The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 4, 2021 Decided January 21, 2022
No. 20-1470
INTERCONTINENTAL EXCHANGE, INC., ET AL.,
PETITIONERS
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of a Final Order
of the Securities and Exchange Commission
Kelly P. Dunbar argued the cause for petitioners. With him
on the briefs was Amy Lishinski.
Jeffrey A. Berger, Senior Litigation Counsel, Securities and
Exchange Commission, argued the cause for respondent. With
him on the brief were Michael A. Conley, Acting General
Counsel, and Tracey A. Hardin, Assistant General Counsel.
Keith Bradley was on the brief for amicus curiae Bloomberg
L.P. in support of respondent.
James A. Brigagliano and Eric D. McArthur were on the
brief for amici curiae McKay Brothers LLC, et al. in support
of respondent.
2
Jason M. Halper was on the brief for amici curiae Securities
Industry and Financial Markets Association and FIA Principal
Traders Group in support of respondent.
Before: KATSAS and WALKER, Circuit Judges, and
GINSBURG, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
GINSBURG.
GINSBURG, Senior Circuit Judge: Five registered national
securities exchanges filed proposed rules with the Securities
and Exchange Commission to establish fee schedules for two
wireless services: Wireless Bandwidth Connections, which
connect a customer’s equipment located on the premises of a
petitioner exchange with the customer’s equipment located on
the premises of a third-party data center; and Wireless Market
Data Connections, which connect a customer to the proprietary
data feed of a petitioner exchange. The exchanges filed the
rules only because SEC staff had informed them that the
Commission views their wireless services as “facilities of an
exchange” and therefore subject to its jurisdiction. The SEC’s
Final Order asserted jurisdiction over the services and
approved the proposed rules.
The exchanges, their common corporate parent, and three
other corporate affiliates petitioned for review of the Final
Order, arguing that (1) the SEC’s assertion of jurisdiction over
the services was based upon an erroneous interpretation of the
statutes that define “exchange” and “facility,” (2) the SEC
arbitrarily and capriciously ignored the effect of the Final Rule
upon the ability of the wireless services to compete, and (3) the
SEC unlawfully ignored Commission regulations defining
“exchange” and arbitrarily and capriciously departed, without
acknowledgment and explanation, from relevant agency
3
precedents. We reject each of these arguments and therefore
deny the petition for review.
I. Background
Before describing the factual and procedural background
giving rise to this petition for review, we first lay out the
statutory framework for the filing of rules by self-regulatory
organizations and then describe some relevant characteristics
of the modern securities market.
A. Statutory Framework
As a “self-regulatory organization,” or SRO, a national
securities exchange must file with the SEC any proposed rule
or rule change. 15 U.S.C. §§ 78c(a)(26), 78s(b)(1). For a rule
to be approved by the SEC, it must, among other requirements,
“provide for the equitable allocation of reasonable dues, fees,
and other charges among . . . persons using its facilities,”
“promote just and equitable principles of trade,” and not
“impose any burden on competition not necessary or
appropriate in furtherance of the purposes of [the Securities
Exchange Act of 1934].”. Id. § 78f(b)(4),(5),(8).
Section 3(a) of that Act defines “exchange” as
any organization, association, or group of
persons . . . which constitutes, maintains, or
provides a market place or 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.
4
15 U.S.C. § 78c(a)(1). The statute specifically provides that an
“exchange” includes not only the marketplace but also “the
market facilities maintained by such exchange.” Id.
Section 3(a)(2) clarifies that
[t]he term ‘facility’ when used with respect to
an exchange includes its premises, tangible or
intangible property whether on the premises or
not, 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 (including, among other things, any
system of communication to or from the
exchange, by ticker or otherwise, maintained by
or with the consent of the exchange), and any
right of the exchange to the use of any property
or service.
Id. § 78c(a)(2).
B. The Modern Securities Market
Securities exchanges, and the market for securities, have
undergone a sea change since passage of the Exchange Act in
1934. Once non-profit and member-owned, exchanges now are
mostly for-profit companies. Trading is overwhelmingly
automated and electronic; the once iconic trading floor has
gone the way of the nickel beer. Exchanges now rely upon
highly sophisticated technologies and matching algorithms to
perform core functions, such as matching buy and sell orders,
while brokers and traders rely upon lightning-fast technology
to generate, route, and execute orders.
5
As the market for securities has evolved, speed has become
increasingly important to sophisticated and successful
securities trading strategies, as vividly recounted in the popular
book “Flash Boys” by Michael Lewis. Speed here is measured
in microseconds (millionths of a second) and nanoseconds
(billionths of a second). These miniscule fractions of a second
— utterly meaningless virtually everywhere else — can make
all the difference when it comes to receiving market data and
completing a profitable transaction. See Market Data
Infrastructure, 85 Fed. Reg. 16726, 16728 (proposed Mar. 24,
2020) (“Today, the U.S. equity markets have evolved into high-
speed, latency-sensitive electronic markets where . . . even
small degrees of latency affect trading strategies. Sophisticated
order routing algorithms dependent on low-latency, high-
quality market information are widely used to execute
securities transactions.”). It should come as no surprise, then,
that sophisticated market participants continually seek to
reduce the latency in their transmissions.
The array of services a modern securities exchange offers to
market participants reflects these realities. Among them is co-
location. A market participant rents rack space and places its
servers in physical proximity to an exchange’s matching engine
or its proprietary market-data feed. The idea is simple: the
closer a trader or broker’s equipment is to a market-data feed,
the sooner it can receive market data and then act upon it; and
the closer this equipment is to a matching engine, the faster an
order can be routed to that matching engine. Exchanges also
charge for access to proprietary market-data feeds and for
various connectivity services, such as access to local networks
that connect to matching engines.
6
C. Factual and Procedural Background
The petitioners are Intercontinental Exchange, Inc. (ICE)
and eight of its wholly owned subsidiaries. Through its
subsidiaries, ICE operates securities exchanges and clearing
houses and provides data services. Five of the eight petitioning
subsidiaries — New York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and
NYSE National, Inc. (the Exchanges) — are for-profit firms
registered with the SEC as national securities exchanges. The
other three — ICE Data Services Wireless LLC, NYSE
Technologies Connectivity, Inc., and ICE Data Connectivity &
Feeds, Inc. (collectively, ICE Data Services, or IDS) — operate
a global connectivity network that provides access to global
markets and data sources. One of the data services affiliates —
NYSE Technologies Connectivity, Inc. — is a subsidiary of the
New York Stock Exchange. See Figure 1.
7
The technological infrastructure of the Exchanges,
including their matching engines, is housed in a 400,000 square
foot building in Mahwah, New Jersey, at which the Exchanges
offer co-location services, as well as connectivity services for
customers’ co-located equipment. The NYSE and others have
routinely filed rules regarding these various services for SEC
approval. See, e.g., Self-Regulatory Organizations; New York
Stock Exchange LLC; Order Approving a Proposed Rule
Change Amending its Price List to Reflect Fees Charged for
Co-Location Services, 75 Fed. Reg. 59310 (Sept. 2010); Self-
Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Partial Amendment No. 4 and Order
Granting Accelerated Approval of a Proposed Rule Change, as
8
Modified by Amendment Nos. 1 Through 4, to Amend the Co-
Location Services Offered by the Exchange To Add Certain
Access and Connectivity Fees, 82 Fed. Reg. 15741 (Mar.
2017).
In January 2020 the Exchanges filed with the SEC proposed
rule changes establishing fee schedules for two wireless
connectivity services operated by IDS. Each of the five NYSE
Exchanges filed two proposed rule changes, one for each of the
two services. One service (Wireless Market Data Connection)
enables a market participant to transport proprietary market
data (sold separately by the Exchanges to market participants),
including information regarding bids, offers, and trades, from
the Exchanges’ facility in Mahwah to the market participant’s
co-located equipment at data centers in Secaucus, New Jersey,
(operated by the Cboe exchange group), Carteret, New Jersey
(operated by the Nasdaq exchange group), or Markham,
Ontario (operated by Canadian exchanges). More specifically,
as shown in Figure 2, the proprietary data first travels via fiber
connections from an Exchange’s matching engine to co-located
IDS equipment and onward to a data pole; the data then travels
wirelessly through a series of towers until it reaches a data pole
at a third-party data center; finally, the data travels via fiber
connections to IDS equipment and then to a market
participant’s equipment.
9
The other service (Wireless Bandwidth Connection)
provides a two-way connection that enables a customer’s co-
located equipment at the Mahwah data center to communicate
with the customer’s co-located equipment at a third-party data
center. At both ends of the connection, IDS equipment
connects by fiber to the market participant’s co-located
equipment. Because a Wireless Bandwidth Connection runs
both ways, a market participant can send a buy or sell order
from Mahwah to a third-party data center, or vice versa. The
Wireless Bandwidth Connection itself, however, does not
connect a market participant’s co-located equipment directly to
the Exchanges’ matching engines; in order to make this final
connection, a market participant must purchase another
connectivity service. See Figure 3.
10
IDS contracts with a non-ICE firm to provide wireless
connections between Mahwah and the data centers in Secaucus
and Carteret. These wireless connections use as their
distribution point a data pole next to the Exchanges’ facility in
Mahwah, to which IDS has exclusive access. See Figure 4.
11
Figure 4: Mahwah Data Center1
For the connection between Mahwah and Markham, by
contrast, IDS uses its own wireless network, and no private
pole is involved. Non-ICE firms, such as amici McKay
Brothers, LLC and Quincy Data, LLC, offer competing
connectivity services between Mahwah and the other two New
1
This figure is taken from the brief of amicus curiae McKay
Brothers LLC, Quincy Data LLC, et al.
12
Jersey data centers, but they are consigned to using a public
access pole, as shown in Figure 4.
In their proposed rules, the Exchanges explained that they
filed with the SEC only because Commission staff informed
them that the Commission viewed the fee schedules as “rules
of an exchange.” In the view of the Exchanges, however, the
Wireless Connections “are not facilities of the Exchange within
the meaning of the Act, and therefore do not need to be
included in its rules.” See, e.g., Self-Regulatory Organizations;
New York Stock Exchange LLC; Notice of Filing of Proposed
Rule Change to Establish a Schedule of Wireless Connectivity
Fees and Charges with Wireless Connections, 85 Fed. Reg.
8938, 8939 (Feb. 2020) (hereinafter Proposed Rule Change).
During the public comment period, several parties argued
that the private data pole located on the grounds of the Mahwah
data center made the proposed rules burdensome to
competition and inequitable because the private pole, to which
IDS has exclusive access, is 700 feet closer to the co-located
equipment than is the closest public pole, increasing the
distance traversed wirelessly and decreasing the distance
traversed through fiber connections. Because light waves
travel faster through air than through fiber-optic cable, this
would meaningfully reduce latency — albeit by less than a
microsecond — and thus give IDS an insuperable latency
advantage over its competitors. See Figure 5.
13
The Exchanges addressed this concern by amending the
proposed rules to ensure that the length of fiber running from
the private data pole to IDS’s co-located hardware would be
equal to the length of fiber running from the closest public
access pole to the co-located hardware of competitors, thereby
negating the advantage provided by the proximity of the private
data pole.
In its Final Order, the SEC affirmed its jurisdiction over the
proposed fee schedules for the Wireless Connections and then
approved them. Self-Regulatory Organizations; New York
Stock Exchange LLC, NYSE American LLC, NYSE Arca,
Inc., NYSE Chicago, Inc., and NYSE National, Inc.; Notice of
Filings of Partial Amendment No. 3 and Order Granting
14
Accelerated Approval to Proposed Rule Changes, Each as
Modified by Partial Amendment No. 3, to Establish a Wireless
Fee Schedule Setting Forth Available Wireless Bandwidth
Connections and Wireless Market Data Connections, 85 Fed.
Reg. 67044 (Oct. 2020). Intercontinental Exchange Inc., the
Exchanges, and IDS petitioned this court for review pursuant
to 15 U.S.C. § 78y(a)(1).
II. Analysis
ICE argues the SEC’s Final Order should be vacated
because (1) it is based upon an erroneous, or at least an
unreasonable, interpretation of the relevant statutes; (2) the
Commission failed to consider the effect of the Order upon
competition; and (3) the Order is inconsistent with SEC
regulations and departs from agency precedents without
adequate acknowledgement and explanation.
A. Statutory Interpretation
The SEC concluded the Wireless Connections are subject to
its jurisdiction as “facilities of an exchange.” This conclusion,
the SEC argues, follows from its unambiguously correct
reading of the relevant statutes. In the alternative, the
Commission says that even if the relevant statutes are
ambiguous, its interpretation of the statute is reasonable and
entitled to deference. ICE maintains, to the contrary, that the
SEC’s Final Order is based upon an unambiguously incorrect
reading of the relevant statutes, and to the extent there is
ambiguity, the SEC resolved it unreasonably.
15
1. Definition of “facility”
Section 3(a)(2), set out above, includes several properties
and property rights and services within the statutory definition
of a “facility” of an exchange. In its Final Order, the SEC
concluded that, for several reasons, both the Wireless
Bandwidth Connection and the Wireless Data Connection
satisfy the statutory definition of “facility.” We agree with the
SEC that the Wireless Connections are “facilities” of an
exchange because they are “system[s] of communication to or
from the exchange . . . maintained by or with the consent of the
exchange” that is offered “for the purpose of effecting or
reporting transactions on the exchange.” 15 U.S.C. § 78c(a)(2).
Start with the Wireless Bandwidth Connection. The
statutory definition of facility describes it to a tee: It allows a
market participant to transmit data, including price quotes and
orders, between the participant’s co-located equipment at the
Mahwah data center and the participant’s co-located equipment
at a third-party data center, and thus to effect or report
transactions on the Exchanges. Indeed, facilitating market
activity is the only reason a market participant would pay a
$10,000 initial fee and a recurring monthly charge of up to
$45,000 for this connection. See Proposed Rule Change, 85
Fed. Reg. at 8942.
The same goes for the Wireless Data Connection. It allows
for transmission of proprietary market data, including
information about bids, offers, and trades, from the premises of
the Exchanges at Mahwah to a market participant’s equipment
co-located at a data center maintained by another exchange.
The market participant may use those data to route orders to the
Exchanges. Therefore, a Wireless Data Connection, too, is “a
system of communication to or from the exchange . . .
16
maintained by or with the consent of the exchange” that is
offered “for the purpose of effecting and reporting transactions
on the Exchange.” Indeed, as the SEC aptly argues in its brief,
the Wireless Data Connection is the modern analogue of the
ticker, which the statute gives as an example of a system of
communication that is considered a “facility,” see 15 U.S.C. §
78c(a)(2).
ICE quibbles with these simple observations. It argues that
because the Wireless Connections are not directly connected to
the Exchanges (i.e., to the matching engines) and are but a
single link in the chain of communication between market
participants and the matching engines, they are not systems of
communication “to or from the exchange.” Further, according
to ICE, unless the court “maintain[s] a strict limit on what it
means to be to or from, you can quickly end up in a scenario
where the SEC could claim the jurisdiction to regulate every
antecedent communications link that may eventually lead to a
securities transaction . . . .” Oral Arg. Rec. at 15:07-15:25.
Taking its point to the extreme, ICE argues the Commission’s
theory would subject to the Commission’s jurisdiction even
“telecommunications providers, couriers, or any service used
by broker-dealers or others that is somehow related to the later
buying and selling of securities on an actual exchange,” an
absurd result.
ICE’s narrow reading of the statute does not withstand
scrutiny, and its warning about the dire consequences of a more
expansive reading rings hollow. As the petitioners conceded at
oral argument, the statutory definition of “exchange”
encompasses more than just the matching engine, so there is no
reason to think the plain meaning of a system of
communication “to or from the exchange” is limited to a
system that provides a direct connection to the matching engine
of an exchange. Furthermore, ICE’s reading of the statue is
17
formalistic to a fault. True enough, the Wireless Bandwidth
Connection does not directly connect a market participant to
equipment owned by an exchange; rather it connects the market
participant’s co-located equipment at Mahwah to the
participant’s co-located equipment at a third-party data center.
Focusing upon this fact alone, however, ignores crucial
context. The Wireless Bandwidth Connection serves no
purpose other than facilitating market activity, which requires
a connection to the matching engine of an exchange.
Technically, the Wireless Bandwidth Connection could be used
for non-market related communications, but it would make no
economic sense to purchase an expensive Wireless Bandwidth
Connection for that reason. Unsurprisingly, a market
participant that purchases a Wireless Bandwidth Connection
invariably purchases a further connection linking its equipment
at Mahwah to a matching engine there. See McKay Brothers
Br. at 15 n.10 (“[A]mici are unaware of any trading firm co-
located in the Exchanges’ data center that does not have a
connection for executing orders on the Exchanges’ system.”);
see also Self-Regulatory Organizations; New York Stock
Exchange LLC, NYSE American LLC, NYSE Arca, Inc.,
NYSE Chicago, Inc., and NYSE National, Inc.; Order Granting
Accelerated Approval, 85 Fed. Reg. at 67049 (Oct. 2020) (
“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 . . . is in fact the case.”). A
Wireless Bandwidth Connection, therefore, is a vital and
proximate link in a system of communication that directly
connects a market participant to the matching engine of an
exchange. To analyze the Wireless Bandwidth Connection
without regard to the context in which it operates makes no
sense.
We are unmoved by ICE’s warning about the dire
consequences of our reading of the statute. Holding the
18
Wireless Bandwidth Connection and the Wireless Data
Connection qualify as systems of communications “for the
purpose of effecting or reporting a transaction on an exchange”
will not lead us down a slippery slope that ends in an irrational
extension of the SEC’s jurisdiction. The differences between
the Wireless Connections and, to take ICE’s own examples, a
telecommunications or courier service used by a broker to
communicate with a customer are legion. In contrast to those
services, the Wireless Connections are very expensive, highly
specialized connections, used exclusively by market
participants for the sole purpose of effectuating trading
strategies and facilitating market activity. Moreover, they are
offered by IDS, an affiliate of the Exchanges, and could not
exist without the consent of the Exchanges — in other words,
they clearly are “system[s] of communication . . . maintained
by or with the consent of the exchange,” 15 U.S.C. § 78c(a)(2).
Communications systems that incidentally facilitate the trading
of securities, by contrast, do not owe their existence to the
consent of any exchange, nor are they maintained by any
exchange. Finally, a Wireless Bandwidth Connection
invariably forms the penultimate link in a direct connection to
the matching engine of an exchange. There is thus a country
mile between subjecting the Wireless Connections to the
jurisdiction of the SEC and subjecting “every antecedent
communications link” to the Commission’s jurisdiction.
2. Section 3(a)(1)
Our analysis does not end with holding the Wireless
Connections come within the definition of “facility” in Section
3(a)(2). Both the SEC and the petitioners read Section 3(a)(2)
through the lens of Section 3(a)(1). In other words, satisfying
the statutory definition of “facility” in Section 3(a)(2) is
necessary but not sufficient to subject a facility to the
jurisdiction of the Commission; it must also be the type of
19
facility that Section 3(a)(1) includes in the term “exchange.”
The logic of this approach apparently is that only the rules of
an SRO are subject to a filing requirement, and the rules of a
facility are not rules of an SRO unless that facility is part of an
SRO. We therefore go on to analyze whether the Wireless
Connections are the type of facility Section 3(a)(1) describes
as being part of an exchange, without deciding whether SEC
jurisdiction depends upon this analysis.
In its Final Order, the SEC concluded that the Wireless
Connections do indeed come within the statutory definition of
the term “exchange.” Section 3(a)(1) defines an “exchange” as
“any organization, association, or group of persons . . . which
constitutes, maintains, or provides a market place or 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.” The statute then
specifically provides that an exchange “includes . . . the market
facilities maintained by such exchange.” 15 U.S.C. 78c(a)(1).
Although the Wireless Connections are provided and
maintained by IDS, and not by the Exchanges themselves, IDS
and the Exchanges form a “group of persons” that together
“maintains or provides a market place or facilities.” Therefore,
the SEC concluded, the Wireless Connections come within the
definition of an exchange in Section 3(a)(1).
We agree. Whatever the outer bounds of the undefined term
“group,” it certainly includes closely connected corporate
affiliates such as the IDS companies and the Exchanges. If it
did not, then a party would itself be able to elude SEC
jurisdiction by making simple changes to its corporate
structure, an obviously untenable result.
We do not suggest the term “group of persons” is
synonymous with corporate affiliation. Unaffiliated entities
20
engaged in joint ventures or other concerted activity may or
may not, depending upon the circumstances, be considered a
“group of persons” for the purposes of this statute. On the other
hand, one corporation that is affiliated with but not controlled
by another may or may not, depending upon the circumstances,
be considered a “group of persons” for the purposes of the
statute. Whether two or more persons are or may be acting in
concert is likely the key consideration. These, however, are
possibilities we need not confront in the present case.
At any rate, corporate affiliation is significant here. Even
putting aside that one of the three companies collectively
referred to by the parties as IDS is a subsidiary of an exchange,
viz., the NYSE, see Figure 1 above, the record reveals a unity
of interests between IDS and the Exchanges. According to the
original proposal submitted by the Exchanges, that is, prior to
the amendments made in response to concerns about the private
pole next to the NYSE’s facility in Mahwah, the Wireless
Connections would have provided IDS, a corporate affiliate of
the Exchanges, with an insuperable latency advantage over its
competitors. Thus, overlooking corporate affiliation here
would allow a company that controls an exchange to evade
SEC oversight by making a simple change to its corporate
structure; it could then use its control over access to exchange
facilities to gain a competitive advantage for its subsidiary,
which would be directly at odds with one purpose of the
Exchange Act, viz., to prevent the imposition of unnecessary
burdens upon competition. See 15 U.S.C. 78f(b)(8). All this
leaves no doubt that the Exchanges and IDS clearly are a
“group of persons” under Section 3(a)(1).
In short, the outer boundary of the term “group of persons”
remains murky, and vigilance is necessary to ensure the term is
not stretched too far. Whatever the limits of that term may be,
21
though, corporate affiliates such as IDS and the Exchanges are
surely well within them.
In its Reply Brief, however, ICE argues Section 3(a)(1)
cannot possibly apply to the Wireless Connections because the
statute speaks about “facilities for bringing together purchasers
and sellers of securities,” which ICE maintains means facilities
that directly connect purchasers and sellers of securities. As
ICE conceded at oral argument, however, under that reading of
the statue the Wireless Connections would not be subject to
SEC jurisdiction even if provided directly by the Exchanges.
Oral Arg. Rec. at 24:06-25:45. That cannot be right.
As mentioned before, Section 3(a)(2) instances a stock
“ticker” as a “facility” even though a ticker merely transmits
stock quotes and does not directly bring together purchasers
and sellers of securities. Moreover, ICE wisely concedes that
sale of proprietary market data is subject to the jurisdiction of
the SEC as a “facility of an exchange,” but that concession is
difficult to square with ICE’s reading of the statute, for a
proprietary market data feed does not directly connect
purchasers and sellers of securities. For similar reasons, ICE’s
reading of the statute is also difficult to square with the SEC’s
unchallenged jurisdiction over co-location services. The SEC
has regulated co-location services at Mahwah since they were
first offered in 2010, see Self-Regulatory Organizations; New
York Stock Exchange LLC; Order Approving a Proposed Rule
Change Amending Its Price List to Reflect Fees Charged for
Co-Location Services, 75 Fed. Reg. 59310 (Sept. 2010), and
given the centrality of those services to trading strategies on a
modern securities exchange, it is difficult to accept a reading
of the statute that would place them beyond regulatory purview
of the Commission.
22
Obviously, then, the statute does not limit a facility of an
exchange to things that directly bring together purchasers and
sellers of securities. Possibly the statute describes what the
group must do as a whole, not what each and every part of the
group must do. Alternatively, by speaking of “facilities for
bringing together etc.,” and not of “facilities that bring
together,” the statute could be limited to facilities that are
maintained for the purpose of bringing together purchasers and
sellers of securities. Either way, however, the Wireless
Connections are covered: IDS is part of a group that directly
brings together purchasers and sellers of securities and it offers
the Wireless Connections for the purpose of bringing together
purchasers and sellers of securities.
In sum, the Wireless Connections come within the
definition of “facility” in Section 3(a)(2) and are the type of
facility – a market facility maintained by an exchange for
bringing together purchasers and sellers of an exchange – that
Section 3(a)(1) brings within the term “exchange.” Therefore,
the SEC correctly concluded that the fee schedules for the
Wireless Connections are “rules of an exchange” and hence
must be filed with the Commission.
B. Failure to Consider Effect Upon Competition
ICE contends the Final Order was arbitrary and capricious
because the SEC failed to consider whether the Order would
“promote efficiency, competition, and capital formation.” See
15 U.S.C. § 78c(f). Although the Final Order thoroughly
discusses the effect the proposed rules would have upon IDS’s
competitors, it did not, ICE maintains, respond to the argument
that subjecting the Wireless Connections to SEC oversight
would hamper IDS’s ability to compete efficiently.
23
As the SEC correctly points out, however, this argument
conflates two distinct questions: (1) whether an organization is
one the Congress decided ought to be subjected to the rule-
approval process, and (2) whether the SEC ought to approve a
particular rule proposed by an SRO. The provision ICE cites
in support of its argument deals with the latter question, as it
speaks of the SEC’s duties “in the review of a rule of a self-
regulatory organization.” Id. It is thus of a piece with Section
6(b), which requires that rules of an exchange must “provide
for the equitable allocation of reasonable dues, fees, and other
charges,” “promote just and equitable principles of trade,” and
not “impose any burden on competition not necessary or
appropriate in furtherance of the purposes of [the Securities
Exchange Act].” Id. § 78f(b)(4), (5), (8).
That the SEC is required to consider all this when reviewing
a rule proposed by an SRO has nothing to do with whether that
SRO is subject to the rule-approval process in the first place.
The SEC is not tasked with deciding whether subjecting an
organization to the rule-approval process would burden its
ability to compete. That decision was made by the Congress:
Because the Wireless Connections satisfy the statutory
definitions in Sections 3(a) and (b), its rules must be filed with
and approved by the SEC — full stop.
C. Consistency with SEC Regulations and Prior Orders
ICE argues that the Final Order is unlawful because it
contradicts SEC regulations defining “exchange.” ICE further
argues that the Final Order was arbitrary and capricious
because it departed from agency precedent without
acknowledging and explaining its change of position. These
arguments are meritless.
24
1. Consistency with Commission Regulations
An SEC regulation defining the terms used in Section
3(a)(1) provides:
An organization, association, or group of
persons shall be considered to constitute,
maintain, or provide “a market place or 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 those terms
are used in section 3(a)(1) of the Act, (15 U.S.C.
78c(a)(1)), if such organization, association, or
group of persons:
(1) Brings together the orders for
securities of multiple buyers and sellers;
and
(2) Uses established, non-discretionary
methods (whether by providing a
trading facility or by setting rules) under
which such orders interact with each
other, and the buyers and sellers
entering such orders agree to the terms
of a trade.
17 C.F.R. § 240.3b-16(a)(1)-(2). The Wireless Connections
do not process orders from buyers and sellers, let alone
establish methods for such orders to interact with each other.
Therefore, ICE argues, the Final Order ignored this regulation
in concluding that the Wireless Connections are subject to the
jurisdiction of the SEC as facilities of an exchange.
25
The cited regulation has no bearing upon this case; it merely
describes characteristics an exchange as a whole — that is, the
group of persons that together constitute an exchange — must
have. Not every part of an exchange, nor every person that is
part of a group that constitutes an exchange, must have all these
characteristics. That the Wireless Connections lack these
characteristics, therefore, does not preclude their being
regulated as part of an exchange.
ICE also points to a regulation providing that merely
“[r]out[ing] orders to a national securities exchange” does not
make something an exchange. 17 C.F.R. § 240.3b-16(b)(1).
This is a red herring. The SEC held not that the Wireless
Connections are exchanges because they route orders to a
national security exchange but that they are included in the
statutory definition of exchange because they are part of a
group of persons that together perform and facilitate exchange
functions going far beyond merely routing orders.
2. Departure from agency precedent without
adequate explanation
ICE also argues that in concluding the Wireless Bandwidth
Connection and the Wireless Data Connection are subject to its
jurisdiction, the SEC departed from two agency precedents
without providing a reasoned explanation. The first precedent
to which ICE points is a 2007 order that dealt with a “neutral
communications service that allow[ed] Nasdaq members and
non-members to route orders to one another.” Self-Regulatory
Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change, as Modified by
Amendments No. 1 and 2, to Remove Provisions Governing
the Operation of the ACES System, 72 Fed. Reg. 46118 (Aug.
2007). The SEC held the system was not a “facility” within the
meaning of the Exchange Act: “the . . . system is not linked
26
with the Exchange’s core systems” and “[i]t is not possible for
an order to be routed to the Nasdaq Market Center via the . . .
system.” Id. at 46119. The same points, ICE argues, describe
the Wireless Bandwidth Connection and the Wireless Data
Connection. Therefore, the argument goes, the SEC was
obligated to acknowledge the 2007 Order and either follow it
or explain its reason for departing from it.
This argument fails because, as the SEC points out, the 2007
Order, which the petitioners never cited in their filings with the
Commission, did not purport to set forth a rule that a “facility”
must be linked directly to an exchange. The lack of a direct
connection was significant in that case because the system
under review merely routed orders between broker-dealers,
making it easier for them to fulfill their best-execution
obligations. Neither of the Wireless Connections involves the
mere routing of orders between broker-dealers, so the 2007
Order is simply irrelevant.
ICE’s second example of a purported departure from
precedent involves a 2008 Order regarding an index
dissemination service through which the Nasdaq calculated and
disseminated index information based upon publicly available
data. Self-Regulatory Organizations; The NASDAQ Stock
Market LLC; Order Approving Proposed Rule Change as
Modified by Amendment Nos. 1 and 2 Thereto to Remove
from Rule 7019 the Fees for Receiving Index Values, 73 Fed.
Reg. 66952 (Nov. 2008). Although that service is unlike either
of the Wireless Services, ICE points to the following wording
in the 2008 Order: “If, however, Nasdaq were to propose to tie
pricing for the index dissemination service to exchange
services . . . Nasdaq would have to file a proposed rule change
with the Commission.” Id. at 66953. Based upon this snippet,
ICE argues the Final Order here under review departed from
agency precedent by holding the Wireless Connections are
27
“facilities” even though their pricing is not in any way tied to
“exchange services.”
There is nothing to this argument either. In the 2008 Order,
having concluded that the index dissemination service was not
a “facility,” the SEC unremarkably pointed out that the service
might be one if the Nasdaq were later to tie its pricing to a
service that is a “facility.” That has nothing to do with our case,
in which the SEC determined the Wireless Connections
independently come within the definition of “facility” and are
themselves properly characterized as “exchange services.”
III. Conclusion
We hold that the Wireless Bandwidth Connection and the
Wireless Data Connection are subject to the SEC’s jurisdiction
as “facilities” of an exchange. The SEC therefore correctly
concluded that the fee schedules for the Wireless Connections
had to be filed with the Commission as “rules of an exchange.”
This conclusion was consistent with SEC regulations and with
agency precedent. For the foregoing reasons, the petition for
review is
Denied.