[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68859-68861]
[FR Doc No: 2023-22012]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98649; File No. SR-C2-2023-020]

Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Suspension
of and Order Instituting Proceedings To Determine Whether To Approve or
Disapprove Proposed Rule Change To Amend Its Fee Schedule Related to
Physical Port Fees

September 29, 2023.

I. Introduction

    On September 1, 2023, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change (File Number SR-C2-2023-020) to amend its fee
schedule to increase the monthly fee for 10 gigabit (``Gbps'') physical
ports. The proposed rule change was immediately effective upon filing
with the Commission pursuant to Section 19(b)(3)(A) of the Act.\3\ The
proposed rule change was published for comment in the Federal Register
on September 20, 2023.\4\ Pursuant to Section 19(b)(3)(C) of the
Act,\5\ the Commission is hereby: (1) temporarily suspending the
proposed rule change; and (2) instituting proceedings to determine
whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ See Securities Exchange Act Release No. 98397 (September 14,
2023), 88 FR 64939 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(3)(C).
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II. Background and Description of the Proposed Rule Change

    The Exchange proposes to amend its fee schedule relating to
physical connectivity fees. The Exchange proposes to increase the
monthly fee for 10 Gbps physical ports from $7,500 to $8,500 per port.
The Exchange currently assesses the following physical connectivity
fees for Trading Permit Holders \6\ (``TPHs'') and non-TPHs on a
monthly basis: $2,500 per physical port for a 1 Gbps circuit and $7,500
per physical port for a 10 Gbps circuit.\7\ According to the Exchange,
the physical ports may also be used to access the systems for the
following affiliate exchanges and only one monthly fee currently (and
will continue) to apply per port: Cboe BZX Exchange, Inc. (options and
equities platforms), Cboe EDGX Exchange, Inc. (options and equities
platforms), Cboe BYX Exchange, Inc., and Cboe EDGA Exchange, Inc.
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    \6\ The term ``Trading Permit Holder'' means an Exchange-
recognized holder of a Trading Permit. The term ``Trading Permit''
means a permit issued by the Exchange that confers the ability to
transact on the Exchange. See Exchange Rule 1.1.
    \7\ A physical port is utilized by a TPH or non-TPH to connect
to the Exchange at the data centers where the Exchange's servers are
located.
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III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\8\ at any time within
60 days of the date of filing of an immediately effective proposed rule
change pursuant to Section 19(b)(1) of the Act,\9\ the Commission
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') if it appears to the Commission that
such action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act. The Commission believes a temporary suspension of the proposed
rule change is necessary and appropriate to allow for additional
analysis of the proposed rule change's consistency with the Act and the
rules thereunder.
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    \8\ 15 U.S.C. 78s(b)(3)(C).
    \9\ 15 U.S.C. 78s(b)(1).
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    In support of the proposal, the Exchange states its belief that the
proposed fee change is reasonable as it reflects a moderate increase in
physical connectivity fees for 10 Gbps physical ports.\10\ The Exchange
states that the current 10 Gbps physical port fee has remained
unchanged since June 2018.\11\ The Exchange states that during this 5-
year span there has been an average inflation rate of 3.9%, producing a
cumulative price increase of approximately 21.1% inflation since the
fee for the 10 Gbps physical port was last modified.\12\ In support of
its claim of reasonableness, the Exchange compares its proposed rate
increase from the rates adopted five years ago of approximately 13% to
the cumulative inflation rate of 21.1%.\13\
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    \10\ See Notice, supra note 4, at 64940.
    \11\ See id.
    \12\ See id.
    \13\ See id.
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    In further support of the proposal, the Exchange states that the
proposed fee is reasonable, fair, and equitable, and not unfairly
discriminatory.\14\ The Exchange believes that the proposed fee is
reasonable as it is still in line with, or even lower than, amounts
assessed by other exchanges for similar connections.\15\ The Exchange
also states its belief that the fee is not unfairly discriminatory,
because the fee would be assessed uniformly across all market
participants that purchase the physical ports.\16\ The Exchange states
that the fee is equitable because increasing the fee for 10 Gbps
physical ports and charging a higher fee as compared to the 1 Gbps
physical port as the 1 Gbps physical port is 1/10 the size of the 10
Gbps physical port and does not offer access to many of the products
and services offered by the Exchange.\17\ The Exchange also states its
belief the proposed fee is reasonably and appropriately allocated
because, the Exchange states, market participants that purchase 10 Gbps
physical ports use the most bandwidth and therefore consume the most
resources from the network.\18\
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    \14\ See id.
    \15\ See id.
    \16\ See id.
    \17\ See id.
    \18\ See id.
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    In further support of its proposed fee, the Exchange states that
TPHs and non-TPHs will continue to choose the method of connectivity
based on their specific needs and no broker-dealer is required to
become a TPH of, or connect directly to, the Exchange.\19\ The Exchange
also states its belief that substitutable products and services are
available to market participants, including, among other things, other
options exchanges that a market participant may connect to in lieu of
the Exchange, indirect connectivity to the Exchange via a third-party
reseller of connectivity, and/or trading of any options product, such
as within the Over-the-Counter markets.\20\ Additionally, the Exchange
believes that low barriers to entry mean that new exchanges may rapidly
enter the market and offer additional substitute platforms to further
compete with the Exchange and the products it offers.\21\ According to
the Exchange, there are 3 exchanges that have been added in the U.S.
options markets in the last 5 years (i.e., Nasdaq MRX, LLC, MIAX Pearl,
LLC, and MIAX Emerald LLC) and one additional

options exchange that is expected to launch in 2023 (i.e., MEMX
LLC).\22\
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    \19\ See id.
    \20\ See id. The Exchange states there are currently 16
registered options exchanges that trade options (12 of which are not
affiliated with Cboe), some of which have similar or lower
connectivity fees; and based on publicly available information, no
single options exchange has more than approximately 19% of the
market share.
    \21\ See id.
    \22\ See id.
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    The Exchange states its belief that participation on the Exchange
remains affordable (notwithstanding the proposed fee change) for all
market participants, including smaller trading firms that may be able
to take advantage of lower costs that result from mutualized
connectivity.\23\ The Exchange states that a market participant may
submit orders to the Exchange via a TPH broker or a third-party
reseller of connectivity.\24\ The Exchange notes that third-party non-
TPHs also resell exchange connectivity, which the Exchange states is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees).\25\ The Exchange states it does not
preclude market participants from reselling its connectivity and has
not adopted fees that would be assessed to third-party resellers on a
per customer basis (i.e., fee based on number of TPHs that connect to
the Exchange indirectly via the third-party).\26\ The Exchange notes
that multiple TPHs are able to share a single physical port (and
corresponding bandwidth) with other non-affiliated TPHs if purchased
through a third-party reseller.\27\ The Exchange states its belief that
this allows resellers to mutualize the costs of the ports for market
participants and provide such ports at a price that may be lower than
the Exchange charges due to this mutualized connectivity.\28\
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    \23\ See id. at 64941.
    \24\ See id.
    \25\ See id. The Exchange states this alternative is already
being used by non-TPHs and further constrains the price that the
Exchange is able to charge for connectivity to its Exchange.
    \26\ See id. The Exchange states its belief these third-party
resellers may purchase the Exchange's physical ports and resell
access to such ports either alone or as part of a package of
services.
    \27\ See id.
    \28\ See id.
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    Finally, the Exchange states that the proposed fees would not cause
any unnecessary or inappropriate burden on intermarket competition
because proposed fee is lower than some fees for similar connectivity
on other exchanges and therefore may stimulate intermarket competition
by attracting additional firms to connect to the Exchange or at least
should not deter interested participants from connecting directly to
the Exchange.\29\ The Exchange also states that if the changes proposed
herein are unattractive to market participants, the Exchange can, and
likely will, see a decline in connectivity via 10 Gbps physical ports
as a result.\30\ Furthermore, the Exchange states that it operates in a
highly competitive market in which market participants can determine
whether or not to connect directly to the Exchange based on the value
received compared to the cost of doing so.\31\ The Exchange also states
that the proposed rule change would not cause any unnecessary or
inappropriate burden on intramarket competition because it will apply
to all similarly situated TPHs equally (i.e., all market participants
that choose to purchase the 10 Gbps physical port).\32\ Additionally,
the Exchange stated that it does not believe its proposed pricing will
impose a barrier to entry to smaller participants and notes that its
proposed connectivity pricing is associated with relative usage of the
various market participants.\33\
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    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See id.
    \33\ See id.
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    To date, the Commission has not received any comment letters on the
proposed rule change.
    When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchange's present proposal,
they are required to provide a statement supporting the proposal's
basis under the Act and the rules and regulations thereunder applicable
to the exchange.\34\ The instructions to Form 19b-4, on which exchanges
file their proposed rule changes, specify that such statement ``should
be sufficiently detailed and specific to support a finding that the
proposed rule change is consistent with [those] requirements.'' \35\
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    \34\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory
Organization's Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change'').
    \35\ See id.
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    Section 6 of the Act, including Sections 6(b)(4), (5), and (8),
require the rules of an exchange to: (1) provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \36\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \37\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\38\
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    \36\ 15 U.S.C. 78f(b)(4).
    \37\ 15 U.S.C. 78f(b)(5).
    \38\ 15 U.S.C. 78f(b)(8).
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    In temporarily suspending the Exchange's proposed rule change, the
Commission intends to further consider whether the proposal to increase
the monthly fee for 10 Gbps physical ports from $7,500 to $8,500 per
port for the Exchange is consistent with the statutory requirements
applicable to a national securities exchange under the Act. In
particular, the Commission will consider whether the proposed rule
change satisfies the standards under the Act and the rules thereunder
requiring, among other things, that an exchange's rules provide for the
equitable allocation of reasonable fees among members, issuers, and
other persons using its facilities; not permit unfair discrimination
between customers, issuers, brokers or dealers; and do not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\39\
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    \39\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule change.\40\
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    \40\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change

    In addition to temporarily suspending the proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\41\ and 19(b)(2)(B) of the Act \42\ to determine whether the
Exchange's proposed rule change should be approved or disapproved.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
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    \41\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
    \42\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\43\ the Commission is
providing

notice of the grounds for possible disapproval under consideration:
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    \43\ Id. Section 19(b)(2)(B) of the Act also provides that
proceedings to determine whether to disapprove a proposed rule
change must be concluded within 180 days of the date of publication
of notice of the filing of the proposed rule change. See id. The
time for conclusion of the proceedings may be extended for up to 60
days if the Commission finds good cause for such extension and
publishes its reasons for so finding, or if the exchange consents to
the longer period. See id.
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     Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(4) of the Act, which requires
that the rules of a national securities exchange ``provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities''; \44\
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    \44\ 15 U.S.C. 78f(b)(4).
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     Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(5) of the Act, which requires,
among other things, that the rules of a national securities exchange
not be ``designed to permit unfair discrimination between customers,
issuers, brokers, or dealers''; \45\ and
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    \45\ 15 U.S.C. 78f(b)(5).
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     Whether the Exchange has demonstrated how the proposed
fees are consistent with Section 6(b)(8) of the Act, which requires
that the rules of a national securities exchange ``not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of [the Act].'' \46\
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    \46\ 15 U.S.C. 78f(b)(8).
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    As discussed in Section III above, the Exchange made various
arguments in support of their proposal. The Commission believes that
there are questions as to whether the Exchange has provided sufficient
information to demonstrate that the proposed fees are consistent with
the Act and the rules thereunder.
    Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the [SRO]
that proposed the rule change.'' \47\ The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding,\48\ and any failure of an SRO to provide this information may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with the
Act and the applicable rules and regulations.\49\
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    \47\ 17 CFR 201.700(b)(3).
    \48\ See id.
    \49\ See id.
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    The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposed fees are consistent with the Act, and
specifically, with its requirements that exchange fees be reasonable
and equitably allocated, not be unfairly discriminatory, and not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.\50\
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    \50\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by October 25, 2023.
Rebuttal comments should be submitted by November 8, 2023. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral presentation.\51\
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    \51\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by an SRO. See Securities
Acts Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change.
    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
file number
    SR-C2-2023-020 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-C2-2023-020. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-C2-2023-020 and should be
submitted on or before October 25, 2023. Rebuttal comments should be
submitted by November 8, 2023.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\52\ that File No. SR-C2-2023-020, be and hereby is, temporarily
suspended. In addition, the Commission is instituting proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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    \52\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
Sherry R. Haywood,
Assistant Secretary.
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    \53\ 17 CFR 200.30-3(a)(57).
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[FR Doc. 2023-22012 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P