Securities and Exchange Commission
- [Release No. 34-90209; File Nos. SR-NYSE-2020-05, SR-NYSEAMER-2020-05, SR-NYSEArca-2020-08, SR-NYSECHX-2020-02, SR-NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-2020-15, SR-NYSECHX-2020-05, SR-NYSENAT-2020-08]
I. Introduction
On January 30, 2020, New York Stock Exchange LLC (“NYSE”), NYSE American LLC (“NYSE American”), NYSE Arca, Inc. (“NYSE Arca”), NYSE Chicago, Inc. (“NYSE Chicago”), and NYSE National, Inc. (“NYSE National”) (collectively, the “Exchanges”) each filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”) [1] and Rule 19b-4 thereunder,[2] a proposed rule change to establish a schedule of Wireless Connectivity Fees and Charges (“Wireless Fee Schedule”) listing available wireless connections between the Mahwah, New Jersey data center (“Mahwah Data Center”) and other data centers. The proposed rule changes (collectively, “Wireless I”) were published for comment in the Federal Register on February 18, 2020.[3] On April 1, 2020, pursuant to Section 19(b)(2) of the Act,[4] the Commission designated a longer period within which to either approve the Wireless I proposed rule changes, disapprove the proposed rule changes, or institute proceedings to determine whether to disapprove the proposed rule changes.[5]
On February 11, 2020, NYSE, NYSE Arca, NYSE Chicago, and NYSE National each filed with the Commission, pursuant to Section 19(b)(1) of the Act [6] and Rule 19b-4 thereunder,[7] a proposed rule change to amend the proposed Wireless Fee Schedule to add wireless connections for the transport of certain market data of the Exchanges. NYSE American filed with the Commission a substantively identical filing on February 12, 2020. The proposed rule changes (collectively, “Wireless II”) were published for comment in the Federal Register on February 25, 2020.[8] On April 1, 2020, pursuant to Section 19(b)(2) of the Act,[9] the Commission designated a longer period within which to either approve the Wireless II proposed rule changes, disapprove the proposed rule changes, or institute proceedings to determine whether to disapprove the proposed rule changes.[10]
On May 18, 2020, the Division of Trading and Markets, for the Commission pursuant to delegated authority, instituted proceedings to determine whether to approve or disapprove the Wireless I and Wireless II proposed rule changes.[11] On July 27, 2020, the Exchanges each filed Partial Amendment No. 1 to the Wireless I and Wireless II proposed rule changes, notices of which were published for comment in the Federal Register on August 7, 2020.[12] On August 12, 2020, pursuant to Section 19(b)(2) of the Act,[13] the Commission designated a longer period for Commission action on proceedings to determine whether to approve or disapprove the Wireless I and Wireless II proposed rule changes, as amended.[14]
On September 10, 2020, the Exchanges each filed Partial Amendment No. 2 to the proposed rule changes.[15] On September 29, 2020, the Exchanges each filed Partial Amendment No. 3 to the proposed rule changes.[16]
This order provides notice of the filing of Partial Amendment No. 3 to each of the proposed rule changes, and grants approval to the proposed rule changes, each as modified by Partial Amendment No. 3, on an accelerated basis.
II. Description of the Proposed Rule Changes, as Modified by Partial Amendment No. 3
A. Proposed Wireless Connectivity Services and Fees
The Exchanges propose wireless connectivity services (“Wireless Connections”) for specified fees that enable market participants purchasing one or more of the proposed services to establish low-latency connectivity between their equipment in the Mahwah Data Center (where the Exchanges house their electronic trading and execution systems and co-location facility),[17] and data centers in Carteret, NJ, Secaucus, NJ, and Markham, Canada (“Third Party Data Centers”).[18] As stated in the Wireless I and Wireless II Notices, Wireless Connections involve beaming signals through the air between antennas that are within sight of one another.[19] Because the signals travel a straight, unimpeded line, and because light waves travel faster through air than through glass (fiber optics), wireless messages have lower latency than messages traveling through fiber optics.[20]
The Exchanges are each an indirect subsidiary of Intercontinental Exchange, Inc. (“ICE”).[21] The Exchanges state that the Wireless Connections are provided and maintained not by them, but by ICE Data Services (“IDS”), which operates through several affiliates of ICE, including an indirect subsidiary of NYSE.[22]
The proposed Wireless Connections are of two types: (i) Bandwidth connections (“Wireless Bandwidth Connections”) that enable market participants to send trading orders and relay market data between their equipment in the Mahwah Data Center and the Third Party Data Centers; [23] and (ii) market data connections (“Wireless Market Data Connections”) that enable market participants in a Third Party Data Center to receive connectivity to certain NYSE, NYSE Arca and NYSE National market data feeds (collectively, the “Selected Market Data”).[24]
For each Wireless Bandwidth Connection, the Exchanges propose a non-recurring initial charge of $10,000 or $15,000, and a monthly recurring charge that varies depending on bandwidth size and location of the connection.[25] For each Wireless Market Data Connection, the Exchanges likewise propose a non-recurring initial charge of $5,000 and a monthly recurring charge that varies depending on the type of feed and location of the connection.[26] In addition, the Exchanges propose to waive the first month's monthly recurring charge,[27] and specify (as they currently do regarding co-location fees) that a market participant obtaining and maintaining a Wireless Connection would not be charged more than once, irrespective of whether it is a member of one, some or none of the Exchanges.[28]
Describing how the Wireless Connections are provided, the Exchanges state that IDS uses its own wireless network to provide Wireless Connections between the Markham Third Party Data Center and the Mahwah Data Center.[29] For Wireless Connections with the Carteret and Secaucus Third Party Data Centers, however, IDS contracts with a non-ICE entity (Anova Technologies, LLC, or “Anova” [30] ) to facilitate provision of the Wireless Connections, via a network traversing a series of towers with wireless equipment, including a pole on the grounds of the Mahwah Data Center property (the “Data Center Pole”), to which third parties do not have access.[31]
The Data Center Pole is where the Wireless Connections to the Carteret and Secaucus Third Party Data Centers begin and end, and convert to a fiber connection into the Mahwah Data Center co-location facility where market participants' servers then connect to the Exchanges' trading and execution systems.[32] In response to comments ( printed page 67046) (discussed below) that restricted access to the Data Center Pole gives a geographical and latency advantage to IDS arising from the Data Center Pole's proximity to the Exchanges' trading and execution systems that competitors cannot replicate, the Exchanges amended the proposals, initially filing Partial Amendment No. 1 and then replacing it with Partial Amendment No. 2, and then replacing Partial Amendment No. 2 with Partial Amendment No. 3.
In Partial Amendment No. 3, the Exchanges each propose to add rules placing restrictions on use of the Data Center Pole designed to address any advantage that the Wireless Connections have by virtue of a Data Center Pole, and thereby level the playing field for competitors offering similar wireless connectivity services between the Mahwah Data Center and Secaucus and Carteret Third Party Data Centers. Specifically, they propose fiber-length equalization measures so that the Wireless Connections, and future wireless connections that use a Data Center Pole (as defined below), would “operat[e] in the same manner as competitors do today without a latency subsidy or other advantage provided by the Exchanges . . . .” [33] In addition, the Exchanges represent that if the rule is approved, once the required changes are implemented, they “commit to have the latency of the relevant fiber route measured.” [34]
For the Wireless Bandwidth Connections, the Exchanges each propose rules requiring that, with respect to each Third Party Data Center,[35] the length of the fiber path between (a) the base of any Data Center Pole and (b) the Patch Panel Point [36] shall be no less than the sum of (x) the length of the fiber path between the base of the Closest Commercial Pole [37] and the Patch Panel Point, plus (y) the difference in length, if any, between (i) the geodesic distance [38] between the Closest Commercial Pole and the Third Party Data Center and (ii) the geodesic distance between the Data Center Pole and the Third Party Data Center. The proposed rules also require that the length of the fiber from the Patch Panel Point to each customer cabinet in the space used for co-location in the Data Center is the same.[39]
Similarly, for the Wireless Market Data Connections, the Exchanges each propose rules requiring that, with respect to each Third Party Data Center, the length of the fiber path between (a) the base of any Data Center Pole and (b) the Production Point [40] shall be no less than the sum of (x) the length of the fiber path between the base of the Closest Commercial Pole and the Production Point, plus (y) the difference in length, if any, between (i) the geodesic distance between the Closest Commercial Pole and the Third Party Data Center and (ii) the geodesic distance between the Data Center Pole and the Third Party Data Center.[41] The proposed rules also require that Exchange market data will be handed off in the Data Center in the same manner and method, including by using the same network path from the Production Point, to (a) any third party that utilizes a Commercial Pole to offer wireless connectivity to such market data to other third parties, and (b) any wireless network that utilizes the Data Center Pole.[42]
The Exchanges state that these proposed rules are designed to provide that market participants using the Wireless Connections would not benefit from wireless equipment being on an ICE-controlled Data Center Pole that is closer to the Patch Panel Point or the Production Point than the Closest Commercial Pole.[43]
B. Filing Requirement for Facilities of an Exchange
Although the Exchanges filed the Wireless I and Wireless II proposals for approval, they maintain that filing is not required because the Wireless Connections are not “facilities of an exchange,” within the meaning of Section 3(a)(1) of the Act (defining “exchange”) and Section 3(a)(2) of the Act (defining the term “facility” of an exchange).[44] They thus take the position that the proposed Wireless Connections and associated fees are not proposed rules of an exchange, and are not subject to review for determination of consistency with Exchange Act standards.[45]
In support of this argument, the Exchanges state that the definition of exchange “focuses on the exchange entity and what it does,” whereas the Wireless Connections are separately offered by IDS, a group of “non-exchange ICE Affiliates.” [46] They acknowledge that the Exchanges squarely fall within the Exchange Act's ( printed page 67047) definition of exchange, but argue that IDS and the ICE Affiliates do not, and that the Exchange Act does not “automatically collapse the ICE Affiliates into the Exchange[s].” [47]
Turning to whether the Wireless Connections are facilities of the Exchanges within the meaning of the definition of “facility” of an exchange in Section 3(a)(2) of the Act,[48] the Exchanges state that the Wireless Connections are not the “premises” of the Exchanges, reasoning that the network that runs between IDS's equipment in the Mahwah Data Center and IDS's equipment in Third Party Data Centers, much of which is actually owned, operated, and maintained by a non-ICE entity, do not constitute “premises.” [49] They also state that the Wireless Connections are not the “property” of the Exchanges because they are “services,” and something owned by a non-exchange “ICE Affiliate” is not owned by the Exchanges.[50] They further maintain that the Exchanges have no right to the use of such premises, property, or services for the purpose of effecting or reporting a transaction on an exchange, and note that the Wireless Bandwidth Connections do not connect directly to the Exchanges' trading and execution systems.[51]
III. Discussion and Commission Findings
A. The Wireless Connections Are Facilities of the Exchanges and Thus the Proposed Rule Changes, as Modified by Partial Amendment No. 3, Are Subject To Review for a Determination of the Consistency With the Exchange Act
The Exchanges filed the proposed rule changes with the Commission. As discussed below, the Wireless Connections are “facilities of an exchange.” Under Section 19(b), the Commission must approve or disapprove the proposed rule changes.[52]
As summarized in Section II.B above, the Exchanges' asserted position about the regulatory status of the Wireless Connections relies upon an analysis that focuses narrowly on the corporate subsidiaries that hold the exchange licenses, and not on the broader group that operates the “exchange” as defined under the Exchange Act. In essence, the Exchanges reason that only the entities that hold the exchange licenses are relevant to assessing what is a facility of an exchange and, since the Wireless Connections are offered by IDS, a separate group of affiliated entities, they cannot be facilities of the Exchanges.[53] However, as discussed in detail below, the Commission finds the Wireless Connections constitute facilities of an exchange.
The definitions of “exchange” and “facility” of an exchange are set forth in Exchange Act Sections 3(a)(1) and 3(a)(2), respectively. Section 3(a)(1) of the Exchange Act defines an “exchange” to include an organization or group of persons, whether incorporated or unincorporated, that maintains a market place for bringing together purchasers and sellers of securities.[54] Under the statute, an “exchange” includes the market place and the market facilities maintained by such exchange. A particular function provided by a group of persons, whether incorporated or unincorporated, may fall within the statutory definition of “exchange” when business activities performed across the group constitute part of that market place for bringing together purchasers and sellers.[55] Thus, the application of the “exchange” definition does not turn on which particular entity directly holds a particular asset, including the exchange license.[56] What is relevant for purposes of this analysis, instead, is determining which functions are part of the relevant market place.
Section 3(a)(2) of the Exchange Act defines a “facility” of an exchange to include the exchange's premises, tangible or intangible property, or any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange.[57] Section ( printed page 67048) 3(a)(2) specifically includes services such as systems of communication to or from the exchange.[58] The Commission also has observed that the term facility of an exchange is defined “very broadly,” [59] and that whether a service is a facility of an exchange requires an analysis of the particular facts and circumstances.[60]
In this case, the Wireless Connections are provided by IDS which, like the Exchanges, is part of the group operating the exchange. As discussed above, in the case of a group such as ICE and its controlled subsidiaries that are operating the exchange market places, it is not important which corporate entity within the group directly holds a particular asset, so long as that asset is provided as part of the relevant exchange market place. Accordingly, the Wireless Connections are facilities of the Exchanges because they are services, in the form of a system of communication, offered by a group of persons providing a market place for bringing together purchasers and sellers of securities, and such services are for the purpose of effecting or reporting transactions on the Exchanges. In addition, the Wireless Connections are facilities of the Exchanges because they use the premises ( i.e., grounds of the Mahwah Data Center) and property ( e.g., the Data Center Pole or IDS network) of the group of persons providing a market place for bringing together purchasers and sellers of securities for such purposes. The Exchanges' arguments that they do not have the right to use premises and property provided by IDS or other ICE affiliates that contribute to the maintenance of this market place do not address the fact that the group operating the exchange market place has the right to use it.
The Exchanges take the position that the Wireless Connections are not facilities of the Exchanges by focusing on the ICE subsidiaries that hold the exchange licenses, and not on the broader operation of the exchange. Specifically, the Exchanges contend that the definition of “exchange” focuses on “the exchange entity and what it does.” [61] The Exchanges suggest that “exchange functions” are performed only by the Exchanges' SRO Systems housed in the Mahwah Data Center. For example, the Exchanges state that the Wireless Connections are not the “premises” of the Exchanges, reasoning that they consist of equipment owned by IDS and not the Exchanges.[62] Similarly, the Exchanges state that the Wireless Connections are not “property” or “services” of the Exchanges because the underlying wireless network is owned by, or provided through rights of, other ICE affiliates.[63] The Exchanges also take the position that the Wireless Connections do not fall within the definition of “facility” of an exchange because they simply connect a customer's equipment in one data center to that customer's equipment in another data center, and do not connect directly to the Exchanges' trading and execution systems.[64]
As discussed above, the statutory definition of an “exchange” includes any group of persons that maintains a market place for bringing together purchasers and sellers of securities, and the definition of “facility” (applicable to an exchange) references that exchange definition. Acknowledging that the functions performed by a group of persons can constitute an exchange does not mean that all of the assets or services of all of the ICE affiliates are “automatically collapsed” into the Exchanges.[65] Rather, with respect to national securities exchanges such as the Exchanges, only facilities “for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood” would be facilities of those exchanges.[66]
Several commenters addressed the purpose of the Wireless Connections, stating that the Wireless Connections are services purchased by market participants for the purpose of effecting and reporting transactions on, or communicating to or from, the Exchanges,[67] and are in fact used to send trading orders and receive market data for that purpose.[68] The ( printed page 67049) Commission finds these comments persuasive, and agrees that market participants purchase the Wireless Bandwidth Connections offered by the Exchanges for the purpose of minimizing the latency of communications between the Mahwah co-location facility that houses the matching engines of the Exchanges and the Third Party Data Centers that house the matching engines of other exchanges trading the same securities, in order to enhance the efficiency of their trading strategies on the Exchanges and elsewhere.[69] The Commission similarly agrees that market participants purchase the Wireless Market Data Connections for the purpose of minimizing the latency of market data produced by the Exchanges and transmitted to them at the Third Party Data Centers, to enhance the efficiency of their trading strategies on the Exchanges and elsewhere.[70] Although the Exchanges take the position that the Wireless Connections cannot be facilities of the Exchanges because they do not connect directly to the Exchanges' trading and execution systems, the definition of facility of an exchange contains no such requirement. What is required for an exchange service to be a facility is that it be provided “for the purpose of” effecting or reporting a transaction on the Exchange which, as discussed above, is in fact the case.[71]
For the reasons discussed above, the Commission also agrees that the Wireless Connections are facilities of the Exchanges because they represent premises and property of the Exchanges. These premises and property include the Mahwah Data Center grounds, the Data Center Pole and equipment thereon used as a point of access to the Mahwah Data Center, and the underlying IDS network uniquely connecting the Markham and Mahwah Data Centers.[72] In this instance, IDS operates the Wireless Connections to and from Carteret and Secaucus via its exclusive access to the Data Center Pole.[73] IDS also operates the Wireless Connections between Markham and Mahwah via its own proprietary wireless network. Each of these assets, irrespective of which member of the group holds title to it, is provided as part of the market place for bringing together purchasers and sellers of securities.
Accordingly, the Commission finds the proposed Wireless Connections are facilities of the Exchanges.
B. The Proposed Rule Changes, as Modified by Partial Amendment No. 3, Are Consistent With the Act
1. The Applicable Standard for Review
The Commission has historically applied a “market-based” test in its assessment of market data fees, which has also been applied in the context of connectivity fees, such as those proposed here.[74] Under that test, the Commission considers “whether the exchange was subject to significant competitive forces in setting the terms of its proposal . . . , including the level of any fees.” [75] If an exchange meets this burden, the Commission will find that its proposal is consistent with the Act unless “there is a substantial countervailing basis to find that the terms” of the proposal violate the Act or the rules thereunder.[76] If an exchange cannot demonstrate that it was subject to significant competitive forces, it must “provide a substantial basis, other than competitive forces, . . . demonstrating that the terms of the proposal are equitable, fair, reasonable, and not unreasonably discriminatory.” [77]
After careful consideration of the proposed rule changes, as modified by Partial Amendment No. 3, comments received, and the Exchanges' responses thereto, the Commission finds that the proposed rule changes, each as modified by Partial Amendment No. 3, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.[78] Specifically, the Commission finds that the proposed rule changes, as amended, are consistent with: (1) Section 6(b)(4) of the Act,[79] 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; (2) Section 6(b)(5) of ( printed page 67050) the Act,[80] which requires that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers; and (3) Section 6(b)(8) of the Act,[81] which requires that the rules of a national securities exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
In support of the proposals, as amended, the Exchanges argue principally that the Wireless Connections are subject to significant competitive forces because they are offered in a competitive environment where substitutes are available.[82] As discussed further below, the Commission believes that Partial Amendment No. 3, in which the Exchanges propose fiber length equalization measures to substantially mitigate the unique proximity advantage of the Data Center Pole, particularly strengthens the Exchanges' argument by establishing a basis upon which to find that there are substantially similar substitutes for the Wireless Connections offered by third party vendors who have not been placed at a meaningful competitive disadvantage created by the Exchange. Therefore, after considering the current competitive landscape, comments received, and Partial Amendment No. 3, the Commission finds that the Exchanges are subject to significant competitive forces in setting the terms on which they offer the Wireless Connections.
2. Review of Competitive Forces Applicable to the Wireless Connections
a. Competitive Environment
In the Wireless I and Wireless II Notices, the Exchanges state that the Wireless Connections are offered on terms that are reasonable, equitable, and not unfairly discriminatory and do not impose a burden on competition that is not necessary or appropriate because use of the Wireless Connections is voluntary and they are offered in a competitive environment where alternatives are available.[83] Describing this competitive environment, the Exchanges state that there are at least three other vendors that offer market participants wireless network connections between the Mahwah Data Center and the Secaucus and Carteret Third Party Access Centers using wireless equipment installed on towers and buildings near the Mahwah Data Center.[84] With respect to the Wireless Market Data Connections specifically, they state that other providers offer connectivity to Selected Market Data in the Third Party Data Centers, and believe that a market participant in the Carteret or Secaucus Third Party Data Center may purchase a wireless connection to the NYSE and NYSE Arca Integrated Feed data feeds from at least two other providers of wireless connectivity.[85] The Exchanges also state that they believe competing wireless connections offered by non-ICE entities provide connectivity at the “same or similar speed” as the Wireless Connections, and at the “same or similar cost.” [86] The Exchanges acknowledge that the Wireless Connections between the Mahwah Data Center and the Markham Third Party Data Center are the first public, commercially available wireless connections between the two points, creating a new connectivity option for customers in Markham.[87] With respect to all of the Wireless Connections, however, the Exchanges state that some market participants have their own proprietary wireless networks, and that market participants may create a new proprietary wireless connection, connect through another market participant, or use fiber connections offered by the Exchanges, ICE affiliates, other service providers, and third party telecommunications providers.[88]
The Exchanges acknowledge that the Wireless Connections between the Mahwah Data Center and Carteret and Secaucus currently rely upon the Data Center Pole, to which access is restricted,[89] but state that the access to such pole is not required for third parties to compete,[90] because (i) proximity to a data center is not the only determinant of a wireless network's speed; [91] (ii) latency is not the only consideration that a market participant may have in selecting a wireless network; [92] and (iii) fiber network connections may sometimes be more attractive since they are more reliable and less susceptible to weather conditions.[93] In the Exchanges' view, the location of the Data Center Pole to which ICE affiliates have exclusive access should not be determinative of whether third-party wireless connectivity providers can compete with IDS.[94]
The Exchanges state that the proposed pricing is reasonable because the services are voluntary, market participants may select the connectivity options that best suit their needs, and the fees reflect the benefit received by customers in terms of lower latency over the fiber optics options.[95] The Exchanges believe that the proposals involve an equitable allocation of fees among market participants because such fees would apply to all market participants equally and would not apply differently to distinct types or sizes of market participants.[96] In addition, the various options proposed offer market participants additional choices that they can select to best suit their needs.[97] For similar reasons, the Exchanges argue that the proposals are not unfairly discriminatory.[98]
The Exchanges also state that, because substitute connectivity providers are available, the proposals do not impose an unnecessary or inappropriate burden on competition.[99] According to the Exchanges, the proposals do not affect competition among national securities exchanges or among members of the ( printed page 67051) Exchanges.[100] Rather the Exchanges state that their filing of the proposals puts IDS at a competitive disadvantage relative to its commercial competitors that are not subject to filing requirements of Section 19(b) of the Act.[101]
Commenters on the original proposals disagreed. Because the Wireless Connections to the Secaucus and Carteret Third Party Data Centers begin and end at the Data Center Pole which is closer to the Exchanges' trading and execution systems than all other poles, commenters objected that IDS's exclusive access to the Data Center Pole would make fair competition in the relevant market impossible.[102] In short, commenters stated that the disparity in access to the Data Center Pole would give IDS an exclusive geographic latency advantage enabling IDS to provide the fastest possible means of communication to the Exchanges that competitors could not overcome.[103]
One of these commenters estimated the Data Center Pole to be “approximately 700 feet closer to the NYSE matching engine” than the closest commercial poles available to all other wireless connectivity vendors.[104] This commenter stated that “timely receipt of market data is essential to trading competitively in today's markets,” [105] and while it may not seem like a significant distance, “the delay of data through 700 feet of fiber is meaningful in today's markets.” [106] This commenter and others believed that the Wireless Connections, as originally proposed, were designed with a structural geographic latency advantage rendering the availability of true substitutes impossible, and therefore that the Wireless Connections were in fact proposed to be offered on terms that were unfairly discriminatory and would impose an inappropriate burden on competition, inconsistent with the Exchange Act.[107]
Relatedly, some commenters stated that restricted access to the Data Center Pole would enable the Exchanges to charge unreasonable or unfairly discriminatory fees.[108] One commenter stated that connecting to the Exchanges through another means, such as through fiber-optic cables or another connectivity service rather than through the Wireless Connections, results in a slower connection that harms a broker-dealer's ability to provide best execution to clients.[109] The commenter further stated that for regulatory and competitive reasons, most broker-dealers feel they must purchase the fastest connectivity services to remain in business—without regard to the price of the Exchanges' connectivity service offerings compared to alternatives.[110]
The Exchanges submitted a response to these comments defending their view that the Wireless Connections were subject to competition.[111] “While having a pole 700 feet closer to a facility is a positive factor for latency,” they stated, “it is just one of a list of factors that determine the network's latency levels.” [112] According to the Exchanges, the fact that the Wireless Connections and Data Center are not new and competition has “continued to develop” since 2016 demonstrates that use of the Data Center Pole is not required for third parties to compete with the Wireless Connections.[113] The Exchanges further defended the choice to limit access to the Data Center Pole, noting that it is smaller than commercial poles and that space limitations, security concerns, and interference are practical factors that are a “real concern.” [114] They also stated that IDS does not believe that its wireless network offers the fastest commercial option, and market participants “often choose not to use IDS.” [115]
Several commenters responded that these arguments were unpersuasive,[116] with one commenter in particular emphasizing that the key issue was not whether competition exists, but whether that competition is fair.[117] This commenter stated that space limitations, security concerns, and interference on the Data Center Pole were not a justification for the exclusive latency advantage for which the Exchanges were seeking approval, nor an explanation for why that advantage did not constitute unfair discrimination or a burden on competition not necessary or appropriate in furtherance of the Act.[118] Estimating the apparent geographic latency advantage to be approximately 700 feet (or approximately 1 microsecond), this commenter also expressed concern about the potential for less obvious ways that an exchange or its preferred provider might benefit from undisclosed latency advantages.[119] The commenter urged that the relevant inquiry with respect to the Wireless Connections is a comparison of (i) the length and latency of the connection between the matching engine and Mahwah Data Center Pole relative to (ii) the length and latency of the connection ( printed page 67052) between the matching engine and the nearest public pole.[120]
Following the submission of these comments, the Exchanges filed Partial Amendment No. 1, and a second response letter, proposing to add new rules to “negate proximity differences and articulate a connectivity policy that requires the length of the connection into the data center from the Data Center Pole to be no less than the connection from the closest commercial pole to the same point.” [121] Commenters on Partial Amendment No. 1 generally commended the Exchanges' efforts to eliminate any unfair competitive advantage enjoyed by the Wireless Connections,[122] but some expressed concern that Partial Amendment No. 1 lacked a firm commitment and sufficient detail to establish that the Exchanges were in fact proposing a level playing field for competitors.[123] One commenter, however, stated that limiting IDS's geographic advantage “should provide other wireless connectivity service providers with the opportunity to compete with [IDS],” and that despite the Exchanges proposing to charge market participants a significant initial fee and recurring monthly fees per wireless connection, “the fact that competitors can offer the same level of wireless connectivity services should constrain the price for NYSE's wireless connectivity services.” [124] This commenter urged the Commission to continue to monitor for other restrictions or conditions that would give IDS an advantage over competitors and consequently affect the ability for market participants to choose competing wireless connectivity services.[125]
Following the submission of these comments, the Exchanges withdrew Partial Amendment No. 1 and replaced it in its entirety with Partial Amendment No. 2.[126] In response to commenters' concerns, the Exchanges represented that they are “committed to the principal of having no measurable latency differential due to [their] use of a Data Center Pole,” [127] and made several changes to the measures proposed in Partial Amendment No. 1. Specifically, the Exchanges revised their proposed definition of “Data Center Pole” to define it by reference to its location on the grounds of the Mahwah Data Center, instead of defining it by which entities have access to it.[128] The Exchanges also added further specificity to their proposed measures, such as by describing the relevant length of equalization as the “fiber path,” and clarifying that the “Data Center Pole” or “Commercial Pole” includes “a pole or other structure ” holding wireless equipment.[129] In addition, with respect to the Wireless Bandwidth Connections specifically, the Exchanges proposed to use the “Patch Panel Point” as the “end point” for the fiber length measurements.[130] Partial Amendment No. 2 did not incorporate the commenter suggestion that the Exchanges account for “over-the-air” latency differentials between the Data Center Pole and the Closest Commercial Pole with respect to each Third Party Data Center, arguing that any measurements of over-the-air distances to the Third Party Data Centers would be “arbitrary at best.” [131]
In addition, the Exchanges made several additional representations in Partial Amendment No. 2. Among them, the Exchanges represented that they would monitor their own compliance with the proposed rules.[132] In response to commenter requests that the proposed rules address what would happen if the Exchanges or an ICE affiliate used a wireless pole on private property off the grounds of the Mahwah Data Center, each of the Exchanges represented that “the Exchange and IDS would have no special access or exclusive rights with respect to any commercial pole off the grounds of the Mahwah data center,” and that “[t]hey would compete for the use of such grounds or any pole built on them, just like IDS does for the other poles in its wireless network.” [133] In addition, the Exchanges represented that “if the rule is approved, once the required changes ( printed page 67053) are implemented, the Exchange[s] commit[] to have the latency of the fiber route between the Data Center Pole and Patch Panel Point measured.” [134]
The Commission received two comment letters on Partial Amendment No. 2 before it was withdrawn. One commenter commended the Exchanges' additional measures, but objected that the Exchanges' efforts to neutralize the advantages enjoyed by the Wireless Connections are incomplete without, at a minimum, accounting for over-the-air geographic differences in connecting to Third Party Data Centers.[135] This commenter previously argued that, after accounting for “over-the-air latency differentials” between the Data Center Pole and the “closest” commercial pole with respect to each Third Party Data Center, a single “closest” commercial pole may be the closest for a connection to one Third Party Data Center but not another.[136] The other commenter concurred and further opined that the “fairest configuration would be to have all equipment located together.” [137]
Following the submission of these comments, the Exchanges withdrew Partial Amendment No. 2 and replaced it in its entirety with Partial Amendment No. 3.[138] In Partial Amendment No. 3, the Exchanges propose the same measures as those proposed in Partial Amendment No. 2, but now further propose to account for “over-the-air” distances in connecting to Third Party Data Centers.[139] Specifically, as described in more detail above,[140] and as suggested by commenters, the Exchanges propose to use geodesic distances in comparing the distances between the Data Center Pole and the Closest Commercial Pole in relation to the relevant Third Party Data Center.[141] The Exchanges believe that these measures take into account commenter concern that “ `irrespective of the route taken from Nasdaq Inc.'s . . . data center in Carteret to the Mahwah Data Center, the minimum distance that must be traveled is shorter via the Data Center Pole than via the closest commercial pole.' ” [142] In addition, the Exchanges again represent they that would each monitor their own compliance with the proposed rules.[143] They also again represent that if the Exchanges or an ICE affiliate used a wireless pole on private property off the grounds of the Mahwah Data Center, then “the Exchange and IDS would have no special access or exclusive rights with respect to any commercial pole off the grounds of the Mahwah data center,” and “[t]hey would compete for the use of such grounds or any pole built on them, just like IDS does for the other poles in its wireless network.” [144] Further, the Exchanges again represent that “if the rule is approved, once the required changes are implemented, the Exchange[s] commit[] to have the latency of the fiber route between the Data Center Pole and Patch Panel Point measured.” [145]
b. Application of the Market Based Test
As discussed above,[146] the Commission's market-based test considers “whether the exchange was subject to significant competitive forces in setting the terms of its proposal . . ., including the level of any fees.” [147] If an exchange meets this burden, then the Commission will find that its proposal is consistent with the Act unless “there is a substantial countervailing basis to find that the terms” of the proposal violate the Act or the rules thereunder,[148] as discussed further below.
The Commission believes the Exchanges have demonstrated that they are subject to significant competitive forces in setting the terms on which they offer Wireless Connections through the Data Center Pole, in particular because substantially similar substitutes are available.[149] The Commission has indicated that the availability of alternatives can impose competitive restraints to ensure that the Exchanges act equitably, fairly, and reasonably.[150]
The Exchanges describe several competing wireless connections offered ( printed page 67054) by non-ICE entities that they state provide connectivity at the “same or similar speed” as the Wireless Connections, and at the “same or similar cost,” [151] and state that some market participants have their own proprietary wireless networks, as well as that market participants may create a new proprietary wireless connection, connect through another market participant, or use fiber connections offered by the Exchanges, ICE affiliates, other service providers, and third party telecommunications providers.[152] With respect to the Wireless Connections with Carteret and Secaucus, which make use of the Data Center Pole, commenters (including competitors to IDS as well as market participants choosing among competitors) objected that IDS's exclusive access to the Data Center Pole and its associated geographic latency advantage would essentially make the availability of true substitutes impossible. In Partial Amendment No. 3, however, the Exchanges substantially mitigate the geographic latency advantage by adding rules requiring fiber-length equalization measures on the segment closest to the Exchanges' data center over which they have control and which take into account the geodesic (or “over-the-air”) distance of each Third Party Data Center. As such, the measures proposed in Partial Amendment No. 3 allow competitors to offer a more similar service than they otherwise could in the absence of these measures.
Some commenters stated that the Exchanges should also commit to providing competitors with full access to the Data Center Pole to level the playing field completely. While doing so may further reduce the potential for differences between competing services, as previously stated, services need not be identical to be substitutable.[153] Separately, the Wireless Connections with Markham do not use the Data Center Pole,[154] and one commenter states that “there appears to be a level playing field for all market participants choosing to access NYSE's offering in Markham.” [155]
Based on the record, the Commission believes that there are alternatives to the Wireless Connections and Partial Amendment No. 3 is designed to further ensure that competitors can offer wireless connectivity services sufficiently comparable to those offered by the Exchanges. Thus, the Commission finds that the Exchanges are subject to significant competitive forces that constrain the terms on which the Wireless Connections are offered, and will approve the proposals, as amended, because there is no substantial countervailing basis to find that the terms of the proposals, as amended, violate the Act or the rules thereunder.[156]
As discussed above, commenters on the original proposals argued that the Exchanges had not met their burden of demonstrating that the Wireless Connections are consistent with the Act because the proximity of the Data Center Pole to the Mahwah Data Center and IDS's exclusive access to it conferred an insurmountable geographic latency advantage to IDS that was unfairly discriminatory and an inappropriate burden on competition.[157] In response to these comments and others, the Exchanges have proposed new rules to substantially mitigate the geographic latency advantage associated with the Data Center Pole, thereby ensuring that competing wireless connectivity service providers will have the opportunity to compete without the measurable and ostensible geographic latency advantage the Wireless Connections would otherwise have by virtue of the location of a Data Center Pole, and offer wireless connectivity services sufficiently comparable to the Wireless Connections.[158] Accordingly, the Commission finds that the Wireless Connections are not offered on terms that are unfairly discriminatory or would impose an inappropriate burden on competition, and otherwise finds no substantial countervailing basis on which to disapprove the proposals, as amended.[159]
Based on its finding that there are substantially similar substitutes to the Wireless Connections that bring significant competitive forces to bear on the equitableness and reasonableness of fees, the Commission finds the proposed rule changes, as modified by Partial Amendment No. 3, to be consistent with Section 6(b)(4) of the Act,[160] 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.
Further, because the Wireless Connections are designed to offer market participants a means to minimize the latency of their communications and receipt of Selected Market Data and thereby enhance the efficiency of their trading strategies on the Exchanges and elsewhere, and competitors may offer a similar level of services as a result of the fiber-length equalization measures, the Commission finds the proposals to be consistent with the Section 6(b)(5) of the Act, which requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, 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, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.[161]
In addition, the Commission believes that the fiber-length equalization measures proposed in Partial Amendment No. 3 will enhance competition in the market for wireless connectivity services between the Mahwah Data Center and Third Party Data Centers, and therefore that the proposals, as amended, are consistent with Section 6(b)(8) of the Act, which prohibits any national securities exchange rule from imposing any burden on competition that is not necessary or appropriate in furtherance of the Act.
In making these findings, the Commission has also taken into consideration certain representations made by the Exchanges in Partial Amendment No. 3.[162] Consistent with their representations, the Commission expects the Exchanges to adhere to the principle of having no measurable latency differential due to their use of the Data Center Pole.[163] Further, the Commission expects the Exchanges, as well as the Commission staff, to monitor the Wireless Connections, particularly as market conditions and technology evolve, to assess whether conditions continue to permit competitors to offer ( printed page 67055) substantially similar substitutes for the Wireless Connections.
IV. Solicitation of Comments on Partial Amendment No. 3
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Partial Amendment No. 3 to each of the Wireless I and Wireless II proposals is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
- Use the Commission's internet comment form (www.sec.gov/rules/sro.shtml); or
- Send an email torule-comments@sec.gov. Please include File Nos. SR-NYSE-2020-05, SR-NYSEAMER-2020-05, SR-NYSEArca-2020-08, SR-NYSECHX-2020-02, SR-NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-2020-15, SR-NYSECHX-2020-05, SR-NYSENAT-2020-08 on the subject line.
www.sec.gov/rules/sro.shtmlPaper Comments
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
V. Accelerated Approval of Proposed Rule Changes, as Modified by Partial Amendment No. 3
The Commission finds good cause to approve the proposed rule changes, each as modified by Partial Amendment No. 3, prior to the thirtieth day after the date of publication of notice of the amended proposal in the Federal Register . The revisions made to the proposals in Partial Amendment No. 3 would place restrictions on the use of a pole or other structure on the grounds of the Mahwah, New Jersey data center that is used for the Wireless Connections. The Commission believes that Partial Amendment No. 3 addresses issues raised by the comments and provides substantially greater support for the conclusion that the Wireless Connections are offered in a market characterized by significant competition in which substantially similar substitutes are available. Further, approval of the proposals will permit competition to continue, rather than reduce the number of competitors in the market for wireless connectivity services. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,[164] to approve the proposed rule changes, each as modified by Partial Amendment No. 3, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[165] that the proposed rule changes (SR-NYSE-2020-05, SR-NYSEAMER-2020-05, SR-NYSEArca-2020-08, SR-NYSECHX-2020-02, SR-NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-2020-15, SR-NYSECHX-2020-05, SR-NYSENAT-2020-08) be, and hereby are, approved on an accelerated basis.
( printed page 67044) October 15, 2020. ( printed page 67045)All submissions should refer to File Nos. SR-NYSE-2020-05, SR-NYSEAMER-2020-05, SR-NYSEArca-2020-08, SR-NYSECHX-2020-02, SR-NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-2020-15, SR-NYSECHX-2020-05, and SR-NYSENAT-2020-08. The file numbers 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 ( 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 Exchanges. 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 publicly available. All submissions should refer to File Nos. SR-NYSE-2020-05, SR-NYSEAMER-2020-05, SR-NYSEArca-2020-08, SR-NYSECHX-2020-02, SR-NYSENAT-2020-03, SR-NYSE-2020-11, SR-NYSEAMER-2020-10, SR-NYSEArca-2020-15, SR-NYSECHX-2020-05, and SR-NYSENAT-2020-08 and should be submitted on or before November 12, 2020.
5 U.S.C. 552By the Commission.
Vanessa A. Countryman,
Secretary.
17 CFR 240.19b-4