Notice2021-17759
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX Emerald Express Interface Ports
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 19, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 158 (Thursday, August 19, 2021)</title>
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[Federal Register Volume 86, Number 158 (Thursday, August 19, 2021)]
[Notices]
[Pages 46726-46733]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17759]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92662; File No. SR-EMERALD-2021-25]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule To Adopt a Tiered-Pricing Structure for Additional
Limited Service MIAX Emerald Express Interface Ports
August 13, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 2, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the Exchange's Fee
Schedule (the ``Fee Schedule'') to amend certain port fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/emerald">http://www.miaxoptions.com/rule-filings/emerald</a>, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 46727]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for additional Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \3\ available to Market Makers.\4\ The
Exchange believes a tiered-pricing structure will encourage Market
Makers to be more efficient and economical when determining how to
connect to the Exchange. This should also enable the Exchange to better
monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.\5\
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\3\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
\5\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
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Additional Limited Service MEI Port Tiered-Pricing Structure
The Exchange proposes to amend the fees for additional Limited
Service MEI Ports. Currently, the Exchange allocates two (2) Full
Service MEI Ports \6\ and two (2) Limited Service MEI Ports \7\ per
matching engine \8\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports, Limited
Service MEI Ports and the additional Limited Service MEI Ports all
include access to the Exchange's primary and secondary data centers and
its disaster recovery center. Market Makers may request additional
Limited Service MEI Ports for which they are assessed a $100 monthly
fee for each additional Limited Service MEI Port for each matching
engine.
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\6\ ``Full Service MEI Ports'' means a port which provides
Market Makers with the ability to send Market Maker simple and
complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\7\ ``Limited Service MEI Ports'' means a port which provides
Market Makers with the ability to send simple and complex eQuotes
and quote purge messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
\8\ ``Matching Engine'' means a part of the MIAX Emerald
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol (for example, options
on SPY may be processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated Matching Engine. A particular root
symbol may not be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
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The Exchange now proposes to move from a flat monthly fee per
additional Limited Service MEI Port for each matching engine to a
tiered-pricing structure per additional Limited Service MEI Ports for
each matching engine under which the monthly fee would vary depending
on the number of additional Limited Service MEI Ports the Market Maker
elects to purchase. Specifically, the Exchange will continue to provide
the first and second additional Limited Service MEI Ports for each
matching engine free of charge, as described above, per the initial
allocation of Limited Service MEI Ports that Market Makers receive.
Specifically, (i) the third and fourth additional Limited Service MEI
Ports for each matching engine will increase from the current flat
monthly fee of $100 to $200 per port; (ii) the fifth and sixth
additional Limited Service MEI Ports for engine matching engine will
increase from the current flat monthly fee of $100 to $300 per port;
and (iii) the seventh to the twelfth additional Limited Service MEI
Ports will increase from the current monthly flat fee of $100 to $400
per port (collectively, the ``Proposed Access Fees'').
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \9\ in general, and furthers
the objectives of Section 6(b)(4) of the Act \10\ in particular, in
that it provides for the equitable allocation of reasonable dues, fees
and other charges among Exchange Members and issuers and other persons
using any facility or system which the Exchange operates or controls.
The Exchange also believes the proposal furthers the objectives of
Section 6(b)(5) of the Act \11\ in that it is 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 is not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(4).
\11\ 15 U.S.C. 78f(b)(5).
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The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor competing venues if they
deem fee levels at a particular venue to be excessive. In such an
environment, the Exchange must continually adjust its fees for services
and products, in addition to order flow, to remain competitive with
other exchanges. The Exchange believes that the proposed changes
reflect this competitive environment.
The Exchange believes the proposal to move from a flat fee per
month to a tiered-pricing structure is reasonable, equitably allocated
and not unfairly discriminatory because the Exchange believes the
proposed structure would encourage firms to be more economical and
efficient in the number of additional Limited Service MEI Ports they
purchase. The Exchange believes this will enable the Exchange to better
monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.
The Exchange notes that the firms that are primarily order routers
seeking best-execution do not utilize Limited Service MEI Ports on MIAX
Emerald. Therefore, the fees described in the proposed tiered-pricing
structure will only be allocated to market making firms that engage in
advanced trading strategies and typically request multiple Limited
Service MEI Ports. Accordingly, the firms engaged in market making
business generate higher costs by utilizing more of the Exchange's
resources. The market making firms that purchase higher amounts of
Limited Service MEI Ports tend to have specific business oriented
market making and taking strategies, as opposed to firms simply
engaging in best-execution order routing business. The use of such
additional Limited Service MEI Ports is entirely voluntary.
The Exchange believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee increase meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. The Exchange deems port fees to be access
fees. It records these fees as part of its ``Access Fees'' revenue
[[Page 46728]]
in its financial statements. The Exchange believes that it is important
to demonstrate that these fees are based on its costs and reasonable
business needs. The Exchange believes the Proposed Access Fees will
allow the Exchange to offset expense the Exchange has and will incur,
and that the Exchange is providing sufficient transparency (as
described below) into how the Exchange determined to charge such fees.
Accordingly, the Exchange is providing an analysis of its revenues,
costs, and profitability associated with the Proposed Access Fees. This
analysis includes information regarding its methodology for determining
the costs and revenues associated with the Proposed Access Fees.
In order to determine the Exchange's costs to provide the access
services associated with the Proposed Access Fees, the Exchange
conducted an extensive cost review in which the Exchange analyzed every
expense item in the Exchange's general expense ledger to determine
whether each such expense relates to the Proposed Access Fees, and, if
such expense did so relate, what portion (or percentage) of such
expense actually supports the access services. The sum of all such
portions of expenses represents the total cost of the Exchange to
provide the access services associated with the Proposed Access Fees.
For the avoidance of doubt, no expense amount was allocated twice. The
Exchange is also providing detailed information regarding the
Exchange's cost allocation methodology--namely, information that
explains the Exchange's rationale for determining that it was
reasonable to allocate certain expenses described in this filing
towards the cost to the Exchange to provide the access services
associated with the Proposed Access Fees.
In order to determine the Exchange's projected revenues associated
with the Proposed Access Fees, the Exchange analyzed the number of
Market Makers currently utilizing Limited Service MEI Ports, and,
utilizing a recent monthly billing cycle representative of 2021 monthly
revenue, extrapolated annualized revenue on a going-forward basis. The
Exchange does not believe it is appropriate to factor into its analysis
future revenue growth or decline into its projections for purposes of
these calculations, given the uncertainty of such projections due to
the continually changing access needs of market participants, discounts
that can be achieved due to lower trading volume and vice versa, market
participant consolidation, etc. Additionally, the Exchange similarly
does not factor into its analysis future cost growth or decline. The
Exchange is presenting its revenue and expense associated with the
Proposed Access Fees in this filing in a manner that is consistent with
how the Exchange presents its revenue and expense in its Audited
Unconsolidated Financial Statements. The Exchange's most recent Audited
Unconsolidated Financial Statement is for 2020. However, since the
revenue and expense associated with the Proposed Access Fees were not
in place in 2020 or for the first seven months of 2021, the Exchange
believes its 2020 Audited Unconsolidated Financial Statement is not
useful for analyzing the reasonableness of the total annual revenue and
costs associated with the Proposed Access Fees. Accordingly, the
Exchange believes it is more appropriate to analyze the Proposed Access
Fees utilizing its 2021 revenue and costs, as described herein, which
utilize the same presentation methodology as set forth in the
Exchange's previously-issued Audited Unconsolidated Financial
Statements. Based on this analysis, the Exchange believes that the
Proposed Access Fees are fair and reasonable because they will not
result in excessive pricing or supra-competitive profit when comparing
the Exchange's total annual expense associated with providing the
services associated with the Proposed Access Fees versus the total
projected annual revenue the Exchange will collect for providing those
services.
* * * * *
On March 29, 2019, the Commission issued its Order Disapproving
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC
Options Facility to Establish BOX Connectivity Fees for Participants
and Non-Participants Who Connect to the BOX Network (the ``BOX
Order'').\12\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\13\ Accordingly, the Exchange
believes that the Proposed Access Fees are consistent with the Act
because they (i) are reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) comply
with the BOX Order and the Guidance; (iii) are supported by evidence
(including comprehensive revenue and cost data and analysis) that they
are fair and reasonable because they will not result in excessive
pricing or supra-competitive profit; and (iv) utilize a cost-based
justification framework that is substantially similar to a framework
previously used by the Exchange, and its affiliates MIAX PEARL, LLC
(``MIAX Pearl'') and Miami International Securities Exchange, LLC
(``MIAX''), to establish or increase other non-transaction fees.\14\
Accordingly, the Exchange believes that the Commission should find that
the Proposed Access Fees are consistent with the Act.
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\12\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04).
\13\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (the ``Guidance'').
\14\ See Securities Exchange Act Release Nos. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase
connectivity fees).
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* * * * *
As of July 31, 2021, the Exchange had a market share of only 4.15%
of the U.S. equity options industry for the month of July 2021.\15\ The
Exchange is not aware of any evidence that a market share of
approximately 4-5% provides the Exchange with anti-competitive pricing
power. If the Exchange were to attempt to establish unreasonable
pricing, then no market participant would join or access the Exchange,
and existing market participants would discontinue all or some of their
access services.
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\15\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a> (last visited July 31, 2021).
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their access (or not initially
access an exchange) if an exchange were to establish prices for its
non-transaction fees that, in the determination of such market
participant, did not make business or economic sense for such market
participant to access such exchange. No options market participant is
required by rule, regulation, or competitive forces to be a Member of
the Exchange. As evidence of the fact that market participants can and
do drop their access to exchanges based on non-transaction fee pricing,
R2G Services LLC (``R2G'') filed a comment letter after BOX's proposed
rule changes to increase its connectivity fees (SR-BOX-2018-24, SR-BOX-
2018-37, and SR-BOX-2019-04). The R2G Letter stated, ``[w]hen BOX
instituted a $10,000/month price increase for connectivity; we had no
choice but to terminate connectivity into them as well as terminate our
market data relationship. The cost benefit analysis just didn't make
any sense for us at those new levels.'' Similarly, the Exchange noted
in a recent filing that once MIAX Emerald issued a notice that it was
instituting MEI Port fees, among other
[[Page 46729]]
non-transaction fees, one MIAX Emerald Member dropped its access to
MIAX Emerald as a result of those fees.\16\ Accordingly, these examples
show that if an exchange sets too high of a fee for ports and/or other
non-transaction fees, including other access fees, for its relevant
marketplace, market participants can choose to drop their access to
such exchange.
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\16\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network
Connectivity Fees, and Increase the Number of Additional Limited
Service MIAX Emerald Express Interface Ports Available to Market
Makers) (adopting tiered MEI Port fee structure ranging from $5,000
to $20,500 per month).
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In order to provide more detail and to quantify the Exchange's
costs associated with providing access to the Exchange in general, the
Exchange notes that there are material costs associated with providing
the infrastructure and headcount to fully-support access to the
Exchange. The Exchange incurs technology expense related to
establishing and maintaining Information Security services, enhanced
network monitoring and customer reporting, as well as Regulation SCI
mandated processes, associated with its network technology. While some
of the expense is fixed, much of the expense is not fixed, and thus
increases as the services associated with the Proposed Access Fees
increase. For example, new Members to the Exchange may require the
purchase of additional hardware to support those Members as well as
enhanced monitoring and reporting of customer performance that the
Exchange and its affiliates provide. Further, as the total number
Members increases, the Exchange and its affiliates may need to increase
their data center footprint and consume more power, resulting in
increased costs charged by their third-party data center provider.
Accordingly, the cost to the Exchange and its affiliates to provide
access to its System for market participants is not fixed. The Exchange
believes the Proposed Access Fees are reasonable in order to offset a
portion of the costs to the Exchange associated with providing access
to its network infrastructure.
The Exchange only has four primary sources of revenue: Transaction
fees, access fees (which includes the Proposed Access Fees), regulatory
fees, and market data fees. Accordingly, the Exchange must cover all of
its expenses from these four primary sources of revenue.
The Exchange believes that the Proposed Access Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the
Exchange projects to incur in connection with providing these access
services versus the total annual revenue that the Exchange projects to
collect in connection with services associated with the Proposed Access
Fees. For 2021,\17\ the total annual expense for providing the access
services associated with the Proposed Access Fees is projected to be
approximately $0.88 million. The approximately $0.88 million in
projected total annual expense is comprised of the following, all of
which are directly related to the access services associated with the
Proposed Access Fees: (1) Third-party expense, relating to fees paid by
the Exchange to third-parties for certain products and services; and
(2) internal expense, relating to the internal costs of the Exchange to
provide the services associated with the Proposed Access Fees.\18\ As
noted above, the Exchange believes it is more appropriate to analyze
the Proposed Access Fees utilizing its 2021 revenue and costs, which
utilize the same presentation methodology as set forth in the
Exchange's previously-issued Audited Unconsolidated Financial
Statements.\19\ The $0.88 million in projected total annual expense is
directly related to the access services associated with the Proposed
Access Fees, and not any other product or service offered by the
Exchange. It does not include general costs of operating matching
systems and other trading technology, and no expense amount was
allocated twice.
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\17\ The Exchange has not yet finalized its 2021 year end
results.
\18\ The percentage allocations used in this proposed rule
change may differ from past filings from the Exchange or its
affiliates due to, among other things, changes in expenses charged
by third-parties, adjustments to internal resource allocations, and
different system architecture of the Exchange as compared to its
affiliates.
\19\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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As discussed, the Exchange conducted an extensive cost review in
which the Exchange analyzed expense items in the Exchange's general
expense ledger (this includes over 150 separate and distinct expense
items) to determine whether each such expense relates to the access
services associated with the Proposed Access Fees, and, if such expense
did so relate, what portion (or percentage) of such expense actually
supports those services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to those services. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide access services associated with the Proposed Access Fees.
For 2021, total third-party expense, relating to fees paid by the
Exchange to third-parties for certain products and services for the
Exchange to be able to provide the access services associated with the
Proposed Access Fees, is projected to be $0.05 million. This includes,
but is not limited to, a portion of the fees paid to: (1) Equinix, for
data center services, for the primary, secondary, and disaster recovery
locations of the Exchange's trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking the Exchange's office
locations in Princeton, New Jersey and Miami, Florida, to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\20\ which supports connectivity and feeds for the entire
U.S. options industry; (4) various other services providers (including
Thompson Reuters, NYSE, Nasdaq, and Internap), which provide content,
connectivity services, and infrastructure services for critical
components of options connectivity and network services; and (5)
various other hardware and software providers (including Dell and
Cisco, which support the production environment in which Members
connect to the network to trade, receive market data, etc.). For
clarity, only a portion of all fees paid to such third-parties is
included in the third-party expense herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
information technology and communication costs to the access services
associated with the Proposed Access Fees.
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\20\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
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[[Page 46730]]
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the access
services associated with the Proposed Access Fees to its Members and
their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only that portion which the Exchange
identified as being specifically mapped to providing the access
services associated with the Proposed Access Fees, approximately 2.05%
of the total applicable Equinix expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees, and not any other service, as supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking the
Exchange with its affiliates, MIAX Pearl and MIAX, as well as the data
center and disaster recovery locations. As such, all of the trade data,
including the billions of messages each day per exchange, flow through
Zayo's infrastructure over the Exchange's network. Without these
services from Zayo, the Exchange would not be able to operate and
support the network and provide the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to providing the Proposed
Access Fees, approximately 1.64% of the total applicable Zayo expense.
The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the access services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees, approximately 2.05% of the total applicable
SFTI and other service providers' expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees.
The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the hardware and software provider expense toward the
cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees, approximately 1.23% of the total applicable
hardware and software provider expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees.
For 2021, total projected internal expense, relating to the
internal costs of the Exchange to provide the access services
associated with the Proposed Access Fees, is projected to be $0.83
million. This includes, but is not limited to, costs associated with:
(1) Employee compensation and benefits for full-time employees that
support the access services associated with the Proposed Access Fees,
including staff in network operations, trading operations, development,
system operations, and business that support those employees and
functions (including an increase as a result of the higher determinism
project); (2) depreciation and amortization of hardware and software
used to provide the access services associated with the Proposed Access
Fees, including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the network for trading; and (3) occupancy costs for leased
office space for staff that provide the access services associated with
the Proposed Access Fees. The breakdown of these costs is more fully-
described below. For clarity, only a portion of all such internal
expenses are included in the internal expense herein, and no expense
amount is allocated twice. Accordingly, the Exchange does not allocate
its entire costs contained in those items to the access services
associated with the Proposed Access Fees.
The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange's employee compensation and benefits
expense relating to providing the access services associated with the
Proposed Access Fees is projected to be approximately $0.76 million,
which is only a portion of the $9.74 million total projected expense
for employee compensation and benefits. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
this includes the time spent by employees of several departments,
including Technology, Back Office, Systems Operations, Networking,
Business Strategy Development (who create the business requirement
documents that the Technology staff use to develop network features and
enhancements), and Trade Operations. As part of the extensive cost
review conducted by the Exchange, the Exchange reviewed the amount of
time spent by each employee on matters relating to the provision of
access services associated with the Proposed Access Fees. Without these
employees,
[[Page 46731]]
the Exchange would not be able to provide the access services
associated with the Proposed Access Fees to its Members and their
customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of the access
services associated with the Proposed Access Fees, only the portions
which the Exchange identified as being specifically mapped to providing
the access services associated with the Proposed Access Fees,
approximately 7.81% of the total applicable employee compensation and
benefits expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide the access
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.
The Exchange's depreciation and amortization expense relating to
providing the services associated with the Proposed Access Fees is
projected to be $0.06 million, which is only a portion of the $3.13
million total projected expense for depreciation and amortization. The
Exchange believes it is reasonable to allocate the identified portion
of such expense because such expense includes the actual cost of the
computer equipment, such as dedicated servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were purchased to operate and support the network and provide the
access services associated with the Proposed Access Fees. Without this
equipment, the Exchange would not be able to operate the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portion which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees,
approximately 1.92% of the total applicable depreciation and
amortization expense, as these access services would not be possible
without relying on such. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the access services associated with the Proposed Access Fees, and not
any other service, as supported by its cost review.
The Exchange's occupancy expense relating to providing the services
associated with the Proposed Access Fees is projected to be $0.01
million, which is only a portion of the $0.52 million total projected
expense for occupancy. The Exchange believes it is reasonable to
allocate the identified portion of such expense because such expense
represents the portion of the Exchange's cost to rent and maintain a
physical location for the Exchange's staff who operate and support the
network, including providing the access services associated with the
Proposed Access Fees. This amount consists primarily of rent for the
Exchange's Princeton, NJ office, as well as various related costs, such
as physical security, property management fees, property taxes, and
utilities. The Exchange operates its Network Operations Center
(``NOC'') and Security Operations Center (``SOC'') from its Princeton,
New Jersey office location. A centralized office space is required to
house the staff that operates and supports the network. The Exchange
currently has approximately 150 employees. Approximately two-thirds of
the Exchange's staff are in the Technology department, and the majority
of those staff have some role in the operation and performance of the
access services associated with the Proposed Access Fees. Without this
office space, the Exchange would not be able to operate and support the
network and provide the access services associated with the Proposed
Access Fees to its Members and their customers. Accordingly, the
Exchange believes it is reasonable to allocate the identified portion
of its occupancy expense because such amount represents the Exchange's
actual cost to house the equipment and personnel who operate and
support the Exchange's network infrastructure and the access services
associated with the Proposed Access Fees. The Exchange did not allocate
all of the occupancy expense toward the cost of providing the access
services associated with the Proposed Access Fees, only the portion
which the Exchange identified as being specifically mapped to operating
and supporting the network, approximately 1.93% of the total applicable
occupancy expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's cost to provide the access
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.
The Exchange notes that a material portion of its total overall
expense is allocated to the provision of access services (including
connectivity, ports, and trading permits). The Exchange believes this
is reasonable and in line, as the Exchange operates a technology-based
business that differentiates itself from its competitors based on its
trading systems that rely on access to a high performance network,
resulting in significant technology expense. Over two-thirds of
Exchange staff are technology-related employees. The majority of the
Exchange's expense is technology-based. As described above, the
Exchange has only four primary sources of fees to recover their costs;
thus, the Exchange believes it is reasonable to allocate a material
portion of their total overall expense towards access fees.
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the access services associated
with the Proposed Access Fees will not result in excessive pricing or
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that annualized revenue for
providing the access services associated with the Proposed Access Fees
would be approximately $2.07 million per annum, based on a recent
billing cycle. The Exchange projects that its annualized expense for
providing the services associated with the Proposed Access Fees will be
approximately $0.88 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for
providing the access services associated with the Proposed Access Fees
will not result in excessive pricing or supra-competitive profit, as
the Exchange will make a profit margin of approximately 58% ($2.07
million in total revenue minus $.088 [sic] million in expense = $1.19
million in profit per annum). Additionally, this profit margin does not
take into account the cost of capital expenditures (``CapEx'') the
Exchange projects to spend each year on CapEx going forward.
For the avoidance of doubt, none of the expenses included herein
relating to the access services associated with the Proposed Access
Fees relate to the provision of any other services offered by the
Exchange or its affiliates. Stated differently, no expense amount of
the Exchange is allocated twice. The Exchange notes that, with respect
to expenses associated with the Exchange's affiliates, MIAX Pearl and
MIAX, those expenses are accounted for separately and are not included
within the scope of this filing. Stated differently, no expense amount
of the Exchange is also allocated to MIAX Pearl or MIAX.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective
[[Page 46732]]
percentages of each expense category described above towards the total
cost to the Exchange of operating and supporting the network, including
providing the access services associated with the Proposed Access Fees
because the Exchange performed a line-by-line item analysis of all the
expenses of the Exchange, and has determined the expenses that directly
relate to providing access to the Exchange. Further, the Exchange notes
that, without the specific third-party and internal items listed above,
the Exchange would not be able to provide the access services
associated with the Proposed Access Fees to its Members and their
customers. Each of these expense items, including physical hardware,
software, employee compensation and benefits, occupancy costs, and the
depreciation and amortization of equipment, have been identified
through a line-by-line item analysis to be integral to providing access
services. The Proposed Access Fees are intended to recover the
Exchange's costs of providing access to its System. Accordingly, the
Exchange believes that the Proposed Access Fees are fair and reasonable
because they do not result in excessive pricing or supra-competitive
profit, when comparing the actual costs to the Exchange versus the
projected annual revenue from the Proposed Access Fees.
The Exchange believes the proposed changes are reasonable,
equitably allocated and not unfairly discriminatory, and do not result
in a ``supra-competitive'' \21\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\22\ With the proposed changes,
the Exchange anticipates it will have a profit margin of approximately
58% based on the Proposed Access Fees. Based on the 2020 Audited
Financial Statements of competing options exchanges (since the 2021
Audited Financial Statements will likely not become publicly available
until early July 2022, after the Exchange has submitted this filing),
the Exchange's profit margin is similar to or below the operating
profit margins of other competing exchanges. For example, Nasdaq ISE,
LLC's (``ISE'') operating profit margin for all of 2020 was
approximately 85%; Nasdaq PHLX LLC's (``PHLX'') operating profit margin
for all of 2020 was approximately 49%; Nasdaq's operating profit margin
for all of 2020 was approximately 62%; NYSE Arca, Inc.'s (``Arca'')
operating profit margin for all of 2020 was approximately 55%; NYSE
American LLC's (``Amex'') operating profit margin for all of 2020 was
approximately 59%; Cboe's operating profit margin for all of 2020 was
approximately 74%; and BZX's operating profit margin for all of 2020
was approximately 52%.
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\21\ See supra note 13.
\22\ See id.
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The Exchange further believes its proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange believes that it benefits overall competition in the
marketplace to allow relatively new entrants like the Exchange and its
affiliates, MIAX Pearl and MIAX, to propose fees that may help these
new entrants recoup their substantial investment in building out costly
infrastructure. The Exchange and its affiliates have historically set
their fees purposefully low in order to attract business and market
share. The Exchange notes that the concept of a tiered-pricing
structure for ports is not new or novel.\23\
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\23\ See Cboe BZX Exchange, Inc. (``BZX'') Options Fee Schedule,
Options Logical Port Fees, Ports with Bulk Quoting Capabilities
(charging $1,500/month for the 1st and 2nd port, $2,500/month for
the 3rd port or more); Cboe Exchange, Inc. (``Cboe'') Fee Schedule,
Logical Connectivity Fees (charging $750/month per port for BOE/FIX
Logical Ports 1 to 5 and $800/month per port for BOE/FIX Logical
Ports greater than 5; charging $1,500/month per port for BOE Bulk
Logical Ports 1 to 5, $2,500/month per port for BOE Bulk Logical
Ports 6 to 30, and $3,000/month per port for BOE Bulk Logical Ports
greater than 30); The Nasdaq Stock Market LLC (``Nasdaq''), Options
7, Pricing Schedule, Section 3 Nasdaq Options Market--Ports and
Other Services (charging $1,500/month per port for first 5 ports,
$1,000/month per port for the next 15 ports, and $500/month per port
for all ports over 20).
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The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor competing venues if they
deem fee levels at a particular venue to be excessive. In such an
environment, the Exchange must continually adjust its fees for services
and products, in addition to order flow, to remain competitive with
other exchanges. The Exchange believes that the proposed changes
reflect this competitive environment.
The Exchange believes the proposal to move from a flat fee per
month to a tiered-pricing structure is reasonable, equitably allocated
and not unfairly discriminatory because the Exchange believes the
proposed structure would encourage firms to be more economical and
efficient in the number of Limited Service MEI Ports they purchase. The
Exchange believes this will enable the Exchange to better monitor and
provide access to the Exchange's network in order to ensure that the
Exchange meets its obligations under the Act such that access to the
Exchange is offered on terms that are not unfairly discriminatory, as
well as to ensure sufficient capacity and headroom in the System.
There is also no regulatory requirement that any market participant
access any one options exchange, that each Market Maker access the
Exchange utilizing more than the two free Limited Service MEI Ports
that the Exchange provides, access the Exchange in a particular
capacity, or trade any particular product offered on the Exchange.
Moreover, membership is not a requirement to participate on the
Exchange. A market participant may submit orders to the Exchange via a
Sponsored User.\24\ Indeed, the Exchange is unaware of any one options
exchange whose membership includes every registered broker-dealer.
Based on a recent analysis conducted by Cboe, as of October 21, 2020,
only three (3) of the broker-dealers, out of approximately 250 broker-
dealers, were members of at least one exchange that lists options for
trading and were members of all 16 options exchanges.\25\ Additionally,
the Cboe Fee Filing found that several broker-dealers were members of
only a single exchange that lists options for trading and that the
number of members at each exchange that trades options varies
greatly.\26\
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\24\ See Exchange Rule 210. The Sponsored User is subject to the
fees, if any, of the Sponsoring Member. The Exchange notes that the
Sponsoring Member is not required to publicize, let alone justify or
file with the Commission its fees, and as such could charge the
Sponsored User any fees it deems appropriate, even if such fees
would otherwise be considered supra-competitive, or otherwise
potentially unreasonable or uncompetitive.
\25\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105) (the
``Cboe Fee Filing''). The Cboe Fee Filing cited to the October 2020
Active Broker Dealer Report, provided by the Commission's Office of
Managing Executive, on October 8, 2020.
\26\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
With respect to intra-market competition, the Exchange does not
believe that the proposed rule change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As stated above, the Exchange does not believe
its proposed pricing will impose
[[Page 46733]]
a barrier to entry to smaller participants and notes that the proposed
pricing structure for is associated with relative usage of the various
market participants. Firms that are primarily order routers seeking
best-execution do not utilize Limited Service MEI Ports on MIAX Emerald
and therefore will not pay the fees associated with the tiered-pricing
structure. Rather, the fees described in the proposed tiered-pricing
structure will only be allocated to market making firms that engage in
advanced trading strategies and typically request multiple Limited
Service MEI Ports. Accordingly, the firms engaged in market making
business generate higher costs by utilizing more of the Exchange's
resources. The market making firms that purchase higher amounts of
Limited Service MEI Ports tend to have specific business oriented
market making and taking strategies, as opposed to firms simply
engaging in best-execution order routing business. Additionally, the
use of such additional Limited Service MEI Ports is entirely voluntary.
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to access
all options exchanges. The Exchange operates in a highly competitive
environment, and as discussed above, its ability to price access and
ports is constrained by competition among exchanges and third parties.
There are other options markets of which market participants may access
in order to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. For example, there are 15 other U.S. options exchanges,
which the Exchange must consider in its pricing discipline in order to
compete for market participants. In this competitive environment,
market participants are free to choose which competing exchange to use
to satisfy their business needs. As a result, the Exchange believes
this proposed rule change permits fair competition among national
securities exchanges. Accordingly, the Exchange does not believe its
proposed fee changes impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\27\ and Rule 19b-4(f)(2) \28\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
\28\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#90e2e5fcf5bdf3fffdfdf5fee4e3d0e3f5f3bef7ffe6"><span class="__cf_email__" data-cfemail="c8babda4ade5aba7a5a5ada6bcbb88bbadabe6afa7be">[email protected]</span></a>. Please include
File Number SR-EMERALD-2021-25 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-EMERALD-2021-25. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EMERALD-2021-25 and should be submitted
on or before September 9, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17759 Filed 8-18-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 19, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.