Notice2022-05842
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange's Fee Schedule To Adopt Connectivity Fees
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
March 21, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 54 (Monday, March 21, 2022)</title>
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[Federal Register Volume 87, Number 54 (Monday, March 21, 2022)]
[Notices]
[Pages 16046-16057]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-05842]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94419; File No. SR-MEMX-2022-02]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend the
Exchange's Fee Schedule To Adopt Connectivity Fees
March 15, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 1, 2022, MEMX LLC (``MEMX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to amend the Exchange's fee schedule applicable to Members \3\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and
(c). The Exchange proposes to implement the changes to the Fee Schedule
pursuant to this proposal on March 1, 2022. The text of the proposed
rule change is provided in Exhibit 5.
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\3\ See Exchange Rule 1.5(p).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchange is re-filing its proposal to amend the Fee Schedule
regarding fees the Exchange charges to Members and non-Members for
physical connectivity to the Exchange and for application sessions
(otherwise known as ``logical ports'') that a Member utilizes in
connection with their participation on the Exchange (together with
physical connectivity, collectively referred to in this proposal as
``connectivity services,'' as described in greater detail below and in
Exhibit 5). The Exchange is proposing to implement the proposed fees on
March 1, 2022.
The Exchange filed its Initial Proposal on December 30, 2021,\4\
and began
[[Page 16047]]
charging fees for connectivity services for the first time in January
of 2022. On February 28, 2022, the Commission suspended the Initial
Proposal and asked for comments on several questions.\5\ The Exchange
has collected fees for connectivity services for two months now and is
thus able to supplement its filing with additional details that were
not available at the time of filing of the Initial Proposal and is also
able to respond to certain questions raised in the OIP. As set forth
below, the Exchange believes that the Initial Proposal provided a great
deal of transparency regarding the cost of providing connectivity
services and anticipated revenue and that the Initial Proposal was
consistent with the Act and associated guidance. The Exchange is re-
filing this proposal promptly with the intention of maintaining the
existing fees for connectivity services while at the same time
providing additional details responsive to certain questions raised in
the OIP. The Exchange believes that this approach is appropriate and
fair for competitive reasons as several other exchanges currently
charge for similar services, as described below, and because others
have followed a similar approach when adopting fees.\6\
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\4\ The Exchange received one comment letter on the Initial
Proposal, which asserted that the Exchange did not address the
Exchange's ownership structure and that revenues from connectivity
services could have a ``disparate impact'' on certain Members. See
Letter from Tyler Gellasch, Healthy Markets Association, dated
January 26, 2022. The Exchange notes that the ownership of an
exchange by members is not unprecedented and that the ownership
structure of the Exchange and related issues were addressed during
the process of the Exchange's registration as a national securities
exchange. See Securities Exchange Act Release No. 88806 (May 4,
2020), 85 FR 27451 (May 8, 2020) (approval order related to the
application of MEMX LLC to register as a national securities
exchange). The Exchange does not believe that the Initial Proposal
or this proposal raises any new issues that have not been previously
addressed.
\5\ See Securities Exchange Act Release No. 94332 (February 28,
2022) (SR-MEMX-2021-22) (Suspension of and Order Instituting
Proceedings to Determine Whether to Approve or Disapprove Proposed
Rule Change to Amend the Exchange's Fee Schedule to Adopt
Connectivity Fees) (the ``OIP'').
\6\ See, e.g., Securities Exchange Act Release No. 87875
(December 31, 2019), 85 FR 770 (January 7, 2020) (SR-MIAX-2019-51)
(notice of filing and immediate effectiveness of changes to the
Miami International Securities Exchange LLC, or ``MIAX'', fee
schedule). The Exchange notes that the MIAX filing was the eighth
filing by MIAX to adopt the fees proposed for certain connectivity
services following multiple times of withdrawing and re-filing the
proposal. The Exchange notes that MIAX charged the applicable fees
throughout this period while working to develop a filing that met
the new standards being applied to fee filings. See also Fee
Guidance, infra note 13.
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As set forth in the Initial Proposal and this filing, the Exchange
does incur significant costs related to the provision of connectivity
services and believes it should be permitted to continue charging for
such services while also providing additional time for public comment
on the level of detail contained in this proposal and other questions
posed in the OIP. Finally, the Exchange does not believe that the
ability to charge fees for connectivity services or the level of the
Exchange's proposed fees are at issue, but rather, that the level of
detail required to be included by the Exchange when adopting such fees
is at issue. For these reasons, the Exchange believes it is appropriate
to re-file this proposal and to continue charging for connectivity
services.
In general, 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 Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
has sought to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\7\ and Rule 19b-4
thereunder,\8\ with respect to the types of information self-regulatory
organizations (``SROs'') should provide when filing fee changes, and
Section 6(b) of the Act,\9\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\10\ not designed
to permit unfair discrimination,\11\ and that they not impose a burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act.\12\ This rule change proposal addresses those
requirements, and the analysis and data in each of the sections that
follow are designed to clearly and comprehensively show how they are
met.\13\
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\7\ 15 U.S.C. 78s(b)(1).
\8\ 17 CFR 240.19b-4.
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(4).
\11\ 15 U.S.C. 78f(b)(5).
\12\ 15 U.S.C. 78f(b)(8).
\13\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While MEMX understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with MEMX's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. See Staff Guidance on
SRO Rule Filings Relating to Fees (May 21, 2019) available at
<a href="https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees">https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees</a>.
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Prior to January 3, 2022, MEMX did not charge fees for connectivity
to the Exchange, including fees for physical connections or application
sessions for order entry purposes or receipt of drop copies. The
objective of this approach was to eliminate any fee-based barriers to
connectivity for Members when MEMX launched as a national securities
exchange in 2020, and it was successful in achieving this objective in
that a significant number of Members are directly or indirectly
connected to the Exchange.
As detailed below, MEMX recently calculated its aggregate monthly
costs for providing physical connectivity to the Exchange at $795,789
and its aggregate monthly costs for providing application sessions at
$347,936. Because MEMX has to date offered all connectivity free of
charge, MEMX has borne 100% of all connectivity costs. In order to
cover the aggregate costs of providing connectivity to its Users (both
Members and non-Members \14\) and to recoup some of the costs already
borne by the Exchange to create and offer its services, the Exchange is
proposing to modify its Fee Schedule, pursuant to MEMX Rules 15.1(a)
and (c), to charge a fee of $6,000 per month for each physical
connection in the data center where the Exchange primarily operates
under normal market conditions (``Primary Data Center'') and a fee of
$3,000 per month for each physical connection in the Exchange's
geographically diverse data center, which is operated for backup and
disaster recovery purposes (``Secondary Data Center''), each as further
described below. The Exchange also proposes to modify its Fee Schedule,
pursuant to MEMX Rules 15.1(a) and (c), to charge a fee of $450 per
month for each application session used for order entry (``Order Entry
Port'') and application session for receipt of drop copies (``Drop Copy
Port'') in the Exchange's Primary
[[Page 16048]]
Data Center, as further described below.\15\
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\14\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services to Members, and thus, may access application sessions on
behalf of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
\15\ As proposed, fees for connectivity services would be
assessed based on each active connectivity service product at the
close of business on the first day of each month. If a product is
cancelled by a Member's submission of a written request or via the
MEMX User Portal prior to such fee being assessed then the Member
will not be obligated to pay the applicable product fee. MEMX will
not return pro-rated fees even if a product is not used for an
entire month.
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Cost Analysis
In October 2021, MEMX completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis''). The Cost
Analysis required a detailed analysis of MEMX's aggregate baseline
costs, including a determination and allocation of costs for core
services provided by the Exchange--transaction execution, market data,
membership services, physical connectivity, and application sessions
(which provide order entry, cancellation and modification
functionality, risk functionality, ability to receive drop copies, and
other functionality).\16\ MEMX separately divided its costs between
those costs necessary to deliver each of these core services, including
infrastructure, software, human resources (i.e., personnel), and
selling, general and administrative expenses (``cost drivers''). Next,
MEMX applied an estimated allocation of each cost driver to each core
service. By allocating segmented costs to each core service, MEMX was
able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has four primary sources of revenue that it can potentially
use to fund its operations: Transaction fees, fees for connectivity
services, membership and regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these four
primary sources of revenue.
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\16\ The Exchange is not proposing to adopt fees for market data
in this filing but anticipates filing for such fees in the near
future. In the meantime, the Exchange has proposed noting in Exhibit
5 that the Exchange does not charge for market data. MEMX notes that
it has separately filed a proposal to modify transaction pricing
(though such changes are not directly related to the costs described
in this filing), which is also to be effective March 1, 2022.
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Based on the analysis described above, MEMX estimates that the cost
drivers to provide connectivity services, including both physical
connections and application sessions, result in an aggregate monthly
cost of $1,143,715.
The following chart details the individual line-item costs
considered by MEMX to be related to offering physical connectivity.
------------------------------------------------------------------------
Costs drivers Costs
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Human Resources............................................. $262,129
Infrastructure and Connectivity Technology (servers, 162,000
switches, etc.)............................................
Data Center Costs........................................... 219,000
Hardware and Software Licenses.............................. 4,507
Monthly Depreciation........................................ 99,328
Allocated Shared Expenses................................... 48,826
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Total..................................................... 795,789
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For personnel costs (Human Resources), MEMX calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the MEMX network infrastructure team, which spends most of
their time performing functions necessary to provide physical
connectivity) as well as a limited subset of personnel with ancillary
functions related to establishing and maintaining such connectivity
(such as information security and finance personnel). The Human
Resources cost was calculated using a blended rate of compensation
reflecting salary, equity and bonus compensation, benefits, payroll
taxes, and 401(k) matching contributions. The Infrastructure and
Connectivity Technology cost includes servers, switches and related
hardware required to provide physical access to the Exchange, some of
which is owned by the Exchange and some of which is leased by the
Exchange in order to allow efficient periodic technology refreshes.
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
Hardware and Software Licenses includes hardware and software licenses
used to operate and monitor physical assets necessary to offer physical
connectivity to the Exchange. All physical assets and software, which
also includes assets used for testing and monitoring of Exchange
infrastructure, were valued at cost, depreciated or leased over periods
ranging from three to five years. Finally, a limited portion of general
shared expenses was allocated to overall physical connectivity costs as
without these general shared costs the Exchange would not be able to
operate in the manner that it does and provide physical connectivity.
The costs included in general shared expenses include general expenses
of the Exchange, including office space and office expenses, utilities,
recruiting and training, marketing and advertising costs, professional
fees for legal, tax and accounting services, and telecommunications
costs. The total monthly cost of $795,789 was divided by the number of
physical connections the Exchange maintains (143), to arrive at a cost
of approximately $5,565 per month, per physical connection.
The following chart details the individual line-item costs
considered by MEMX to be related to offering application sessions.
------------------------------------------------------------------------
Costs drivers Costs
------------------------------------------------------------------------
Human Resources............................................. $147,029
Infrastructure and Connectivity Technology (servers, 33,358
switches, etc.)............................................
Data Center Costs........................................... n/a
Hardware and Software Licenses.............................. 108,138
Monthly Depreciation........................................ n/a
Allocated Shared Expenses................................... 59,400
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Total..................................................... 347,926
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With respect to application sessions, MEMX calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing application sessions and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). The
Human Resources cost was again calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions. The
Infrastructure and Connectivity Technology cost includes servers and
switches, and related hardware, and the allocation of cost was limited
to those specifically supporting the provision of application sessions.
Hardware and Software Licenses includes hardware and software licenses
used to monitor the health of the order entry services provided by the
Exchange. All physical assets and software, which also includes assets
used for testing and monitoring of order entry infrastructure, were
valued at cost, depreciated or leased over periods ranging from three
to five years. Finally, a limited portion of general shared expenses
was allocated to overall application session costs as without these
general shared costs the Exchange
[[Page 16049]]
would not be able to operate in the manner that it does and provide
application sessions. The costs included in general shared expenses
include general expenses of the Exchange, including office space and
office expenses, utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services, and telecommunications costs. The total monthly cost of
$347,926 was divided by the number of application sessions the Exchange
maintains (835), to arrive at a cost of approximately $417 per month,
per application session.
As discussed above, the Exchange conducted an extensive Cost
Analysis in which the Exchange analyzed every expense item in the
Exchange's general expense ledger to determine whether each such
expense relates to the provision of connectivity services, and, if such
expense did so relate, what portion (or percentage) of such expense
actually supports the provision of connectivity services, and thus
bears a relationship that is, ``in nature and closeness,'' directly
related to network connectivity services. In turn, the Exchange
allocated certain costs more to physical connectivity and others to
applications, while certain costs were only allocated to such services
at a very low percentage or not at all. The sum of all such portions of
expenses represents the total actual baseline cost of the Exchange to
provide connectivity services, or a monthly expense of $1,143,715.
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or application sessions) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filing it intends
to submit proposing fees for proprietary data feeds offered by the
Exchange. For instance, in calculating the Human Resources expenses to
be allocated to physical connections, the Exchange allocated network
infrastructure personnel with a high percentage of the cost of such
personnel (75%) given their focus on functions necessary to provide
physical connections. The salaries of those same personnel were
allocated only 2.5% to application sessions and the remaining 22.5% was
allocated to transactions and market data. The Exchange did not
allocate any other Human Resources expense for providing physical
connections to any other employee group outside of a smaller allocation
(19%) of the cost associated with certain specified personnel who work
closely with and support network infrastructure personnel. In contrast,
the Exchange allocated much smaller percentages of costs (11% or less)
across a wider range of personnel groups in order to allocate Human
Resources costs to providing application sessions. This is because a
much wider range of personnel are involved in functions necessary to
offer, monitor and maintain application sessions but the tasks
necessary to do so are not a primary or full-time function.
In total, the Exchange allocated 13.8% of its personnel costs to
providing physical connections and 7.7% of its personnel costs to
providing application sessions, for a total allocation of 21.5% Human
Resources expense to provide connectivity services. In turn, the
Exchange allocated the remaining 78.5% of its Human Resources expense
to membership (less than 1%) and transactions and market data (77.5%).
Thus, again, the Exchange's allocations of cost across core services
were based on real costs of operating the Exchange and were not double-
counted across the core services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and application
sessions, but in different amounts. 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. Without this equipment, the Exchange would not
be able to operate the network and provide connectivity services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 27% of the Exchange's overall depreciation and
amortization expense to connectivity services (19% attributed to
physical connections and 8% to application sessions). The Exchange
allocated the remaining depreciation and amortization expense
(approximately 73%) toward the cost of providing transaction services
and market data.
The Exchange notes that the Cost Analysis was based on the
Exchange's first year of operations and projections for the next year.
As such, the Exchange believes that its costs will remain relatively
similar in future years. It is possible however that such costs will
either decrease or increase. To the extent the Exchange sees growth in
use of connectivity services it will receive additional revenue to
offset future cost increases. However, if use of connectivity services
is static or decreases, the Exchange might not realize the revenue that
it anticipates or needs in order to cover applicable costs.
Accordingly, the Exchange commits to periodically review the costs
applicable to providing connectivity services and to propose changes to
its fees as appropriate.
Looking at the Exchange's operations holistically, the total
monthly costs to the Exchange for offering core services is $3,954,537.
Based on the initial two months of billing for connectivity services,
the Exchange expects to collect its original estimate of $1,233,750 on
a monthly basis for such services.\17\ Incorporating this amount into
the Exchange's overall projected revenue, including projections related
to market data fees that have not yet been proposed and which the
Exchange will not begin collecting until April 2022, subject to filing
the necessary proposal to adopt such fees, the Exchange anticipates
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources
(i.e., connectivity fees and membership fees that were introduced in
January 2022, transaction fees, and revenue from market data, both
through the fees anticipated to be adopted in April 2022 and through
the revenue received from the SIPs). As such, applying the Exchange's
holistic Cost Analysis to a holistic view of anticipated revenues, the
Exchange would earn approximately 8.5% to 15% margin on its operations
as a whole. The Exchange believes that this amount is reasonable.
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\17\ The Exchange notes that it has charged connectivity
services for two months and so far the average amount expected
(because not all February bills have yet been paid) is very close to
the estimated revenue provided in the Initial Proposal.
Specifically, the Exchange has earned an estimated $1,229,125 for
connectivity services on an average basis over January and February.
As such, the Exchange will continue to use its original estimated
revenue of $1,233,750 in this proposal.
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The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. As a new entrant to the hyper-competitive exchange
environment, and an exchange focused on driving competition, the
Exchange does not yet know whether such
[[Page 16050]]
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or application sessions or in obtaining new clients
that will purchase such services. Similarly, the Exchange will have to
be successful in retaining a positive net capture on transaction fees
in order to realize the anticipated revenue from transaction pricing.
To the extent the Exchange is successful in gaining market share,
improving its net capture on transaction fees, encouraging new clients
to connect directly to the Exchange, and other developments that would
help to increase Exchange revenues, the Exchange does not believe it
should be penalized for such success. The Exchange, like other
exchanges, is, after all, a for-profit business. Accordingly, while the
Exchange believes in transparency around costs and potential margins,
the Exchange does not believe that these estimates should form the sole
basis of whether or not a proposed fee is reasonable or can be adopted.
Instead, the Exchange believes that the information should be used
solely to confirm that an Exchange is not earning supra-competitive
profits, and the Exchange believes its Cost Analysis and related
projections demonstrate this fact.
Physical Connectivity Fees
MEMX offers its Members the ability to connect to the Exchange in
order to transmit orders to and receive information from the Exchange.
Members can also choose to connect to MEMX indirectly through physical
connectivity maintained by a third-party extranet. Extranet physical
connections may provide access to one or multiple Members on a single
connection. Users of MEMX physical connectivity services (both Members
and non-Members \18\) seeking to establish one or more connections with
the Exchange submit a request to the Exchange via the MEMX User Portal
or directly to Exchange personnel. Upon receipt of the completed
instructions, MEMX establishes the physical connections requested by
the User. The number of physical connections assigned to each User as
of February 28, 2022, ranges from one to ten, depending on the scope
and scale of the Member's trading activity on the Exchange as
determined by the Member, including the Member's determination of the
need for redundant connectivity. The Exchange notes that 44% of its
Members do not maintain a physical connection directly with the
Exchange in the Primary Data Center (though many such Members have
connectivity through a third party provider) and another 44% have
either one or two physical ports to connect to the Exchange in the
Primary Data Center. Thus, only a limited number of Members, 12%,
maintain three or more physical ports to connect to the Exchange in the
Primary Data Center.
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\18\ See supra note 14.
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As described above, in order to cover the aggregate costs of
providing physical connectivity to Users and to recoup some of the
costs already borne by the Exchange to provide physical connectivity,
the Exchange is proposing to charge a fee of $6,000 per month for each
physical connection in the Primary Data Center and a fee of $3,000 per
month for each physical connection in the Secondary Data Center. There
is no requirement that any Member maintain a specific number of
physical connections and a Member may choose to maintain as many or as
few of such connections as each Member deems appropriate. The Exchange
notes, however, that pursuant to Rule 2.4 (Mandatory Participation in
Testing of Backup Systems), the Exchange does require a small number of
Members to connect and participate in functional and performance
testing as announced by the Exchange, which occurs at least once every
12 months. Specifically, Members that have been determined by the
Exchange to contribute a meaningful percentage of the Exchange's
overall volume must participate in mandatory testing of the Exchange's
backup systems (i.e., such Members must connect to the Secondary Data
Center). The Exchange notes that Members that have been designated are
still able to use third party providers of connectivity to access the
Exchange at its Secondary Data Center. Nonetheless, because some
Members are required to connect to the Secondary Data Center pursuant
to Rule 2.4 and to encourage Exchange Members to connect to the
Secondary Data Center generally, the Exchange has proposed to charge
one-half of the fee for a physical connection in the Primary Data
Center.
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
physical connections a User requests, based upon factors deemed
relevant by each User (either a Member, service bureau or extranet).
The Exchange believes these factors include the costs to maintain
connectivity, business model and choices Members make in how to
participate on the Exchange, as further described below.
The proposed fee of $6,000 per month for physical connections at
the Primary Data Center is designed to permit the Exchange to cover the
costs allocated to providing connectivity services with a modest markup
(approximately 8%), which would also account for costs the Exchange has
previously borne completely on its own and help fund future
expenditures (increased costs, improvements, etc.). The Exchange
believes it is appropriate to charge fees that represent a reasonable
markup over cost given the other factors discussed above, including the
lack of other costs to participate on the Exchange and the need for the
Exchange to maintain a highly performant and stable platform to allow
Members to transact with determinism. The Exchange also reiterates that
the Exchange did not charge any fees for connectivity services prior to
January 2022, and its allocation of costs to physical connections was
part of a holistic allocation that also allocated costs to other core
services without double-counting any expenses. As such, the proposal
only truly constitutes a ``markup'' to the extent the Exchange recovers
the initial costs of building the network and infrastructure necessary
to offer physical connectivity and operating the Exchange for over a
year without connectivity fees.
As noted above, the Exchange proposes a discounted rate of $3,000
per month for physical connections at its Secondary Data Center. The
Exchange has proposed this discounted rate for Secondary Data Center
connectivity in order to encourage Members to establish and maintain
such connections. Also, as noted above, a small number of Members are
required pursuant to Rule 2.4 to connect and participate in testing of
the Exchange's backup systems, and the Exchange believes it is
appropriate to provide a discounted rate for physical connections at
the Secondary Data Center given this requirement. The Exchange notes
that this rate is well below the cost of providing such services and
the Exchange will operate its network and systems at the Secondary Data
Center without recouping the full amount of such cost through
connectivity services.
The proposed fee for physical connections is effective on filing
and will become operative on March 1, 2022. The Exchange has separately
proposed to make certain changes to Exchange transaction fees effective
March 1, 2022, and intends to propose in a separate filing market data
fees effective April 1, 2022.
[[Page 16051]]
Application Session Fees
Similar to other exchanges, MEMX offers its Members application
sessions, also known as logical ports, for order entry and receipt of
trade execution reports and order messages. Members can also choose to
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one
or multiple Members on a single session. Users of MEMX connectivity
services (both Members and non-Members \19\) seeking to establish one
or more application sessions with the Exchange submit a request to the
Exchange via the MEMX User Portal or directly to Exchange personnel.
Upon receipt of the completed instructions, MEMX assigns the User the
number of sessions requested by the User. The number of sessions
assigned to each User as of February 28, 2022, ranges from one to more
than 100, depending on the scope and scale of the Member's trading
activity on the Exchange (either through a direct connection or through
a service bureau) as determined by the Member. For example, by using
multiple sessions, Members can segregate order flow from different
internal desks, business lines, or customers. The Exchange does not
impose any minimum or maximum requirements for how many application
sessions a Member or service bureau can maintain, and it is not
proposing to impose any minimum or maximum session requirements for its
Members or their service bureaus.
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\19\ See supra note 14.
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As described above, in order to cover the aggregate costs of
providing application sessions to Users and to recoup some of the costs
already borne by the Exchange to provide application sessions, the
Exchange is proposing to charge a fee of $450 per month for each Order
Entry Port and Drop Copy Port in the Primary Data Center. The Exchange
notes that it does not propose to charge for: (1) Order Entry Ports or
Drop Copy Ports in the Secondary Data Center, or (2) any Test Facility
Ports or MEMOIR Gap Fill Ports. The Exchange has proposed to provide
Order Entry Ports and Drop Copy Ports in the Secondary Data Center free
of charge in order to encourage Members to connect to the Exchange's
backup trading systems. Similarly, because the Exchange wishes to
encourage Members to conduct appropriate testing of their use of the
Exchange, the Exchange has not proposed to charge for Test Facility
Ports. With respect to MEMOIR Gap Fill ports, such ports are
exclusively used in order to receive information when a market data
recipient has temporarily lost its view of MEMX market data. The
Exchange has not proposed charging for such ports because the costs of
providing and maintaining such ports is more directly related to
producing market data.
The proposed fee of $450 per month for each Order Entry Port and
Drop Copy Port in the Primary Data Center is designed to permit the
Exchange to cover the costs allocated to providing application sessions
with a modest markup (approximately 8%), which would also account for
costs the Exchange has previously borne completely on its own and help
fund future expenditures (increased costs, improvements, etc.). The
Exchange also reiterates that the Exchange did not charge any fees for
connectivity services prior to January 2022, and its allocation of
costs to application sessions was part of a holistic allocation that
also allocated costs to other core services without double-counting any
expenses. As such, the proposal only truly constitutes a ``markup'' to
the extent the Exchange recovers the initial costs of building the
network and infrastructure necessary to offer application sessions and
operating the Exchange for over a year without connectivity fees.
The proposed fee is also designed to encourage Users to be
efficient with their application session usage, thereby resulting in a
corresponding increase in the efficiency that the Exchange would be
able to realize in managing its aggregate costs for providing
connectivity services. There is no requirement that any Member maintain
a specific number of application sessions and a Member may choose to
maintain as many or as few of such ports as each Member deems
appropriate. The Exchange has designed its platform such that Order
Entry Ports can handle a significant amount of message traffic (i.e.,
over 50,000 orders per second), and has no application flow control or
order throttling. As such, while several Members maintain a relatively
high number of ports because that is consistent with their usage on
other exchanges and is preferable for their own reasons, the Exchange
believes that it has designed a system capable of allowing such Members
to significantly reduce the number of application sessions maintained.
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
application sessions a User requests, based upon factors deemed
relevant by each User (either a Member or service bureau on behalf of a
Member). The Exchange believes these factors include the costs to
maintain connectivity and choices Members make in how to segment or
allocate their order flow.\20\
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\20\ The Exchange understands that some Members (or service
bureaus) may also request more Order Entry Ports to enable the
ability to send a greater number of simultaneous order messages to
the Exchange by spreading orders over more Order Entry Ports,
thereby increasing throughput (i.e., the potential for more orders
to be processed in the same amount of time). The degree to which
this usage of Order Entry Ports provides any throughput advantage is
based on how a particular Member sends order messages to MEMX,
however the Exchange notes that its architecture reduces the impact
or necessity of such a strategy. All Order Entry Ports on MEMX
provide the same throughput, and as noted above, the throughput is
likely adequate even for a Member sending a significant amount of
volume at a fast pace, and is not artificially throttled or limited
in any way by the Exchange.
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The proposed fee for application sessions is effective on filing
and will become operative on March 1, 2022. The Exchange has separately
proposed to make certain changes to Exchange transaction fees effective
March 1, 2022, and intends to propose in a separate filing market data
fees effective April 1, 2022.
Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (1) Consume the most bandwidth and resources
of the network; (2) transact the vast majority of the volume on the
Exchange; and (3) require the high-touch network support services
provided by the Exchange and its staff, including network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange to provide such connectivity services. For these reasons, MEMX
believes it is not unfairly discriminatory for the Members with higher
message traffic and/or Members with more complicated connections to pay
a higher share of the total connectivity services fees. While Members
with a business model that
[[Page 16052]]
results in higher relative inbound message activity or more complicated
connections are projected to pay higher fees, the level of such fees is
based solely on the number of physical connections and/or application
sessions deemed necessary by the Member and not on the Member's
business model or type of Member. The Exchange notes that the
correlation between message traffic and usage of connectivity services
is not completely aligned because Members individually determine how
many physical connections and application sessions to request, and
Members may make different decisions on the appropriate ways based on
facts unique to their individual businesses. Based on the Exchange's
architecture, as described above, the Exchange believes that a Member
even with high message traffic would be able to conduct business on the
Exchange with a relatively small connectivity services footprint.
Because the Exchange has already adopted fees for connectivity
services, the Exchange has initial results of the impact such fees have
had on Member and non-Member usage of connectivity services. Since the
fees went into effect as set forth in the Initial Proposal, nine (9)
customers with physical connectivity to the Exchange have canceled one
or more of their physical connections. In each instance, the customer
told the Exchange that its reason for cancelling its connectivity was
the imposition of fees. Of these customers, two (2) customers canceled
services entirely, three (3) maintained at least one physical
connection provided directly by the Exchange, and the remaining four
(4) customers migrated to alternative sources of connectivity through a
third-party provider. As such, some market participants (one market
data provider and one extranet) determined that they no longer wanted
to connect to the Exchange directly or through a third party as it was
not necessary for their business and their initial connection was only
worthwhile so long as services were provided free of charge. Other
market participants (one market data provider, one extranet and one
Member) determined that they still wished to be directly connected to
the Exchange but did not need as many connections. Finally, some market
participants (one market data provider, one service bureau and two
trading participants) determined that there was a more affordable
alternative through a third party provider of connectivity services. As
a general matter, the customers that discontinued use of physical
connectivity or transitioned to a third party provider of connectivity
services were either connected purely to consume market data for their
own purposes or distribution to others, were themselves extranets or
service bureaus providing alternatives to the Exchange's connectivity
services, or were smaller trading firms.
Additionally, since the Exchange began charging for application
sessions, five (5) customers have canceled a total of thirty (30)
application sessions due to the fees adopted by the Exchange. As a
general matter, these customers determined that the number of
application sessions that they maintained was not necessary in order to
participate on the Exchange.
Based on its experience since adopting the proposed fees in
January, the Exchange believes that there is ample evidence showing
that it is subject to competitive forces when setting fees for physical
connectivity and application sessions. Indeed, the evidence shows that
firms can choose not to purchase those services, reduce consumption, or
rely on external third-party providers in response to proposed fees.
These competitive forces ensure that the Exchange cannot charge supra-
competitive fees for connectivity services. In fact, as a new entrant
to the exchange industry, the Exchange is particularly subject to
competitive forces and has carefully crafted its current and proposed
fees with the goal of growing its business. In this environment, the
Exchange has no ability to set fees at levels that would be deemed
supra-competitive as doing so would limit the Exchange's ability to
compete with its larger, established competitors.
Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\21\ Reg SCI Rule 1001(a) requires that the Exchange establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure (among other things) that its Reg SCI systems have
levels of capacity adequate to maintain the Exchange's operational
capability and promote the maintenance of fair and orderly markets.\22\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. As noted above,
based on early results, the adoption of fees has led to certain firms
reducing the number of application sessions maintained now that such
sessions are no longer provided free of charge. Additionally, because
the Exchange will charge a lower rate for a physical connection to the
Secondary Data Center and will not charge any fees for application
sessions at the Secondary Data Center or its Test Facility, the
proposed fee structure will further support the Exchange's Reg SCI
compliance by reducing the potential impact of a disruption should the
Exchange be required to switch to its Disaster Recovery Facility and
encouraging Members to engage in any necessary system testing with low
or no cost imposed by the Exchange.\23\
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\21\ 17 CFR 242.1000-1007.
\22\ 17 CFR 242.1001(a).
\23\ While some Members might directly connect to the Secondary
Data Center and incur the proposed $3,000 per month fee, there are
other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not imposing fees
for application sessions in the Secondary Data Center, a Member
connecting through another method would not incur any fees charged
directly by the Exchange. However, the Exchange notes that a third
party service provider providing connectivity to the Exchange likely
would charge a fee for providing such connectivity; such fees are
not set by or shared in by the Exchange.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \24\ of the Act in general, and
furthers the objectives of Section 6(b)(4) \25\ of the Act, in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities. Additionally, the Exchange
believes that the proposed fees are consistent with the objectives of
Section 6(b)(5) \26\ of the Act in that they are designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to a free and open market and
national market system, and, in general, to protect investors and the
public interest, and, particularly, are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\24\ 15 U.S.C. 78f.
\25\ 15 U.S.C. 78f(b)(4).
\26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has repeatedly expressed its preference for
competition
[[Page 16053]]
over regulatory intervention in determining prices, products, and
services in the securities markets. In Regulation NMS, the Commission
highlighted the importance of market forces in determining prices and
SRO revenues and also recognized that current regulation of the market
system ``has been remarkably successful in promoting market competition
in its broader forms that are most important to investors and listed
companies.'' \27\ One of the primary objectives of MEMX is to provide
competition and to reduce fixed costs imposed upon the industry.
Consistent with this objective, the Exchange believes that this
proposal reflects a simple, competitive, reasonable, and equitable
pricing structure designed to permit the Exchange to cover certain
fixed costs that it incurs for providing connectivity services, which
are discounted when compared to products and services offered by
competitors.\28\
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\27\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
\28\ See infra notes 35-40 and accompanying text.
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Commission staff noted in its Fee Guidance that, as an initial step
in assessing the reasonableness of a fee, staff considers whether the
fee is constrained by significant competitive forces. To determine
whether a proposed fee is constrained by significant competitive
forces, staff has said that it considers whether the evidence
demonstrates that there are reasonable substitutes for the product or
service that is the subject of a proposed fee. There is no regulatory
requirement that any market participant connect to the Exchange, that
any participant connect in a particular manner, or that any participant
maintain a certain number of connections to the Exchange. The Exchange
reiterates that a small number of Members are required to connect to
the Exchange for participation in mandatory testing of backup systems
but such connectivity does not have to be obtained directly from the
Exchange but instead can be through a third party provider that
provides connectivity to the Exchange.
The Exchange also acknowledges that certain market participants
operate businesses that do, in fact, require them to be connected to
all U.S. equity exchanges. For instance, certain Members operate as
routing brokers for other market participants. As an equities exchange
with 4% volume, these routing brokers likely need to maintain a
connection to the Exchange on behalf of their clients. However, it is
connectivity services provided by the Exchange that allow such
participants to offer their clients a service for which they can be
compensated (and allowing their clients not to directly connect but
still to access the Exchange), and, as such, the Exchange believes it
is reasonable, equitably allocated and not unfairly discriminatory to
charge such Members for connectivity services.
As a new entrant to the equities market, the Exchange does not have
as Members many market participants that actively trade equities on
other exchanges nor are such market participants directly connected to
the Exchange. There are also a number of the Exchange's Members that do
not connect directly to MEMX. For instance, of the number of Members
that maintain application sessions to participate directly on the
Exchange, many such Members do not maintain physical connectivity but
instead access the Exchange through a service bureau or extranet. In
addition, of the Members that are directly connected to MEMX, it is
generally the individual needs of the Member that require whether they
need one or multiple physical connections to the Exchange as well as
the number of application sessions that they will maintain. It is all
driven by the business needs of the Member, and as described above, the
Exchange believes it offers technology that will enable Members to
maintain a smaller connectivity services footprint than they do on
other markets.
The potential argument that all broker-dealers are required to
connect to all exchanges is not true given the Exchange's experience as
a new entrant to the market over the past year. Instead, many market
participants awaited the Exchange growing to a certain percentage of
market share before they would join as a Member or connect to the
Exchange. In addition, many market participants still have not
connected despite the Exchange's growth in one year to more than 4% of
the overall equities market share. Thus, the Exchange recognizes that
the decision of whether to connect to the Exchange is separate and
distinct from the decision of whether and how to trade on the Exchange.
This is because there are multiple alternatives to directly
participating on the Exchange (such as use of a third-party routing
broker to access the Exchange) or directly connecting to the Exchange
(such as use of an extranet or service bureau). The Exchange
acknowledges that many firms may choose to connect to the Exchange, but
ultimately not trade on it, based on their particular business needs.
The decision of which type of connectivity to purchase, or whether to
purchase connectivity at all, is based on the business needs of each
individual firm.
There is also competition for connectivity to the Exchange. For
instance, the Exchange competes with certain non-Members who provide
connectivity and access to the Exchange, namely extranets and service
bureaus. These are resellers of MEMX connectivity--they are not
arrangements between broker-dealers to share connectivity costs. Those
non-Members resell that connectivity to multiple market participants
over the same connection. When physical connectivity is re-sold by a
third-party, the Exchange will not receive any connectivity revenue
from that sale, and without connectivity fees for the past year, such
third parties have been able to re-sell something they receive for
free. Such arrangements are entirely between the third-party and the
purchaser, thus constraining the ability of MEMX to set its
connectivity pricing as indirect connectivity is a substitute for
direct connectivity.
Indirect connectivity is a viable alternative that is already being
used by Members and non-Members of MEMX, constraining the price that
the Exchange is able to charge for connectivity to its Exchange. As set
forth above, nearly half of the Exchange's Members do not have a
physical connection provided by the Exchange and instead must use a
third party provider. Members who have not established any connectivity
to the Exchange are still able to trade on the Exchange indirectly
through other Members or non-Member extranets or service bureaus that
are connected. These Members will not be forced or compelled to
purchase physical connectivity services, and they retain all of the
other benefits of membership with the Exchange. Accordingly, Members
have the choice to purchase physical connectivity and are not compelled
to do so. The Exchange notes that without an application session,
specifically an Order Entry Port, a Member could not submit orders to
the Exchange. As such, while application sessions too can be obtained
from a third party reseller (i.e., a service bureau) the Exchange will
receive revenue either from the Member or the third party service
bureau for each application session. However, as noted elsewhere, the
Exchange has designed its platform such that Order Entry Ports can
handle a significant amount of message traffic (i.e., over 50,000
orders per second), and has no application flow control or order
throttling. As such, the Exchange believes that it has designed a
system capable of allowing such Members to significantly reduce
[[Page 16054]]
the number of application sessions maintained.
As described above, the Exchange has seen certain Members and non-
Members discontinue or change their usage of connectivity services
provided by the Exchange in response to the fees adopted by the
Exchange. Specifically, nine (9) participants reduced or discontinued
use of connectivity services provided directly by the Exchange and five
(5) participants reduced the number of application sessions used to
participate on the Exchange. The Exchange believes that this
demonstrates that not all market participants are required to use
connectivity services provided by the Exchange but can instead choose
to participate on the Exchange through a third-party provider of
connectivity services, indirectly through another Member of the
Exchange, or not at all. The Exchange also notes that of the
participants that reduced or discontinued their use of connectivity
services, several were in fact third-party providers of connectivity
services, which demonstrates that such providers will connect to the
Exchange to the extent they have sufficient clients to whom they can
provide connectivity services and make a profit but they will not
connect if this is not the case.
The Exchange believes that the proposed fees for connectivity
services are reasonable, equitable and not unfairly discriminatory
because, as described above, the proposed pricing for connectivity
services is directly related to the relative costs to the Exchange to
provide those respective services, and does not impose a barrier to
entry to smaller participants. Accordingly, the Exchange offers direct
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above.
The Exchange recognizes that there are various business models and
varying sizes of market participants conducting business on the
Exchange. The Exchange's incremental aggregate costs for all
connectivity services are disproportionately related to Members with
higher message traffic and/or Members with more complicated connections
established with the Exchange, as such Members: (1) Consume the most
bandwidth and resources of the network; (2) transact the vast majority
of the volume on the Exchange; and (3) require the high-touch network
support services provided by the Exchange and its staff, including
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services.
Accordingly, the Exchange believes the allocation of the proposed fees
that increase based on the number of physical connections or
application sessions is reasonable based on the resources consumed by
the respective type of market participant (i.e., lowest resource
consuming Members will pay the least, and highest resource consuming
Members will pay the most), particularly since higher resource
consumption translates directly to higher costs to the Exchange.
With respect to equities trading, the Exchange had approximately
4.3% market share of the U.S. equities industry in February 2022.\29\
The Exchange is not aware of any evidence that a market share of
approximately 4% provides the Exchange with supra-competitive pricing
power because, as shown above, market participants that choose to
connect to the Exchange have various choices in determining how to do
so, including third party alternatives. This, in addition to the fact
that not all broker-dealers are required to connect to the Exchange,
supports the Exchange's conclusion that its pricing is constrained by
competition.
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\29\ Market share percentage calculated as of February 28, 2022.
The Exchange receives and processes data made available through
consolidated data feeds (i.e., CTS and UTDF).
---------------------------------------------------------------------------
Several market participants choose not to be Members of the
Exchange and choose not to access the Exchange, and several market
participants also access the Exchange indirectly through another market
participant. To illustrate, the Exchange currently has 66 Members.
However, based on publicly available information regarding a sample of
the Exchange's competitors, the New York Stock Exchange LLC (``NYSE'')
has 142 members, Cboe BZX Exchange, Inc. (``BZX'') has 140 members, and
Investors Exchange LLC (``IEX'') has 133 members.\30\ If all market
participants were required to be Members of the Exchange and connect
directly to the Exchange, the Exchange would have over 130 Members, in
line with these other exchanges. But it does not. The Exchange
currently has approximately half of the number of members as compared
to these other exchanges.
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\30\ See NYSE Membership Directory, available at: <a href="https://www.nyse.com/markets/nyse/membership">https://www.nyse.com/markets/nyse/membership</a>; BZX Form 1 filed November 19,
2021, available at: <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21009368.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21009368.pdf</a>; IEX Current Members list, available at: <a href="https://exchange.iex.io/resources/trading/current-membership/">https://exchange.iex.io/resources/trading/current-membership/</a>.
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Members of the Exchange if the Exchange were to establish unreasonable
and uncompetitive prices for its connectivity services. Market
participants choose to connect to a particular exchange and because it
is a choice, MEMX must set reasonable pricing for connectivity
services, otherwise prospective Members would not connect and existing
Members would disconnect, connect through a third-party reseller of
connectivity, or otherwise access the Exchange indirectly. The Exchange
reiterates that several Members and non-Members did in fact reduce or
discontinue use of connectivity services provided directly by the
Exchange in response to the fees adopted by the Exchange. No market
participant is required by rule or regulation to be a Member of or
connect directly to the Exchange, though again, the Exchange
acknowledges that certain types of broker-dealers might be compelled by
their business model to connect and also notes that pursuant to Rule
2.4, certain Members with significant volume on the Exchange are
required to connect to the Exchange's backup systems for testing on at
least an annual basis.
With regard to reasonableness, the Exchange understands that the
Commission has traditionally taken a market-based approach to examine
whether the SRO making the proposal was subject to significant
competitive forces in setting the terms of the proposal. In looking at
this question, the Commission considers whether the SRO has
demonstrated in its filing that: (i) There are reasonable substitutes
for the product or service; (ii) ``platform'' competition constrains
the ability to set the fee; and/or (iii) revenue and cost analysis
shows the fee would not result in the SRO taking supra-competitive
profits. If the SRO demonstrates that the fee is subject to significant
competitive forces, the Commission will next consider whether there is
any substantial countervailing basis to suggest the fee's terms fail to
meet one or more standards under the Exchange Act. If the filing fails
to demonstrate that the fee is constrained by competitive forces, the
SRO must provide a substantial basis, other than competition, to show
that it is consistent with the Exchange Act, which may include
production of relevant revenue and cost data pertaining to the product
or service.
As described above, the Exchange believes that competitive forces
are in effect and that if the proposed fees for connectivity services
were unreasonable that the Exchange would lose current or prospective
Members and market share. The Exchange does not yet have comprehensive
data of the impact of the
[[Page 16055]]
proposed fees but, as discussed, several market participants have in
fact modified the way that they connect to the Exchange in response to
the Exchange's pricing proposal. Further, the Exchange has conducted a
comprehensive Cost Analysis in order to determine the reasonability of
its proposed fees, including that the Exchange will not take supra-
competitive profits.
MEMX believes the proposed fees for connectivity services are fair
and reasonable as a form of cost recovery for the Exchange's aggregate
costs of offering connectivity services to Members and non-Members. The
proposed fees are expected to generate monthly revenue of $1,233,750
providing cost recovery to the Exchange for the aggregate costs of
offering connectivity services, based on a methodology that narrowly
limits the aggregate cost elements considered to those closely and
directly related to the particular product offering.\31\ In addition,
this revenue will allow the Exchange to continue to offer, to enhance,
and to continually refresh its infrastructure as necessary to offer a
state-of-the-art trading platform. The Exchange believes that,
consistent with the Act, it is appropriate to charge fees that
represent a reasonable markup over cost given the other factors
discussed above, including the lack of other costs to participate on
the Exchange and the need for the Exchange to maintain a highly
performant and stable platform to allow Members to transact with
determinism. The Exchange also believes the proposed fee is a
reasonable means of encouraging Users to be efficient in the
connectivity services they reserve for use, with the benefits to
overall system efficiency to the extent Members and non-Members
consolidate their usage of connectivity services or discontinue
subscriptions to unused physical connectivity.
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\31\ See supra note 17.
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The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (1) Consume
the most bandwidth and resources of the network; (2) transact the vast
majority of the volume on the Exchange; and (3) require the high-touch
network support services provided by the Exchange and its staff,
including network monitoring, reporting and support services, resulting
in a much higher cost to the Exchange to provide such connectivity
services.
Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering
whether an exchange's proposed fees are consistent with the Act.\32\ As
described in the Fee Guidance, the term ``supra-competitive profits''
refers to profits that exceed the profits that can be obtained in a
competitive market. The proposed fee structure would not result in
excessive pricing or supra-competitive profits for the Exchange. The
proposed fee structure is merely designed to permit the Exchange to
cover the costs allocated to providing connectivity services with a
modest markup (approximately 8%), which would also account for costs
the Exchange has previously borne completely on its own and help fund
future expenditures (increased costs, improvements, etc.). The Exchange
believes that this is fair, reasonable, and equitable. Accordingly, the
Exchange believes that its proposal is consistent with Section 6(b)(4)
\33\ of the Act because the proposed fees will permit recovery of the
Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
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\32\ See Fee Guidance, supra note 13.
\33\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The proposed fees for connectivity services will allow the Exchange
to cover certain costs incurred by the Exchange associated with
providing and maintaining necessary hardware and other network
infrastructure as well as network monitoring and support services;
without such hardware, infrastructure, monitoring and support the
Exchange would be unable to provide the connectivity services. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by adopting fees for
connectivity services. As detailed above, the Exchange has four primary
sources of revenue that it can potentially use to fund its operations:
Transaction fees, fees for connectivity services, membership and
regulatory fees, and market data fees. Accordingly, the Exchange must
cover its expenses from these four primary sources of revenue. The
Exchange's Cost Analysis estimates the costs to provide connectivity
services at $1,143,715. Based on current connectivity services usage,
the Exchange would generate monthly revenues of approximately
$1,233,750.\34\ This represents a modest profit when compared to the
cost of providing connectivity services. However, the Exchange does
anticipate (and encourages) Members and non-Members to more closely
evaluate their connectivity services usage now that such services are
no longer free, and thus, it is possible that the revenue actually
received by the Exchange will be less than $1,233,750. Even if the
Exchange earns that amount or incrementally more, the Exchange believes
the proposed fees for connectivity services are fair and reasonable
because they will not result in excessive pricing or supra-competitive
profit, when comparing the total expense of MEMX associated with
providing connectivity services versus the total projected revenue of
the Exchange associated with network connectivity services. As noted
above, when incorporating the projected revenue from connectivity
services into the Exchange's overall projected revenue, including
projections related to market data fees that have not yet been proposed
and which the Exchange will not begin collecting until April 2022,
subject to filing the necessary proposal to adopt such fees, the
Exchange anticipates monthly revenue ranging from $4,296,950 to
$4,546,950 from all sources. As such, applying the Exchange's holistic
Cost Analysis to a holistic view of anticipated revenues, the Exchange
would earn approximately 8.5% to 15% margin on its operations as a
whole. The Exchange believes that this amount is reasonable and is
again evidence that the Exchange will not earn a supra-competitive
profit.
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\34\ See supra note 17.
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[[Page 16056]]
The Exchange notes that other exchanges offer similar connectivity
options to market participants and that the Exchange's fees are a
discount as compared to the majority of such fees.\35\ With respect to
physical connections, each of the Nasdaq Stock Market LLC (``Nasdaq''),
NYSE, NYSE Arca, Inc. (``Arca''), BZX and Cboe EDGX Exchange, Inc.
(``EDGX'') charges between $7,500-$22,000 per month for physical
connectivity at their primary data centers that is comparable to that
offered by the Exchange.\36\ Nasdaq, NYSE and Arca also charge
installation fees, which are not proposed to be charged by the
Exchange. With respect to application sessions, each of Nasdaq, NYSE,
Arca, BZX and EDGX charges between $500-$575 per month for order entry
and drop ports.\37\ The Exchange further notes that several of these
exchanges each charge for other logical ports that the Exchange will
continue to provide for free, such as application sessions for testing
and disaster recovery purposes.\38\ While the Exchange's proposed
connectivity fees are lower than the fees charged by Nasdaq, NYSE,
Arca, BZX and EDGX, MEMX believes that it offers significant value to
Members over these other exchanges in terms of bandwidth available over
such connectivity services, which the Exchanges believes is a
competitive advantage, and differentiates its connectivity versus
connectivity to other exchanges.\39\ Additionally, the Exchange's
proposed connectivity fees to its disaster recovery facility are within
the range of the fees charged by other exchanges for similar
connectivity alternatives.\40\ The Exchange believes that its proposal
to offer certain application sessions free of charge is reasonable,
equitably allocated and not unfairly discriminatory because such
proposal is intended to encourage Member connections and use of backup
and testing facilities of the Exchange, and, with respect to MEMOIR Gap
Fill ports, such ports are used exclusively in connection with the
receipt and processing of market data from the Exchange.
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\35\ One significant differentiation between the Exchanges is
that while it offers different types of physical connections,
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does
not propose to charge different prices for such connections. In
contrast, most of the Exchange's competitors provide scaled pricing
that increases depending on the size of the physical connection. The
Exchange does not believe that its costs increase incrementally
based on the size of a physical connection but instead, that
individual connections and the number of such separate and disparate
connections are the primary drivers of cost for the Exchange.
\36\ See the Nasdaq equities fee schedule, available at: <a href="http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2">http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2</a>; the NYSE fee
schedule, available at: <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a>; the NYSE Arca equities fee
schedule, available at: <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf</a>; the BZX equities
fee schedule, available at: <a href="https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/">https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/</a>; the EDGX equities fee schedule,
available at: <a href="https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/">https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/</a>. This range is based on a review of the fees
charged for 10-40Gb connections at each of these exchanges and
relates solely to the physical port fee or connection charge,
excluding co-location fees and other fees assessed by these
exchanges. The Exchange notes that it does not offer physical
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the
Exchange through third-party extranets or service bureaus.
\37\ See id.
\38\ See id.
\39\ As noted above, all physical connections offered by MEMX
are at least 10Gb capable and physical connections provided with
larger bandwidth capabilities will be provided at the same rate as
such connections. MEMX application sessions are capable of handling
significant amount of message traffic (i.e., over 50,000 orders per
second), and have no application flow control or order throttling.
\40\ See supra note 36.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\41\ for the reasons discussed above in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
its Members and other persons using its facilities, does not permit
unfair discrimination between customers, issuers, brokers, or dealers,
and is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and in general to protect investors
and the public interest, particularly as the proposal neither targets
nor will it have a disparate impact on any particular category of
market participant. As described more fully below in the Exchange's
statement regarding the burden on competition, the Exchange believes
that it is subject to significant competitive forces, and that the
proposed fee structure is an appropriate effort to address such forces.
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\41\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\42\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\42\ 15 U.S.C. 78f(b)(8).
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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. In particular, while
the Exchange did not officially proposed fees until late December of
2021 when it filed the Initial Proposal, Exchange personnel had been
informally discussing potential fees for connectivity services with a
diverse group of market participants that are connected to the Exchange
(including large and small firms, firms with large connectivity service
footprints and small connectivity service footprints, as well as
extranets and service bureaus) for several months leading up to that
time. The Exchange received no official complaints from Members, non-
Members (extranets or service bureaus), third-parties that purchase the
Exchange's connectivity and resell it, and customers of those
resellers, that the Exchange's fees or the proposed fees for
connectivity services would negatively impact their abilities to
compete with other market participants or that they are placed at a
disadvantage.
As expected, the Exchange did, however, have several market
participants reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the fees adopted by
the Exchange. The Exchange does not believe that the proposed fees for
connectivity services place certain market participants at a relative
disadvantage to other market participants because the proposed
connectivity pricing is associated with relative usage of the Exchange
by each market participant and does not impose a barrier to entry to
smaller participants. As described above, the connectivity services
purchased by market participants typically increase based on their
additional message traffic and/or the complexity of their operations.
The market participants that utilize more connectivity services
typically utilize the most bandwidth, and those are the participants
that consume the most resources from the network. Accordingly, the
proposed fees for connectivity services do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the proposed connectivity fees
reflects the network resources consumed by the various size of market
participants and the costs to the
[[Page 16057]]
Exchange of providing such connectivity services.
Inter-Market Competition
The Exchange does not believe the proposed fees place an undue
burden on competition on other SROs that is not necessary or
appropriate. In particular, market participants are not forced to
connect to all exchanges, as shown by the number of Members of the
Exchange as compared to the much greater number of members at other
exchanges, as described above. Not only does MEMX have less than half
the number of members as certain other exchanges, but there are also a
number of the Exchange's Members that do not connect directly to the
Exchange. Additionally, other exchanges have similar connectivity
alternatives for their participants, but with higher rates to
connect.\43\ The Exchange is also unaware of any assertion that the
proposed fees for connectivity services would somehow unduly impair its
competition with other exchanges. To the contrary, if the fees charged
are deemed too high by market participants, they can simply disconnect.
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\43\ See supra notes 35-40 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \44\ and Rule 19b-4(f)(2) \45\ thereunder.
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\44\ 15 U.S.C. 78s(b)(3)(A)(ii).
\45\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#88fafde4eda5ebe7e5e5ede6fcfbc8fbedeba6efe7fe"><span class="__cf_email__" data-cfemail="ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab">[email protected]</span></a>. Please include
File Number SR-MEMX-2022-02 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-MEMX-2022-02. 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-MEMX-2022-02 and should be submitted on
or before April 11, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05842 Filed 3-18-22; 8:45 am]
BILLING CODE 8011-01-P
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