FR 2024-29043

Summary of the Document

The notice from the Securities and Exchange Commission (SEC) details a proposed rule change by the Cboe BZX Exchange regarding their fee structure for a service known as "Dedicated Cores." This service allows firms to utilize dedicated CPU cores for their trading activities. The advantage of this service is the potential for enhanced trading performance due to reduced latency, leading to faster and more reliable transaction processing. Users can access up to two Dedicated Cores at no charge, with additional usage incurring fees. This service aims to offer improved trading experiences, particularly for firms sensitive to latency.

Significant Issues and Concerns

One major issue with the document is its complex and technical language. Terms like "CPU Cores," "Binary Order Entry," and "logical ports" are used extensively without layman-friendly explanations, which could alienate those unfamiliar with financial and technical jargon. This complexity might hinder the understanding of potential users who are considering the adoption of Dedicated Cores but lack in-depth knowledge of such technical details.

Additionally, there is an aspect of the fee structure that seems arbitrary. While the document thoroughly describes the tiered fee system, it fails to provide a detailed rationale for specific fee amounts and the increments between tiers. This could lead to perceptions of uneven cost structures, potentially seen as favoring larger firms with more resources.

Impact on the Public

Broadly, the implications of this change are likely minimal for the general public, as the service is targeted specifically at market participants engaged in trading on the exchange. However, the increased efficiency and speed of transactions for users who opt into the Dedicated Cores service could improve market operations and potentially affect market liquidity.

Impact on Specific Stakeholders

For trading entities, especially proprietary trading firms or those with latency-sensitive operations, the dedicated resources could offer competitive advantages by allowing faster trade executions. This could benefit firms that can afford higher service tiers, possibly leading to a competitive edge over smaller firms that might not justify the additional cost of more Dedicated Cores.

Conversely, smaller firms or those less dependent on latency might perceive a disadvantage, as the service's benefits largely cater to high-frequency trading dynamics. The optional nature of the service, however, suggests that firms can continue current operations without significant changes if they choose not to opt-in.

On a regulatory note, the document indicates the SEC's ongoing role in overseeing fair competition and protecting public interest. While the exchange market remains competitive, ensuring equitable access to technological advancements is critical. The document also highlights the ongoing balance regulatory bodies must maintain between fostering innovation and preventing unfair market practices.

The Federal Register document outlines a proposal by the Cboe BZX Exchange to amend its fee schedule regarding Dedicated Cores. These Dedicated Cores are specialized processing units aimed at providing reduced latency and enhanced performance for users. The proposal introduces a tiered fee structure for those who choose to utilize more than two Dedicated Cores, along with a cap on the number of cores a user can purchase.

The financial allocations in this proposal are structured as follows:

Tiered Fee Structure:

• Users are allowed up to two Dedicated Cores at no additional cost. However, for those who need more, the Exchange sets a tiered pricing model:
• $650 per Dedicated Core for users purchasing 3-15 Cores.
• $850 per Dedicated Core for those acquiring 16-30 Cores.
• $1,050 per Dedicated Core for users buying 31 or more Cores.

Example Calculation:

To provide clarity, the document gives an example where a user purchasing 16 Dedicated Cores would incur a monthly fee of $9,300. This is calculated as $0 for 2 free cores + $650 * 13 cores + $850 for the 16th core.

Port Fees:

Additionally, there is a mention of the Exchange's current assessment of $550 per port per month, irrespective of whether Dedicated or shared CPU cores are used.

Special Considerations for Sponsoring Members:

A complex example involves a Sponsoring Member with 3 Sponsored Access relationships. If each relationship maximizes by purchasing 35 Dedicated Cores, the fee would total $30,450 per month. This is elaborated by breaking down the fee for tiers and illustrating how a Sponsoring Member is provided some cores at no cost while paying the tiered fees for additional cores.

The financial references raise some important issues identified within the document:

1. Complexity and Understanding: The fee structure is detailed but may not be immediately clear to users who are not familiar with terms like Dedicated Cores or logic ports. The increments between tiers are specific, but the rationale behind choosing these exact amounts is not fully explained. This could lead to perceptions of arbitrariness and confusion among potential users.

2. Economic Bias: There is an implicit suggestion that firms capable of affording higher numbers of Dedicated Cores may receive better performance benefits. This could potentially put smaller or less affluent firms at a competitive disadvantage, suggesting an economic bias towards larger players who can leverage this technology extensively.

3. Adoption Rates: Despite these offerings, statistics in the document indicate that only 16% of Exchange Members use Dedicated Cores, with many only utilizing the free cores. This suggests that the benefits may not universally be perceived as cost-effective, or necessary, leading to questions about whether financial allocations toward additional cores are justified for all users.

4. Justification and Clarity: The tiered fee approach reflects an effort to manage Exchange resources effectively, yet the precise reasons behind the exact financial increments could be better articulated. A more simplified explanation might enhance understanding and fairness perceptions among users.

Overall, while the proposal provides a clear financial structure for those opting for these enhanced services, it underscores the importance of transparency and clear communication regarding how and why fees are structured in this manner.