Notice2022-02082
Self-Regulatory Organizations; Miami International Securities Exchange, LLC, MIAX Emerald, LLC; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Changes To Amend Fee Schedules To Adopt Tiered-Pricing Structures for Additional Limited Service MIAX and 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
February 2, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 22 (Wednesday, February 2, 2022)</title>
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[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5918-5923]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-02082]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94087; File Nos. SR-MIAX-2021-60, SR-EMERALD-2021-43]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC, MIAX Emerald, LLC; Suspension of and Order Instituting
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule
Changes To Amend Fee Schedules To Adopt Tiered-Pricing Structures for
Additional Limited Service MIAX and MIAX Emerald Express Interface
Ports
January 27, 2022.
I. Introduction
On December 1, 2021, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald'') (each an
``Exchange''; collectively, the ``Exchanges'') each filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change (File Numbers SR-
MIAX-2021-60 and SR-EMERALD-2021-43) to amend the MIAX Options Fee
Schedule and MIAX Emerald Fee Schedule (collectively, the ``Fee
Schedules'') to adopt a tiered-pricing structure for additional limited
service express interface ports. Each proposed rule change was
immediately effective upon filing with the Commission pursuant to
Section 19(b)(3)(A) of the Act.\3\ The proposed rule changes were
published for comment in the Federal Register on December 20, 2021.\4\
Under Section 19(b)(3)(C) of the Act,\5\ the Commission is hereby: (i)
Temporarily suspending File Numbers SR-MIAX-2021-60 and SR-EMERALD-
2021-43; and (ii) instituting proceedings to determine whether to
approve or disapprove File Numbers SR-MIAX-2021-60 and SR-EMERALD-2021-
43.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
\4\ See Securities Exchange Act Release Nos. 93771 (December 14,
2021), 86 FR 71940 (December 20, 2021) (SR-MIAX-2021-60) (``MIAX
Notice''); 93772 (December 14, 2021), 86 FR 71965 (December 20,
2021) (SR-EMERALD-2021-43) (``MIAX Emerald Notice''). For ease of
reference, citations to statements generally applicable to both
notices are to the MIAX Notice.
\5\ 15 U.S.C. 78s(b)(3)(C).
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II. Background and Description of the Proposed Rule Changes
Limited Service MIAX Express Interface Ports and Limited Service
MIAX Emerald Express Interface Ports (collectively, ``Limited Service
MEI Ports'') provide Market Makers \6\ with the ability to send eQuotes
and quote purge messages, and are also capable of receiving
administrative information.\7\ Currently, each Exchange allocates two
Limited Service MEI Ports, free of charge, per matching engine to which
a Market Maker connects. Market Makers may request additional Limited
Service MEI Ports for each matching engine to which they connect for an
additional monthly fee for each such additional port. Prior to the
proposed rule changes, each Exchange charged a flat $100 monthly fee
for each such additional port. Each Exchange has proposed to adopt a
tiered-pricing structure.\8\ For both MIAX and MIAX Emerald, the first
and second Limited Service MEI Ports for each matching engine would
remain free of charge. For MIAX, the additional Limited Service MEI
Port fees for each matching engine would increase from $100 to: (i)
$150 for the third and fourth Limited Service MEI Ports; (ii) $200 for
the fifth and sixth Limited Service MEI Ports; and (iii) $250 for the
seventh or more Limited Service MEI Ports.\9\ For MIAX Emerald, the
additional Limited Service MEI Port fees for each matching engine would
increase from $100 to: (i) $200 for the third and fourth Limited
Service MEI Ports; (ii) $300 for the fifth and sixth Limited Service
MEI Ports; and (iii) $400 for the seventh to fourteenth Limited Service
MEI Ports.\10\
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\6\ Defined at MIAX Rule 100 and MIAX Emerald Rule 100.
\7\ See, e.g., MIAX Notice, supra note 4, at 71941 n.15.
\8\ The Exchanges initially filed the proposed fee changes on
August 2, 2021. See Securities Exchange Act Release Nos. 92661
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37);
92662 (August 13, 2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-
2021-25). These filings were withdrawn by the Exchanges. The
Exchanges filed new proposed fee changes with additional
justification (SR-MIAX-2021-43 and SR-EMERALD-2021-31, which were
the subject of a Suspension of and Order Instituting Proceedings.
See Securities Exchange Act Release No. 93640 (November 22, 2021),
86 FR 67745 (November 29, 2021). The Exchanges subsequently withdrew
those filings and replaced them with the instant filings to provide
additional information and a revised justification for the
proposals, which are discussed herein. See also Securities Exchange
Act Release No. 91857 (May 12, 2021), 86 FR 26973 (May 18, 2021)
(MIAX-2021-19) (allowing purchase of any number of additional
Limited Service MEI Ports and stating that, at a continued monthly
fee of $100 for each additional port, the Exchange anticipates
generating an annual loss from the provision).
\9\ See MIAX Notice, supra note 4, at 71941.
\10\ See MIAX Emerald Notice, supra note 4, at 71966-67. The
MIAX Emerald Fee Schedule states that Market Makers are limited to
twelve additional Limited Service MEI Ports per matching engine, for
a total of fourteen per matching engine. See MIAX Emerald Fee
Schedule 5.d.ii.
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III. Suspension of the Proposed Rule Changes
Pursuant to Section 19(b)(3)(C) of the Act,\11\ at any time within
60 days of the date of filing of an immediately effective proposed rule
change pursuant to Section 19(b)(1) of the Act,\12\ the Commission
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. As discussed below, the Commission believes a temporary
suspension of the proposed rule changes is necessary and appropriate to
allow for additional analysis of the proposed rule changes' consistency
with the Act and the rules thereunder.
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\11\ 15 U.S.C. 78s(b)(3)(C).
\12\ 15 U.S.C. 78s(b)(1).
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In support of the proposed tiered-pricing structures and associated
fee increases, the Exchanges state that such fees (which they refer to
as ``Proposed Access Fees'') are reasonable because
[[Page 5919]]
they will permit recovery of the Exchanges' costs in providing access
services to supply additional Limited Service MEI Ports and will not
result in the Exchanges generating a supra-competitive profit.\13\
Specifically, the Exchanges state that the Proposed Access Fees are
based on a ``cost-plus model,'' designed to result in ``cost recovery
plus present the possibility of a reasonable return.'' \14\ Each
Exchange provides an analysis of its revenues, costs, and profitability
associated with the Proposed Access Fees, which they argue employs a
``conservative methodology'' that ``strictly considers only those costs
that are most clearly directly related to the provision and maintenance
of additional Limited Service MEI Ports.'' \15\ The Exchanges state
that this analysis reflects an extensive cost review in which the
Exchanges analyzed nearly every expense item in the Exchanges' general
expense ledgers to determine whether each such expense relates to the
Proposed Access Fees, and, if such expense did so relate, what portion
(or percentage) of such expense actually supports the access services
associated with the Proposed Access Fees.\16\ They state that this
process entailed discussions with each Exchange department head to
identify the expenses that support the access services associated with
the Proposed Access Fees, review of the expenses holistically on an
Exchange-wide level with assistance from the internal finance
department, and then assessment of the total expense, with no expense
allocated twice.\17\
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\13\ See, e.g., MIAX Notice, supra note 4, at 71942.
\14\ See, e.g., id.
\15\ See, e.g., id.
\16\ See, e.g., id. at 71943. Each Exchange also states that no
expense amount is allocated twice; and the expenses in each
Exchange's analysis only cover its own options market, not those of
any affiliate. See, e.g., id. at 71945.
\17\ See, e.g., id. at 71943. Each Exchange also states that its
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,'' and does not include
general costs of operating matching engines and other trading
technology. See, e.g., id. at 71944.
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For 2021, the total annual cost for providing the access services
associated with the Proposed Access Fees is projected by the Exchanges
to be approximately $1.32 million for MIAX (or approximately $110,000
per month on average) and $0.88 million for MIAX Emerald (or
approximately $73,333.33 per month on average).\18\ As described in
more detail in the MIAX Notice and MIAX Emerald Notice, the total
annual cost for each Exchange is comprised of the following, all of
which the Exchanges state are directly related to the access services
associated with the Proposed Access Fees: \19\
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\18\ See MIAX Notice, supra note 4, at 71943; MIAX Emerald
Notice, supra note 4, at 71969.
\19\ See, e.g., MIAX Notice, supra note 4, at 71944-47.
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<bullet> Third-party expense, relating to fees paid by the
Exchanges to third-parties for certain products and services. This
included allocating a portion of fees paid to: (1) Equinix for data
center services; (2) Zayo Group Holdings, Inc. for network services;
(3) Secure Financial Transaction Infrastructure, which supports
connectivity and feeds; (4) various other service providers for
content, connectivity, and infrastructure services; and (5) various
other hardware and software providers; and
<bullet> internal expense, relating to the internal costs of the
Exchanges to provide the access services associated with the Proposed
Access Fees. This included allocating a portion of the Exchanges': (1)
Employee compensation and benefits expenses for full-time employees
that support the access services associated with the Proposed Access
Fees; (2) depreciation and amortization of hardware and software used
to provide the access services associated with the Proposed Access
Fees; and (3) occupancy expenses for leased office space for staff that
provide the access services associated with the Proposed Access Fees.
MIAX estimated its baseline revenues from additional Limited
Service MEI Ports in July 2021 (the month prior to the implementation
of the Proposed Access Fees) to be approximately $124,800 (for a
baseline profit margin of approximately 12 percent); and estimated its
revenues from additional Limited Service MEI Ports in November 2021 to
be approximately $248,950 (a profit margin of approximately 56
percent).\20\ MIAX Emerald estimated its baseline revenues from
additional Limited Services MEI Ports in July 2021 to be approximately
$62,500 (for a baseline loss margin of approximately 17.3 percent); and
estimated its revenues from additional Limited Service MEI Ports in
November 2021 to be approximately $216,600 (a profit margin of
approximately 66 percent).\21\ Each Exchange believes its profit margin
will allow it to begin to recoup its expenses and continue to invest in
its technology infrastructure, and believes that the proposed profit
margin increase (44 percent increase for MIAX, 83.3 percent increase
for MIAX Emerald) is reasonable because it represents a reasonable rate
of return.\22\ The Exchanges add that the profit margin: (i) May
fluctuate from month to month based on the uncertainty of predicting
how many ports may be purchased as Members and non-Members add and drop
ports at any time based on their own business decisions, which they
frequently do; (ii) may decrease due to future increased costs to
procure the third-party services; and (iii) may decrease due to
inflationary pressure on capital items that the Exchanges need to
purchase to maintain their technology and systems, which have resulted
in price increases upwards of 30 percent on network equipment due to
supply chain shortages, and in turn resulted in higher overall costs
associated with ongoing system maintenance.\23\
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\20\ See MIAX Notice, supra note 4, at 71943.
\21\ See MIAX Emerald Notice, supra note 4, at 71969.
\22\ See, e.g., MIAX Notice, supra note 4, at 71947.
\23\ See, e.g., id. at 71943.
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In addition, although the Exchanges do not assert that competitive
forces constrain the Proposed Access Fees, they maintain that the
Proposed Access Fees are reasonable when compared to the fees of other
options exchanges. The Exchanges provide port fees for competing
exchanges which, according to the Exchanges, demonstrate that the
Proposed Access Fees are similar to or significantly lower than fees
charged by competing options exchanges with similar market share.\24\
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\24\ See, e.g., id. at 71948-49.
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The Exchanges also argue that the proposed tiered-pricing
structures result in an equitable allocation of fees that are not
unfairly discriminatory. The Exchanges state that they sought to design
their proposed tiered-pricing structures to set the amount of the fee
to relate to the number of ports a firm purchases.\25\ The Exchanges
state that the fees will ``apply to all Members and non-Members in the
same manner based on the amount of additional Limited Service MEI Ports
they require based on their own business decisions and usage of
Exchange resources.'' \26\ The Exchanges states that firms that
primarily route orders seeking best-execution generally do not utilize
additional Limited Service MEI Ports and ``also generally send less
orders and messages over those connections, resulting in less strain on
Exchange resources.'' \27\ By contrast, the Exchanges contend that
those firms that purchase higher amounts of Limited Service MEI Ports
are primarily those that engage in advanced trading strategies, rather
than order-routing
[[Page 5920]]
firms seeking best execution; \28\ that such firms ``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;'' \29\ that such firms typically generate a
disproportionate amount of messages and order traffic, usually billions
per day across the Exchanges, which consume the Exchanges' resources
and significantly contribute to the overall network access expense for
storage and network transport capabilities; \30\ that such firms tend
to frequently add and drop ports mid-month to determine which ports
have the least latency, which results in increased costs to the
Exchanges to constantly make changes in their data centers and a
``disproportionate pull'' on Exchange resources to provide the
additional port access; \31\ and that the more ports purchased by a
Market Maker ``likely results in greater expenditures of Exchange
resources and increased cost to the Exchange.'' \32\
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\25\ See, e.g., id. at 71948.
\26\ See, e.g., id. at 71947.
\27\ See, e.g., id. at 71948.
\28\ See, e.g., id.
\29\ See, e.g., id.
\30\ See, e.g., id. at 71947-48.
\31\ See, e.g., id. at 71948.
\32\ See, e.g., id.
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In addition, the Exchanges state that the proposed tiered-pricing
structures result in an equitable allocation of fees that are not
unfairly discriminatory because they are designed to encourage Members
and non-Members to be more efficient and economical when determining
how to connect to the Exchanges and would enable the Exchanges to
better monitor and provide access to the Exchanges' networks to ensure
sufficient capacity and headroom in their systems.\33\
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\33\ See, e.g., id. at 71947.
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To date, the Commission has not received any comment letters on the
revised justifications for the Proposed Access Fees.\34\
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\34\ Comments received on the previous filings are available on
the Commission's website at: <a href="https://www.sec.gov/comments/sr-miax-2021-37/srmiax202137.htm">https://www.sec.gov/comments/sr-miax-2021-37/srmiax202137.htm</a> (SR-MIAX-2021-37); <a href="https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm">https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm</a> (SR-EMERALD-2021-
25); <a href="https://www.sec.gov/comments/sr-miax-2021-43/srmiax202143.htm">https://www.sec.gov/comments/sr-miax-2021-43/srmiax202143.htm</a>
(SR-MIAX-2021-43); <a href="https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm">https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm</a> (SR-EMERALD-2021-31).
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When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchanges' present
proposals, they are required to provide a statement supporting the
proposals' basis under the Act and the rules and regulations thereunder
applicable to the exchanges.\35\ The instructions to Form 19b-4, on
which exchanges file their proposed rule changes, specify that such
statement ``should be sufficiently detailed and specific to support a
finding that the proposed rule change is consistent with [those]
requirements.'' \36\
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\35\ See 17 CFR 240.19b-4 (General Instructions for Form 19b-4--
Information to be Included in the Complete Form--Item 3 entitled
``Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change'').
\36\ See id.
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Section 6 of the Act, including Sections 6(b)(4), (5), and (8),
require, among other things, that the rules of an exchange: (1) Provide
for the equitable allocation of reasonable fees among members, issuers,
and other persons using the exchange's facilities; \37\ (2) be designed
to perfect the mechanism of a free and open market and a national
market system and to protect investors and the public interest, and not
be designed to permit unfair discrimination between customers, issuers,
brokers, or dealers; \38\ and (3) not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\39\
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\37\ 15 U.S.C. 78f(b)(4).
\38\ 15 U.S.C. 78f(b)(5).
\39\ 15 U.S.C. 78f(b)(8).
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In temporarily suspending the Exchanges' proposed rule changes, the
Commission intends to further consider whether the proposed additional
Limited Service MEI Port fees are consistent with the statutory
requirements applicable to a national securities exchange under the
Act. In particular, the Commission will consider whether the proposed
rule changes satisfy the standards under the Act and the rules
thereunder requiring, among other things, that an exchange's rules
provide for the equitable allocation of reasonable fees among members,
issuers, and other persons using its facilities; not permit unfair
discrimination between customers, issuers, brokers or dealers; and do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\40\
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\40\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule changes.\41\
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\41\ For purposes of temporarily suspending the proposed rule
changes, the Commission has considered the proposed rules' impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Changes
In addition to temporarily suspending the proposals, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\42\ and 19(b)(2)(B) \43\ of the Act to determine whether the
Exchanges' proposed rule changes should be approved or disapproved.
Institution of such proceedings is appropriate at this time in view of
the legal and policy issues raised by the proposed rule changes.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide comments on the proposed rule changes to
inform the Commission's analysis of whether to approve or disapprove
the proposed rule changes.
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\42\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\43\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\44\ the Commission is
providing notice of the grounds for possible disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of whether the Exchanges have sufficiently
demonstrated how the proposed rule changes are consistent with Sections
6(b)(4),\45\ 6(b)(5),\46\ and 6(b)(8) \47\ of the Act. Section 6(b)(4)
of the Act requires that the rules of a national securities exchange
provide for the equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and other persons using its
facilities. Section 6(b)(5) of the Act requires that the rules of a
national securities exchange be designed, among other things, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest, and not be designed to
[[Page 5921]]
permit unfair discrimination between customers, issuers, brokers, or
dealers. Section 6(b)(8) of the Act requires that the rules of a
national securities exchange not impose any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.
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\44\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
See id. The time for conclusion of the proceedings may be extended
for up to 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding, or if the
exchange consents to the longer period. See id.
\45\ 15 U.S.C. 78f(b)(4).
\46\ 15 U.S.C. 78f(b)(5).
\47\ 15 U.S.C. 78f(b)(8).
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The Commission asks that commenters address the sufficiency of the
Exchanges' statements in support of the proposals, which are set forth
in the MIAX Notice and MIAX Emerald Notice, in addition to any other
comments they may wish to submit about the proposed rule changes. In
particular, the Commission seeks comment on the following aspects of
the proposals and asks commenters to submit data where appropriate to
support their views:
1. Cost Estimates and Allocation. The Exchanges state that they are
not asserting that the Proposed Access Fees are constrained by
competitive forces, but rather set forth a ``cost-plus model,''
employing a ``conservative methodology'' that ``strictly considers only
those costs that are most clearly directly related to the provision and
maintenance of additional Limited Service MEI Ports.'' \48\ As
summarized in greater detail above, MIAX and MIAX Emerald project $1.32
million and $0.88 million, respectively, in aggregate annual estimated
costs for 2021 for additional Limited Service MEI Ports. Do commenters
believe that the Exchanges have provided sufficient detail about how
they determined (a) which categories and sub-categories of third-party
and internal expenses are most clearly directly associated with
providing and maintaining additional Limited Service MEI Ports, (b) the
total annual expenses associated with such categories/sub-categories,
and (c) what percentage of each such expense should be allocated as
actually supporting the additional Limited Service MEI Ports (as
opposed to, for example, allocated to the first two ``free'' Limited
Service MEI Ports or other types of ports or connectivity services
offered by the Exchanges)? The Exchanges describe a process involving
all Exchange department heads, including the finance department, but do
not specify further what principles were applied in making these
determinations or arriving at particular allocations. Do commenters
believe further explanation is necessary? For employee compensation and
benefit costs, for example, the Exchanges calculated an allocation of
employee time in several departments, including Technology, Back
Office, Systems Operations, Networking, Business Strategy Development,
and Trade Operations, but do not provide the job titles and salaries of
persons whose time was accounted for, or explain the methodology used
to determine how much of an employee's time is devoted to providing and
maintaining additional Limited Service MEI Ports. What are commenters'
views on whether the Exchanges have provided sufficient detail on the
identity and nature of services provided by third parties? Across all
of the categories and sub-categories of third-party and internal
expenses that the Exchanges identified as being clearly directly
associated with providing and maintaining additional Limited Service
MEI Ports, what are commenters' views on whether the Exchanges have
provided sufficient detail on how they selected such categories/sub-
categories and how shared costs within or among such categories/sub-
categories are allocated to additional Limited Service MEI Ports, to
permit an independent review and assessment of the reasonableness of
purported cost-based fees and the corresponding profit margin thereon?
Should the Exchanges be required to identify the categories/sub-
categories of expenses that they deemed not to be clearly directly
associated with additional Limited Service MEI Ports, and/or what
Exchange products or services account for the un-allocated percentage
of those categories/sub-categories of expenses that were deemed to be
associated with additional Limited Service MEI Ports (e.g., what
products or services are associated with the approximately 95 percent
and 98 percent, respectively, of applicable depreciation and
amortization expenses that MIAX and MIAX Emerald do not allocate to the
Proposed Access Fees)? Do commenters believe that the costs projected
for 2021 are generally representative of expected costs going forward
(to the extent commenters consider 2021 to be a typical or atypical
year), or should an exchange present an estimated range of costs with
an explanation of how profit margins could vary along the range of
estimated costs?
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\48\ See, e.g., MIAX Notice, supra note 4, at 71942.
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2. Revenue Estimates and Profit Margin Range. MIAX and MIAX Emerald
use a single monthly revenue figure (November 2021) as the basis for
calculating their projected profit margins of 56 percent and 66
percent, respectively. Yet the Exchanges acknowledge that the number of
ports purchased fluctuates from month to month as Members and non-
Members add and drop ports.\49\ Do commenters believe a single month
provides a reasonable basis for a revenue projection? If not, why not?
The profit margin is also dependent on the accuracy of the cost
projections which, if inflated (intentionally or unintentionally), may
render the projected profit margin meaningless. The Exchanges
acknowledge that the profit margin may decrease if costs increase,\50\
but they do not account for the possibility of cost decreases. What are
commenters' views on the extent to which actual costs (or revenues)
deviate from projected costs (or revenues)? Do commenters believe that
the Exchanges' methodology for estimating the profit margin is
reasonable? Should the Exchanges provide a range of profit margins that
they believe are reasonably possible, and the reasons therefor?
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\49\ See, e.g., id. at 71943.
\50\ See, e.g., id.
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3. Reasonable Rate of Return. The Exchanges state that their
Proposed Access Fees are ``designed to cover [their] costs with a
limited return in excess of such costs,'' and believe that their 56
percent and 66 percent profit margins are such a limited return over
such costs.\51\ Do commenters agree with the Exchanges that their
expected 56 percent and 66 percent profit margins would constitute
reasonable rates of return over costs for additional Limited Service
MEI Ports? If not, what would commenters consider to be a reasonable
rate of return and/or what methodology would they consider to be
appropriate for determining a reasonable rate of return? The Exchanges
state that they chose to initially provide additional Limited Service
MEI Ports at a discounted price and to forego revenue that they
otherwise could have generated from assessing higher fees.\52\ Do
commenters believe that this should be considered in the
``reasonableness'' assessment? Do commenters believe it relevant to an
assessment of reasonableness that, according to the Exchanges, the
Exchanges' Proposed Access Fees are similar to or lower than fees
charged by competing options exchanges with similar market share?
Should an assessment of reasonable rate of return include consideration
of factors other than costs; and if so, what factors should be
considered, and why?
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\51\ See, e.g., id. at 71943, 71947.
\52\ See, e.g., id. at 71943-44.
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4. Periodic Reevaluation. The Exchanges have not addressed whether
they believe a material deviation from the anticipated profit margin
would warrant the need to make a rule filing pursuant to Section 19(b)
of the Act to increase or decrease the fees accordingly. In light of
the impact that
[[Page 5922]]
the number of ports purchased has on profit margins, and the potential
for costs to decrease (or increase) over time, what are commenters'
views on the need for exchanges to commit to reevaluate, on an ongoing
and periodic basis, their cost-based connectivity fees to ensure that
the fees stay in line with their stated profitability projections and
do not become unreasonable over time, for example, by failing to adjust
for efficiency gains, cost increases or decreases, and changes in
subscribers? How formal should that process be, how often should that
reevaluation occur, and what metrics and thresholds should be
considered? How soon after a new connectivity fee change is implemented
should an exchange assess whether its revenue and/or cost estimates
were accurate and at what threshold should an exchange commit to file a
fee change if its estimates were inaccurate? Should an initial review
take place within the first 30 days after a connectivity fee is
implemented? 60 days? 90 days? Some other period?
5. Tiered Structure for Additional Limited Service MEI Ports. The
Exchanges state that the proposed tiered fee structures are designed to
set the amount of the fees to relate to the number of ports a firm
purchases \53\ and that ``[c]harging a higher fee to a Market Maker
that utilizes numerous ports is directly related to the increased costs
the [Exchanges incur] in providing and maintaining those additional
ports.'' \54\ According to the Exchanges, firms that purchase numerous
Limited Service MEI Ports are primarily those that engage in advanced
trading strategies, typically generate a disproportionate amount of
messages and order traffic, and frequently add or drop ports mid-month,
and thus that ``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.'' \55\ The Proposed Access Fees
would not just increase the previous $100 per additional Limited
Service MEI Port fee, but would progressively increase the fee up to
2.5-fold on MIAX (up to $250 per port for seven or more ports), and up
to four-fold on MIAX Emerald (up to $400 per port for seven or more
ports). However, the Exchanges have not specifically asserted that it
is, for example, 2.5 times more costly for MIAX, or four times more
costly for MIAX Emerald, to provide the seventh or more ports. Instead,
the Exchanges argue generally that the more ports purchased by a Market
Maker ``likely'' results in greater expenditure of Exchange resources
and increased cost to the Exchange.\56\ Do commenters believe that the
fees for each tier, as well as the fee differences between the tiers,
are supported by the Exchanges' assertions that they set the tiered-
pricing structure in a manner that is equitable and not unfairly
discriminatory? Do commenters believe that the Exchanges should
demonstrate how the proposed tiered fee levels correlate with tiered
costs (e.g., by providing cost information broken down by tier,
messaging volumes through the additional Limited Service MEI Ports by
tier, and/or mid-month add/drop rates by tier) to better substantiate,
by tier, the ``disproportionate pull'' on the Exchanges' resources as a
firm increases the number of additional Limited Service MEI Ports that
it purchases and to permit an assessment of the Exchanges' statement
that the Proposed Access Fees ``are solely determined by the individual
Member's or non-Member's business needs and its impact on the Exchanges
resources''? \57\
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\53\ See, e.g., id. at 71948.
\54\ See, e.g., id. at 71947.
\55\ See, e.g., id. at 71947-48.
\56\ See, e.g., id. at 71948.
\57\ See, e.g., id. at 71947.
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
[SRO] that proposed the rule change.'' \58\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding,\59\ and any failure of an SRO to provide this
information may result in the Commission not having a sufficient basis
to make an affirmative finding that a proposed rule change is
consistent with the Act and the applicable rules and regulations.\60\
Moreover, ``unquestioning reliance'' on an SRO's representations in a
proposed rule change would not be sufficient to justify Commission
approval of a proposed rule change.\61\
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\58\ 17 CFR 201.700(b)(3).
\59\ See id.
\60\ See id.
\61\ See Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the
Commission's reliance on an SRO's own determinations without
sufficient evidence of the basis for such determinations).
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The Commission believes it is appropriate to institute proceedings
to allow for additional consideration and comment on the issues raised
herein, including as to whether the proposals are consistent with the
Act, any potential comments or supplemental information provided by the
Exchanges, and any additional independent analysis by the Commission.
V. Request for Written Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above, as well as any other relevant
concerns. In particular, the Commission invites the written views of
interested persons concerning whether the proposal is consistent with
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the
Act, or the rules and regulations thereunder. The Commission asks that
commenters address the sufficiency and merit of the Exchanges'
statements in support of the proposals, in addition to any other
comments they may wish to submit about the proposed rule changes.
Although there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral presentation.\62\
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\62\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by an SRO. See Securities
Acts Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposals should be approved or
disapproved by February 23, 2022. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
March 9, 2022.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#651710090048060a0808000b1116251600064b020a13"><span class="__cf_email__" data-cfemail="d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0">[email protected]</span></a>. Please include
File Nos. SR-MIAX-2021-60 and 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 Numbers SR-MIAX-2021-60 and SR-
EMERALD-2021-43. These file numbers should be included on the
[[Page 5923]]
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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule changes that are filed with the Commission, and all
written communications relating to the proposed rule changes 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 filings also will be available for inspection and copying
at the principal office of each 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 Numbers SR-
MIAX-2021-60 and SR-EMERALD-2021-43 and should be submitted on or
before February 23, 2022. Rebuttal comments should be submitted by
March 9, 2022.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\63\ that File Numbers SR-MIAX-2021-60 and SR-EMERALD-2021-43 be,
and hereby are, temporarily suspended. In addition, the Commission is
instituting proceedings to determine whether the proposed rule changes
should be approved or disapproved.
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\63\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02082 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P
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