transactions fees were decreasing, the
options exchanges, except for BOX, began charging physical connectivity
fees to market participants. As such, BOX began to find itself at a
significant competitive disadvantage due to the decreased transaction
fees at other exchanges. To remain competitive, BOX was forced to
follow suit and decrease its transaction fees in order to continue
receiving order flow to the Exchange. While other exchanges lowered
transaction fees, they were still able to rely on the connectivity fee
revenues as a means of covering a portion of the costs to operate their
respective exchanges. BOX had no choice but to begin charging
Participants and non-Participants fees for connecting directly to the
BOX network (which BOX has taken considerable measures to maintain and
enhance for the benefit of those Participants and non-Participants) in
order to remain competitive with the other options exchanges in the
industry.
As discussed in the Exchange's recent Petition for Review of the
Commission's Order Disapproving BOX's three filings, not allowing BOX
to charge such connectivity fees arbitrarily and inequitably treats BOX
differently from each of the other exchanges that submitted prior
immediately effective connectivity fee filings that were not suspended
or disapproved by the Commission.\19\ The Exchange notes that all other
options exchanges currently charge for similar physical
connectivity.\20\
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\19\ See Securities Exchange Act Release No. 85927. Order
Granting Petition for Review and Scheduling Filing of Statements,
dated May 23, 2019.
\20\ Nasdaq PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC
(``Nasdaq''), NYSE Arca, Inc. (``Arca''), NYSE American LLC (``NYSE
American''), Nasdaq ISE, LLC (``ISE''), Cboe Exchange, Inc.
(``Cboe''), Cboe BZX Exchange, Inc. (``CboeBZX''), Cboe EDGX
Exchange, Inc. (``CboeEDGX'') and Cboe C2 Exchange, Inc. (``C2'')
all offer a type of 10Gb and non-10Gb connectivity alternative to
their participants. See Phlx, and ISE Rules, General Equity and
Options Rules, General 8, Section 1(b). 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, which is the
equivalent of the Exchange's 10Gb ULL 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, which is the equivalent of the Exchange's 10Gb ULL
connection. See also Cboe, CboeBZX, CboeEDGX and C2 Fee Schedules.
Cboe charges monthly quoting and order entry bandwidth packet fees.
Specifically, Cboe charges $1,600 for the 1st through 5th packet,
$800 for the 6th through 8th packet, $400 for the 9th through 13th
packet and $200 for the 14th packet and each additional packet.
CboeBZX, CboeEDGX and C2 each charge a monthly fee of $2,500 for
each 1Gb connection and $7,500 for each 10Gb connection.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act, in general, and Section
6(b)(4) and 6(b)(5)of the Act,\21\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees, and other
charges among BOX Participants and other persons using its facilities
and does not unfairly discriminate between customers, issuers, brokers
or dealers.
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\21\ 15 U.S.C. 78f(b)(4) and (5).
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The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. 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.'' \22\
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\22\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29,2005).
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The Exchange believes that the proposed fees in general constitute
an equitable allocation of fees, and are not unfairly discriminatory,
because they allow BOX to recover costs associated with offering access
through the network connections. The proposed fees are also expected to
offset the costs both the Exchange and BOX incur in maintaining and
implementing ongoing improvements to the trading systems, including
connectivity costs, costs incurred on software and hardware
enhancements and resources dedicated to software development, quality
assurance, and technology support.
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act, in that the proposed fee changes are fair,
equitable and not unreasonably discriminatory, because the fees for the
connectivity alternatives available on BOX, as proposed, are
constrained by significant competitive forces. The U.S. options markets
are highly competitive (there are currently 16 options markets) and a
reliance on competitive markets is an appropriate means to ensure
equitable and reasonable prices. As stated above, BOX instituted the
proposed fees after finding itself at a competitive disadvantage with
other options exchanges. As other options exchanges lowered their
transaction fees, they were

[[Page 63922]]

still able to rely on the connectivity fee revenues as a means of
covering a portion of the costs to operate their respective exchanges.
By not charging for connectivity, BOX could not realistically compete
for order flow through reduced transaction fees and still remain
solvent.
Further, as the Exchange explained to the Division in previous
filings and comment letters, the existence of robust competition
between exchanges to attract order flow requires exchanges to keep
prices for all of their joint services--including connectivity to the
exchanges' networks at a pro-competitive level.\23\ This conclusion is
substantiated by the report prepared by Professor Janusz A. Ordover and
Gustavo Bamberger addressing the theory of ``Platform Competition'' and
its application to the pricing of exchanges' services, including
connectivity services.\24\ In the report, Ordover and Bamberger explain
that ``the provision of connectivity services . . . is inextricably
linked to the provision of trading services, so that, as a matter of
economics, it is not possible to appropriately evaluate the pricing of
connectivity services in isolation from the pricing of trading and
other `joint' services offered by'' an exchange. Ordover and Bamberger
state that ``connectivity services are an `input' into trading'' and
that ``excessive pricing of such services would raise the costs of
trading on [an exchange] relative to its rivals and thus discourage
trading on'' that exchange.
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\23\ Letter from Lisa J. Fall, BOX, to Brent J. Fields,
Secretary, Securities and Exchange Commission (Feb. 19, 2019),
https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4945872-178516.pdf.
\24\ Id.
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Although the Ordover/Bamberger Statement focuses on the pricing of
connectivity services by Nasdaq-affiliated equities exchanges, its
``overarching conclusion . . . that the pricing of connectivity
services should not be analyzed in isolation'' applies with equal force
to the proposed BOX fees. As discussed herein, BOX is engaged with
rigorous competition with other exchanges to attract order flow to its
platform. As such, BOX is constrained in its ability to price its joint
services--including connectivity services--at supracompetitive levels.
That competition ensures that BOX's connectivity fees are set at levels
consistent with the requirements of the Exchange Act.
The Exchange acknowledges that there is no regulatory requirement
that any market participant must connect to BOX, or that any
participant must connect at any specific connection speed. The rule
structure for options exchanges are, in fact, fundamentally different
from those of equities exchanges. In particular, options market
participants are not forced to connect to (and purchase market data
from) all options exchanges, as shown by the number of Participants of
BOX as compared to the much greater number of participants at other
options exchanges. Not only does BOX have less than half the number of
participants as certain other options exchanges, but there are also a
number of BOX Participants that do not connect directly to BOX.
Further, of the number of Participants that connect directly to BOX,
many such Participants do not purchase market data from BOX. In
addition, of the market makers that are connected to BOX, it is the
individual needs of the market maker that require whether they need one
connection or multiple connections to BOX. BOX has market maker
Participants that only purchase one connection (10Gb) and BOX has
market maker Participants that purchase multiple connections. It is all
driven by the business needs of the market maker. Market makers that
are consolidators that target resting order flow tend to purchase more
connectivity than market makers that simply quote all symbols on BOX.
Even though non-Participants purchase and resell 10Gb and non-10Gb
connections to both Participants and non-Participants, no market makers
currently connect to BOX indirectly through such resellers.
The argument that all broker-dealers are required to connect to all
exchanges is not true in the options markets. The options markets have
evolved differently than the equities markets both in terms of market
structure and functionality. For example, there are many order types
that are available in the equities markets that are not utilized in the
options markets, which relate to mid-point pricing and pegged pricing
which require connection to the SIPs and each of the equities exchanges
in order to properly execute those orders in compliance with best
execution obligations. In addition, in the options markets there is a
single SIP (OPRA) versus two SIPs in the equities markets, resulting in
few hops and thus alleviating the need to connect directly to all the
options exchanges. Additionally, in the options markets, the linkage
routing and trade through protection are handled by the exchanges, not
by the individual participants. Thus not connecting to an options
exchange or disconnecting from an options exchange does not potentially
subject a broker-dealer to violate order protection requirements as
suggested by SIFMA. The Exchange recognizes that the decision of
whether to connect to BOX is separate and distinct from the decision of
whether and how to trade on BOX. The Exchange acknowledges that many
firms may choose to connect to BOX, but ultimately not trade on it,
based on their particular business needs.
Further, there is competition for connectivity to BOX. BOX competes
with ten (10) non-Participants who resell BOX connectivity or market
data. These are resellers of BOX connectivity--they are not
arrangements between broker dealers to share connectivity costs. Those
non-Participants resell that connectivity to multiple market
participants over that same connection, including both Participants and
non-Participants of BOX. When connectivity is re-sold by a third-party,
BOX does not receive any connectivity revenue from that sale. It is
entirely between the third-party and the purchaser, thus constraining
the ability of BOX to set its connectivity pricing as indirect
connectivity is a substitute for direct connectivity. There are
currently ten (10) non-Participants that purchase connectivity to BOX.
Those non-Participants resell that connectivity or market data to
approximately twenty-seven (27) customers, some of whom are agency
broker-dealers that have tens of customers of their own. Some of those
twenty-seven (27) customers also purchase connectivity directly from
BOX. Accordingly, indirect connectivity is a viable alternative that is
already being used by non-Participants of BOX, constraining the price
that BOX is able to charge for connectivity.
The Exchange is comprised of 50 BOX Participants. Of those 50
Participants, 27 Participants have purchased 10Gb or non-10Gb
connections or some combination of multiple various connections. The
remaining Participants who have not purchased any connectivity to BOX
are still able to trade on BOX indirectly through other Participants or
non-Participant service bureaus that are connected. These remaining
Participants who have not purchased connectivity are not forced or
compelled to purchase connectivity, and they retain all of the other
benefits of membership with the Exchange. Accordingly, Participants and
non-Participants have the choice to purchase connectivity and are not
compelled to do so in any way.
The Exchange believes that the proposed fees are fair, equitable
and not unreasonably discriminatory because the connectivity pricing is
directly

[[Page 63923]]

related to the relative costs to BOX to provide those respective
services and does not impose a barrier to entry to smaller
participants. Accordingly, BOX offers various direct connectivity
alternatives and various indirect connectivity (via third party)
alternatives. BOX recognizes that there are various business models and
varying sizes of market participants conducting business on BOX. The
decision of which type of connectivity to purchase, or whether to
purchase connectivity at all for a particular exchange, is based on the
business needs of the firm. To assist prospective Participants or firms
considering connecting to BOX, the Exchange provides information about
BOX's available connectivity alternatives on the BOX website.\25\
Section 2.4 of the BOX Connectivity Guide details the bandwidth
requirements depending on the type of traffic each firm requires.
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\25\ See BOX Connectivity Guide at https://boxoptions.com/assets/NET-BX-001E-BOX-Network-Connection-Specifications-v2.7.pdf.
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The non-10Gb direct connectivity alternatives \26\ are all
comprised of bandwidth of equal to or less than 1Gb and are purchased
by market participants that require less bandwidth. For example, a firm
requiring only simple order routing (which requires 128 kbps of
bandwidth) would be satisfied with a non-10Gb connection. Additionally,
non-10Gb connections can fully support both the sending of orders and
the consumption of BOX's HSVF Data Feed.\27\ By definition, non-10Gb
connections utilize less bandwidth and consume less resources from the
network. Additionally, non-10Gb connections and their interface modules
cost considerably less than 10Gb connections. Accordingly, because
these connections consume the least resources of the Exchange and are
the least costly for the Exchange to provide, the non-10Gb connections
are at a lower price point than the 10Gb connections.
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\26\ Non-10Gb connectivity alternatives are comprised of
protocol types that are at or under 1Gb bandwidth. The protocol
types are: Gigabit Ethernet, Ethernet, Fast Ethernet, Fiber Channel,
OC-3, Singlemode Fiber, ISDN, POTS and T1.
\27\ BOX's HSVF Data Feed does not require a 10Gb physical
connection. However, to receive the five best limits on the HSVF, a
10Gb connection is required. On MIAX, the 1Gb connection cannot
support the consumption of the top of market data feed or the depth
data feed product--both require a 10Gb connection.
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In contrast, market participants that purchase 10Gb connections
utilize the most bandwidth and consume the most resources from the
network.\28\ The 10Gb connection offers optimized connectivity for
latency sensitive participants and is faster in round trip time for
connection oriented traffic to BOX than the non-10Gb connection. This
lower latency is achieved through more advanced network equipment, such
as advanced hardware and switching components, which translates to
increased costs to BOX. A 10Gb connection uses at least ten times the
network infrastructure as the non-10Gb connections as BOX has to scale
the systems by the amount and size of all connections regardless of how
they are used.\29\ Accordingly, the Exchange believes that the
allocation of the proposed fees ($1,000 per non-10Gb connection and
$5,000 per 10Gb connection) are reasonable based on the resources
consumed by the respective type of connection--lower resource consuming
market participants pay the least, and highest resource consuming
market participants pay the most, particularly since higher resource
consumption translates to higher costs to BOX.\30\
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\28\ Supporting a 10Gb connection requires larger internal
uplinks, firewalls and sniffer devices, all of which cost
considerably more to maintain than support for non10-Gb connections.
\29\ The Exchange's network infrastructure requirements are
based on the premise of all connections operating at full capacity,
\30\ The IEX Comment Letter questioned if there were cost
differentials between 10Gb and non-10Gb connections, stating that
``the hardware components to support a 10Gb connection are
essentially the same as those for a non-10Gb connection . . . there
may be marginally higher maintenance costs in the way of
replacements or upgrades for a 10Gb option, but IEX believes the
difference in exchange cost for a 10Gb connection will certainly be
less than twice that of a higher latency connection.'' As described
above, this is not true for BOX.
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
BOX Participants if the Exchange were to establish unreasonable and
uncompetitive price increases for its connectivity alternatives. Market
participants choose to connect to a particular exchange and because it
is a choice, BOX must set reasonable connectivity pricing, otherwise
prospective participants would not connect and existing participants
would disconnect or connect through a third-party reseller of
connectivity. No options market participant is required by rule,
regulation, or competitive forces to be a BOX Participant.\31\ As
evidence of the fact that market participants can and do disconnect
from exchanges based on connectivity pricing, see the R2G Services LLC
(``R2G'') letter based on BOX's proposed rule changes to increase its
connectivity fees. The R2G letter stated, ``[w]hen BOX instituted a
$10,000/month price increase for connectivity; we had no choice but to
terminate connectivity into them as well as terminate our market data
relationship. The cost benefit analysis just didn't make any sense for
us at those new levels.'' \32\ Accordingly, this example shows that if
an exchange sets too high of a fee for connectivity and/or market data
services for its relevant marketplace, market participants can choose
to disconnect from the exchange.
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\31\ Cboe Exchange Inc. has over 200 members, Nasdaq ISE, LLC
has approximately 100 members, and NYSE American LLC has over 80
members. In comparison, the BOX has 51 Participants.
\32\ The Exchange notes that R2G was a non-Participant service
provider who connected to BOX at no cost and then sold BOX
connectivity and market data to its customers. The $10,000 charge
referenced in the R2G Letter was for two (2) 10Gb connections.
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Several market participants choose not to be BOX Participants and
choose not to access BOX, and several market participants also access
BOX indirectly through another market participant. If all market
participants were required to be Participants of each exchange and
connect directly to the exchange, all exchanges would have over 200
Participants, in line with Cboe's total membership.
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the proposed fees allow the BOX to recover a
portion of the costs incurred by BOX associated with maintaining and
enhancing a state-of-the-art exchange network infrastructure in the US
options industry. Additionally, there are significant costs associated
with various projects and initiatives to improve overall network
performance and stability, as well as costs paid to the third-party
data centers for space rental, power used, etc.
The Exchange notes that unlike its competitors, BOX does not own
its own data center and therefore cannot control data center costs.
While some of the data center expenses are fixed, much of the expenses
are not fixed, and thus increases as the number of physical connections
increase. For example, new non-10Gb and 10Gb connections require the
purchase of additional hardware to support those connections. Further,
as the total number of all connections increase, BOX needs to increase
their data center footprint and consume more power, resulting in
increased costs charged by their third-party data center provider.
Further, as discussed herein, because the costs of operating a data
center are significant and not economically feasible for BOX, BOX does
not operate its own data centers, and instead contracts with a third-
party data center provider. The Exchange notes that

[[Page 63924]]

larger, dominant exchange operators own/operate their data centers,
which offers them greater control over their data center costs. Because
those exchanges own and operate their data centers as profit centers,
BOX is subject to additional costs. Connectivity fees, which are
charged for accessing the BOX's data center network infrastructure, are
directly related to the network and offset such costs.
As detailed in the Exchange's and BOX Market's \33\ 2018 audited
financial statements which are publicly available as part of the
Exchange's Form 1 Amendment, BOX only has two sources of revenue that
it can control: Transaction fees and non-transactions fees.\34\
Accordingly, BOX must cover all of its expenses from these two sources
of revenue.
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\33\ BOX Exchange LLC (``Exchange'') and BOX Options Market LLC
(``BOX'') are two different entities. The Exchange is a national
securities exchange registered with the SEC under Section 6 of the
Securities Exchange Act of 1934. The Exchange fulfills the
regulatory functions and responsibilities and oversees BOX, the
equity options market. Expenses associated with network connectivity
services are born by both the Exchange and BOX.
\34\ Options Price Authority Reporting (``OPRA'') income is not
controlled by BOX.
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The Proposed Fees are fair and reasonable because they will not
result in excessive pricing or supracompetitive profit, when comparing
the total annual expense of the Exchange and BOX associated with
providing the network connectivity services versus the total projected
annual revenue of the Exchange \35\ and BOX associated with providing
the network connectivity services.
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\35\ Revenues for the Exchange are limited to the Options
Regulatory Fee (``ORF'') and fines and disgorgements.
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For 2018, the annual expense for BOX and the Exchange associated
with providing the network connectivity services was approximately $8.9
million. This amount is comprised of both direct and indirect expenses.
The financial information below is meant to provide greater detail and
clarity concerning BOX's cost allocations as they pertain to expenses
for network connectivity services; and further describe the nature and
closeness of the relationship between the identified costs and
connectivity services where possible.
The direct expense (which relates 100% to the network
infrastructure, associated data center processing equipment required to
support various connections, network monitoring systems and associated
software required to support the various forms of connectivity) was
approximately $6.4 million.\36\ A more detailed breakdown of the direct
annual operational expense in 2018 includes the following:
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\36\ Direct connectivity expenses are a portion of the following
line items in the BOX and Exchange Form 1 Financial Statements:
Technical and Operational, Other and Communications and Data
Processing. The Exchange notes that these direct expenses include
all expenses associated with the Exchanges' data centers. BOX's
infrastructure design does not distinguish network connectivity
expenses from other data center expenses. In other words, network
connectivity is intertwined with the overall infrastructure of the
BOX system.
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Over $2.8 million for space rental, power usage,
connections, etc. at the Exchanges data centers; \37\
---------------------------------------------------------------------------

\37\ This cost can be found in three line items in the Statement
of Income of the BOX and Exchange Form 1 documents: ``Professional
Services: Other,'' ``Professional Services: Technical and
Operational''; and ``Communications and data processing.
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Over $1.1 million for data center support and management
of third party vendors; \38\
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\38\ These costs include annual service and support contracts
with a large number of third party vendors to support the data
centers and trading platform. These costs appear in the
``Professional Services: Technical and Operational'' line item of
the Statement of Income of the BOX and Exchange Form 1 documents.
---------------------------------------------------------------------------

Over $700,000 in technological improvements to the data
center infrastructure; \39\
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\39\ This cost is represented on the BOX's Financial Statement
document under the ``Computer equipment and software and leasehold
improvements'' line item. The associated amortization in 2018 was
excluded from the indirect depreciation outlined herein.
---------------------------------------------------------------------------

Over $1.4 million for resources for technical and
operational services for the Exchange's data centers; \40\ and
---------------------------------------------------------------------------

\40\ These costs are included in the ``Professional Services:
Technical and Operational'' line item of the Statement of Income of
the BOX and Exchange Form 1 documents.
---------------------------------------------------------------------------

$400,000 in market data connectivity fees.\41\
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\41\ A portion can be tied to the ``Communications and data
processing'' line item of the BOX and Exchange Statement of Income.
The remaining portion is in the ``Professional Services: Other''
line item of the BOX and the Exchange Statement of Income. Of note,
regarding market data connectivity fees, this is the cost associated
with BOX consuming connectivity/content from the equities markets in
order to operate the Exchange, causing BOX to effectively pay its
competitors for this connectivity.
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The indirect expense (which includes expense from such areas as
trading operations, software development, business development,
information technology, marketing, human resources, legal and
regulatory, finance and accounting) that the Exchange and BOX allocate
to the maintenance and support of network connectivity services was
approximately $2.5 million.\42\ Included in this indirect expense total
are the following:
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\42\ Indirect expenses for connectivity are a portion of the
following line items in the BOX and Exchange Form 1 Financial
Statements: Employee Costs, Depreciation and Amortization,
Consulting, Financial and Administrative, and Other. The Exchange
notes that these indirect expenses represent approximately 10% of
the total annual expenses for BOX and the Exchange in 2018.
---------------------------------------------------------------------------

Over $1 million in employee compensation and benefits for
full-time employees that support network connectivity services; \43\
---------------------------------------------------------------------------

\43\ This cost includes employees in network operations, trading
operations, development, system operations, business, etc., as well
as staff in general corporate departments (such as legal,
regulatory, and finance) that support those employees and functions.
BOX's employee compensation and benefits expense relating to
providing network connectivity services was a portion of the total
expense for employee compensation and benefits that is stated in the
2018 Financial Statements for BOX and the Exchange.
---------------------------------------------------------------------------

Over $1 million in software and hardware depreciation;
\44\
---------------------------------------------------------------------------

\44\ This cost includes depreciation and amortization of
hardware and software used to provide network connectivity services,
including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the provision of network connectivity for trading.
BOX's depreciation and amortization expense relating to
providing network connectivity services was a portion of the total
expense for depreciation and amortization that is stated in the 2018
Financial Statements for BOX and the Exchange.
---------------------------------------------------------------------------

Over $100,000 in office space and rent to support
employees related to network connectivity; \45\ and
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\45\ This cost includes occupancy costs for leased office space
for staff that support the provision of network connectivity
services. BOX and Exchange's combined occupancy expense relating to
providing network connectivity services is a portion of the total
expense for occupancy that is stated in the 2018 Financial
Statements for BOX and the Exchange.
---------------------------------------------------------------------------

Over $200,000 in miscellaneous data, communications,
external IT, and regulatory audit costs relate to expenses that support
general connectivity for trading and personnel support.\46\
---------------------------------------------------------------------------

\46\ The combined miscellaneous expense relating to trading
connectivity and personnel support was a portion of multiple line
items in the 2018 Financial Statements for BOX and the Exchange.
---------------------------------------------------------------------------

Total projected annualized revenue associated with selling the
network connectivity services (reflecting the proposed fees on a fully-
annualized basis, using July 2019 data) for BOX is projected to be
approximately $4.6 million. This projected revenue amount of $4.6
million represents approximately 13% of total net revenue of BOX and
Exchange for 2018 of approximately $35.5 million. The Exchange believes
that an indirect expense allocation of 10% of total expense (less
direct expense) to network connectivity services is fair and
reasonable, as total projected network connectivity revenue represents
approximately 13% of total net revenue for 2018. That is, direct
expense of $6.4 million plus indirect expense of $2.5 million fairly
reflects the total annual

[[Page 63925]]

expense associated with providing the network connectivity services,
both from the perspective of similar revenue and expense percentages
(connectivity to total), as well as matching connectivity resources to
connectivity expenses. The Exchange believes that this is a
conservative allocation of indirect expense. Accordingly, the total
projected connectivity revenue for BOX, reflective of the proposed
fees, on an annualized basis, of $4.6 million, is almost half of the
total annual actual BOX and Exchange connectivity expense (direct and
indirect) for 2018 of $8.9 million. Further, even the direct expense
associated with providing network connectivity ($6.4 million) exceeds
expected revenue from connectivity.
The Exchange projects comparable network connectivity revenue and
expense for 2019 for BOX. Accordingly, the Proposed Fees are fair and
reasonable because they do not result in excessive pricing or
supracompetitive profit, when comparing the actual network connectivity
costs to the Exchange and BOX versus the projected network connectivity
annual revenue. Additional information on overall revenue and expense
can be found in the Exchange's and BOX's 2018 audited financial
results, which is publicly available as part of the Exchange's Form 1
filed with the Commission.
The Exchange again notes that other exchanges have similar
connectivity alternatives for their participants, including similar
low-latency connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE
Arca, Inc. (``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq
ISE, LLC (``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet
connectivity alternatives to each of their participants.\47\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\48\
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\47\ See Phlx and ISE Rules, General Equity and Options Rules,
General 8, Section 1(b). 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, which the equivalent of the
Exchange's 10Gb ULL connection. 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, which the equivalent of the Exchange's 10Gb ULL connection.
\48\ Id.
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The financials above show that BOX has incurred substantial costs
associated with maintaining and enhancing the BOX network. These costs,
coupled with BOX's historically low transaction fees, place BOX at a
competitive disadvantage against other options exchanges who charge
connectivity fees to market participants. BOX has no choice but to
begin charging Participants and non-Participants fees for connecting
directly to the network which BOX has taken considerable measures to
maintain and enhance for the benefit of those Participants and non-
Participants in order to remain competitive with the other options
exchanges in the industry.
Finally, the Exchange believes redefining the HSVF Connection Fee
as a Port Fee is reasonable, equitable and not unfairly discriminatory.
This classification is more accurate because an HSVF subscription is
not enabled through a physical connection to the Exchange. Although
market participant must be credentialed by BOX to receive the HSVF,
anyone can become credentialed by submitting the required
documentation.\49\ The Exchange does not propose to alter the amount of
the existing HSVF fee; subscribers to the HSVF will continue to pay
$1,500 per month. As with the Connectivity Fees, BOX's HSVF Port Fee is
in line with industry practice.\50\
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\49\ See Trading Interface Specification, BOX Options, https://boxoptions.com/technology/trading-interface-specifications/.
\50\ See Cboe Data Services, LLC (CDS) Fee Schedule Sec. VI
(charging $500 per month for up to five users to access the Enhanced
Controlled Data Distribution Program).
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B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange 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. In particular, the
Exchange has received no official complaints from Participants that
purchase the Exchange's connectivity that the Exchange's fees or the
Proposed Fees are negatively impacting or would negatively impact their
abilities to compete with other market participants or that they are
placed at a disadvantage.\51\ The Exchange believes that the Proposed
Fees do not place certain market participants at a relative
disadvantage to other market participants because the connectivity
pricing is associated with relative usage of the various market
participants and does not impose a barrier to entry to smaller
participants. As described above, the less expensive non-10Gb direct
connection is generally purchased by market participants that utilize
less bandwidth. The market participants that purchase 10Gb connections
utilize the most bandwidth, and those are the participants that consume
the most resources from the network. Accordingly, the Proposed Fees do
not favor certain categories of market participants in a manner that
would impose a burden on competition; rather, the allocation of the
Proposed Fees reflect 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 BOX.
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\51\ The Exchange notes that it did receive one complaint from a
non-Participant third party that, prior to the proposed fees,
received connectivity for free and resold it to other market
participants. This non-Participant ceased connectivity to the
Exchange in January 2019.
---------------------------------------------------------------------------

Inter-Market Competition
The Exchange believes the Proposed Fees do not place an undue
burden on competition on other SROs that is not necessary or
appropriate. In particular, options market participants are not forced
to connect to (and purchase market data from) all options exchanges, as
shown by the number of Participants of BOX as compared to the much
greater number of members at other options exchanges (as described
above). Not only does BOX have less than half the number of
Participants as certain other options exchanges, but there are also a
number of the Exchange's Participants that do not connect directly to
BOX. Additionally, the Exchange notes other exchanges have similar
connectivity alternatives for their participants, including similar
low-latency connectivity, but with much higher rates to connect.\52\
The Exchange is also unaware of any assertion that its existing fee
levels or the Proposed Fees would somehow unduly impair its competition
with other options exchanges. To the contrary, if the fees charged are
deemed too high by market participants, they can simply disconnect.
---------------------------------------------------------------------------

\52\ See supra note 20.
---------------------------------------------------------------------------

Unilateral action by the Exchange in establishing fees for services
provided to its Participants and others using its facilities will not
have an impact on

[[Page 63926]]

competition. As a small exchange in the already highly competitive
environment for options trading, the Exchange does not have the market
power necessary to set prices for services that are unreasonable or
unfairly discriminatory in violation of the Exchange Act. The
Exchange's proposed fees, as described herein, are comparable to and
generally lower than fees charged by other options exchanges for the
same or similar services. Lastly, the Exchange believes the proposed
change will not impose a burden on intramarket competition as the
proposed fees are applicable to all Participants and others using its
facilities that connect to BOX.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act \53\ and Rule 19b-4(f)(2)
thereunder,\54\ because it establishes or changes a due, or fee.
---------------------------------------------------------------------------

\53\ 15 U.S.C. 78s(b)(3)(A)(ii).
\54\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend the rule
change if it appears to the Commission that the action is necessary or
appropriate in the public interest, for the protection of investors, or
would otherwise further the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

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-BOX-2019-32 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-BOX-2019-32. 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BOX-2019-32, and should be submitted on
or before December 10, 2019.
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\55\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24976 Filed 11-18-19; 8:45 am]
BILLING CODE 8011-01-P