Notice2022-03652
Self-Regulatory Organizations; MIAX Emerald LLC; Notice of Filing of a Proposed Rule Change To Amend the MIAX Emerald Fee Schedule To Adopt a Tiered-Pricing Structure for Certain Connectivity Fees; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change
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 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 35 (Tuesday, February 22, 2022)</title>
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[Federal Register Volume 87, Number 35 (Tuesday, February 22, 2022)]
[Notices]
[Pages 9678-9695]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03652]
[[Page 9678]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94257; File No. SR-EMERALD-2022-04]
Self-Regulatory Organizations; MIAX Emerald LLC; Notice of Filing
of a Proposed Rule Change To Amend the MIAX Emerald Fee Schedule To
Adopt a Tiered-Pricing Structure for Certain Connectivity Fees;
Suspension of and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove the Proposed Rule Change
February 15, 2022.
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 February 1, 2022, MIAX Emerald, LLC (``MIAX Emerald'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I and II
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 and is, pursuant to Section 19(b)(3)(C)
of the Act, hereby: (i) Temporarily suspending the rule change; and
(ii) instituting proceedings to determine whether to approve or
disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Emerald Fee
Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings">http://www.miaxoptions.com/rule-filings</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 [sic] below. The Exchange has prepared summaries, set 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 the 10 gigabit (``Gb'') ultra-low latency
(``ULL'') fiber connection available to Members \3\ and non-Members.
The Exchange initially filed this proposal on July 30, 2021, with the
proposed fee changes effective beginning August 1, 2021 (``First
Proposed Rule Change'').\4\ The First Proposed Rule Change was
published for comment in the Federal Register on August 17, 2021.\5\
The Commission received one comment letter on the First Proposed Rule
Change.\6\ The Exchange withdrew the First Proposed Rule Change on
September 24, 2021 and re-submitted the proposal on September 24, 2021,
with the proposed fee changes being immediately effective (``Second
Proposed Rule Change'').\7\ The Second Proposed Rule Change was
published for comment in the Federal Register on October 4, 2021.\8\
The Second 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 Second Proposed Rule Change.\9\ The
Commission suspended the Second Proposed Rule Change on November 22,
2021.\10\ The Exchange withdrew the Second Proposed Rule Change on
December 1, 2021 and submitted a revised proposal for immediate
effectiveness (``Third Proposed Rule Change'').\11\ The Third Proposed
Rule Change meaningfully attempted 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,\12\ and feedback provided
by Commission Staff during a telephone conversation on November 18,
2021 relating to the Second Proposed Rule Change. The Third Proposed
Rule Change was published for comment in the Federal Register on
December 20, 2021.\13\ The Exchange receive no comment letters on the
Third Proposed Rule Change. The Commission suspended the Third Proposed
Rule Change on January 27, 2022.\14\ The Exchange withdrew the Third
Proposed Rule Change on February 1, 2022 and now submits this proposal
for immediate effectiveness (``Fourth Proposed Rule Change''). This
Fourth Proposed Rule Change provides additional justification and
explanation for the proposed fee changes.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ See Securities Exchange Act Release No. 92645 (August 11,
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
\5\ Id.
\6\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\7\ See Securities Exchange Act Release No. 93166 (September 28,
2021), 86 FR 54760 (October 4, 2021) (SR-EMERALD-2021-29).
\8\ Id.
\9\ 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''). See also letter
from Tyler Gellasch, Executive Director, Healthy Markets Association
(``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''); 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'').
\10\ See Securities Exchange Act Release No. 93644 (November 22,
2021), 86 FR 67750 (November 29, 2021).
\11\ See Securities Exchange Act Release No. 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42).
\12\ 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.
\13\ See supra note 11.
\14\ See Securities Exchange Act Release No. 94089 (January 27,
2022) (Suspension of and Order Instituting Proceedings to Determine
Whether to Approve or Disapprove Proposed Rule Change to Amend the
MIAX Emerald Fee Schedule to Adopt a Tiered Pricing Structure for
Certain Connectivity Fees).
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10Gb ULL Tiered-Pricing Structure
The Exchange proposes to amend Sections 5)a)-b) of the Fee Schedule
to
[[Page 9679]]
provide for a tiered-pricing structure for 10Gb ULL connections for
Members and non-Members. Prior to the First Proposed Rule Change, the
Exchange assessed Members and non-Members a flat monthly fee of $10,000
per 10Gb ULL connection for access to the Exchange's primary and
secondary facilities.
The Exchange now proposes to move from a flat monthly fee per
connection to a tiered-pricing structure under which the monthly fee
would vary depending on the number of 10Gb ULL connections each Member
or non-Member elects to purchase per exchange. Specifically, the
Exchange proposes to decrease the fee for the first and second 10Gb ULL
connections for each Member and non-Member from the current flat
monthly fee of $10,000 to $9,000 per connection. To encourage more
efficient connectivity usage, the Exchange proposes to increase the per
connection fee for Members and non-Members that purchase more than two
10Gb ULL connections. In particular, (i) the third and fourth 10Gb ULL
connections for each Member or non-Member will increase from the
current flat monthly fee of $10,000 to $11,000 per connection; and (ii)
for the fifth 10Gb ULL connection, and each 10Gb ULL connection
purchased by Members and non-Members thereafter, the fee will increase
from the flat monthly fee of $10,000 to $13,000 per connection. The
proposed 10Gb ULL tiered-pricing structure and fees are collectively
referred to herein as the ``Proposed Access Fees.''
The Exchange believes the other exchanges' connectivity fees are a
useful example of alternative approaches to providing and charging for
connectivity 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 connectivity. As shown by the below
table, the Exchange's proposed highest tier is still less than fees
charged for similar connectivity provided by other options exchanges.
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\15\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\16\ See PHLX Rules, General 8: Connectivity.
\17\ See ISE Rules, General 8: Connectivity.
\18\ See NYSE American Options Fee Schedule, Section IV.
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Exchange Type of port Monthly fee
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MIAX Emerald (as proposed).. 10Gb ULL............ 1-2 connection.
$9,000.00 3-4
connections.
$11,000.00 5 or
more. $13,000.00.
The NASDAQ Stock Market LLC 10Gb Ultra fiber.... $15,000.00
(``NASDAQ'') \15\.
Nasdaq ISE LLC (``ISE'') 10Gb Ultra fiber.... $15,000.00
\16\.
Nasdaq PHLX LLC (``PHLX'') 10Gb Ultra Fiber.... $15,000.00
\17\.
NYSE American LLC (``Amex'') 10Gb LX LCN......... $22,000.00
\18\.
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The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange proposes to pro-rate the fees when a Member
or non-Member makes a change to the connectivity (by adding or deleting
connections) with such pro-rated fees based on the number of trading
days that the Member or non-Member has been credentialed to utilize any
of the Exchange APIs or market data feeds in the production environment
through such connection, divided by the total number of trading days in
such month multiplied by the applicable monthly rate. The Exchange will
continue to assess monthly Member and non-Member network connectivity
fees for connectivity to the disaster recovery facility in each month
during which the Member or non-Member has established connectivity with
the disaster recovery facility.
2. Statutory Basis
The Exchange believes that the Proposed Access Fees are consistent
with Section 6(b) of the Act \19\ in general, and furthers the
objectives of Section 6(b)(4) of the Act \20\ in particular, in that
they provide for the equitable allocation of reasonable dues, fees and
other charges among Members and other persons using any facility or
system which the Exchange operates or controls. The Exchange also
believes the Proposed Access Fees further the objectives of Section
6(b)(5) of the Act \21\ in that they are 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 are not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(4).
\21\ 15 U.S.C. 78f(b)(5).
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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'').\22\ 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.'' \23\ Based on both the
BOX Order and the Guidance, 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.\24\
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\22\ 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).
\23\ 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'').
\24\ See Securities Exchange Act Release Nos. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase
connectivity fees).
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[[Page 9680]]
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 amendment 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 connectivity to be access
fees. It records these fees as part of its ``Access Fees'' revenue in
its financial statements.
In 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.'' \25\ The
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.'' \26\ 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 supra-competitive profit,
specific information, including quantitative information, should be
provided to support that argument.'' \27\ 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 10Gb ULL connectivity and will not
result in the Exchange generating a supra-competitive profit.
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\25\ See Guidance, supra note 23.
\26\ Id.
\27\ Id.
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The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \28\
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.'' \29\ The Exchange provides
this analysis below.
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\28\ Id.
\29\ Id.
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Based on this analysis, the Exchange believes the Proposed Access
Fees are reasonable and do not result in a ``supra-competitive'' \30\
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 connectivity to the Exchange.
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\30\ Id.
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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 connectivity, 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 10Gb ULL connectivity) to estimate such costs,\31\ as
well as the relative costs of providing and maintaining 10Gb ULL
connectivity, 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 10Gb ULL
connectivity because of the uncertainty of forecasting subscriber
decision making with respect to firms' connectivity needs and the
likely potential for increased costs to procure the third-party
services described below.
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\31\ For example, the Exchange only included the costs
associated with providing and supporting connectivity and excluded
from its connectivity cost calculations any cost not directly
associated with providing and maintaining such connectivity. Thus,
the Exchange notes that this methodology underestimates the total
costs of providing and maintaining connectivity.
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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 \32\ included discussions
with each Exchange department head to determine the expenses that
support access services associated with the Proposed Access Fees. This
included numerous meetings between the Exchange's Chief Information
Officer, Chief Financial Officer, Head of Strategic Planning and
Operations, Chief Technology Officer, various members of the Legal
Department, and other group leaders. The Exchange reviewed each
individual expense to determine if such expense was related to 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.
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\32\ 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 9.
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The internal cost analysis conducted by the Exchange is a
proprietary process that is designed to make a fair and
[[Page 9681]]
reasonable assessment of costs and resources allocated to support the
provision of access services associated with the Proposed Access Fees.
The Exchange acknowledges that this assessment can only capture a
moment in time and that costs and resource allocations may change. That
is why the Exchange has historically, and on an ongoing basis,
periodically revisits its costs and resource allocations to ensure it
is appropriately allocating resources to properly provide services to
the Exchange's constituents. Any requirement that an exchange should
conduct a periodic re-evaluation on a set timeline of its cost
justification and amend its fees accordingly should be established by
the Commission holistically, applied to all exchanges and not just
through pending fee proposals, such as this filing. In order to be
fairly applied, such a mandate should be applied to existing access
fees as well.
In accordance with the Guidance, the Exchange has provided
sufficient detail to support a finding that the proposed fees are
consistent with the Exchange Act. The proposal includes a detailed
description of the Exchange's costs and how the Exchange determined to
allocate those costs related to the proposed fees. In fact, the detail
and analysis provided in this proposed rule change far exceed the level
of disclosure provided in other exchange fee filings that have not been
suspended by the Commission during its 60-day suspension period. A
finding that this proposed rule change is inconsistent with the
Exchange Act would run contrary to the Commission Staff's treatment of
other recent exchange fee proposals that have not been suspended and
remain in effect today.\33\ For example, a proposed fee filing that
closely resembles the Exchange's current filing was submitted in 2020
by the Cboe Exchange, Inc. (``Cboe'') and increased fees for Cboe's
10Gb connections.\34\ This filing was submitted on September 2, 2020,
nearly 15 months after the Staff's Guidance was issued. In that filing,
the Cboe stated that the ``proposed changes were not designed with the
objective to generate an overall increase in access fee revenue.'' \35\
This filing provided no cost based data to support its assertion that
the proposal was intended to be revenue neutral. Among other things,
Cboe did not provide a description of the costs underlying its
provision of 10Gb connections to show that this particular fee did not
generate a supra-competitive profit or describe how any potential
profit may be offset by increased costs associated with another fee
included in its proposal. This filing, nonetheless, was not suspended
by the Commission and remains in effect today.
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\33\ See, e.g., Securities Exchange Act Release Nos. 91339
(March 17, 2021), 86 FR 15524 (March 23, 2021) (SR-CboeBZX-2021-020)
(increasing fees for a market data product while not providing a
cost based justification for the increase); 93293 (October 21,
2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-058) (increasing
fees for historical market data while not providing a cost based
justification for the increase); 92970 (September 14, 2021), 86 FR
52261 (September 20, 2021) (SR-CboeBZX-2021-047) (adopting fees for
a market data related product while not providing a cost based
justification for the fees); and 89826 (September 10, 2021), 85 FR
57900 (September 16, 2021) (SR-CBOE-2020-086) (increasing
connectivity fees without including a cost based justification).
\34\ See Securities Exchange Act Release No. 89826 (September
10, 2020), 85 FR 57900 (September 16, 2020) (SR-CBOE-2020-086)
(increasing connectivity fees without including a cost based
justification).
\35\ See id. at 57909.
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The Exchange believes exchanges, like all businesses, should be
provided flexibility when allocating costs and resources they deem
necessary to operate their business, including providing market data
and access services. The Exchange notes that costs and resource
allocations may vary from business to business and, likewise, costs and
resource allocations may differ from exchange to exchange when it comes
to providing market data and access services. It is a business decision
that must be evaluated by each exchange as to how to allocate internal
resources and what costs to incur internally or via third parties that
it may deem necessary to support its business and its provision of
market data and access services to market participants. An exchange's
costs may also vary based on fees charged by third parties and periodic
increases to those fees that may be outside of the control of an
exchange.\36\
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\36\ See supra note 32.
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To determine the Exchange's projected revenue associated with the
Proposed Access Fees, the Exchange analyzed the number of Members and
non-Members currently utilizing the 10Gb ULL fiber connection 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.\37\ 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 associated with providing access services
related to the Proposed Access Fees and not result in excessive pricing
or supra-competitive profit.
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\37\ Id.
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As outlined in more detail below, the Exchange projects that the
final annualized expense for 2021 to provide network connectivity
services (all connectivity alternatives) to be approximately $7.2
million per annum or an average of $600,000 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 98 10Gb ULL
connections for which the Exchange charged approximately $971,905 (this
includes Members and non-Members dropping or adding connections mid-
month, resulting a pro-rated charge at times). This resulted in a
profit of $371,905 for that month (a profit margin of 38%). For the
month of October 2021, which includes the varying rates for 10Gb ULL
connectivity for the Proposed Access Fees, Exchange Members and non-
Members purchased a total of 100 10Gb ULL connections for which the
Exchange charged approximately $1,146,714 for that
[[Page 9682]]
month (also including pro-rated connection charges). This resulted in a
profit of $546,714 for that month (a modest 9% profit margin increase
from July 2021 to October 2021 from 38% to 47%). The Exchange believes
that the Proposed Access Fees are reasonable because they only generate
an additional 9% of profit margin per-month (reflecting a 47% profit
margin). The Exchange cautions that this profit margin is likely to
fluctuate from month to month based on the uncertainty of predicting
how many connections may be purchased from month to month as Members
and non-Members are able to add and drop connections 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 the
Exchange needs to purchase to maintain the Exchange's technology and
systems.\38\ The Exchange has been subject to price increases upwards
of 30% during the past year 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.
---------------------------------------------------------------------------
\38\ 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).
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As mentioned above, the Exchange projects that its annualized
expense for 2021 to provide network connectivity services (all
connectivity alternatives) to be approximately $7.2 million per annum
or an average of $600,000 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.\39\ 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.
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\39\ 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.
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The Exchange only has four primary sources of revenue and cost
recovery mechanisms to fund all of its operations: 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.\40\ 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.\41\ 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.
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\40\ 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>.
\41\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
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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 mentioned above, for 2021,\42\ the total annual expense for
providing the access services associated with the Proposed Access Fees
is projected to be approximately $7.2 million, or approximately
$600,000 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.\43\ 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.\44\ The $7.2 million 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
[[Page 9683]]
technology. No expense amount was allocated twice.
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\42\ The Exchange has not yet finalized its 2021 year end
results.
\43\ 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.
\44\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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As discussed 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. In performing this calculation, the Exchange considered other
services and to which the expense may be applied and how much of the
expense is directly and/or indirectly utilized in providing those other
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, expenses relating to fees paid by the Exchange to third-
parties for products and services necessary to provide the access
services associated with the Proposed Access Fees is projected to be
$1.7 million. This includes, but is not limited to, a portion of the
fees paid to: (1) Equinix for data center services, including 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 and its affiliates' office locations in
Princeton, New Jersey and Miami, Florida, to all data center locations;
(3) Secure Financial Transaction Infrastructure (``SFTI''),\45\ 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.).
---------------------------------------------------------------------------
\45\ See supra note 39.
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For clarity, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to providing access services in connection with the Proposed
Access Fees. Only a portion of all fees paid to such third-parties is
included in the third-party expenses described 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. This may result in
the Exchange under allocating an expense to the provision of access
services in connection with the Proposed Access Fees and such expenses
may actually be higher or increase above what the Exchange utilizes
within this proposal. Further, the Exchange notes that expenses
associated with its affiliates, MIAX and MIAX Pearl (the options and
equities markets), are accounted for separately and are not included
within the scope of this filing. Further, as part its ongoing
assessment of costs and expenses (described above), the Exchange
recently conducted a periodic thorough review of its expenses and
resource allocations which, in turn, resulted in revised percentage
allocations in this filing. Therefore, 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. The Exchange notes that the expense
allocations differ from the Exchange's filing earlier this year, SR-
EMERALD-2021-11, because that prior filing pertained to several
different access fees, which the Exchange had not been charging for
since the Exchange launched operations in March 2019.\46\ In SR-
EMERALD-2021-11, the Exchange sought to adopt fees for FIX Ports, MEI
Ports, Purge Ports, Clearing Trade Drop Ports, and FIX Drop Copy Ports,
all of which had been free for market participants for over two years.
---------------------------------------------------------------------------
\46\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11).
---------------------------------------------------------------------------
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. According to the
Exchange's calculations, it allocated approximately 62% of the total
applicable Equinix expense to providing the access services associated
with the Proposed Access Fees. 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.\47\
---------------------------------------------------------------------------
\47\ 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 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 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. According to the Exchange's
[[Page 9684]]
calculations, it allocated approximately 62% of the total applicable
Zayo expense to providing the access services associated with the
Proposed Access Fees. 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 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. According to the Exchange's calculations, it
allocated approximately 89% of the total applicable SFTI and other
service providers' expense to providing the access services associated
with the Proposed Access Fees. 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.\49\
---------------------------------------------------------------------------
\49\ Id. See also supra note 39 (regarding SFTI's announced fee
increases).
---------------------------------------------------------------------------
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. According to the Exchange's calculations, it
allocated approximately 51% of the total applicable hardware and
software provider expense to providing the access services associated
with the Proposed Access Fees. 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.\50\
---------------------------------------------------------------------------
\50\ See supra note 47.
---------------------------------------------------------------------------
Internal Expense Allocations
For 2021, total projected internal expenses relating to the
Exchange providing the access services associated with the Proposed
Access Fees are projected to be approximately $5.5 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, business, as well as staff in general corporate departments
(such as legal, regulatory, and finance) 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, and as stated above, the Exchange took a conservative
approach in determining the expense and the percentage of that expense
to be allocated to providing access services in connection with the
Proposed Access Fees. 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. This may result in the Exchange under
allocating an expense to the provision of access services in connection
with the Proposed Access Fees and such expenses may actually be higher
or increase above what the Exchange utilizes within this proposal.
Further, as part its ongoing assessment of costs and expenses
(described above), 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 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 $3.2 million,
which is only a portion of the approximately $9.7 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), Trade Operations, Finance (who provide
billing and accounting services relating to the network), and Legal
(who provide legal services relating to the network, such as rule
filings and various license agreements and other contracts). As part of
the extensive cost review conducted by the Exchange, the Exchange
reviewed the amount of time spent by employees 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
portions which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees.
According to the Exchange's calculations, it allocated approximately
33% of the total applicable employee compensation and benefits expense
to providing the access services associated with the Proposed Access
Fees. The Exchange believes this allocation is reasonable because it
[[Page 9685]]
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.\51\
---------------------------------------------------------------------------
\51\ Id.
---------------------------------------------------------------------------
The Exchange's depreciation and amortization expense relating to
providing the services associated with the Proposed Access Fees is
projected to be $2 million, which is only a portion of the $3.1 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.
According to the Exchange's calculations, it allocated approximately
63% of the total applicable depreciation and amortization expense to
providing the access services associated with the Proposed Access Fees,
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.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
The Exchange's occupancy expense relating to providing the services
associated with the Proposed Access Fees is projected to be
approximately $0.3 million, which is only a portion of the $0.5 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, New Jersey 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.
According to the Exchange's calculations, it allocated approximately
53% of the total applicable occupancy expense to providing the access
services associated with the Proposed Access Fees. 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.\53\
---------------------------------------------------------------------------
\53\ 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 network connectivity services (all connectivity alternatives)
to be approximately $7.2 million per annum or an average of $600,000
per month. The Exchange implemented the Proposed Access Fees on August
1, 2021. For July 2021, prior to the Proposed Access Fees, Exchange
Members and non-Members purchased a total of 98 10Gb ULL connections
for which the Exchange charged approximately $971,905. This resulted in
a profit of $371,905 (a profit margin of 38%) for that month (including
pro-rated charges). For the month of October 2021, which includes the
varying 10Gb ULL connectivity fees pursuant to the Proposed Access
Fees, the Exchange had Members and non-Members purchasing a total of
100 10Gb ULL connections for which the Exchange charged approximately
$1,146,714 (including pro-rated charges). This resulted in a profit of
$546,714 for that month (a modest 9% profit margin increase from July
2021 to October 2021 from 38% to 47%). The Exchange believes that the
Proposed Access Fees are reasonable because they only generate an
additional 9% of profit margin per month (reflecting a 47% profit
margin). The Exchange believes this modest increase in profit margin
will allow it to continue 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
connections may be purchased from month to month as Members and non-
Members are free to add and drop connections at any time based on their
own business decisions. Notwithstanding that the revenue (and profit
margin) may vary from month to month due to changes in connections and
to changes to the Exchange's expenses, the number of connections has
not materially changed over the prior months. Consequently, the
Exchange believes that the months it has
[[Page 9686]]
used as a baseline to perform its assessment are representative of
reasonably anticipated costs and expenses. 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.\54\ 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.
---------------------------------------------------------------------------
\54\ See supra note 38.
---------------------------------------------------------------------------
The Exchange believes that conducting the above analysis on a per
month basis is reasonable as the revenue generated from access services
subject to the proposed fee generally remains static from month to
month. The Exchange also conducted the above analysis on a per month
basis to comply with the Commission Staff's Guidance, which requires a
baseline analysis to assist in determining whether the proposal
generates a supra-competitive profit. This monthly analysis was also
provided in response to comment received on prior submissions of this
proposed rule change.
The Exchange reiterates that it 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. As a result, each of these fees cannot be ``flat'' and
cover only the expenses directly related to the fee that is charged.
The above revenue and associated profit margin therefore are not solely
intended to cover the costs associated with providing access services
subject to the Proposed Access Fees.
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 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 10Gb ULL connectivity they require based on their own
business decisions and 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 connections a Member or non-Member utilizes. Charging an
incrementally higher fee to a Member or non-Member that utilizes
numerous connections is directly related to the increased costs the
Exchange incurs in providing and maintaining those additional
connections. 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.
The Exchange believes that the proposal to move to a tiered-pricing
structure for its 10Gb ULL connections is reasonable, equitably
allocated and not unfairly discriminatory because the majority of
Members and non-Members that purchase 10Gb ULL connections will either
save money or pay the same amount after the tiered-pricing structure is
implemented. After the effective date of the First Proposed Rule Change
on August 1, 2021, approximately 60% of the firms that purchased at
least one 10Gb ULL connection experienced a decrease in their monthly
connectivity fees while only approximately 40% of firms experienced an
increase in their monthly connectivity fees as a result of the proposed
tiered-pricing structure when compared to the flat monthly fee
structure. To illustrate, firms that purchase only one 10Gb ULL
connection per month used to pay the flat rate of $10,000 per month for
that one 10Gb ULL connection. Pursuant to the proposed tiered-pricing
structure, these firms now pay $9,000 per month for that same one 10Gb
ULL connection, saving $1,000 per month or $12,000 annually. Further,
firms that purchase two 10Gb ULL connections per month previously paid
a flat rate of $20,000 per month ($10,000 x 2) for those two 10Gb ULL
connections. Pursuant to the proposed tiered-pricing structure, these
firms now pay $18,000 per month ($9,000 x 2) for those two 10Gb ULL
connections, saving $2,000 per month or $24,000 annually.
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 connectivity resources, but also those firms that most
heavily consume Exchange connectivity resources, network consumers, and
purchasers of 10Gb ULL connectivity. 10Gb ULL connectivity is not an
unlimited resource as the Exchange needs to purchase additional
equipment to satisfy requests for additional connections. The Exchange
also needs to provide personnel to set up new connections, service
requests related to adding new and/or deleting existing connections,
respond to performance queries from, and to maintain those connections
on behalf of Members and non-Members. Also, those firms that utilize
10Gb ULL connectivity 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
connectivity expense for storage and network transport capabilities.
The Exchange also has to purchase additional storage capacity on
[[Page 9687]]
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.\55\ Thus, as the number of
connections an entity has increases, certain other costs incurred by
the Exchange that are correlated to, though not directly affected by,
connection costs (e.g., storage costs, surveillance costs, service
expenses) also increase.
---------------------------------------------------------------------------
\55\ 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 fees to relate to the number of connections a
firm purchases. The more connections purchased by a firm likely results
in greater expenditure of Exchange resources and increased cost to the
Exchange. With this in mind, the Exchange proposes to decrease the
monthly fees for those firms who connect to the Exchange as part of
their best execution obligations and generally tend to send the least
amount of orders and messages over those connections. The Exchange
notes that firms that primarily route orders seeking best-execution
generally only purchase a limited number of connections. Those firms
also generally send fewer orders and messages over those connections,
resulting in less strain on Exchange resources. Therefore, the
connectivity costs will likely be lower for these firms based on the
proposed tiered-pricing structure.
On a similar note, the Exchange proposes to increase the fee for
those firms that purchase more connections resulting in greater
expenditure of Exchange resources and increased cost to the Exchange.
The Exchange notes that these firms that purchase more than two to four
10Gb ULL connections essentially do so for competitive reasons amongst
themselves and choose to utilize numerous connections 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 connections 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 of their 10Gb ULL connections
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 10Gb ULL
connections 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 connections mid-month to determine which connections have the
least latency, which results in increased costs to the Exchange to
frequently make changes in the data center and provide the additional
technical and personnel support necessary to satisfy these requests.
The firms that engage in the above-described liquidity removing and
advanced trading strategies typically require multiple connections and,
therefore, generate higher costs by utilizing more of the Exchange's
resources. Those firms may also conduct other latency measurements over
their connections and drop and simultaneously add connections 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 connections in the data center. Therefore, the
Exchange believes it is equitable for these firms to experience
increased connectivity costs based on their disproportionate pull on
Exchange resources to provide the additional connectivity.
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.\56\ As
stated above, 10Gb ULL connectivity is not an unlimited resource and
the Exchange's network is limited in the amount of connections it can
provide. However, the Exchange must accommodate requests for additional
connectivity 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 connectivity on top of current network capacity
constraints, requires that the Exchange purchase additional equipment
to satisfy these requests. The Exchange also needs to provide personnel
to set up new connections and to maintain those connections on behalf
of Members and non-Members. The proposed tiered-pricing structure is
equitable because it is designed to encourage Members and non-Members
to be more efficient and economical in selecting the amount of
connectivity they request while balancing that against the Exchange's
increased expenses when expanding its network to accommodate additional
connectivity.
---------------------------------------------------------------------------
\56\ 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
The Exchange does not have visibility into other equities
exchanges' costs to provide connectivity or their fee markup over those
costs, and therefore cannot use other exchange's connectivity fees as a
benchmark to determine a reasonable markup over the costs of providing
connectivity. Nevertheless, the Exchange believes the other exchange's
connectivity fees are a useful example of alternative approaches to
providing and charging for connectivity. To that end, the Exchange
believes the proposed tiered-pricing structure for 10Gb ULL connections
is reasonable because the proposed highest tier is still less than fees
charged for similar connectivity provided by other options exchanges
with comparable market shares. For example, NASDAQ (equity options
market share of 8.88% as of November 26, 2021 for the month of
November) \57\ charges a monthly fee of $10,000 per 10Gb fiber
connection and $15,000 per 10Gb Ultra fiber connection.\58\ The highest
tier of the Exchange's proposed fee structure for a 10Gb ULL connection
is $13,000 for the fifth and subsequent connections, which is $2,000
per month less than NASDAQ and, unlike NASDAQ, the Exchange does not
charge installation fees. For market participants with fewer
connections, the difference is even more stark. For a market
participant with two connections to the Exchange and two connections to
NASDAQ, the difference in connection fees would be $12,000 per month.
The Exchange notes that the same connectivity fees described above for
NASDAQ also apply to its affiliates, ISE \59\ (equity options market
share of 7.96% as of November 26, 2021 for the month of November) \60\
and PHLX (equity options market share of 9.31% as of November 26, 2021
for the month
[[Page 9688]]
of November).\61\ Amex (equity options market share of 5.05% as of
November 26, 2021 for the month of November) \62\ charges $15,000 per
connection initially plus $22,000 monthly per 10Gb LX LCN circuit
connection.\63\ Again, the highest tier of the Exchange's proposed fee
structure for a 10Gb ULL connection is $9,000 per month lower than the
Amex connectivity fee after the first month.
---------------------------------------------------------------------------
\57\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a> (last visited November 26, 2021).
\58\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\59\ See ISE Rules, General 8: Connectivity.
\60\ See supra note 57.
\61\ See id. See also PHLX Rules, General 8: Connectivity.
\62\ See supra note 57.
\63\ See Amex Fee Schedule, Section IV.
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In the each of the above cases, the Exchange's highest tier in the
proposed tiered-pricing structure only applies to the fifth and
additional connections and is still 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 connectivity alternatives. Each
of the connectivity rates in place at competing options exchanges were
filed with the Commission for immediate effectiveness and remain in
place today.
The Exchange further believes that the Proposed Access Fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for one 10Gb ULL connection, the Exchange provides each Member
or non-Member access to all twelve (12) matching engines on MIAX
Emerald and a vast majority choose to connect to all twelve (12)
matching engines. The Exchange believes that other exchanges require
firms to connect to multiple matching engines.\64\
---------------------------------------------------------------------------
\64\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at <a href="http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf">http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf</a>. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
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 its proposed connectivity pricing structure
for its 10Gb ULL connections is associated with relative usage of the
various market participants. Further, the majority of firms that
purchase 10Gb ULL connections may either save money or pay the same
amount after the tiered-pricing structure is implemented. While total
cost may be increased for market participants with larger capacity
needs or for business/technical preferences, such options provide far
more capacity and are purchased by those that consume more resources
from the network. Accordingly, the proposed tiered-pricing structure
does not favor certain categories of market participants in a manner
that would impose an undue burden on competition; rather, the
allocation reflects the network resources consumed by the various usage
of market participants--lowest bandwidth consuming members pay the
least, and highest bandwidth consuming members pay the most,
particularly since higher bandwidth consumption translates to higher
costs to the Exchange.
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 connect
to all options exchanges. The Exchange operates in a highly competitive
environment, and as discussed above, its ability to price access and
connectivity is constrained by competition among exchanges and third
parties. There are other options markets of which market participants
may connect to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. For example, there are 15 other U.S. options exchanges,
which the Exchange must consider in its pricing discipline in order to
compete for market participants. In this competitive environment,
market participants are free to choose which competing exchange or
reseller 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.
Regrettably, the Exchange believes that the application of the
Guidance to date has adversely affected inter-market competition by
impeding the ability of smaller, low cost exchanges to adopt or
increase fees for their market data and access services (including
connectivity and port products and services). Since the adoption of the
Guidance, and even more so recently, it has become harder, particularly
for smaller, low cost exchanges, to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of the affected exchanges' market participants. Although the Staff
Guidance has served an important policy goal of improving disclosures
and requiring exchanges to justify that their market data and access
fee proposals are fair and reasonable, it has also negatively impacted
exchanges, and particularly many smaller, low cost exchanges, that seek
to adopt or increase fees despite providing enhanced disclosures and
rationale to support their proposed fee changes.
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 and four comment letters on the Second
Proposed Rule Change.\65\ The Exchange responded to the comment letters
in the Third Proposed Rule Change and repeats its response in is
filing. No comment letters were received in response to the Third
Proposed Rule Change.
---------------------------------------------------------------------------
\65\ See supra note 9.
---------------------------------------------------------------------------
HMA Letter
The HMA Letter does not raise specific issues with the First or
Second Proposed Rule Changes. Instead the HMA Letter is generally
critical of the exchange fee filing process contained in Section
19(b)(3)(A)(ii) of the Act,\66\ and Rule 19b-4(f)(2) thereunder,\67\
and other exchanges' fee filings in recent years.
[[Page 9689]]
The HMA Letter, however, applauds the level of disclosure the Exchange
included in the First and Second Proposed Rule Changes and was
supportive of the efforts made by the Exchange and its affiliates to
provide transparency and justify their proposed fees. The HMA Letter
specifically notes that:
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78s(b)(3)(A)(ii).
\67\ 17 CFR 240.19b-4.
``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. For example, MIAX detailed the
associated projected revenues generated from the connectivity fees
by user class, again in a clear attempt to comply with the SRO Fee
Filing Guidance.'' \68\
---------------------------------------------------------------------------
\68\ See HMA Letter, supra note 9.
As the HMA Letter notes, the Exchange refiled its same fee
proposals to include significantly greater information about who is
impacted and how, primarily at the request of the Commission Staff and
in response to comments. The Exchange is again refiling its proposal to
include more information surrounding the proposed fees and to respond
to commenters.
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.'' \69\ 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.
---------------------------------------------------------------------------
\69\ See SIG Letter 2, supra note 9.
---------------------------------------------------------------------------
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.'' \70\ 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.
---------------------------------------------------------------------------
\70\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
Until recently, the Exchange operated at a net annual loss since it
launched operations in 2019.\71\ 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 Proposed Rule Change, Second
Proposed Rule Change. 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 Options, and
SIG did not submit a comment letter on those filings.\72\ 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.\73\
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
[[Page 9690]]
that have been permitted to take effect without suspension.'' \74\ That
same commenter also noted their ``worry that the Commission's process
for reviewing and evaluating exchange filings may be inconsistently
applied.'' \75\
---------------------------------------------------------------------------
\71\ See supra note 40.
\72\ 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).
\73\ 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).
\74\ See HMA Letter, supra note 9.
\75\ 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.
Nonetheless, the Exchange has enhanced its cost and revenue
analysis and data in this Third [sic] 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 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 from SIG Letter 1, 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, the Exchanges' respective profit margins of 30% (for MIAX
and Pearl) and 51% (for Emerald) in relation to connectivity fees
are high in any event, and comparisons to competing exchanges'
overall operating profit margins are an inapt ``apples-to-oranges''
comparison; (3) the Exchanges provide no support for their claim
that their proposed tiered pricing structure is needed to encourage
efficiency in connectivity usage; (4) the Exchanges provided no
support for their 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; (5) the
Exchanges' claim that firms who purchase more 10Gb ULL lines
generate ``higher'' costs is misleading, and they offered no support
for this claim in any event; (6) no other exchange has tiered
connectivity pricing; (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; and (8) the recoupment of investment claim belies
the Exchanges' claim of encouraging efficiency in connectivity
usage.'' \76\
---------------------------------------------------------------------------
\76\ See SIG Letter 3, supra note 9.
The Exchange's Examples of Members Terminating Their Exchange Access
Shows That Members Have Choice Whether To Connect to an Exchange Based
on Fees
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.'' \77\ 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 connectivity 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.'' \78\
Nonetheless, the Third [sic] 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.
---------------------------------------------------------------------------
\77\ Id.
\78\ See Guidance, supra note 23.
---------------------------------------------------------------------------
The Proposed 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 Exchange's claims that they will not realize a
supracompetitive profit,'' that ``the Exchanges' respective profit
margins of 30% (for MIAX and Pearl) and 51% (for Emerald) in relation
to connectivity fees are high in any event,'' and ``comparisons to
competing exchanges' overall operating profit margins are an inapt
`apples-to-oranges' comparison.''
The Exchange has provided ample data that the proposed fees would
not result in excessive pricing or a supra-competitive profit. In this
Third [sic] 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
Third [sic] 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.
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.
Firms That Purchase More 10Gb ULL Generate Higher Exchange Costs
SIG argues that ``the Exchanges' claim that firms who purchase more
10Gb ULL lines generate `higher' costs is misleading,'' and that the
Exchange has ``offered no support for this claim in any event.'' As
described above, the Exchange sought to design the proposed tiered-
pricing structure to set the amount of the fees to relate to the number
of connections a firm purchases and the Exchange believes it provided
[[Page 9691]]
ample justification for the proposed tiered-pricing structure in the
First and Second Proposed Rule Changes. Nonetheless, the Exchange
provides additional justification to support that the Proposed Access
Fees are equitable and not unfairly discriminatory above in response to
SIG's assertions.
The Proposed Tiered-Pricing Structure for 10Gb ULL Connectivity Will
Provide Cost Savings for the Majority of Exchange Members
The SIG Letter incorrectly asserts that no other exchange has
tiered connectivity pricing. Numerous other exchanges provide tiered
fee structures for various other types of access to their platforms,
including trading permits and ports.\79\ The Exchange provided adequate
evidence that most firms would incur cost savings under the Proposed
Access Fees in the First and Second Proposed Rule Changes and this
filing. Nonetheless, the Exchange believes it provided additional
justification to support that the Proposed Access Fees are equitable
and not unfairly discriminatory above in response to SIG's assertions.
---------------------------------------------------------------------------
\79\ See Cboe Exchange, Inc. Fee Schedule, Logical Connectivity
Fees ($750 per port per month for the first 5 BOE/FIX Logical Ports
and $800 per port per month for each port over 5; $1,500 per port
per month for the first 5 BOE Bulk Logical Ports, $2,500 per port
per month for ports 6-30, and $3,000 per port per month for each
port over 30); Cboe BXZ Exchange, Inc. Options Fee Schedule, Options
Logical Port Fees, Ports with Bulk Quoting Capabilities ($1,500 per
port per month for the first and second ports, $2,500 per port per
month for three or more); Nasdaq Stock Market LLC, Options 7,
Pricing Schedule, Section 3 ($1,500 per port per month for the first
5 SQF ports; $1,000 per port per month for SQF ports 15-20; and $500
per port per month for all SQF ports over 21); NYSE American Options
Fee Schedule, Section V.A., Port Fees and NYSE Arca Options Fee
Schedule, Port Fees (both charging $450 per port for order/quote
entry ports 1-40 and $150 per port for ports 41 and greater).
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Recoupment of Exchange Infrastructure Costs
Nowhere in this proposal or in the First Proposed Fee change 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.
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.'' \80\ The Exchange does not believe it is necessary to
respond to this assertion because it has never set forth a ``platform
competition'' \81\ argument to justify the Proposed Access Fees in the
First or Second Proposed Rule Change nor does it do so in this filing.
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\80\ See SIFMA Letter, supra note 9.
\81\ 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
23.
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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.'' \82\ 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.
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\82\ See SIFMA Letter, supra note 9.
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Other SIFMA Assertions
SIFMA also challenges or asserts: (i) The substitutability or
optionality of 10Gb ULL connections, (ii) whether the Exchange has
shown that the fees are equitable and non-discriminatory; (iii) that a
tiered pricing structure will impose higher cost on all market
participants; (iv) that a tiered pricing structure will encourage
market participants to be more economical with the usage; (v) greater
number of connections use greater Exchange resources; and (vi) 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. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\83\ at any time within
60 days of the date of filing of a proposed rule change pursuant to
Section 19(b)(1) of the Act,\84\ 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 change is necessary and appropriate to allow for
additional analysis of the proposed rule change's consistency with the
Act and the rules thereunder.
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\83\ 15 U.S.C. 78s(b)(3)(C).
\84\ 15 U.S.C. 78s(b)(1).
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As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on July
30, 2021, with the proposed fee changes effective beginning August 1,
2021. That proposal, SR-EMERALD-2021-23, was published for comment in
the Federal Register on August 17, 2021.\85\ On September 24, 2021 the
Exchange withdrew SR-EMERALD-2021-23 and filed a proposed rule change
proposing fee changes as proposed herein. That proposal, SR-EMERALD-
2021-29, was
[[Page 9692]]
published for comment in the Federal Register on October 4, 2021.\86\
The Commission received four comment letters from three separate
commenters on SR-EMERALD-2021-29.\87\ On November 22, 2021, pursuant to
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily
suspended the proposed rule change; and (2) instituted proceedings to
determine whether to approve or disapprove the proposed rule
change.\88\ On December 1, 2021, the Exchange withdrew SR-EMERALD-2021-
29 and filed a proposed rule change proposing fee changes as proposed
herein. That filing, SR-EMERALD-2021-42,\89\ was published for comment
in the Federal Register on December 20, 2021.\90\ On January 27, 2022,
pursuant to Section 19(b)(3)(C) of the Act, the Commission: (1)
Temporarily suspended the proposed rule change (SR-EMERALD-2021-42) and
(2) instituted proceedings to determine whether to approve or
disapprove the proposal.\91\ On February 1, 2022, the Exchange withdrew
SR-EMERALD-2021-42 and filed the instant filing, which is substantially
similar.
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\85\ See Securities Exchange Act Release No. 92645 (August 11,
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23). The
Commission received one comment letter on that proposal. Comment for
SR-EMERALD-2021-23 can be found at: <a href="https://www.sec.gov/comments/sr-emerald-2021-23/sremerald202123.htm">https://www.sec.gov/comments/sr-emerald-2021-23/sremerald202123.htm</a>.
\86\ See Securities Exchange Act Release No. 93166 (September
28, 2021), 86 FR 54760 (October 4, 2021) (SR-EMERALD-2021-29).
\87\ Comment on SR-EMERALD-2021-29 can be found at: <a href="https://www.sec.gov/comments/sr-emerald-2021-29/sremerald202129.htm">https://www.sec.gov/comments/sr-emerald-2021-29/sremerald202129.htm</a>.
\88\ See Securities Exchange Act Release No. 93644 (November 22,
2021), 86 FR 67750 (November 29, 2021).
\89\ See text accompanying supra note 12.
\90\ See Securities Exchange Act Release No. 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021).
\91\ See Securities Exchange Act Release No. 94089 (January 27,
2022), 87 FR 5910 (February 2, 2022).
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When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchange's present proposal,
they are required to provide a statement supporting the proposal's
basis under the Act and the rules and regulations thereunder applicable
to the exchange.\92\ 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.'' \93\
---------------------------------------------------------------------------
\92\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory
Organization's Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change'').
\93\ Id.
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Among other things, exchange proposed rule changes are subject to
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which
requires the rules of an exchange to: (1) Provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \94\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \95\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\96\
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\94\ 15 U.S.C. 78f(b)(4).
\95\ 15 U.S.C. 78f(b)(5).
\96\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposal to modify fees for
certain connectivity options and implement a tiered pricing fee
structure is consistent with the statutory requirements applicable to a
national securities exchange under the Act. In particular, the
Commission will consider whether the proposed rule change satisfies 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.\97\
---------------------------------------------------------------------------
\97\ Se 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------
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 change.\98\
---------------------------------------------------------------------------
\98\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's 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 Change
The Commission is instituting proceedings pursuant to Sections
19(b)(3)(C) \99\ and 19(b)(2)(B) \100\ of the Act to determine whether
the Exchange's proposed rule change 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 change.
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 change to
inform the Commission's analysis of whether to approve or disapprove
the proposed rule change.
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\99\ 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.
\100\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\101\ 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 Exchange has sufficiently
demonstrated how the proposed rule change is consistent with Sections
6(b)(4),\102\ 6(b)(5),\103\ and 6(b)(8) \104\ 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 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.
---------------------------------------------------------------------------
\101\ 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.
\102\ 15 U.S.C. 78f(b)(4).
\103\ 15 U.S.C. 78f(b)(5).
\104\ 15 U.S.C. 78f(b)(8).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, in addition to any
other comments they may wish to submit about the proposed rule change.
In particular, the Commission seeks comment on the following aspects of
the proposal and asks commenters to submit data where appropriate to
support their views:
[[Page 9693]]
1. Cost Estimates and Allocation. The Exchange states that it is
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 10Gb ULL connectivity to estimate such
costs.'' \105\ Setting forth its costs in providing 10Gb ULL
connectivity, and as summarized in greater detail above, the
Exchange projects $7.2 million in aggregate annual estimated costs
for 2021 as the sum of: (1) $1.7 million in third-party expenses
paid in total to Equinix (62% of the total applicable expense) for
data center services; Zayo Group Holdings, for network services (62%
of the total applicable expense); SFTI for connectivity support,
Thompson Reuters, NYSE, Nasdaq, and Internap and others (89% of the
total applicable expense) for content, connectivity services, and
infrastructure services; and various other hardware and software
providers (51% of the total applicable expense) supporting the
production environment, and (2) $5.5 million in internal expenses,
allocated to (a) employee compensation and benefit costs ($3.2
million, approximately 33% of the Exchange's total applicable
employee compensation and benefits expense); (b) depreciation and
amortization ($2 million, approximately 63% of the Exchange's total
applicable depreciation and amortization expense); and (c) occupancy
costs ($0.3 million, approximately 53% of the Exchange's total
applicable occupancy expense). Do commenters believe that the
Exchange has provided sufficient detail about how it determined
which costs are most clearly directly associated with providing and
maintaining 10Gb ULL connectivity? The Exchange describes a
``proprietary'' process involving all Exchange department heads,
including the finance department and numerous meetings between the
Exchange's Chief Information Officer, Chief Financial Officer, Head
of Strategic Planning and Operations, Chief Technology Officer,
various members of the Legal Department, and other group leaders,
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 Exchange calculated
an allocation of employee time in several departments, including
Technology, Back Office, Systems Operations, Networking, Business
Strategy Development, Trade Operations, Finance, and Legal, 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 that specific activity. What are
commenters' views on whether the Exchange has provided sufficient
detail on the identity and nature of services provided by third
parties? Across all of the Exchange's projected costs, what are
commenters' views on whether the Exchange has provided sufficient
detail on the elements that go into connectivity costs, including
how shared costs are allocated and attributed to connectivity
expenses, to permit an independent review and assessment of the
reasonableness of purported cost-based fees and the corresponding
profit margin thereon? Should the Exchange be required to identify
for what services or fees the remaining percentage of un-allocated
expenses are attributable to (e.g., what services or fees are
associated with the 37% of applicable depreciation and amortization
expenses the Exchange does 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? Should the Exchange use cost projections or actual
costs estimated for 2021 in a filing made in 2022, or make cost
projections for 2022?
---------------------------------------------------------------------------
\105\ See supra Section II.A.2.
---------------------------------------------------------------------------
2. Revenue Estimates and Profit Margin Range. The Exchange
provides a single monthly revenue figure as the basis for
calculating the profit margin of 47%. Do commenters believe this is
reasonable? If not, why not? The Exchange states that their proposed
fee structure is ``designed to cover its costs with a limited return
in excess of such costs,'' and that ``revenue and associated profit
margin [ ] are not solely intended to cover the costs associated
with providing access services subject to the Proposed Access
Fees,'' and believes that a 47% margin is a limited return over such
costs.\106\ 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 Exchange acknowledges that this margin may
fluctuate from month to month due to changes in the number of
connections purchased, and that costs may increase. They also state
that the number of connections has not materially changed over the
prior months and so the months that the Exchange has used as a
baseline to perform its assessment are representative of reasonably
anticipated costs and expenses.\107\ The Exchange does not account
for the possibility of cost decreases, however. What are commenters'
views on the extent to which actual costs (or revenues) deviate from
projected costs (or revenues)? Do commenters believe that the
Exchange's methodology for estimating the profit margin is
reasonable? Should the Exchange provide a range of profit margins
that they believe are reasonably possible, and the reasons therefor?
---------------------------------------------------------------------------
\106\ See supra Section II.A.2.
\107\ See id.
---------------------------------------------------------------------------
3. Reasonable Rate of Return. Do commenters agree with the
Exchange that its expected 47% profit margin would constitute a
reasonable rate of return over cost for 10GB ULL connectivity? 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? What are commenters'
views regarding what factors should be considered in determining
what constitutes a reasonable rate of return for 10Gb ULL
connectivity fees? Do commenters believe it relevant to an
assessment of reasonableness that the Exchange's proposed fees for
10Gb ULL connections, even at the highest tier, are lower than those
of other options exchanges to which the Exchange has compared the
Proposed Access Fees? What are commenters' views regarding the
difference in profit margins between the Exchange, at 47%, and that
of its affiliates (MIAX and PEARL Options), at 21.3%? Do commenters
believe that this profit margin difference between affiliates for
the same Proposed Access Fees is appropriate given the Exchange's
Proposed Access Fees are not for shared 10Gb ULL connectivity; why
or why not? 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?
4. Periodic Reevaluation. The Exchange has addressed whether it
believes 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,
stating that ``[a]ny requirement that an exchange should conduct a
periodic re-evaluation on a set timeline of its cost justification
and amend its fees accordingly should be established by the
Commission holistically, applied to all exchanges and not just
through pending fee proposals, such as this filing,'' and that
``[i]n order to be fairly applied, such a mandate should be applied
to existing access fees as well.'' \108\ In light of the impact that
the number of subscribers has on connectivity 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 they stay in line with their stated
profitability target 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 subscriber 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?
---------------------------------------------------------------------------
\108\ See supra Section II.A.2.
---------------------------------------------------------------------------
5. Tiered Structure for 10Gb ULL Connections. The Exchange
states that the proposed tiered fee structure is designed to
decrease the monthly fees for those firms that connect to the
Exchange as part of their best execution obligations and generally
tend to send the least amount of orders and messages over those
connections, because such firms generally only purchase a limited
number of
[[Page 9694]]
connections, and also ``generally send fewer orders and messages
over those connections, resulting in less strain on Exchange
resources.'' \109\ According to the Exchange, 80% of firms have not
experienced a fee increase as a result of the tiered structure.
However, firms that purchase five or more connections will see a 30%
increase in their fees for each connection above the fourth.
Regarding these firms, the Exchange has not asserted that it is 30%
more costly for the Exchange to offer such connections to these
firms, but instead argues generally that these firms are ``likely''
to result in greater expenditure of Exchange resources and increased
cost to the Exchange and that as the number of connections an entity
has increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs
(e.g., storage costs, surveillance costs, service expenses) also
increase.\110\ Do commenters believe that the price differences
between the tiers are supported by the Exchange's assertions that it
set the level of its proposed fees in a manner that it is equitable
and not unfairly discriminatory? Do commenters believes the Exchange
should demonstrate how the proposed tiered fee levels correlate with
tiered costs (e.g., by providing cost information broken down by
tier, messaging and order volumes through the additional 10Gb ULL
connections by tier, and/or mid-month add/drop of connection rates
by tier)? Do commenters believe that the Exchange should provide
more detail about the costs that firms purchasing three or more or
five or more 10Gb ULL connections impose on the Exchange, to permit
an assessment of the Exchange's statement that the Proposed Access
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?'' \111\
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\109\ See id.
\110\ See id.
\111\ See id.
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.'' \112\ 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,\113\ 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.\114\
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.\115\
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\112\ 17 CFR 201.700(b)(3).
\113\ See id.
\114\ See id.
\115\ 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).
---------------------------------------------------------------------------
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 proposal is consistent with the
Act, any potential comments or supplemental information provided by the
Exchange, and any additional independent analysis by the Commission.
V. Commission's Solicitation of 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 Exchange's
statements in support of the proposal, in addition to any other
comments they may wish to submit about the proposed rule change.
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.\116\
---------------------------------------------------------------------------
\116\ 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).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by March 15, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by March 29,
2022.
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#1163647d743c727e7c7c747f6562516274723f767e67"><span class="__cf_email__" data-cfemail="d5a7a0b9b0f8b6bab8b8b0bba1a695a6b0b6fbb2baa3">[email protected]</span></a>. Please include
File No. SR-EMERALD-2022-04 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-2022-04. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EMERALD-2022-04 and should be submitted
on or before March 15, 2022. Rebuttal comments should be submitted by
March 29, 2022.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\117\ that File Numbers SR-EMERALD-2022-04 be, and hereby is,
temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule change should be
approved or disapproved.
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\117\ 15 U.S.C. 78s(b)(3)(C).
[[Page 9695]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\118\
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\118\ 17 CFR 200.30-3(a)(12), (57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03652 Filed 2-18-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on February 22, 2022.
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