[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10268-10274]
[FR Doc No: 2022-03763]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94264; File No. SR-BOX-2022-07]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee
Schedule on the BOX Options Market LLC Facility To Adopt Electronic
Market Maker Trading Permit Fees

February 16, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 1, 2022, BOX Exchange LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the Exchange. The Exchange filed the proposed rule
change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-
4(f)(2) thereunder,\4\ which renders the proposal effective upon filing
with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission
(``Commission'') a proposed rule change to amend the Fee Schedule to on
the BOX Options Market LLC (``BOX'') options facility. The text of the
proposed rule change is available from the principal office of the
Exchange, at the Commission's Public Reference Room and also on the
Exchange's internet website at 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 proposes to amend the Fee Schedule to establish a new
monthly Participant Fee. Specifically, the Exchange proposes to adopt
electronic Market Maker Trading Permit Fees as follows: (i) $4,000 per
month for Market Maker Appointments in up to and including 10 classes;
(ii) $6,000 per month for Market Maker Appointments in up to and
including 40 classes; (iii) $8,000 per month for Market Maker
Appointments in up to and including 100 classes; and (iv) $10,000 per
month for Market Maker Appointments for over 100 classes. For the
calculation of the monthly electronic Market Maker Trading Permit fees,
the number of classes is defined as the greatest number of classes the
Market Maker was appointed to quote in on any given day within the
calendar month. The Exchange notes that the proposed electronic Market
Maker Trading Permit fees are lower than fees assessed at competing
options exchanges.\5\ The Exchange notes the current monthly
Participant Fee of $1,500 per month will not apply to electronic Market
Makers. Under this proposal, electronic Market Makers will pay the
applicable monthly electronic Market Maker Trading Permit fee only. All
other electronic Participants \6\ will continue to pay the monthly
Participant Fee in Section VIII.B of the BOX Fee Schedule.
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    \5\ See NYSE Arca, Inc. (``NYSEArca'') Fee Schedule (assessing
Market Makers $6,000 for up to 175 option issues, an additional
$5,000 for up to 350 option issues, an additional $4,000 for up to
1,000 option issues, and an additional $3,000 for all option issues
traded on the Exchange). The Exchange notes that these fees are
compounded, so Market Makers who trade in all option issues on the
exchange are assessed $18,000 per month. See also Miami
International Securities Exchange, LLC (``MIAX'') Fee Schedule
(assessing Market Makers $7,000 for up to 10 classes or up to 20% of
classes by volume, $12,000 for up to 40 classes or up to 35% of
classes by volume, $17,000 for up to 100 classes or up to 50% or
classes by volume, and $22,000 for over 100 classes or over 50% of
classes by volume up to all classes listed on MIAX).
    \6\ The Exchange notes the following Participant types on BOX:
Public Customers, Professional Customers, Broker Dealers, and Market
Makers. Pursuant to this proposal, Public Customers, Professional
Customers, and Broker Dealers will continue to be charged the $1,500
Participant Fee detailed in Section VIII.B of the BOX Fee Schedule.
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    The Exchange believes that it is important to demonstrate that
these fees are based on its costs and reasonable business needs that
have grown substantially since the Exchange implemented the Participant
Fee for all BOX Participants in 2016. The Exchange also believes the
proposed electronic Market Maker Trading Permit Fees will allow BOX to
offset expenses that BOX has and will incur, and that BOX is providing
sufficient transparency (as described below) into how BOX determined to
charge such fees. Accordingly, BOX is providing an analysis of its
revenues, costs, and profitability associated with the proposed
electronic Market Maker Trading Permit Fees. This analysis includes
information regarding its methodology for determining the costs and
revenues associated with providing access services to electronic Market
Makers.\7\
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    \7\ BOX notes that the structure of BOX is different from other
options exchanges in the industry. Specifically, BOX Exchange LLC
(``Exchange'') is a fully separate legal entity from BOX Options
Market LLC, the equity options facility of the Exchange. All of the
Exchange's expenses support the regulatory function as the Exchange.
Further, the Exchange fulfills the regulatory functions and
responsibilities as a national securities exchange registered with
the SEC under Section 6 of the Securities Exchange Act of 1934, and
oversees the BOX Options Market. Exchange expenses are solely
regulatory in nature because, due to the unique structure between
the Exchange and the BOX Options Market facility, the Exchange
expenses are separate from the BOX Options Market facility expenses
and there can be no commingling of the funds. As such, the expenses
discussed herein are solely those of BOX Options Market and not the
Exchange.

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    In order to determine BOX's costs to provide the access services to
electronic Market Makers, BOX conducted an extensive cost review in
which BOX analyzed all expenses in BOX's general expense ledger to
determine whether each such expense relates to Market Maker access
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the access services. The
sum of all such portions of expenses represents the total cost for BOX
to provide the access services to electronic Market Makers. For the
avoidance of doubt, no expense amount was allocated twice.
    In order to determine BOX's projected revenues associated with the
proposed Market Maker Permit Fees, BOX analyzed the number of
Participants currently utilizing the Trading Permits, and, utilizing a
recent monthly billing cycle representative of 2021 monthly revenue,
extrapolated annualized revenue on a going-forward basis utilizing the
proposed Market Maker Permit Fees discussed herein. BOX does not
believe it is possible or appropriate to factor into its analysis
future revenue growth or decline into its projections for purposes of
these calculations, given the uncertainty of such projections due to
the continually changing access needs of market participants and
general market participant behavior. BOX does, however, believe that it
is reasonable and appropriate to factor into its analysis future cost
growth or decline for expenses related to providing access services
associated with the proposed electronic Market Maker Trading Permit
fees. The Exchange is presenting its revenue and expense associated
with providing access services to electronic Market Makers in this
filing in a manner that is consistent with how BOX presents its revenue
and expense in its Audited Financial Statements. BOX's most recent
Audited Financial Statement is for 2020. However, since the revenues
and expenses associated with the proposed electronic Market Maker
Trading Permit fees were not in place in 2020, the Exchange believes
its 2020 Audited Financial Statement is not representative of its
current total annualized revenue and costs associated with the proposed
electronic Market Maker Trading Permit fees. Accordingly, BOX believes
it is more appropriate to analyze the proposed electronic Market Maker
Trading Permit fees utilizing its 2021 revenue and costs, as described
herein, which utilize the same presentation methodology as set forth in
BOX's previously-issued Audited Financial Statements.\8\ Based on the
analysis discussed herein, the Exchange believes that the proposed
electronic Market Maker Trading Permit fees are fair and reasonable
because they will not result in excessive pricing or supra-competitive
profit when comparing BOX's total annual expense associated with
providing the access services to electronic Market Makers versus the
total projected annual revenue BOX will collect for providing those
services.
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    \8\ For example, BOX previously noted that direct and indirect
expenses described in a prior fee filing were contained in the
following line items in BOX's 2018 Form 1: Technical and
Operational, External IT Services, Data Processing & Communication,
Depreciation, Personnel, Amortization, Rent of facilities, Office-
related, Professional Services, Other. See Securities Exchange Act
Release No. 88161 (February 11, 2020), 85 FR 8968 (February 18,
2020) (SR-BOX-2020-03). Accordingly, the direct and indirect
expenses described in this filing is attributed to the same line
items for BOX's 2021 Form 1 Amendment, which will be filed in 2022.
The Exchange notes that another exchange has utilized a similar
presentation methodology in a recent filing and such filing was
noticed and not suspended by the Commission when the exchange
adopted Trading Permit fees. See Securities Exchange Act Release
Nos. 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03). See also SR-PEARL-2021-59.
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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,\9\ 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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    \9\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange established the current $1,500 monthly Participant Fee
in October 2016 for all Participants regardless of account type.\10\ At
the time BOX established this Participant Fee, BOX's market share was
2.45% and the total volume of options contracts traded on BOX in
September 2016 was 8,737,707. The Exchange established this lower (when
compared to other options exchanges in the industry) Participant fee in
order to encourage market participants to become Participants of BOX
and register as BOX Market Makers. Since 2016, BOX has grown its market
share and membership base significantly. Specifically, in September
2021, BOX's market share was 5.19% and the total volume of option
contracts traded on BOX in September 2021 was 42,098,287. BOX recently
reviewed its current Participant Fees detailed in Section VIII of the
BOX Fee Schedule. In its review, BOX determined that Participant fees
would need to be raised, and a flat fee for all Participant types is no
longer appropriate. Specifically, BOX found that electronic Market
Makers had been benefitting from a flat Participant Fee rate while (1)
consuming the most bandwidth and resources of the network; (2)
transacting the vast majority of the volume on BOX; and (3) requiring
the high touch network support services provided by BOX and its staff.
The Exchange notes that Broker Dealers, Professional Customers, and
Public Customers take up significantly less BOX resources and costs as
discussed further below. In its review, BOX found that since 2016,
Market Makers have had the luxury of paying the same Participant Fees
as other account types despite Market Makers consuming the most
resources on the BOX system and contributing to increased costs for
BOX. As such, the Exchange proposes to establish higher, separate
electronic Trading Permit fees for Market Makers that are more aligned
with the costs and resources that Market Makers continue to place on
BOX and its systems. Additionally, the Exchange believes that the
proposed change will better align BOX Participant Fees with rates
charged by competing options exchanges in the industry for similar
Trading Permits for such market participants. As such, BOX believes the
proposed electronic Market Maker Trading Permit fees are reasonable in
that they are lower than comparable fees at other options
exchanges.\11\ Further, the Exchange believes that the proposal is
reasonably designed to continue to compete with other options exchanges
by incentivizing market participants to register as Market Makers on
BOX in a manner than enables BOX to improve its overall competitiveness
and strengthen market quality for all market participants.
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    \10\ See Securities Exchange Act Release No. 79038 (October 4,
2016), 81 FR 70214 (October 11, 2016) (SR-BOX-2016-47).
    \11\ See supra note 5.
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    The proposed fees are equitable and not unfairly discriminatory as
the fees apply equally to all electronic Market Makers. As such, all
similarly situated

electronic Market Makers, with the same number of appointments, will be
subject to the same electronic Market Maker Trading Permit fee. The
Exchange also believes that assessing lower fees to electronic Market
Makers that quote in fewer classes is reasonable and appropriate as it
will allow BOX to retain and attract smaller-scale electronic Market
Makers, which are an integral component of the options industry
marketplace. Since these smaller electronic Market Makers utilize less
bandwidth and capacity on the BOX network due to the lower number of
quoted classes, the Exchange believes it is reasonable and appropriate
to offer such electronic Market Makers a lower fee. The Exchange also
notes that other options exchanges assess permit fees at different
rates, based upon a member's participation on that exchange,\12\ and,
as such, this concept is not new or novel.
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    \12\ See e.g., NYSE Arca Options Fees and Charges, p.1
(assessing market makers $6,000 for up to 175 option issues, an
additional $5,000 for up to 350 option issues, an additional $4,000
for up to 1,000 option issues, an additional $3,000 for all option
issues on the exchange, and an additional $1,000 for the fifth
trading permit and for each trading permit thereafter); NYSE
American Options Fee Schedule, p. 23 (assessing market makers $8,000
for up to 60 plus the bottom 45% of option issues, an additional
$6,000 for up to 150 plus the bottom 45% of option issues, an
additional $5,000 for up to 500 plus the bottom 45% of option
issues, and additional $4,000 for up to 1,100 plus the bottom 45% of
option issues, an additional $3,000 for all issues traded on the
exchange, and an additional $2,000 for 6th to 9th ATPs; plus an
addition fee for premium products). See also Cboe BZX Options
Exchange (``BZX Options'') assesses the Participant Fee, which is a
membership fee, according to a member's ADV. See Cboe BZX Options
Exchange Fee Schedule under ``Membership Fees''. The Participant Fee
is $500 if the member ADV is less than 5,000 contracts and $1,000 if
the member ADV is equal to or greater than 5,000 contracts.
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    Further, the Exchange believes the proposed tiered structure of the
electronic Market Maker Trading Permit fees is reasonable and
appropriate. Under the proposal, electronic Market Makers will be
charged monthly fees based on the greatest number of classes quoted on
any given trading day in a calendar month. Under the proposed fee
structure, the fees increase as the number of classes quoted by a
Market Maker increases. The Exchange believes this structure is
reasonable because the BOX system requires increased performance and
capacity in order to provide the opportunity for Market Makers to quote
in a higher number of options classes on BOX. Specifically, the more
classes that are actively quoted on BOX by a Market Maker requires
increased memory for record retention, increased bandwidth for
optimized performance, increased functionalities on each application
layer, and increased optimization with regard to surveillance and
monitoring of such classes quoted. As such, basing the Market Maker
Trading Permit fee on the greatest number of classes quoted in on any
given day in a calendar month is reasonable and appropriate when taking
into account how the increased number of quoted classes directly impact
the costs and resources for BOX. Further, the Exchange believes that
the proposed tiered structure is equitable and not unfairly
discriminatory as all similarly situated Market Makers will be charged
the same fee. The Exchange notes that another options exchange in the
industry calculates Market Maker Permit Fees in the same manner.\13\
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    \13\ See Nasdaq Phlx LLC (``Phlx'') Fee Schedule, Section 8(B)
detailing the tiered structure for Streaming Quote Trader (``SQT'')
Fees.
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    The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the proposed fees will not result in
excessive or supra-competitive profit. The costs associated with
providing access to Participants and non-Participants are extensive,
have increased year-over-year, and are projected to increase year-over-
year in the future. In particular, BOX has experienced a material
increase in its costs in the last several years, in connection with
projects to make its network environment more transparent and
deterministic, based on customer demand. In order to provide this for
BOX Participants and non-Participants, in 2021 alone BOX has made
significant capital expenditures (``CapEx''), incurred increased
ongoing operational expenditures (``OpEx''), and undertaken additional
engineering research and development (``R&D'') in the following areas:
(i) Implementing an improved network design to ensure equalized cabling
between Participants; (ii) introducing designated gateways for BOX
Market Makers; and (iii) optimization of network and systems to better
handle the increased quote and order flow seen through 2020 and 2021.
The CapEx in 2021 was approximately $720,000 for BOX. This expense does
not include the significant increase in employee time and other
resources necessary to maintain and service this network, which expense
is captured in the operating expense discussed below. These projects,
which resulted in a material increase in expense to BOX, are, among
other things, intended to enhance the overall trading experience at
BOX, making it a venue that market participants want to access.
    Given these increased costs, BOX determined that access fees must
be increased and believes the proposed electronic Market Maker Trading
Permit fees are equitably allocated between other BOX Participants and
Market Makers, when these fees are viewed in the context of the overall
activity on BOX, as Market Makers: (1) Consume the most bandwidth and
resources of the network; (2) transact the vast majority of the volume
on BOX; and (3) require the high touch network support services
provided by BOX and its staff, including more costly network
monitoring, reporting and support services, resulting in a much higher
cost to BOX. The proposed electronic Market Maker Trading Permit fees
are equitably allocated in this regard because the majority of customer
demand comes from Market Makers, whose transactions make up a majority
of the volume on BOX. Accordingly, the Exchange believes it is
reasonable, equitably allocated, and not unfairly discriminatory to
recoup a portion of its costs associated with providing electronic
Market Makers access services. BOX believes that the proposed
electronic Market Maker Trading Permit fees are equitably allocated
between other BOX Participants and Market Makers, as Market Makers
consume the most bandwidth and resources of the network because only
Market Makers submit quotes on BOX. Specifically, BOX notes that these
market participants account for greater than 99% of message traffic
over the network, while other non-Market Maker market participants
account for less than 1% of message traffic over the network. In BOX's
experience, most BOX Participants do not have a business need for the
high performance network solutions required by Market Makers. BOX's
high performance network solutions and supporting infrastructure
(including employee support), provides unparalleled system throughput
and the capacity to handle approximately 3 million quote messages per
second. On an average day, BOX handles over 1.6 billion total messages.
Of those, Market Makers generate approximately 1.59 billion messages,
and other BOX Participants generate 9.5 million messages. However, in
order to achieve consistent, premium network performance, BOX must
build out and maintain a network that has the capacity to handle the
message rate requirements of its most heavy network consumers. These
billions of messages per day consume BOX's resources and significantly
contribute to the overall expense for storage and network transport
capabilities. Given this difference in network utilization rate, the
Exchange believes that it is

reasonable, equitable, and not unfairly discriminatory that Market
Makers pay for a higher portion of the access costs (compared to other
Participant types) designed to be recovered via the proposed electronic
Market Maker Trading Permit fees.
    In order to provide more detail and to quantify BOX's costs
associated with providing access to the BOX network in general, BOX
notes that there are material costs associated with providing the
infrastructure and headcount to fully-support access to BOX. BOX incurs
technology expenses related to establishing and maintaining Information
Security services, enhanced network monitoring and customer reporting
associated with its network technology. While some of the expense is
fixed, much of the expense is not fixed, and thus increases as the
expenses associated with access services for electronic Market Makers
increase. For example, new Market Makers to BOX may require the
purchase of additional hardware to support those Participants as well
as enhanced monitoring and reporting of customer performance that BOX
provides. Further, as the total number of Market Makers increase, BOX
may need to increase their data center footprint and consume more
power, resulting in increased costs charged by their third-party data
center provider. Accordingly, the cost to BOX to provide access to its
Participants is not fixed. BOX believes the proposed electronic Market
Maker Trading Permit fees are reasonable in order to offset a portion
of the costs to BOX associated with providing access to Market Makers
to its network infrastructure.
    BOX Market Makers have and continue to account for the vast
majority of network capacity utilization and trading activity on BOX
and thus account for the majority of expenses placed on BOX systems.
Specifically, in 2017 (the year after BOX established the flat
Participant Fee), the total expense for providing access services for
all Participant types was approximately $819,000. Broken down further,
in 2017, the total expense for providing access services to non-Market
Maker Participants was approximately $117,000 and the total expense for
providing access services to Market Makers was approximately $702,000.
The Exchange has seen this disparity in access expenses between non-
Market Makers and Market Makers year after year since the establishment
of the Participant Fee in 2016. In 2018, the total expense for
providing access services for all Participant types was approximately
$763,000--approximately $109,000 allocated to non-Market Maker expenses
and approximately $654,000 allocated to Market Maker expenses. In 2019,
the total expense for providing access services for all Participant
types was approximately $722,000--approximately $103,000 allocated to
non-Market Maker expenses and approximately $619,000 allocated to
Market Makers. In 2020, the total expense for providing access services
for all Participant types was approximately $1.1 million--approximately
$161,000 allocated to non-Market Maker expenses and approximately
$971,000 allocated to Market Makers. Further, as discussed herein, BOX
experienced a material increase in costs in 2021 and projects a similar
material increase for 2022 due to projects to make its network
environment more transparent and deterministic, and increased order
flow seen throughout the industry. These increased costs are reflected
in the expenses related to providing access services to all BOX
Participants. Specifically, in 2021, the total expense for providing
access services for all Participant types was approximately $1.29
million--approximately $190,000 allocated to non-Market Maker expenses
and approximately $1.1 million allocated to Market Makers. Further, in
the projected expenses for 2022, the total projected expense for
providing access services for all Participant types is approximately
$1.89 million--approximately $270,000 allocated to non-Market Maker
expenses and $1.62 million allocated to Market Makers. As illustrated
by these access expenses year over year, it is clear that BOX Market
Makers account for the majority of expenses related to the provision of
access services for BOX Participants. Accordingly, BOX believes that it
is reasonable and appropriate to charge electronic Market Makers more
than other BOX Participants for electronic Trading Permits to access
the BOX network.
    BOX believes that the proposed Market Maker Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that BOX
projects to incur in connection with providing these access services
versus the total annual revenue that BOX projects it will collect in
connection with the associated electronic Market Maker Trading Permit
fees.
    As discussed herein, BOX conducted an extensive cost review in
which BOX analyzed all expenses in BOX's general expense ledger to
determine whether each such expense relates to the access services for
electronic Market Makers, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports those
services, and thus bears a relationship that is, ``in nature and
closeness,'' directly related to those services. While BOX undertook
this review of its expenses from 2019 through 2021, it focused on the
2021 expenses as these are the most recent and clearly demonstrate why
BOX determined that access fees needed to be raised for certain
Participants. The sum of all such portions of expenses represents the
total cost to BOX to provide Market Makers access to the BOX network.
    For 2021,\14\ the total annual expense for providing access
services to Market Makers was approximately $1.1 million. The $1.1
million in projected total annual expense is comprised of direct and
indirect expenses. For 2021, total direct expense, (which relates to
the network infrastructure, associated data center processing equipment
required to support various connections, network monitoring systems and
associated software required to support the access services for Market
Makers) was $770,749.\15\ It is important to note that BOX did not
allocate the entirety of its overall direct expense in 2021 to
providing access services for Market Makers. Specifically, the $770,749
direct expense is only a portion of the overall direct expenses for
access service incurred by BOX as overall direct expenses in 2021
totaled approximately $8.2 million.\16\ To reiterate, the Exchange did
not allocate all of the direct expenses toward the cost of providing
access services to Market Makers, only that portion which BOX
identified as being specifically mapped to providing the access
services to Market Makers, approximately 10% of the total direct
expense for access services. The Exchange believes this allocation is
reasonable because it represents BOX's actual cost to provide access
services to its Market Makers, and not any other service, as supported
by its cost review.
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    \14\ BOX has not yet finalized its 2021 year end results.
    \15\ The direct expenses detailed herein are contained in the
following line items: Technical and Operational, External IT
Services, Data Processing & Communication, and Depreciation.
    \16\ This overall direct expense total includes all expenses
related to space rental, power usage, connections, etc., at the
Exchange's data centers, trading technology support, software and
hardware depreciation, and intermarket linkage and third party
market data connectivity fees.
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    The indirect expense (which includes expenses related to employee
compensation and benefits for full-time

employees, legal expenses and other professional services, and office
space and rent and other miscellaneous expenses) that BOX allocates to
providing access services to electronic Market Makers in 2021 was
approximately $370,435.\17\ BOX notes that the overall indirect expense
in 2021 totaled approximately $18.5 million. To reiterate, the Exchange
did not allocate all of the indirect expenses incurred in 2021 toward
the cost of providing the access services to Market Makers.
Specifically, BOX allocated approximately 2% of the total indirect
expense incurred in 2021 to Market Maker access services. The Exchange
notes that it took a conservative approach with regard to the
allocation of indirect expenses related to providing access services to
Market Makers. As such, this may result in BOX under allocating an
expense to the provision of access services for Market Makers and such
expenses may actually be higher or increase above what BOX utilizes
within this proposal. The Exchange believes this allocation is
reasonable and appropriate when compared to other exchanges'
allocations of similar indirect costs.\18\
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    \17\ The indirect expenses detailed herein are contained in the
following line items in the BOX 2021 Form 1: Personnel,
Amortization, Rent of facilities, Office-related, Professional
Services, Other expenses.
    \18\ With regard to their proposed access fees, MIAX Emerald
allocated approximately 15% of the total employee compensation and
benefits expense, approximately 15% of the total depreciation and
amortization expense, and approximately 15% of the total occupancy
expense. MIAX Pearl allocated approximately 6% of the total
applicable employee compensation and benefits expense, approximately
5% of the total applicable depreciation and amortization expense,
and approximately 8% of the total applicable occupancy expense. As
such, BOX believes its conservative allocation percentage is
reasonable and appropriate.
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    Further, BOX analyzed projected expenses for 2022 with regard to
providing access services to Market Makers. The projected total expense
for providing access services to Market Makers in 2022 is approximately
$1.6 million.\19\ BOX notes that direct expenses associated with
providing access services to Market Makers will increase 61%, while
indirect expenses associated with providing access services to Market
Makers are not projected to exceed 2021 costs.\20\ BOX expects
significant increases in costs for space rental, power usage,
connections, etc., at the Exchange's data centers and trading
technology support. These increased costs are attributed to projects
including, but not limited to redesign and migration to an equalized
cabling infrastructure, the optimization of order entry protocol, and
upgrades to the trading servers and production network in connection
with the increased order flow seen in 2020 and 2021 and expected in
2022.\21\
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    \19\ The Exchange notes that these numbers are projections based
on BOX's projected 2022 budget expenditures. These costs are subject
to change depending on the nature of the project or service, however
BOX does not expect material changes to the projected expenses.
    \20\ Expenses for 2022 are based off of BOX projected expenses
and budget. These expenses are subject to change.
    \21\ As discussed above, the costs of these projects are
included in the total direct expenses for access services, of which
only a portion were allocated to the direct expenses associated with
providing access services to Market Makers.
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    The Exchange notes that a material portion of its total overall
expense is allocated to the provision of access services (including
connectivity for all BOX Participants and ports).\22\ The Exchange
believes this is reasonable and in line, as BOX operates a technology-
based business that differentiates itself from its competitors based on
its trading systems that rely on access to a high-performance network,
resulting in significant technology expense. The majority of BOX's
expense is technology-based. As such, the Exchange believes it is
reasonable to allocate a portion of its total overall expense towards
the proposed electronic Market Maker Trading Permit fees.
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    \22\ No expenses related to connectivity or ports were included
in BOX's overall expense calculation for purposes of this proposal.
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    Accordingly, based on the facts and circumstances presented above,
the Exchange believes that the proposed electronic Market Maker Trading
Permit Fees will not result in excessive pricing or supra-competitive
profit. To illustrate, beginning January 1, 2022, on a fully annualized
basis, BOX projects that its annualized revenue associated with the
proposed electronic Market Maker Trading Permit Fees would be
approximately $1.23 in 2022 based on a recent billing cycle. As noted
above, BOX projects that its annualized expense for providing the
access services to electronic Market Makers would be approximately
$1.62 million in 2022. Accordingly, on a fully-annualized basis, the
Exchange believes its total projected revenue from the proposed
electronic Market Maker Trading Permit fees will not result in any
profit for BOX, rather the projected revenue will only recoup a portion
of the 2022 expense for providing access services to electronic Market
Makers (approximately $1.23 million revenue minus approximately $1.62
million in expense = approximately $388,000 loss in 2022).\23\ The
Exchange notes that the fee charged to each Market Maker for electronic
Trading Permits may vary from month to month depending on the number of
classes in which the Market Maker was appointed to quote on any given
day within the calendar month. As such, the revenue projection is not a
static number, with monthly Trading Permit fees likely to fluctuate
month to month.
---------------------------------------------------------------------------

    \23\ The Exchange notes that other exchanges that recently
amended access fees resulted in a 24% and 10% profit margin,
respectively. See Securities Exchange Act Release Nos. 93555
(November 10, 2021), 86 FR 64254 (November 17, 2021) (SR-PEARL-2021-
54) and 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03). The Exchange notes that similar access fees are
currently charged at these exchanges today.
---------------------------------------------------------------------------

    For the avoidance of doubt, none of the expenses included herein
relating to providing access services to electronic Market Makers
relate to the provision of any other services offered by BOX. Stated
differently, no expense amount on BOX was allocated more than once. The
Exchange notes that, with respect to the BOX expenses included herein,
those expenses only cover the BOX Options Market; expenses associated
with the Exchange, BOX Exchange LLC, are accounted for separately and
are not included within the scope of this filing.
    The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective figures of each expense
category described above towards the total cost to BOX of operating and
supporting the network, including providing access services to
electronic Market Makers because BOX performed a line-by-line item
analysis of all the expenses of BOX, and has determined the expenses
that directly relate to providing Market Makers access to BOX. Further,
the Exchange notes that, without the specific direct and indirect items
listed above, BOX would not be able to provide the access services to
its Market Makers. Each of these expense items, including physical
hardware, software, employee compensation and benefits, occupancy
costs, and the depreciation and amortization of equipment, have been
identified through a line-by-line item analysis to be integral to
providing access services to its Market Makers. The proposed fees are
intended to recover BOX's costs of providing Market Makers access to
the BOX network. Accordingly, the Exchange believes that the proposed
electronic Market Maker Trading Permit fees are fair and reasonable
because they do not result in excessive pricing or supra-competitive
profit, when comparing the actual costs to BOX versus the projected
annual

revenue from the proposed electronic Market Maker Trading Permit fees.
    The Exchange believes that the proposed electronic Market Maker
Trading Permit fees are reasonable, equitable, and not unfairly
discriminatory because they are lower than comparable fees at other
competing options exchanges.\24\ The proposed fees are fair and
equitable and not unreasonably discriminatory because they apply
equally to all Market Makers and access to BOX is offered on terms that
are not unfairly discriminatory. BOX designed the fee rates in order to
provide objective criteria for Market Makers of different sizes and
business models that best matches their quoting activity on BOX. BOX
believes that the proposed fee rates and criteria provide an objective
and flexible framework that will encourage Market Makers to be
appointed and quote in option classes while also equitably allocating
the fees in a reasonable manner amongst Market Maker appointments to
account for quoting and trading activity.\25\
---------------------------------------------------------------------------

    \24\ See supra note 5.
    \25\ Prior to filing this proposal, the Exchange notes that BOX
Market Makers were made aware of the proposed tier structure and fee
change. BOX received feedback from these Market Makers and adjusted
the fees accordingly based on their feedback. Market Makers are not
required to quote on every options exchange. BOX Market Makers
choose to quote and transact business on BOX because BOX is
providing increased trading opportunities for these firms.
---------------------------------------------------------------------------

    The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor competing venues if they
deem fee levels at a particular venue to be excessive. In such an
environment, BOX must continually adjust its fees for services and
products, in addition to order flow, to remain competitive with other
exchanges. BOX believes that the proposed changes reflect this
competitive environment.
    Finally, the Exchange notes it is not aware of any reason why
Market Makers could not simply drop their access to an exchange (or not
initially access an exchange) if an exchange were to establish prices
for its non-transaction fees that, in the determination of such Market
Maker, did not make business or economic sense for such Market Maker to
access such exchange. No options market participant--including Market
Makers--are required by rule, regulation, or competitive forces to be a
Participant of the Exchange. As evidence of the fact that market
participants can and do drop their access to exchanges based on non-
transaction fee pricing, R2G Services LLC (``R2G'') filed a comment
letter after BOX's proposed rule changes to increase its connectivity
fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-BOX-2019-04). 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.'' Accordingly, this example shows that if an exchange sets a
certain fee for connectivity and/or other non-transaction fees for its
relevant marketplace that are too high or deemed unreasonable by such
market participant, market participants can choose to drop their access
to such exchange if they so choose.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes that the proposed electronic Market Maker
Trading Permit fees do not place certain market participants at a
relative disadvantage to other market participants because the proposed
fees do not favor certain categories of market participants in a manner
that would impose a burden on competition; rather, the fee rates are
designed in order to provide objective criteria for Market Makers of
different sizes and business models that best matches their quoting
activity on BOX. Further, the Exchange believes that the proposed
electronic Market Maker Trading Permit fees will not impose a burden on
intramarket competition because, when these fees are viewed in the
context of the overall activity on BOX, Market Makers: (1) Consume the
most bandwidth and resources of the network; (2) transact the vast
majority of the volume on BOX; and (3) require the high touch network
support services provided by BOX and its staff, including more costly
network monitoring, reporting and support services, resulting in a much
higher cost to BOX. The Exchange notes that the majority of customer
demand comes from Market Makers, whose transactions make up a majority
of the volume on BOX. Further, as discussed herein, other Participant
types (Broker Dealers, Professional Customers, and Public Customers)
take up significantly less BOX resources and costs. As such, the
Exchange does not believe charging electronic Market Makers higher
Trading Permit fees than other Participant types will impose a burden
on intramarket competition.
    The Exchange believes that the tiered structure of the proposed
electronic Market Maker Trading Permit fees will not impose a burden on
intramarket competition because the tiered structure takes into account
the number of classes quoted by each individual Market Maker. As
discussed herein, the BOX system requires increased performance and
capacity in order to provide the opportunity for each Market Maker to
quote in a higher number of options classes on BOX. Specifically, the
more classes that are actively quoted on BOX by a Market Maker requires
increased memory for record retention, increased bandwidth for
optimized performance, increased functionalities on each application
layer, and increased optimization with regard to surveillance and
monitoring of such classes quoted. As such, basing the Market Maker
Trading Permit fee on the greatest number of classes quoted in on any
given day in a calendar month is reasonable and appropriate when taking
into account how the increased number of quoted classes directly impact
the costs and resources for BOX.
Inter-Market Competition
    The Exchange believes the proposed Market Maker 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 become participants of all options exchanges. The Exchange notes
that it has far less Participants as compared to the much greater
number of participants at other options exchanges. There are a number
of large market makers and broker-dealers that are participants of
other options exchange but not Participants of BOX. The Exchange is
also unaware of any assertion that its existing fee levels or the
proposed electronic Market Maker Fees would somehow unduly impair its
competition with other options exchanges. To the contrary, if the fees
charged are deemed too high by market participants, they can simply
discontinue their membership with BOX.
    The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than 16% market share. Therefore,
no exchange possesses significant pricing power in the execution of
multiply-listed equity and

ETF options order flow. For the month of November 2021, BOX had a
market share of approximately 5.58% of executed multiply-listed equity
options \26\ and BOX believes that the ever-shifting market share among
exchanges from month to month demonstrates that market participants can
discontinue or reduce use of certain categories of products, or shift
order flow, in response to fee changes. In such an environment, BOX
must continually adjust its fees and fee waivers to remain competitive
with other exchanges and to attract order flow to the facility.
---------------------------------------------------------------------------

    \26\ See Options Volume by Exchange available at https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange.
---------------------------------------------------------------------------

    Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues. In such an environment, the Exchange must continually
review, and consider adjusting, its fees and credits to remain
competitive with other exchanges. For the reasons described above, the
Exchange believes that the proposed rule change reflects this
competitive environment.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act \27\ and Rule 19b-4(f)(2)
thereunder,\28\ because it establishes or changes a due, or fee.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 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-2022-07 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-2022-07. 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-2022-07, and should be submitted on
or before March 16, 2022.
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03763 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 85, Number 160 (Tuesday, August 18, 2020)]
[Notices]
[Pages 50855-50858]
[FR Doc No: 2020-17962]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89528; File No. SR-CBOE-2020-072]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Its Rules Relating to the
Processing of Auction Responses

August 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 30, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 rules relating to the processing of auction responses. 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
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange seeks to amend its rules related to its auction
mechanisms to provide a dedicated path for auction response messages
originating from logical ports that will allow the System to process
such messages more efficiently. Specifically, the Exchange proposes to
amend Rule 5.25 (Message Traffic Mitigation) to adopt two separate
message queues which would allow for auction response messages to be
processed by the System in priority sequence relative to other non-
auction response message traffic on a rotating basis.
Background
    The Exchange currently offers a variety of auction mechanisms which
provide price improvement opportunities for eligible orders.
Particularly, the Exchange offers the following auction mechanisms:
Complex Order Auction (``COA''),\3\ Step Up Mechanism (``SUM''),\4\
Automated Improvement Mechanism (``AIM''),\5\ Complex AIM (``C-
AIM''),\6\ Solicitation Auction Mechanism (``SAM''),\7\ Complex SAM
(``C-SAM''),\8\ FLEX Auction Process,\9\ FLEX AIM \10\ and FLEX
SAM.\11\ The Exchange notes that eligible orders are electronically
exposed for an Exchange determined period (collectively referred to
herein as ``auction response period'') in accordance with the
applicable Exchange Rule, during which time

Users may submit responses (collectively referred to herein as
``auction responses'') to an auction message. Trading Permit Holders
(``TPHs'') may submit auction responses via logical port connectivity.
By way of background, a User connects to the Exchange using a logical
port available through an API, such as the industry-standard FIX or BOE
protocol. Logical ports represent a technical port established by the
Exchange within the Exchange's trading system for the delivery and/or
receipt of trading messages, including orders, cancels, and auction
responses. Currently, the System processes all messages through a
single ``queue'' and prioritizes the processing of all message traffic
from the logical ports in the order in which the System received them
(i.e., in time priority).
---------------------------------------------------------------------------

    \3\ See Rule 5.33(d).
    \4\ See Rule 5.35.
    \5\ See Rule 5.37.
    \6\ See Rule 5.38.
    \7\ See Rule 5.39.
    \8\ See Rule 5.40.
    \9\ See Rule 5.72(c).
    \10\ See Rule 5.73.
    \11\ See Rule 5.74.
---------------------------------------------------------------------------

Proposal
    The Exchange proposes to modify the operation of its System to
allow for the System to handle auction responses received via such
logical ports in a way that the Exchange believes may reduce latency
associated with auction responses. Currently, auction response messages
wait in the same System queue as all other order and quote message
traffic. In certain circumstances, the auction response period may end
before queued response messages are processed, resulting in the
initiating eligible order missing out on potential price improvement
from respective queued auction response(s). For example, if an auction
response submitted during an auction response period is received at a
time where there is a deep queue of other message traffic, the auction
response may not be ``processed'' by the System in sufficient time
(i.e., prior to the end of the auction response period so that it is
able to participate in the applicable auction mechanism) because the
System is ``busy'' processing the deep queue of pending message traffic
that was received prior to the auction response. An auction response
may only execute in the applicable auction and is cancelled if it does
not execute during an auction. If an auction response is unable to be
processed by the System during the auction response period, that
auction response is unable to receive any execution opportunity or
provide liquidity (and possible price improvement) on the Exchange.
    The Exchange therefore proposes to modify the way the System
processes auction responses in order to allow the System to handle
auction responses in a more timely manner, including during periods of
high message traffic. As noted above, the System currently processes
all message traffic in time priority. In other words, all messages are
placed in a single ``queue'' based on the time the message is received
by the System and handled by the System in that order. The Exchange
proposes to adopt a separate ``priority queue'', which queue would
consist solely of auction response messages. Specifically, the System
would be able to identify auction response messages and divert such
messages from the general message queue (``general queue'') to the
priority queue. The System would then alternate processing a certain
number of messages as determined by the Exchange from each queue (i.e.,
on a rotating basis). Although the System would alternate between the
two queues, the priority queue would offer reduced latency as the
priority queue would consist only of auction responses, as compared to
the general queue which would consist of all other message traffic,
(i.e., new orders/quote messages, cancel messages (including mass
cancel messages) and modify messages).
    The Exchange believes the proposed modification to provide for a
separate queue for the processing of auction responses increases the
possibility that such responses are processed by the Exchange during
the auction response period and have an opportunity for execution in
the applicable auction mechanism. The Exchange believes this will, as a
result, increase execution opportunities for liquidity providers that
submit auction responses and enhance the potential for price
improvement for orders submitted to each mechanism to the benefit of
investors and public interest. The Exchange also believes the benefits
that result from the adoption of a priority queue for auction responses
would outweigh any potential negative impact to other message traffic.
Moreover, the Exchange believes the impact to other message traffic to
be de minimis.
    Particularly, the Exchange reviewed all submitted message traffic
from March 9-March 13, 2020 and notes that during this time period,
auction responses across all its auction mechanisms accounted only for
approximately 0.02% of the message traffic, whereas new order/quote
messages accounted for approximately 40.3%, modify messages accounted
for approximately 47.9%, and cancel messages accounted for
approximately 11.7%. Accordingly, the number of messages that would be
processed via the priority queue as compared to general queue is
extremely small. Indeed, as noted above, only 0.02% of all messages
would be processed via the priority queue and therefore the number of
rotations between the two queues throughout the trading day would
likely be very limited as there are only so many auction responses that
would need to be processed compared to other message traffic. Moreover,
only a mere 0.007% of non-auction response messages were related to a
customer order. Therefore, the chances of a customer order being
disadvantaged by allowing an auction response to be processed via a
priority queue are nearly zero. Additionally, executions at the
conclusion of an auction mechanism will occur in the same manner as
they do today. For example, priority customer orders in the Book will
continue to have first priority at each price level at the conclusion
of a paired auction, regardless of whether an auction response is
processed via a priority queue and processed ahead of a priority
customer order.
    Furthermore, the Exchange's review of auction responses during the
period of March 30-April 3, 2020 indicated that approximately 17% of
auction responses had no opportunity to execute in their respective
auctions, notwithstanding being submitted within the auction response
period. In certain classes, such as SPXW, this percentage was even
higher. Particularly, 47% of SPXW auction responses had no opportunity
to execute in the applicable auction, notwithstanding being submitted
within the auction response period.
    The Exchange also notes that it takes the system approximately 10
microseconds to process a single order/quote or auction response
message and, on average, approximately 190 microseconds to process a
mass cancel message. As such, under the current system, an auction
response that is entered after a mass cancel message is more likely to
be detrimentally impacted as compared to a mass cancel message that is
entered after an auction response (i.e., a 190 microsecond ``wait
time'' versus a 10 microsecond ``wait time'').
    Accordingly, the Exchange believes that adopting a priority queue
for all auction response messages will continue to allow the Exchange
to set each auction response period to an amount of time that provides
TPHs with sufficient time to respond to, compete for, and provide price
improvement for orders but provides auctioned orders with quick
executions that may reduce market and execution risk, while also
providing timely submitted auction responses with more execution
opportunities in the applicable auction prior to the end of the auction
response

period, even during periods of high message traffic, thereby
potentially providing customers with additional opportunities for price
improvements.
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.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes modifying its System to allow
it to handle auction responses in a timelier manner may provide further
opportunities for auction eligible orders to receive price improvement
that they may not otherwise receive if the System is unable to process
auction response messages prior to the conclusion of an auction
response period, if submitted during a time when there is a deep queue
of message traffic. In particular, the proposed rule change will
continue to provide investors with timely processing of their options
quote and order messages, while providing investors who submit auction
eligible orders with additional auction liquidity. Indeed, the proposed
rule change may allow more investors additional opportunities to
receive price improvement through an auction mechanism. While the
Exchange may increase the length of auction response periods to
accommodate more auction responses, the Exchange believes the proposed
rule change allows the Exchange to continue to mitigate the market risk
for TPHs using any such mechanism by setting the length of an auction
response period to a time frame that allows an adequate amount of time
for TPHs to respond to an auction message and fast executions.
Additionally, a priority queue may provide liquidity providers that
submit auction responses with additional execution opportunities in
auctions, which may encourage the submission of more auction responses
which may contribute to a deeper, more liquid auction process and,
thus, provide investors with additional price improvement
opportunities.
    The Exchange believes that the information outlined above
demonstrates why adopting a priority queue for auction responses would
better provide customers with additional opportunities for price
improvements with little impact to non-auction response message
traffic. As discussed, auction responses account for an incredibly
small fraction of message traffic submitted to the Exchange. Indeed,
based on the Exchange's analysis, auction response messages accounted
for a mere 0.02% of all message traffic submitted to the Exchange. The
Exchange believe the processing of such a small amount of message
traffic via a priority queue (which as proposed would rotate with the
general queue) would therefore have a minimal impact on the processing
of non-auction response messages in the general queue. Conversely, as
demonstrated by the data discussed above, the current system
configuration (i.e., a single queue for all message traffic) can
negatively impact the timeliness of the processing of auction responses
to the detriment of investors who may miss out on opportunities to
receive price improvement through one of the Exchange's auction
mechanisms due to the time necessary for the System to process auction
responses behind a queue of other message traffic. The Exchange
therefore believes its proposal will make it more likely that the
System processes timely submitted auction responses prior to the end of
an auction response period and thus have more opportunities to execute
against auctioned orders, even during periods of high message traffic.
The Exchange also believes having the flexibility to determine the
number of messages that it processes in each queue before alternating
allows the Exchange to configure the number as needed to ensure the
benefits of alternating between a priority queue and general queue
continue to outweigh any potential negative impact to non-auction
response message traffic. The Exchange further believes the proposal
will continue to allow the Exchange to set an auction response period
to an amount of time that provides TPHs with sufficient time to respond
to, compete for, and provide price improvement for orders but provides
auctioned orders with quick executions that may reduce market and
execution risk. Accordingly, the Exchange believes the adoption of a
priority queue for auction responses would provide customers with
additional opportunities for price improvement and enhance the quality
of the auctions, 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.
    The Exchange also believes the proposed rule change is not designed
to permit unfair discrimination between market participants as all
market participants are allowed to submit auction responses.
Additionally, the Exchange believes it's reasonable to adopt a priority
queue for auction responses as compared to other messages because
auction responses are submitted only for the purpose of executing (and
possibly providing price improvement) in auctions with short durations,
whereas other messages are generally submitted to rest in or execute
against the book (and generally not used to submit liquidity into
auctions). As discussed above, the Exchange also believes the benefits
that result from the adoption of a priority queue for auction responses
would outweigh any potential negative impact to other message traffic,
including customer orders, which have an incredibly low chance of being
affected by the proposed change and which continue to receive priority
allocation in any event.
    The Exchange lastly does not believe that the purpose of the
proposed rule change to adopt a priority queue for certain message
traffic is new or unique. As the Commission is aware, other exchanges
offer similar functionality. For example, Miami International
Securities Exchange LLC (``MIAX'') makes clear in its current technical
specifications that it offers priority mass cancel ports, which
similarly provide expedited processing for certain message types by
alternating between processing messages from a priority queue (but for
mass cancel requests instead of auction responses) and messages from a
general queue (for all other message traffic).\15\
---------------------------------------------------------------------------

    \15\ See e.g., MIAX Express Orders Binary Orders for Trading
Options MEO Interface Specification, Appendix E, Priority Mass
Cancel Ports, at: https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Express_Interface_MEI_v2.8.pdf.

---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance
of the purposes of the Act, as the proposed rule change would apply
equally to all TPHs that submit auction responses. As noted above, all
market participants are able to submit auction responses. Additionally,
the Exchange believes the adoption of a priority queue for auction
responses would have little impact to non-auction response message
traffic. As discussed, auction response messages account for an
incredibly small fraction of message traffic submitted to the Exchange.
The Exchange therefore believes the processing of such a small amount
of message traffic via a priority queue would have a minimal impact on
the processing of non-auction response messages in the general queue.
Moreover, the Exchange believes it's reasonable to adopt a priority
queue for auction responses as compared to other messages because
auction responses are submitted only for the purpose of executing (and
possibly providing price improvement) in auctions with short durations,
whereas other messages are generally submitted to rest in or execute
against the book (and generally not used to submit liquidity into
auctions). Lastly, the Exchange does not believe the proposed rule
change will impose any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act, as
the proposed change affects how the System processes auction responses
that may only participate in auctions that occur on the Exchange.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule
change should be 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_ADDRESS>Please include
File Number SR-CBOE-2020-072 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-2020-072. 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-2020-072, and should be submitted
on or before September 8, 2020.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17962 Filed 8-17-20; 8:45 am]
BILLING CODE 8011-01-P