Notice2021-27421
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
December 20, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 241 (Monday, December 20, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 241 (Monday, December 20, 2021)]
[Notices]
[Pages 71965-71978]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27421]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93772; File No. SR-EMERALD-2021-43]
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
December 14, 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 December 1, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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
[[Page 71966]]
forth in sections A, B, and C below, of the most significant aspects of
such statements.
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
The Exchange initially filed the proposed fee changes on August 2,
2021, with the changes being immediately effective.\6\ The First
Proposed Rule Change was published for comment in the Federal Register
on August 19, 2021.\7\ The Commission received one comment letter on
the First Proposed Rule Change.\8\ The Exchange withdrew the First
Proposed Rule Change on September 27, 2021 and resubmitted its proposal
(``Second Proposed Rule Change'').\9\ On September 28, 2021, the
Exchange withdrew the Second Proposed Rule Change and re-submitted the
proposal on September 28, 2021, with the proposed fee changes being
immediately effective (``Third Proposed Rule Change'').\10\ The Third
Proposed Rule Change was published for comment in the Federal Register
on October 5, 2021.\11\ The Third Proposed Rule Change provided
additional justification for the proposed fee changes and addressed
certain points raised in the single comment letter that was submitted
on the First Proposed Rule Change. The Commission received four comment
letters from three separate commenters on the Third Proposed Rule
Change.\12\ The Commission suspended the Third Proposed Rule Change on
November 22, 2021.\13\ The Exchange withdrew the Third Proposed Rule
Change on December 1, 2021 and now submits this proposal for immediate
effectiveness (``Fourth Proposed Rule Change''). This Fourth Proposed
Rule Change meaningfully attempts to address issues or questions that
have been raised by providing additional justification and explanation
for the proposed fee changes and directly respond to the points raised
in SIG Letters 1, 2, and 3, as well as the SIFMA Letter submitted on
the First and Second Proposed Rule Changes,\14\ and feedback provided
by Commission Staff during a telephone conversation on November 18,
2021 relating to the Third Proposed Rule Change.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 92662 (August 13,
2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-2021-25).
\7\ Id.
\8\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\9\ See SR-EMERALD-2021-30.
\10\ See Securities Exchange Act Release No. 93188 (September
29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-2021-31).
\11\ Id.
\12\ See letters from Richard J. McDonald, SIG, to Vanessa
Countryman, Secretary, Commission, dated October 1, 2021 (``SIG
Letter 2'') and October 26, 2021 (``SIG Letter 3''); and Ellen
Green, Managing Director, Equity and Options Market Structure,
Securities Industry and Financial Markets Association (``SIFMA''),
to Vanessa Countryman, Secretary, Commission, dated November 26,
2021 (``SIFMA Letter''). The Exchange notes that the Healthy Markets
Association (``HMA'') submitted a comment letter on a related filing
to amend fees for 10Gb ULL connections, on which SIG Letters 1, 2,
and 3 as well as the SIFMA Letter also commented. See letter from
Tyler Gellasch, Executive Director, HMA (``HMA''), to Hon. Gary
Gensler, Chair, Commission, dated October 29, 2021 (commenting on
SR-CboeEDGA-2021-017, SR-CboeBYX-2021-020, SR-Cboe-BZX-2021-047, SR-
CboeEDGX-2021-030, SR-MIAX-2021-41, SR-PEARL-2021-45, and SR-
EMERALD-2021-29 and stating that ``MIAX has repeatedly filed to
change its connectivity fees in a way that will materially lower
costs for many users, while increasing the costs for some of its
heaviest of users. These filings have been withdrawn and repeatedly
refiled. Each time, however, the filings contain significantly
greater information about who is impacted and how than other filings
that have been permitted to take effect without suspension'')
(emphasis added) (``HMA Letter'').
\13\ See Securities Exchange Act Release No. 93644 (November 22,
2021), 86 FR 67745 (November 29, 2021).
\14\ The Exchange notes that while the HMA Letter applauds the
level of disclosure the Exchange included in the First and Second
Proposed Rule Changes, the HMA Letter does not raise specific issues
with the First or Second Proposed Rule Changes. Rather, it
references the Exchange's proposals by way of comparison to show the
varying levels of transparency in exchange fees filings and
recommends changes to the Commission's review process of exchange
fee filings generally. Therefore, the Exchange does not feel it is
necessary to address the issues raised in the HMA Letter.
---------------------------------------------------------------------------
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 \15\ and two (2) Limited Service MEI Ports \16\ per
matching engine \17\ 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.
---------------------------------------------------------------------------
\15\ ``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.
\16\ ``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.
\17\ ``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.
---------------------------------------------------------------------------
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 for 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. The
Exchange now proposes the following
[[Page 71967]]
tiered-pricing structure: (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 each 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'').
The Exchange believes the other exchange's port fees are a useful
example of alternative approaches to providing and charging for port
access and provides the below table for comparison purposes only to
show how its proposed fees compare to fees currently charged by other
options exchanges for similar port access. As shown by the below table,
the Exchange's proposed highest tier is still less than fees charged
for similar port access provided by other options exchanges.
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of port port)
------------------------------------------------------------------------
MIAX Emerald (as proposed).. Additional Limited 1-2 ports. FREE (not
Service MEI Port. changed in this
proposal).
3-4 ports. $200.
5-6 ports. $300.
7-12 ports. $400.
NYSE American, LLC Order/Quote Entry $450.
(``Amex'') \18\. Port.
NYSE Arca, Inc. (``Arca'') Order/Quote Entry $450.
\19\. Port.
The NASDAQ Stock Market LLC SQF Port............ 1-5 ports.
(``NASDAQ'') \20\. $1,500.00.
6-20 ports.
$1,000.00.
21 or more ports.
$500.
------------------------------------------------------------------------
2. Statutory Basis
---------------------------------------------------------------------------
\18\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees.
\19\ See NYSE Arca Options Fee Schedule, Port Fees.
\20\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule,
Section 3, Nasdaq Options Market--Ports and Other Services.
---------------------------------------------------------------------------
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \21\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \22\ 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 \23\ in that it
is designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general protect investors and the
public interest and is not designed to permit unfair discrimination
between customers, issuers, brokers and dealers.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(4).
\23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
On March 29, 2019, the Commission issued an Order disapproving a
proposed fee change by the BOX Market LLC Options Facility to establish
connectivity fees for its BOX Network (the ``BOX Order'').\24\ On May
21, 2019, the Commission Staff issued guidance ``to assist the national
securities exchanges and FINRA . . . in preparing Fee Filings that meet
their burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \25\ 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 Miami International
Securities Exchange, LLC (``MIAX'') and MIAX PEARL, LLC (``MIAX
Pearl''), to amend other non-transaction fees.\26\
---------------------------------------------------------------------------
\24\ 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) (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).
\25\ 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'').
\26\ 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).
---------------------------------------------------------------------------
The Proposed Access Fees Will Not Result in a Supra-Competitive Profit
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 ports to be access fees.
It records these fees as part of its ``Access Fees'' revenue in its
financial statements.
In its Guidance, the Commission Staff stated that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\27\ The Commission Staff Guidance further states that, ``. . . even
where an SRO cannot demonstrate, or does not assert, that significant
competitive forces constrain the fee at issue, a cost-based discussion
may be an alternative basis upon which to show consistency with the
Exchange Act.'' \28\ In its Guidance, the Commission staff further
states that, ``[i]f an SRO seeks to support its claims that a proposed
fee is fair and reasonable because it will permit recovery of the SRO's
costs, or will not result in excessive pricing or supracompetitive
profit, specific
[[Page 71968]]
information, including quantitative information, should be provided to
support that argument.'' \29\ The Exchange does not assert that the
Proposed Access Fees are constrained by competitive forces. Rather, the
Exchange asserts that the Proposed Access Fees are reasonable because
they will permit recovery of the Exchange's costs in providing access
services to supply additional Limited Service MEI Ports and will not
result in the Exchange generating a supra-competitive profit.
---------------------------------------------------------------------------
\27\ See Guidance, supra note 25.
\28\ Id.
\29\ Id.
---------------------------------------------------------------------------
The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \30\
The Commission Staff further states in the Guidance that ``the SRO
should provide an analysis of the SRO's baseline revenues, costs, and
profitability (before the proposed fee change) and the SRO's expected
revenues, costs, and profitability (following the proposed fee change)
for the product or service in question.'' \31\ The Exchange provides
this analysis below.
---------------------------------------------------------------------------
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------
Based on this analysis, the Exchange believes the Proposed Access
Fees are reasonable and do not result in a ``supra-competitive'' \32\
profit. The Exchange believes that it is important to demonstrate that
the Proposed Access Fees are based on its costs and reasonable business
needs. The Exchange believes the Proposed Access Fees will allow the
Exchange to offset expenses the Exchange has and will incur, and that
the Exchange provides sufficient transparency (described below) into
the costs and revenue underlying the Proposed Access Fees. Accordingly,
the Exchange provides 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. As a
result of this analysis, the Exchange believes the Proposed Access Fees
are fair and reasonable as a form of cost recovery plus present the
possibility of a reasonable return for the Exchange's aggregate costs
of offering additional Limited Service MEI Port access to the Exchange.
---------------------------------------------------------------------------
\32\ See Guidance, supra note 25.
---------------------------------------------------------------------------
The Proposed Access Fees are based on a cost-plus model. In
determining the appropriate fees to charge, the Exchange considered its
costs to provide port access, using what it believes to be a
conservative methodology (i.e., that strictly considers only those
costs that are most clearly directly related to the provision and
maintenance of additional Limited Service MEI Ports) to estimate such
costs,\33\ as well as the relative costs of providing and maintaining
additional Limited Service MEI Ports, and set fees that are designed to
cover its costs with a limited return in excess of such costs. However,
as discussed more fully below, such fees may also result in the
Exchange recouping less than all of its costs of providing and
maintaining additional Limited Service MEI Ports because of the
uncertainty of forecasting subscriber decision making with respect to
firms' additional Limited Service MEI Port needs and the likely
potential for increased costs to procure the third-party services
described below.
---------------------------------------------------------------------------
\33\ For example, the Exchange only included the costs
associated with providing and supporting additional Limited Service
MEI Ports and excluded from its cost calculations any cost not
directly associated with providing and maintaining such ports. Thus,
the Exchange notes that this methodology underestimates the total
costs of providing and maintaining additional Limited Service MEI
Ports.
---------------------------------------------------------------------------
To determine the Exchange's costs to provide access services
associated with the Proposed Access Fees, the Exchange conducted an
extensive cost review in which the Exchange analyzed nearly 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 access services associated with the Proposed
Access Fees.
The Exchange also provides 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. The Exchange conducted a
thorough internal analysis to determine the portion (or percentage) of
each expense to allocate to the support of access services associated
with the Proposed Access Fees. This analysis \34\ included discussions
with each Exchange department head to determine the expenses that
support access services associated with the Proposed Access Fees. Once
the expenses were identified, the Exchange department heads, with the
assistance of our internal finance department, reviewed such expenses
holistically on an Exchange-wide level to determine what portion of
that expense supports providing access services for the Proposed Access
Fees. The sum of all such portions of expenses represents the total
cost to the Exchange to provide access services associated with the
Proposed Access Fees. For the avoidance of doubt, no expense amount was
allocated twice.
---------------------------------------------------------------------------
\34\ A description of the Exchange's methodology for determining
the portion (or percentage) of each expense to allocate to the
Proposed Access Fee is being provide in response to comments from
SIG and SIFMA. See SIG Letter 3 and SIFMA Letter, supra note 12.
---------------------------------------------------------------------------
To determine the Exchange's projected revenue associated with the
Proposed Access Fees, the Exchange analyzed the number of Market Makers
currently utilizing additional Limited Service MEI Ports and used a
recent monthly billing cycle representative of 2021 monthly revenue.
The Exchange also provided its baseline by analyzing July 2021, the
monthly billing cycle prior to the Proposed Access Fees going into
effect, and compared it to its expenses for that month.\35\ As
discussed below, 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 and potential increase in internal and third party
expenses. 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 representative of its current total annualized 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 reasonable because they will allow the
Exchange to recover its costs
[[Page 71969]]
associated with providing access services related to the Proposed
Access Fees and not result in excessive pricing or supra-competitive
profit.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
As outlined in more detail below, the Exchange projects that its
annualized expense for 2021 to provide additional Limited Service MEI
Ports to be approximately $880,000 per annum or an average of
$73,333.33 per month. The Exchange implemented the Proposed Access Fees
on August 1, 2021 in the First Proposed Rule Change. For July 2021,
prior to the Proposed Access Fees, the Exchange Members and non-Members
purchased a total of 625 additional Limited Service MEI Ports for which
the Exchange charged approximately $62,500. This resulted in a loss of
$10,833.33 for that month (a loss margin of approximately 17.3%). For
the month of November 2021, which includes the tiered rates for
additional Limited Service MEI Ports for the Proposed Access Fees,
Exchange Members and non-Members increased the number of additional
Limited Service MEI Ports they purchased resulting in a total of 860
additional Limited Service MEI Ports for which the Exchange charged
approximately $216,600 for that month. This resulted in a profit of
$143,266.67 for that month (a profit margin of approximately 66%, after
experiencing monthly losses prior to the Proposed Access Fees. The
Exchange believes that the Proposed Access Fees are reasonable because
they are designed to generate a revenue per-month after experiencing
monthly losses prior to the Proposed Access Fees. The Exchange cautions
that this profit margin may fluctuate from month to month based on the
uncertainty of predicting how many ports may be purchased from month to
month as Members and non-Members are able to add and drop ports at any
time based on their own business decisions, which they frequently do.
This profit margin may also decrease due to the significant
inflationary pressure on capital items that the Exchange needs to
purchase to maintain the Exchange's technology and systems.\36\ The
Exchange has been subject to price increases upwards of 30% on network
equipment due to supply chain shortages. This, in turn, results in
higher overall costs for ongoing system maintenance, but also to
purchase the items necessary to ensure ongoing system resiliency,
performance, and determinism. These costs are expected to continue to
go up as the U.S. economy continues to struggle with supply chain and
inflation related issues.
---------------------------------------------------------------------------
\36\ See ``Supply chain chaos is already hitting global growth.
And it's about to get worse'', by Holly Ellyatt, CNBC, available at
<a href="https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html">https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html</a> (October 18, 2021); and
``There will be things that people can't get, at Christmas, White
House warns'' by Jarrett Renshaw and Trevor Hunnicutt, Reuters,
available at <a href="https://www.reuters.com/world/us/americans-may-not-get-some-christmas-treats-white-house-officials-warn-2021-10-12/">https://www.reuters.com/world/us/americans-may-not-get-some-christmas-treats-white-house-officials-warn-2021-10-12/</a>
(October 12, 2021).
---------------------------------------------------------------------------
Further, the Exchange chose to provide additional Limited Service
MEI Ports at a discounted price to attract order flow and encourage
market participants to experience the determinism and resiliency of the
Exchange's trading systems. This resulted in the Exchange forgoing
revenue it could have generated from assessing higher fees. The
Exchange could have sought to charge higher fees at the outset, but
that could have served to discourage participation on the Exchange.
Instead, the Exchange chose to provide a low cost exchange alternative
to the options industry which resulted in lower initial revenues, or in
this case, a monthly loss. The Exchange is now trying to amend its fee
structure to enable it to continue to maintain and improve its overall
market and systems while also providing a highly reliable and
deterministic trading system to the marketplace.
As mentioned above, the Exchange projects that its annualized
expense for 2021 to provide additional Limited Service MEI Ports to be
approximately $880,000 per annum or an average of $73,333.33 per month
and that these costs are expected to increase not only due to
anticipated significant inflationary pressure, but also periodic fee
increases by third parties.\37\ 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 the cost to the Exchange to
provide access services associated with the Proposed Access Fees. 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 Members is not
fixed. The Exchange believes the Proposed Access Fees are a reasonable
attempt to offset a portion of the costs to the Exchange associated
with providing access to its network infrastructure.
---------------------------------------------------------------------------
\37\ For example, on October 20, 2021, ICE Data Services
announced a 3.5% price increase effective January 1, 2022 for most
services. The price increase by ICE Data Services includes their
SFTI network, which is relied on by a majority of market
participants, including the Exchange. See email from ICE Data
Services to the Exchange, dated October 20, 2021. The Exchange
further notes that on October 22, 2019, the Exchange was notified by
ICE Data Services that it was raising its fees charged to the
Exchange by approximately 11% for the SFTI network.
---------------------------------------------------------------------------
The Exchange only has four primary sources of revenue and cost
recovery mechanisms: 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 and cost recovery mechanisms. Until
recently, the Exchange has operated at a cumulative net annual loss
since it launched operations in 2019.\38\ This is a result of providing
a low cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems.\39\ To do so, the Exchange chose to waive
the fees for some non-transaction related services or provide them at a
very marginal cost, which was not profitable to the Exchange. This
resulted in the Exchange forgoing revenue it could have generated from
assessing higher fees.
---------------------------------------------------------------------------
\38\ The Exchange has incurred a cumulative loss of $22 million
since its inception in 2019 to 2020, the last year for which the
Exchange's Form 1 data is available. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed July 28, 2021, available at
<a href="https://sec.report/Document/9999999997-21-004557/">https://sec.report/Document/9999999997-21-004557/</a>.
\39\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
---------------------------------------------------------------------------
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. As
[[Page 71970]]
mentioned above, for 2021,\40\ the total annual expense for providing
the access services associated with the Proposed Access Fees is
projected to be approximately $880,000.00, or approximately $73,333.33
per month. This 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.\41\ 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.\42\ The $880,000 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
engines and other trading technology. No expense amount was allocated
twice.
---------------------------------------------------------------------------
\40\ The Exchange has not yet finalized its 2021 year end
results.
\41\ 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.
\42\ 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.
---------------------------------------------------------------------------
As discussed above, the Exchange conducted an extensive cost review
in which the Exchange analyzed nearly every expense item 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.
External Expense Allocations
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''),\43\ 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.
---------------------------------------------------------------------------
\43\ 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.
---------------------------------------------------------------------------
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. Further, the Exchange notes
that, with respect to the expenses included herein, those expenses only
cover the MIAX Emerald market; expenses associated with MIAX Pearl for
its options and equities markets and MIAX, are accounted for separately
and are not included within the scope of this filing. As noted above,
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. Further, as part its
ongoing assessment of costs and expenses, the Exchange recently
conducted a periodic thorough review of its expenses and resource
allocations which, in turn, resulted in a revised percentage
allocations in this filing.
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.\44\
---------------------------------------------------------------------------
\44\ As noted above, 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. Again, as part of its ongoing assessment
of costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------
[[Page 71971]]
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.\45\
---------------------------------------------------------------------------
\45\ Id.
---------------------------------------------------------------------------
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.\46\
---------------------------------------------------------------------------
\46\ Id.
---------------------------------------------------------------------------
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.\47\
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
Internal Expense Allocations
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, 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 portion
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.\48\
---------------------------------------------------------------------------
\48\ Id.
---------------------------------------------------------------------------
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
[[Page 71972]]
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.\49\
---------------------------------------------------------------------------
\49\ Id.
---------------------------------------------------------------------------
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 200 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. 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.\50\
---------------------------------------------------------------------------
\50\ Id.
---------------------------------------------------------------------------
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
more deterministic and resilient 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 its total overall expense towards access
fees.
Based on the above, the Exchange believes that its provision of
access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit. As discussed
above, the Exchange projects that its annualized expense for 2021 to
provide the access services associated with the Proposed Access Fees to
be approximately $880,000 per annum or an average of $73,333.33 per
month. The Exchange implemented the Proposed Access Fees on August 1,
2021 in the First Proposed Rule Change. For July 2021, prior to the
Proposed Access Fees, the Exchange Members and non-Members purchased a
total of 625 additional Limited Service MEI Ports for which the
Exchange charged approximately $62,500. This resulted in a loss of
$10,833.33 for that month (a loss margin of approximately 17.3%). For
the month of November 2021, which includes the tiered rates for
additional Limited Service MEI Ports for the Proposed Access Fees,
Exchange Members and non-Members increased the number of additional
Limited Service MEI Ports they purchased resulting in a total of 860
additional Limited Service MEI Ports for which the Exchange charged
approximately $216,600 for that month. This resulted in a profit of
$143,266.67 for that month (a profit margin of approximately 66%),
after experiencing monthly losses prior to the Proposed Access Fees.
The Exchange believes that the Proposed Access Fees are reasonable
because they are designed to generate a revenue per-month after
experiencing monthly losses prior to the Proposed Access Fees. The
Exchange believes this profit margin will allow it to begin to recoup
its expenses and continue to invest in its technology infrastructure.
Therefore, the Exchange also believes that this proposed profit margin
increase is reasonable because it represents a reasonable rate of
return.
Again, the Exchange cautions that this profit margin may fluctuate
from month to month based in the uncertainty of predicting how many
ports may be purchased from month to month as Members and non-Members
are free to add and drop ports at any time based on their own business
decisions. This profit margin may also decrease due to the significant
inflationary pressure on capital items that it needs to purchase to
maintain the Exchange's technology and systems.\51\ Accordingly, the
Exchange believes its total projected revenue for the providing the
access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit.
---------------------------------------------------------------------------
\51\ See supra note 36.
---------------------------------------------------------------------------
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective 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
[[Page 71973]]
item analysis of nearly every expense 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 expense 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 costs of providing access to the Exchange's
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 Proposed Tiered-Pricing Structure Is Not Unfairly Discriminatory
and Provides for the Equitable Allocation of Fees, Dues, and Other
Charges
The Exchange believes the proposed tiered-pricing structure is
reasonable, fair, equitable, and not unfairly discriminatory because it
will apply to all Members and non-Members in the same manner based on
the amount of Limited Service MEI Ports they require based on their own
business decisions and its usage of Exchange resources. All similarly
situated Members and non-Members would be subject to the same fees. The
fees do not depend on any distinction between Members and non-Members
because they are solely determined by the individual Members' or non-
Members' business needs and its impact on Exchange resources.
The proposed tiered-pricing structure is not unfairly
discriminatory and provides for the equitable allocation of fees, dues,
and other charges because it is designed to encourage Members and non-
Members to be more efficient and economical when determining how to
connect to the Exchange and the amount of the fees are based on the
number of ports a Market Maker utilizes. Charging a higher fee to a
Market Maker that utilizes numerous ports is directly related to the
increased costs the Exchange incurs in providing and maintaining those
additional ports. The proposed tiered pricing structure 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 while still providing the first and second additional Limited
Service MEI Ports for each matching engine free of charge.
To achieve a consistent, premium network performance, the Exchange
must build out and continue to maintain a network that has the capacity
to handle the message rate requirements of not only firms that consume
minimal Exchange access resources, but also those firms that most
heavily consume Exchange access resources, network consumers, and
purchasers of Limited Service MEI Ports. Limited Service MEI Ports is
not an unlimited resource as the Exchange needs to purchase additional
equipment to satisfy requests for additional ports. The Exchange also
needs to provide personnel to set up new ports, service requests
related to adding new and/or deleting existing ports, respond to
performance queries, and to maintain those ports on behalf of Members
and non-Members. Also, those firms that utilize additional Limited
Service MEI Ports typically generate a disproportionate amount of
messages and order traffic, usually billions per day across the
Exchange. These billions of messages per day consume the Exchange's
resources and significantly contribute to the overall network access
expense for storage and network transport capabilities. The Exchange
also has to purchase additional storage capacity on an ongoing basis to
ensure it has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\52\
---------------------------------------------------------------------------
\52\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange sought to design the proposed tiered-pricing structure
to set the amount of the fee to relate to the number of ports a firm
purchases. The Exchange notes that Limited Service MEI Ports are
primarily utilized by firms that engage in advanced trading strategies
and typically request multiple Limited Service MEI Ports, beyond the
two per matching engine that are currently provided free of charge.
Accordingly, the firms engaged in advanced trading strategies generate
higher costs by utilizing more of the Exchange's resources. Those firms
purchase higher amounts of Limited Service MEI Ports tend to have
specific business oriented market making and trading strategies, as
opposed to firms engaging solely in order routing as part of their
best-execution obligations.
The use of such additional Limited Service MEI Ports is a voluntary
business decision of each Market Maker. Additional Limited Service MEI
Ports are primarily used by Market Makers seeking to remove liquidity
and, for competitive reasons, a Market Maker may choose to utilize
numerous ports in an attempt to access the market quicker by using one
port that may have less latency. The more ports purchased by a Market
Maker likely results in greater expenditure of Exchange resources and
increased cost to the Exchange. With this in mind, the Exchange will
continue to provide the first and second additional Limited Service MEI
Ports free of charge. The Exchange notes that firms that primarily
route orders seeking best-execution generally do not utilize additional
Limited Service MEI Ports. Those firms also generally send less orders
and messages over those connections, resulting in less strain on
Exchange resources.
On a similar note, the Exchange proposes to increase the fee for
those firms that purchase more ports resulting in greater expenditure
of Exchange resources and increased cost to the Exchange. The Exchange
notes that these firms that purchase numerous additional Limited
Service MEI Ports essentially do so for competitive reasons amongst
themselves and choose to utilize numerous ports based on their business
needs and desire to attempt to access the market quicker by using the
connection with the least amount of latency. These firms are generally
engaged in sending liquidity removing orders to the Exchange and seek
to add more ports so they can access resting liquidity ahead of their
competitors. For instance, a Member may have just sent numerous
messages and/or orders over one or more of their additional Limited
Service MEI Ports that are in queue to be processed. That same Member
then seeks to enter an order to remove liquidity from the Exchange's
Book. That Member may choose to send that order over one or more of
their other additional Limited Service MEI Ports with less message and/
or order traffic to ensure that their liquidity taking order accesses
the Exchange quicker because that connection's queue is shorter. These
firms also tend to frequently add and drop ports mid-month to determine
which ports have the least latency, which results in increased costs to
the Exchange to constantly make changes in the data center.
The firms that engage in the above-described liquidity removing and
advanced trading strategies typically
[[Page 71974]]
require multiple ports and, therefore, generate higher costs by
utilizing more of the Exchange's resources. Those firms may also
conduct other latency measurements over their ports and drop and
simultaneously add ports mid-month based on their own assessment of
their performance. This results in Exchange staff processing such
requests, potentially purchasing additional equipment, and performing
the necessary network engineering to replace those ports in the data
center. Therefore, the Exchange believes it is equitable for these
firms to experience increased port costs based on their
disproportionate pull on Exchange resources to provide the additional
port access.
In addition, the proposed tiered-pricing structure is equitable
because it is designed to encourage Members and non-Members to be more
efficient and economical when determining how to connect to the
Exchange. Section 6(b)(5) of the Exchange Act requires the Exchange to
provide access on terms that are not unfairly discriminatory.\53\ As
stated above, Additional Limited Service MEI Ports are not an unlimited
resource and the Exchange's network is limited in the amount of ports
it can provide. However, the Exchange must accommodate requests for
additional Limited Service MEI Ports and access to the Exchange's
System to ensure that the Exchange is able to provide access on non-
discriminatory terms and ensure sufficient capacity and headroom in the
System. To accommodate requests for additional Limited Service MEI
Ports on top of current network capacity constraints, requires that the
Exchange to purchase additional equipment to satisfy these requests.
The Exchange also needs to provide personnel to set up new ports and to
maintain those ports on behalf of Members and non-Members. The proposed
tiered-pricing structure is equitable because it is designed to
encourage Market Makers to be more efficient and economical in
selecting the amount of additional Limited Service MEI Ports they
request while balancing that against the Exchange's increased expenses
when expanding its network to accommodate additional Limited Service
MEI Ports.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Proposed Fees Are Reasonable When Compared to the Fees of Other
Options Exchanges With Similar Market Share
For example, Amex (equity options market share of 5.05% as of
November 26, 2021 for the month of November) \54\ and Arca (equity
options market share of 14.88% as of November 26, 2021 for the month of
November) \55\ both charge $450 per port for order/quote entry ports 1-
40 and $150 per port for ports 41 and greater,\56\ all on a per
matching engine basis, with Amex and Arca having 17 match engines and
19 match engines, respectively.\57\ Similarly, NASDAQ (equity options
market share of 8.88% as of November 23, 2021 for the month of
November) \58\ charges $1,500 per port for SQF ports 1-5, $1,000 per
SQF port for ports 6-20, and $500 per SQF port for ports 21 and
greater,\59\ all on a per matching engine basis, with NASDAQ having
multiple matching engines.\60\ The NASDAQ SQF Interface Specification
provides that PHLX/NOM/BX Options trading infrastructures may consist
of multiple matching engines with each matching engine trading only a
range of option underlyings. Further, the SQF infrastructure is such
that the firms connect to one or more servers residing directly on the
matching engine infrastructure. Since there may be multiple matching
engines, firms will need to connect to each engine's infrastructure in
order to establish the ability to quote the symbols handled by that
engine.\61\
---------------------------------------------------------------------------
\54\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a> (last visited November 26, 2021).
\55\ See id.
\56\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees; NYSE Arca Options Fee Schedule, Port Fees.
\57\ See NYSE Technology FAQ and Best Practices: Options,
Section 5.1 (How many matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file detailing the
number of matching engines per options exchange).
\58\ See supra note 54.
\59\ See NASDAQ Stock Market, NASDAQ Options 7 Pricing Schedule,
Section 3, NASDAQ Options Market--Ports and Other Services.
\60\ See NASDAQ Specialized Quote Interface (SQF) Specification,
Version 6.4 (October 2017), Section 2, Architecture (the ``NASDAQ
SQF Interface Specification'').
\61\ See id.
---------------------------------------------------------------------------
In the each of the above cases, the Exchange's highest tier in the
proposed tiered-pricing structure is similar to or significantly lower
than that of competing options exchanges with similar market share.
Despite proposing lower or similar fees to that of competing options
exchanges with similar market share, the Exchange believes that it
provides a premium network experience to its Members and non-Members
via a highly deterministic System, enhanced network monitoring and
customer reporting, and a superior network infrastructure than markets
with higher market shares and more expensive port alternatives. Each of
the port rates in place at competing options exchanges were filed with
the Commission for immediate effectiveness and remain in place today.
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 a barrier to entry to smaller
participants and notes that the proposed pricing structure 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,
beyond the two that are free. Accordingly, the firms engaged in a
Market Making business generate higher costs by utilizing more of the
Exchange's resources. Those Market Making firms that purchase higher
amounts of additional Limited Service MEI Ports tend to have specific
business oriented market making and trading strategies, as opposed to
firms engaging solely 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
[[Page 71975]]
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
As described above, the Exchange received one comment letter on the
First Proposed Rule Change \62\ and three comment letters on the Second
Proposed Rule Change.\63\ The Exchange now responds to the comment
letters in this filing.
---------------------------------------------------------------------------
\62\ See supra note 8.
\63\ See supra note 12.
---------------------------------------------------------------------------
SIG Letter 2
SIG Letter 2 argues that the Exchange, in withdrawing the First
Proposed Rule Change and refiling the Second Proposed Rule Change,
``improperly circumvent[ed] the procedural protections embedded in
Exchange Act Section 19(b)(3)(C), and subvert[ed] the balance of
interests upheld therein.'' \64\ SIG's assertion that the Exchange's
entire reason for withdrawing and refiling was to subvert the
protections of the Exchange Act are entirely without merit. The
Exchange withdrew the First Proposed Rule Change and replaced it with
the Second Proposed Rule Change in good faith to provide additional
justification and explanation for the proposed fee changes and did so
in compliance with the Exchange Act. The same is true in this filing,
where the Exchange withdrew the Second Proposed Rule Change and
submitted this filing to provide additional justification and
explanation for the proposed fee changes and directly responds to
certain points raised in SIG Letters 1, 2, and 3, as well as the SIFMA
Letter submitted on the First and Second Proposed Rule Changes.
---------------------------------------------------------------------------
\64\ See SIG Letter 2, supra note 12, at page 1.
---------------------------------------------------------------------------
As SIG well knows, exchanges are able withdraw and refile various
proposals (including fee changes and other rule changes) with the
Commission for a multitude of reasons, not the least of which is to
address feedback and comments from market participants and Commission
Staff. The Exchange is well within the bounds of the Act and the rules
and regulations thereunder to withdraw a proposed rule change and
replace it with a new proposed rule change in good faith and to enhance
the filing to ensure it complies with the requirements of the Act.
SIG Letters 1 and 3
As an initial matter, SIG Letter 1 cites Rule 700(b)(3) of the
Commission's Rules of Fair Practice which places ``the burden to
demonstrate that a proposed rule change is consistent with the Act on
the self-regulatory organization that proposed the rule change'' and
states that a ``mere assertion that the proposed rule change is
consistent with those requirements . . . is not sufficient.'' \65\ SIG
Letter 1's assertion that the Exchange has not met this burden is
without merit, especially considering the overwhelming amounts of
revenue and cost information the Exchange included in the First and
Second Proposed Rule Changes and this filing.
---------------------------------------------------------------------------
\65\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
Until recently, the Exchange operated at a net annual loss since it
launched operations in 2019.\66\ As stated above, 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 believes it has achieved this
standard in this filing and in the First and Second Proposed Rule
Changes. Similar justifications for the proposed fee change included in
the First and Second Proposed Rule Changes, but also in this filing,
were previously included in similar fee changes filed by the Exchange
and its affiliates, MIAX and MIAX Pearl, and SIG did not submit a
comment letter on those filings.\67\ Those filings were not suspended
by the Commission and continue to remain in effect. The justification
included in each of the prior filings was the result of numerous
withdrawals and re-filings of the proposals to address comments
received from Commission Staff over many months. The Exchange and its
affiliates have worked diligently with Commission Staff on ensuring the
justification included in past fee filings fully support an assertion
that those fee changes are consistent with the Act.\68\ The Exchange
leveraged its past work with Commission Staff to ensure the
justification provided herein and in the First and Second Proposed Rule
Changes include the same level of detail (or more) as the prior fee
changes that survived Commission scrutiny. The Exchange's detailed
disclosures in fee filings have also been applauded by one industry
group which noted, ``[the Exchange's] filings contain significantly
greater information about who is impacted and how than other filings
that have been permitted to take effect
[[Page 71976]]
without suspension.'' \69\ That same commenter also noted their ``worry
that the Commission's process for reviewing and evaluating exchange
filings may be inconsistently applied.'' \70\
---------------------------------------------------------------------------
\66\ See supra note 38.
\67\ See Securities Exchange Act Release Nos. 91858 (May 12,
2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Amend the MIAX Pearl Fee Schedule to Remove the Cap on the Number of
Additional Limited Service Ports Available to Market Makers); 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); and 91857 (May 12, 2021), 86 FR 26973
(May 18, 2021) (SR-MIAX-2021-19) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To
Remove the Cap on the Number of Additional Limited Service Ports
Available to Market Makers).
\68\ See, e.g., Securities Exchange Act Release No. 90196
(October 15, 2020), 85 FR 67064 (October 21, 2020) (SR-EMERALD-2020-
11) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt One-Time Membership
Application Fees and Monthly Trading Permit Fees). See Securities
Exchange Act Release Nos. 90601 (December 8, 2020), 85 FR 80864
(December 14, 2020) (SR-EMERALD-2020-18) (re-filing with more detail
added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-11); and 91033 (February 1, 2021), 86 FR
8455 (February 5, 2021) (SR-EMERALD-2021-03) (re-filing with more
detail added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-18). The Exchange initially filed a
proposal to remove the cap on the number of additional Limited
Service MEO Ports available to Members on April 9, 2021. See SR-
PEARL-2021-17. On April 22, 2021, the Exchange withdrew SR-PEARL-
2021-17 and refiled that proposal (without increasing the actual fee
amounts) to provide further clarification regarding the Exchange's
revenues, costs, and profitability any time more Limited Service MEO
Ports become available, in general, (including information regarding
the Exchange's methodology for determining the costs and revenues
for additional Limited Service MEO Ports). See SR-PEARL-2021-20. On
May 3, 2021, the Exchange withdrew SR-PEARL-2021-20 and refiled that
proposal to further clarify its cost methodology. See SR-PEARL-2021-
22. On May 10, 2021, the Exchange withdrew SR-PEARL-2021-22 and
refiled SR-PEARL-2021-23. See Securities Exchange Act Release No.
91858 (May 12, 2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23).
\69\ See HMA Letter, supra note 12.
\70\ Id. (providing examples where non-transaction fee filings
by other exchanges have been permitted to remain effective and not
suspended by the Commission despite less disclosure and
justification).
---------------------------------------------------------------------------
Therefore, a finding by the Commission that the Exchange has not
met its burden to show that the proposed fee change is consistent with
the Act would be different than the Commission's treatment of similar
past filings, would create further ambiguity regarding the standards
exchange fee filings should satisfy, and is not warranted here.
In addition, the arguments in SIG Letter 1 do not support their
claim that the Exchange has not met its burden to show the proposed
rule change is consistent with the Act. Prior to, and after submitting
the First Proposed Rule Change, the Exchange solicited feedback from
its Members, including SIG. SIG relayed their concerns regarding the
proposed change. The Exchange then sought to work with SIG to address
their concerns and gain a better understanding of the access/
connectivity/quoting infrastructure of other exchanges. In response,
SIG provided no substantive suggestions on how to amend the First
Proposed Rule Change to address their concerns and instead chose to
submit three comment letters. One could argue that SIG is using the
comment letter process not to raise legitimate regulatory concerns
regarding the proposal, but to inhibit or delay proposed fee changes by
the Exchange. With regards to the First and Second Proposed Rule
Changes, the SIG Letter does not directly address the proposed fees or
lay out specific arguments as to why the proposal is not consistent
with Section 6(b)(4) of the Act. Rather, it simply describes the
proposed fee change and flippantly states that its claims concerning
the 10Gb ULL fee change proposals by the Exchange, and its affiliates,
apply to these changes. Nonetheless, the Exchange submits the below
response to the SIG Letter concerning the First Proposed Rule Change.
Furthermore, the Exchange has enhanced its cost and revenue
analysis and data in this Fourth Proposed Rule Change to further
justify that the Proposed Access Fees are reasonable in accordance with
the Commission Staff's Guidance. Among other things, these enhancements
include providing baseline information in the form of data from the
month before the Proposed Access Fees became effective.
The Exchange now responds to SIG's remaining claims below. SIG
Letter 3 first summarizes its arguments made in SIG Letters 1 and 2 and
incorporates those arguments by reference. The Exchange responded to
the arguments in SIG Letter 2 above. SIG Letter 3 incorporates the
following arguments regarding additional Limited Service MEI Port fees
from SIG Letter 1 (while excluding arguments that pertain solely to
connectivity), which the Exchange will first respond to in turn, below:
``(1) The prospect that a member may withdraw from the Exchanges
if a fee is too costly is not a basis for asserting that the fee is
reasonable; (2) profit margin comparisons do not support the
Exchanges' claims that they will not realize a supracompetitive
profit . . . and comparisons to competing exchanges' overall
operating profit margins are an inapt ``apples-to-oranges''
comparison . . . (7) the recoupment of investment for exchange
infrastructure has no supporting nexus with the claim that the
proposed fees are reasonable, equitably allocated, and not unfairly
discriminatory . . . .'' \71\
---------------------------------------------------------------------------
\71\ See SIG Letter 3, supra note 10.
General
First, the SIG Letter 1 states that additional Limited Service MEI
Ports ``are critical to Exchange members to be competitive and to
provide essential protection from adverse market events'' (emphasis
added).\72\ The Exchange notes that this statement is generally not
true for additional Limited Service MEI Ports as those ports are
completely voluntary and used primarily for entering liquidity removing
orders and not risk protection activities like purging quotes resting
on the MIAX Emerald Book. Additional Limited Service MEI Ports are
essentially used for competitive reasons and Market Makers may choose
to utilize one or two Limited Service MEI Ports that are provided for
free, or purchase additional Limited Service MEI Ports based on their
business needs and desire to attempt to access the market quicker by
using one port that may have less latency. For instance, a Market Maker
may have just sent numerous messages and/or orders over one of their
additional Limited Service MEI Ports that are in queue to be processed.
That same Market Maker then seeks to enter an order to remove liquidity
from the Exchange's Book. That Market Maker may choose to send that
order simultaneously over all of their Limited Service MEI Ports that
they elected to purchase to ensure that their liquidity taking order
accesses the Exchange as quickly as possible.
---------------------------------------------------------------------------
\72\ See SIG Letter 1 at page 2, supra note 12.
---------------------------------------------------------------------------
If the Exchanges Were To Attempt To Establish Unreasonable Pricing,
Then No Market Participant Would Join or Connect to the Exchange, and
Existing Market Participants Would Disconnect
SIG asserts that ``the prospect that a member may withdraw from the
Exchanges if a fee is too costly is not a basis for asserting that the
fee is reasonable.'' \73\ SIG misinterprets the Exchange's argument
here. The Exchange provided the examples of firms terminating access to
certain markets due to fees to support its assertion that firms,
including market makers, are not required to connect to all markets and
may drop access if fees become too costly for their business models and
alternative or substitute forms of access are available to those firms
who choose to terminate access. The Commission Staff Guidance also
provides that ``[a] statement that substitute products or services are
available to market participants in the relevant market (e.g., equities
or options) can demonstrate competitive forces if supported by evidence
that substitute products or services exist.'' \74\ Nonetheless, the
Fourth Proposed Rule Change no longer makes this assertion as a basis
for the proposed fee change and, therefore, the Exchange believes it is
not necessary to respond to this portion of SIG Letters 1 and 3.
---------------------------------------------------------------------------
\73\ Id.
\74\ See Guidance, supra note 27.
---------------------------------------------------------------------------
The Proposed Access Fees Will Not Result in Excessive Pricing or Supra-
Competitive Profit
Next, SIG asserts that the Exchange's ``profit margin comparisons
do not support the Exchanges' claims that they will not realize a
supracompetitive profit,'' and ``comparisons to competing exchanges'
overall operating profit margins are an inapt `apples-to-oranges'
comparison.'' \75\
---------------------------------------------------------------------------
\75\ See supra note 12. The Exchange does not have visibility
into other equities exchanges' costs to provide port access or their
fee markup over those costs, and therefore cannot use other
exchange's port fees as a benchmark to determine a reasonable markup
over the costs of providing port access. Nevertheless, the Exchange
believes the other exchange's port fees are a useful example of
alternative approaches to providing and charging for port access. To
that end, the Exchange believes the proposed tiered-pricing
structure for Limited Service MEI Ports is reasonable because the
proposed highest tier is still less than fees charged for similar
port access provided by other options exchanges with comparable
market shares.
---------------------------------------------------------------------------
The Exchange has provided ample data that the Proposed Access Fees
would not result in excessive pricing or a supra-competitive profit. In
this
[[Page 71977]]
Fourth Proposed Rule Change, the Exchange no longer utilizes a
comparison of its profit margin to that of other options exchanges as a
basis that the Proposed Access Fees are reasonable. Rather, the
Exchange has enhanced its cost and revenue analysis and data in this
Fourth Proposed Rule Change to further justify that the Proposed Access
Fees are reasonable in accordance with the Commission Staff's Guidance.
Therefore, the Exchange believes it is no longer necessary to respond
to this portion of SIG Letters 1 and 3.
Recoupment of Exchange Infrastructure Costs
Nowhere in this proposal or in the First, Second, or Third Proposed
Rule Changes did the Exchange assert that it benefits competition to
allow a new exchange entrant to recoup their infrastructure costs.
Rather, the Exchange asserts above that its ``proposed fees are
reasonable, equitably allocated and not unfairly discriminatory because
the Exchange, and its affiliates, are still recouping the initial
expenditures from building out their systems while the legacy exchanges
have already paid for and built their systems.'' The Exchange no longer
makes this assertion in this filing and, therefore, does not believe is
it necessary to respond to SIG's assertion here.
The Proposed Tiered Pricing Structure is Not Unfairly Discriminatory
SIG challenges the proposed fees by arguing that ``the Exchange[ ]
provide[s] no support for [its] claim that [the] proposed tiered
pricing structure is needed to encourage efficiency in connectivity
usage and the Exchange[ ] provided no support for [the] claim that the
tiered pricing structure allows them to better monitor connectivity
usage, nor that this is an appropriate basis for the pricing structure
in any event.'' The Exchange provided additional justification to
support that the Proposed Access Fees are equitable and not unfairly
discriminatory above in response to SIG's assertions.
SIFMA Letter
In sum, the SIFMA Letter asserts that the Exchange has failed to
demonstrate that the Proposed Access Fees are reasonable for three
reasons:
(i) ``The Exchanges' ``platform competition'' argument that
competition for order flow constrains pricing for market data or
other products and services exclusively offered by an exchange does
not demonstrate that the fees are reasonable.''
(ii) ``. . . order flow competition alone between exchanges does
not demonstrate that the fees for the products and services subject
to the Proposal are reasonable.''
(iii) ``the Exchanges' argument that the products and services
subject to the Proposals are optional does not reflect marketplace
reality, nor does it demonstrate that the proposed fees are
reasonable.''
The Exchange responds to each of SIFMA's challenges in turn below.
The Exchange Never Set Forth a ``Platform Competition'' Argument
The SIFMA Letter asserts that the Exchange's ``platform
competition'' argument that competition for order flow constrains
pricing for market data or other products and services exclusively
offered by an exchange does not demonstrate that the fees are
reasonable.'' The Exchange does not believe it is necessary to respond
to this assertion because it has never set forth a ``platform
competition'' \76\ argument to justify the Proposed Access Fees in the
First or Second Proposed Rule Change nor does it do so in this filing.
---------------------------------------------------------------------------
\76\ Pursuant to the Guidance, ``platform theory generally
asserts that when a business offers facilities that bring together
two or more distinct types of customers, it is the overall return of
the platform, rather than the return of any particular fees charged
to a type of customer, that should be used to assess the
competitiveness of the platform's market.'' See Guidance, supra note
25.
---------------------------------------------------------------------------
The Exchange Is Not Arguing That Order Flow Competition Alone
Demonstrates That the Proposed Fees Are Reasonable
The SIFMA Letter asserts that ``order flow competition alone
between exchanges does not demonstrate that the fees for the products
and services subject to the Proposal are reasonable.'' \77\ The
Exchange never directly asserted in the First or Second Proposed Rule
Changes, nor does it do so in this filing, that order flow competition,
alone, demonstrated that the Proposed Access Fees are reasonable and
has removed any language that could imply this argument from this
filing.
---------------------------------------------------------------------------
\77\ See SIFMA Letter, supra note 12.
---------------------------------------------------------------------------
Other SIFMA Assertions
SIFMA's also challenges or asserts: (i) Whether the Exchange has
shown that the fees are equitable and non-discriminatory; (ii) that a
tiered pricing structure will encourage market participants to be more
economical with the usage; (iii) greater number of ports use greater
Exchange resources; and (iv) that the Exchange has not provided
extensive information regarding its cost data and how it determined it
cost analysis. The Exchange believes that these assertions by SIFMA
basically echo assertions made in SIG Letters 1 and 3 and that it
provided a response to these assertions under its response to SIG above
or in provided enhanced transparency and justification in this filing.
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,\78\ and Rule 19b-4(f)(2) \79\ 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.
---------------------------------------------------------------------------
\78\ 15 U.S.C. 78s(b)(3)(A)(ii).
\79\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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#146661787139777b7979717a6067546771773a737b62"><span class="__cf_email__" data-cfemail="d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5">[email protected]</span></a>. Please include
File Number SR-EMERALD-2021-43 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-2021-43. 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
[[Page 71978]]
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-2021-43 and should be submitted on or before January 10, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
---------------------------------------------------------------------------
\80\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-27421 Filed 12-17-21; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on December 20, 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.