Notice2022-08382
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX Emerald Express Interface Ports; 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
April 20, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 76 (Wednesday, April 20, 2022)</title>
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[Federal Register Volume 87, Number 76 (Wednesday, April 20, 2022)]
[Notices]
[Pages 23633-23647]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-08382]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94718; File No. SR-EMERALD-2022-15]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a
Tiered-Pricing Structure for Additional Limited Service MIAX Emerald
Express Interface Ports; Suspension of and Order Instituting
Proceedings To Determine Whether To Approve or Disapprove the Proposed
Rule Change
April 14, 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 April 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 proposed 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 Options
Fee Schedule (the ``Fee Schedule'') to amend certain port fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/emerald">http://www.miaxoptions.com/rule-filings/emerald</a>, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV [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 additional Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \3\ available to Market Makers.\4\ The
Exchange believes a tiered-pricing structure will encourage Market
Makers to be more efficient and economical when determining how to
connect to the Exchange. This should also enable the Exchange to better
monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.\5\
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\3\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
\5\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
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The Exchange initially filed the proposed fee changes on August 2,
2021, with the changes being immediately effective (``First Proposed
Rule Change'').\6\ The First Proposed Rule Change was published for
comment in the Federal Register on August 19, 2021.\7\ The Commission
received one comment letter on the First Proposed Rule Change.\8\ The
Exchange withdrew the First Proposed Rule Change on September 27, 2021
and resubmitted its proposal (``Second Proposed Rule Change'').\9\ On
September 28, 2021, the Exchange withdrew the Second Proposed Rule
Change and re-submitted the proposal on September 28, 2021, with the
proposed fee changes being immediately effective (``Third Proposed Rule
Change'').\10\ The Third Proposed Rule Change was published for comment
in the Federal Register on October 5,
[[Page 23634]]
2021.\11\ The Third Proposed Rule Change provided additional
justification for the proposed fee changes and addressed certain points
raised in the single comment letter that was submitted on the First
Proposed Rule Change. The Commission received four comment letters from
three separate commenters on the Third Proposed Rule Change.\12\ The
Commission suspended the Third Proposed Rule Change on November 22,
2021.\13\ The Exchange withdrew the Third Proposed Rule Change on
December 1, 2021 and submitted a revised proposal for immediate
effectiveness (``Fourth Proposed Rule Change'').\14\ The Fourth
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 [sic] Proposed Rule
Changes,\15\ and feedback provided by Commission Staff during a
telephone conversation on November 18, 2021 relating to the Third
Proposed Rule Change. The Fourth Proposed Rule Change was published for
comment in the Federal Register on December 20, 2021.\16\ Although the
Commission did not receive any comment letters on the Fourth Proposed
Rule Change, the Commission suspended the Fourth Proposed Rule Change
on January 27, 2022.\17\ The Exchange withdrew the Fourth Proposed Rule
Change on February 1, 2022 and submitted a revised proposal for
immediate effectiveness, which was noticed and immediately suspended by
the Commission on February 15, 2022 (``Fifth Proposed Rule
Change'').\18\ The Commission received one comment letter on the Fifth
Proposed Rule Change.\19\ The Exchange withdrew the Fifth Proposed Rule
Change on March 30, 2022 and submits this revised proposal to be
effective April 1, 2022 (``Sixth Proposed Rule Change'').
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\6\ See Securities Exchange Act Release No. 92662 (August 13,
2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-2021-25).
\7\ Id.
\8\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\9\ See SR-EMERALD-2021-30.
\10\ See Securities Exchange Act Release No. 93188 (September
29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-2021-31).
\11\ Id.
\12\ See letters from Richard J. McDonald, SIG, to Vanessa
Countryman, Secretary, Commission, dated October 1, 2021 (``SIG
Letter 2'') and October 26, 2021 (``SIG Letter 3''); and Ellen
Green, Managing Director, Equity and Options Market Structure,
Securities Industry and Financial Markets Association (``SIFMA''),
to Vanessa Countryman, Secretary, Commission, dated November 26,
2021 (``SIFMA Letter'').
The Exchange notes that the Healthy Markets Association
(``HMA'') submitted a comment letter on a related filing to amend
fees for 10Gb ULL connections, on which SIG Letters 1, 2, and 3 as
well as the SIFMA Letter also commented. See letter from Tyler
Gellasch, Executive Director, HMA (``HMA''), to Hon. Gary Gensler,
Chair, Commission, dated October 29, 2021 (commenting on SR-
CboeEDGA-2021-017, SR-CboeBYX-2021-020, SR-Cboe-BZX-2021-047, SR-
CboeEDGX-2021-030, SR-MIAX-2021-41, SR-PEARL-2021-45, and SR-
EMERALD-2021-29 and stating that ``MIAX has repeatedly filed to
change its connectivity fees in a way that will materially lower
costs for many users, while increasing the costs for some of its
heaviest of users. These filings have been withdrawn and repeatedly
refiled. Each time, however, the filings contain significantly
greater information about who is impacted and how than other filings
that have been permitted to take effect without suspension'')
(emphasis added) (``HMA Letter'').
\13\ See Securities Exchange Act Release No. 93644 (November 22,
2021), 86 FR 67745 (November 29, 2021).
\14\ See Securities Exchange Act Release No. 93772 (December 14,
2021), 86 FR 71965 (December 20, 2021) (SR-EMERALD-2021-43).
\15\ 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.
\16\ See supra note 14.
\17\ See Securities Exchange Act Release No. 94087 (January 27,
2022), 87 FR 5918 (February 2, 2022) (SR-MIAX-2021-60, SR-EMERALD-
2021-43) (Suspension of and Order Instituting Proceedings to
Determine Whether to Approve or Disapprove Proposed Rule Changes to
Amend Fee Schedules to Adopt Tiered-Pricing Structures for
Additional Limited Service MIAX and MIAX Emerald Express Interface
Ports).
\18\ See Securities Exchange Act Release No. 94260 (February 15,
2022), 87 FR 9695 (February 22, 2022) (SR-EMERALD-2022-05) (Notice
of Filing of a Proposed Rule Change to Amend Its Fee Schedule to
Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX
Emerald Express Interface Ports; Suspension of and Order Instituting
Proceedings to Determine Whether to Approve or Disapprove the
Proposed Rule Change).
\19\ See Letter from Richard J. McDonald, SIG, to Vanessa
Countryman, Secretary, Commission, dated March 15, 2022 (``SIG
Letter 4'').
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Additional Limited Service MEI Port Tiered-Pricing Structure
The Exchange proposes to amend the fees for additional Limited
Service MEI Ports. Currently, the Exchange allocates two (2) Full
Service MEI Ports \20\ and two (2) Limited Service MEI Ports \21\ per
matching engine \22\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports, Limited
Service MEI Ports and the additional Limited Service MEI Ports all
include access to the Exchange's primary and secondary data centers and
its disaster recovery center. Market Makers may request additional
Limited Service MEI Ports. Prior to the First Proposed Rule Change,
Market Makers were assessed a $100 monthly fee for each additional
Limited Service MEI Port for each matching engine.
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\20\ ``Full Service MEI Ports'' means a port which provides
Market Makers with the ability to send Market Maker simple and
complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\21\ ``Limited Service MEI Ports'' means a port which provides
Market Makers with the ability to send simple and complex eQuotes
and quote purge messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
\22\ ``Matching Engine'' means a part of the MIAX Emerald
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol (for example, options
on SPY may be processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated Matching Engine. A particular root
symbol may not be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
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The Exchange now proposes to move from a flat monthly fee per
additional Limited Service MEI Port for each matching engine to a
tiered-pricing structure for additional Limited Service MEI Ports for
each matching engine under which the monthly fee would vary depending
on the number of additional Limited Service MEI Ports the Market Maker
elects to purchase. Specifically, the Exchange will continue to provide
the first and second additional [sic] Limited Service MEI Ports for
each matching engine free of charge, as described above, per the
initial allocation of Limited Service MEI Ports that Market Makers
receive. The Exchange now proposes the following tiered-pricing
structure: (i) The third and fourth additional [sic] Limited Service
MEI Ports for each matching engine will increase from the current flat
monthly fee of $100 to $200 per port; (ii) the fifth and sixth
additional [sic] Limited Service MEI Ports for each matching engine
will increase from the current flat monthly fee of $100 to $300 per
port; and (iii) the seventh to the twelfth [sic] additional [sic]
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $400 per port.
The Exchange believes the other exchanges' port fees are useful
examples of alternative approaches to providing and charging for port
access and provides the below table for comparison purposes only to
show how its proposed fees compare to fees currently charged by other
options exchanges for similar port access. As shown by the below
[[Page 23635]]
table, the Exchange's proposed highest tier is still less than fees
charged for similar port access provided by other options exchanges.
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of port port)
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MIAX Emerald (as proposed) Limited Service 1-2 ports. FREE
(equity options market share of MEI Port. (not changed in
3.95% as of March 29, 2022 for this proposal).
the month of March) \23\. 3-4 ports. $200.
5-6 ports. $300.
7-12 [sic]. $400.
NYSE American, LLC (``Amex'') Order/Quote Entry $450.
\24\ (equity options market Port.
share of 7.15% as of March 29,
2022 for the month of March)
\25\.
The NASDAQ Stock Market LLC SQF Port.......... 1-5 ports.
(``NASDAQ'') \26\ (equity $1,500.00.
options market share of 8.62% 6-20 ports.
as of March 29, 2022 for the $1,000.00.
month of March) \27\. 21 or more ports.
$500.
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2. Statutory Basis
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\23\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a> (last visited March 29, 2022).
\24\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees.
\25\ See supra note 23.
\26\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule,
Section 3, Nasdaq Options Market--Ports and Other Services.
\27\ See supra note 23.
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The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \28\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \29\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system that the
Exchange operates or controls. The Exchange also believes the proposal
furthers the objectives of Section 6(b)(5) of the Act \30\ in that it
is designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest and are not designed to permit unfair discrimination
between customers, issuers, brokers and dealers.
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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(4).
\30\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes as set forth in recent Commission and
Commission Staff guidance. 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'').\31\ 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.'' \32\ Based on both the BOX Order and the Guidance, the
Exchange believes that the proposed fees are consistent with the Act
because they are (i) reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) comply
with the BOX Order and the Guidance; and (iii) supported by evidence
(including comprehensive revenue and cost data and analysis) that the
proposed fees are fair and reasonable and will not result in excessive
pricing or supra-competitive profit.
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\31\ 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).
\32\ 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'').
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The Proposed 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 fees for market participants to access an
exchange's marketplace.
In the Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\33\ 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.'' \34\ In the 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.'' \35\ The Exchange does not assert
that the proposed fees are constrained by competitive forces. Rather,
the Exchange asserts that the proposed fees are reasonable because they
will permit recovery of the Exchange's costs in providing access
services to supply Limited Service MEI Ports and will not result in the
Exchange generating a supra-competitive profit.
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\33\ Id.
\34\ Id.
\35\ 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.'' \36\
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.'' \37\ The Exchange provides
this analysis below.
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\36\ Id.
\37\ Id.
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The proposed fees are based on a cost-plus model. A Limited Service
MEI Port provides access to each of the three Exchange networks,
extranet, internal
[[Page 23636]]
network, and external network, all of which are necessary for Exchange
operations. The Exchange's extranet provides the means by which the
Exchange communicates with market participants and includes access to
the Member portal and the ability to send and receive daily
communications and reports. The internal network connects the extranet
to the rest of the Exchange's systems and includes trading systems,
market data systems, and network monitoring. The external network
includes connectivity between the Exchange and other national
securities exchanges, market data providers, and between the Exchange's
locations in Princeton, New Jersey, Secaucus, New Jersey (NY4), Miami,
Florida, and Chicago, Illinois (CH4). In determining the appropriate
fees to charge Members and non-Members to access the Exchange's System
Networks via Limited Service MEI Ports, the Exchange considered its
costs to provide and maintain its System Networks and connectivity to
those System Networks, using costs that are related to providing and
maintaining access the Exchange's System Networks via Limited Service
MEI Ports to estimate such costs, and set fees that are designed to
cover its costs with a limited return in excess of such costs. The
Exchange believes that it is important to demonstrate that the proposed
fees are based on the Exchange's costs and reasonable business needs
and believes the proposed fees will allow the Exchange to continue to
offset expenses. 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 access to the Exchange's System Networks via
Limited Service MEI Ports because of the uncertainty of forecasting
subscriber decision making with respect to firms' port and access
needs. The Exchange believes that the proposed fees will not result in
excessive pricing or supra-competitive profit based on the total
expenses the Exchange incurs versus the total revenue the Exchange
projects to collect, and therefore meets the standards in the Act as
interpreted by the Commission and the Commission Staff in the BOX Order
and the Guidance.
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
Limited Service MEI Ports, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports access to the
Exchange's System Networks via Limited Service MEI Ports. In
determining what portion (or percentage) to allocate to access
services, each Exchange department head, in coordination with other
Exchange personnel, determined the expenses that support access
services and System Networks associated with Limited Service MEI Ports.
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 analysis also
included each department head meeting with the divisions of teams
within each department to determine the amount of time and resources
allocated by employees within each division towards the access services
and System Networks associated with Limited Service MEI Ports. The
Exchange reviewed each individual expense to determine if such expense
was related to Limited Service MEI Ports. 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 and the System Networks. The sum of all such
portions of expenses represents the total cost to the Exchange to
provide access services associated with Limited Service MEI Ports. For
the avoidance of doubt, no expense amount is allocated twice.
The analysis conducted by the Exchange is a proprietary process
that is designed to make a fair and reasonable assessment of costs and
resources allocated to support the provision of access services
associated with Limited Service MEI Ports. 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
historically, and on an ongoing annual basis, reviews its costs and
resource allocations to ensure it appropriately allocates resources to
properly provide services to the Exchange's constituents.
The Exchange believes exchanges, like all businesses, should be
provided flexibility when developing and applying a methodology to
allocate 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.
The Exchange notes that there are material costs associated with
providing the infrastructure and headcount to fully support access to
the Exchange and its System Networks via Limited Service MEI Ports. 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. Both fixed and variable
expenses have significant impact on the Exchange's overall costs to
provide and maintain access to the Exchange's System Networks via
Limited Service MEI Ports. For example, to accommodate new Members, the
Exchange may need to purchase additional hardware to support those
Members as well as provide enhanced monitoring and reporting of
customer performance that the Exchange and its affiliates currently
provide. Further, as the total number of 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 fees are a reasonable attempt
to offset a portion of those costs associated with providing access to
and maintaining its System Networks' infrastructure and related Limited
Service MEI Ports.
The Exchange estimated its total annual expense to provide and
maintain access to the Exchange's System Networks via Limited Service
MEI Ports based on the following general expense categories: (1)
External expenses, which include fees paid to third parties for certain
products and services; (2) internal expenses relating to the internal
costs to provide the services associated with Limited Service MEI
Ports; and (3) general shared expenses.\38\ The
[[Page 23637]]
Guidance does not include any information regarding the methodology
that an exchange should use to determine its cost associated with a
proposed fee change. The Exchange utilized a methodology in this
proposed fee change that it believes is reasonable because the Exchange
analyzed its entire cost structure, allocated a percentage of each cost
attributable to maintaining its System Networks, then divided those
costs according to the cost methodology outlined below.
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\38\ 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.
\39\ 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 2022 Form 1 Amendment, which will be filed in 2023. In
its Suspension Order, the Commission also asked should the Exchange
to use cost projections or actual costs estimated for 2021 in a
filing made in 2022, or make cost projections for 2022. The Exchange
utilized expenses from its most recent audited financial statement
as those numbers are more reliable than more recent unaudited
numbers, which may be subject to change.
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For 2022, the total annual expense for providing the access
services associated with the Limited Service MEI Ports is estimated to
be $1,394,961, or $116,246 per month. The Exchange believes it is more
appropriate to analyze the proposed fees utilizing its estimated 2022
revenue and costs, which utilize the same presentation methodology as
set forth in the Exchange's previously-issued Audited Unconsolidated
Financial Statements.\39\ The $1,394,961 estimated total annual expense
is directly related to the access to the Exchange's System Networks via
Limited Service MEI Ports and not any other product or service offered
by the Exchange. For example, it does not include general costs of
operating matching engines and other trading technology. No expense
amount was allocated twice. Each of the categories of expenses are set
forth in the following table and details of the individual line-item
costs considered by the Exchange for each category are described
further below.
------------------------------------------------------------------------
External expenses
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Percentage of
Category total expense
amount allocated
------------------------------------------------------------------------
Data Center Provider................................ 4.95%
Fiber Connectivity Provider......................... 2.64%
Security Financial Transaction Infrastructure 4.95%
(``SFTI''), and Other Connectivity and Content
Service Providers..................................
Hardware and Software Providers..................... 4.95%
-------------------
Total of External Expenses.......................... \40\ $64,417
------------------------------------------------------------------------
Internal Expenses
------------------------------------------------------------------------
Category Expense amount
allocated
------------------------------------------------------------------------
Employee Compensation............................... $916,303
Depreciation and Amortization....................... 81,932
Occupancy........................................... 10,501
-------------------
Total of Internal Expenses...................... 1,008,736
------------------------------------------------------------------------
Allocated Shared Expenses........................... 321,808
------------------------------------------------------------------------
The Exchange notes that it only has two primary sources of revenue,
connectivity and port fees, to recover those costs associated with
providing and maintaining access to the Exchange's System Networks. The
Exchange notes that, without the specific third party and internal
expense items, the Exchange would not be able to provide and maintain
the System Networks and access to the System Networks via Limited
Service MEI Ports to Members. Each of these expense items, including
physical hardware, software, employee compensation and benefits,
occupancy costs, and the depreciation and amortization of equipment,
has been identified through a line-by-line item analysis to be integral
to providing and maintaining the System Networks and access to System
Networks via Limited Service MEI Ports.
---------------------------------------------------------------------------
\40\ The Exchange does not believe it is appropriate to disclose
the actual amount it pays to each individual third-party provider as
those fee arrangements are competitive or the Exchange is
contractually prohibited from disclosing that number.
---------------------------------------------------------------------------
For clarity, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to providing and maintaining the System Networks and access
to System Networks in connection with Limited Service MEI Ports. The
Exchange describes the analysis conducted for each expense and the
resources or determinations that were considered when determining the
amount necessary to allocate to each expense. 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 providing and maintaining the
System Networks and access to Exchange's System Networks via Limited
Service MEI Ports. This may result in the Exchange under allocating an
expense to provide and maintain its System Networks and access to the
System Networks via Limited Service MEI Ports, and such expenses may
actually be higher than what the Exchange allocated as part of this
proposal. The Exchange notes that expenses associated with its
affiliates, MIAX Pearl and MIAX, are accounted for separately and are
not included within the scope of this filing.
Further, as part its ongoing assessment of costs and expenses, the
Exchange recently conducted a periodic, thorough review of its expenses
and resource allocations, which resulted in revised percentage
allocations in this
[[Page 23638]]
filing. The revised percentages are, among other things, the result of
the shuffling of internal resources in response to business objectives
and changes to fees charged and services provided by third parties.
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.
External Expense Allocations
For 2022, expenses relating to fees paid by the Exchange to third
parties for products and services necessary to provide and maintain the
System Networks and access to the System Networks via Limited Service
MEI Ports are estimated to be $64,417. This includes, but is not
limited to, a portion of the fees paid to: (1) A third party data
center provider, including for the primary, secondary, and disaster
recovery locations of the Exchange's trading system infrastructure; (2)
a fiber connectivity provider 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) SFTI, which supports connectivity feeds for
the entire U.S. options industry; (4) various other content and
connectivity service providers, 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 that support the production environment
in which Members and non-Members connect to the network to trade and
receive market data.
Data Center Space and Operations Provider
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 where the Exchange houses servers, switches and related
equipment. Data center costs include 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 data center provider operates the data centers (primary, secondary,
and disaster recovery) that host the Exchange's network infrastructure.
Without the retention of a third-party data center, the Exchange would
not be able to operate its systems and provide a trading platform for
market participants. The Exchange does not employ a separate fee to
cover its data center expense and recoups that expense, in part, by
charging for Limited Service MEI Ports.
The Exchange reviewed its data center footprint, including its
total rack space, cage usage, number of servers, switches, cabling
within the data center, heating and cooling of physical space, storage
space, and monitoring and divided its data center expenses among
providing transaction services, market data, and connectivity. Based on
this review, the Exchange determined that 4.95% of the total applicable
data center provider expense is applicable to providing and maintaining
access services and System Networks associated with Limited Service MEI
Ports. The Exchange believes this allocation is reasonable because
Limited Service MEI Ports are a core means of access to the Exchange's
network, providing one method for market participants to send and
receive order and trade messages, as well as receive market data. A
large portion of the Exchange's data center expense is due to providing
and maintaining port access and connectivity to the Exchange's System
Networks, including providing cabling within the data center between
market participants and the Exchange. The Exchange excluded from this
allocation servers that are dedicated to market data. The Exchange also
did not allocate the remainder of the data center expense because it
pertains to other areas of the Exchange's operations, such as other
ports, market data, and transaction services.
Fiber Connectivity Provider
The Exchange engages a third-party service provider that provides
the internet, fiber and bandwidth connections between the Exchange's
networks, primary and secondary data center, and office locations in
Princeton and Miami. Fiber connectivity is necessary for the Exchange
to switch to its secondary data center in the case of an outage in its
primary data center. Fiber connectivity also allows the Exchange's
National Operations & Control Center (``NOCC'') and Security Operations
Center (``SOC'') in Princeton to communicate with the Exchange's
primary and secondary data centers. As such, all trade data, including
the billions of messages each day, flow through this third-party
provider's infrastructure over the Exchange's network. Without these
services, the Exchange would not be able to operate and support the
network and provide and maintain access services and System Networks
associated with the Limited Service MEI Ports to its Members and their
customers. Without the retention of a third-party fiber connectivity
provider, the Exchange would not be able to communicate between its
data centers and office locations. The Exchange does not employ a
separate fee to cover its fiber connectivity expense and recoups that
expense, in part, by charging for Limited Service MEI Ports.
The Exchange reviewed its costs to retain fiber connectivity from a
third party, including the ongoing costs to support fiber connectivity,
ensuring adequate bandwidth and infrastructure maintenance to support
exchange operations, and ongoing network monitoring and maintenance and
determined that 2.64% of the total fiber connectivity expense was
applicable to providing and maintaining access services and System
Networks associated with Limited Service MEI Ports. The Exchange
believes this allocation is reasonable because Limited Service MEI
Ports are a core means of access to the Exchange's network, providing
one method for market participants to send and receive order and trade
messages, as well as receive market data. A large portion of the
Exchange's fiber connectivity expense is due to providing and
maintaining connectivity between the Exchange's System Networks, data
centers, and office locations and is core to the daily operation of the
Exchange. Fiber connectivity is a necessary integral means to
disseminate information from the Exchange's primary data center to
other Exchange locations. The Exchange excluded from this allocation
fiber connectivity usage related to market data or other business
lines. The Exchange also did not allocate the remainder of this expense
because it pertains to other areas of the Exchange's operations and
does not directly relate to providing and maintaining access services
and System Networks associated with Limited Service MEI Ports. The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to retain fiber connectivity and maintain
and provide access to its System Networks via Limited Service MEI
Ports.
Connectivity and Content Services Provided by SFTI and Other Providers
The Exchange relies on SFTI and various other connectivity and
content service providers for connectivity and data feeds for the
entire U.S. options industry, as well as content, connectivity, and
infrastructure services for critical components of the network
[[Page 23639]]
that are necessary to provide and maintain its System Networks and
access to its System Networks via Limited Service MEI Ports.
Specifically, the Exchange utilizes SFTI and other content service
provider to connect to other national securities exchanges, the Options
Price Reporting Authority (``OPRA''), and to receive market data from
other exchanges and market data providers. SFTI is operated by the
Intercontinental Exchange, the parent company of five registered
exchanges, and has become integral to the U.S. markets. The Exchange
understands SFTI provides services to most, if not all, of the other
U.S. exchanges and other market participants. Without services from
SFTI and various other service providers, the Exchange would not be
able to connect to other national securities exchanges, market data
providers, or OPRA and, therefore, would not be able to operate and
support its System Networks. The Exchange does not employ a separate
fee to cover its SFTI and content service provider expense and recoups
that expense, in part, by charging for Limited Service MEI Ports.
The Exchange reviewed it costs to retain SFTI and other content
service providers, including network monitoring and maintenance,
remediation of connectivity related issues, and ongoing administrative
activities related to connectivity management and determined that 4.95%
of the total applicable SFTI and other service provider expense is
allocated to providing the access services associated with Limited
Service MEI Ports. SFTI and other content service providers are key
vendors and necessary components in providing connectivity to the
Exchange. The primary service SFTI provides for the Exchange is
connectivity to other national securities exchanges and their disaster
recovery facilities and, therefore, a vast portion of this expense is
allocated to providing access to the System Networks via Limited
Service MEI Ports. Connectivity via SFTI is necessary for purposes of
order routing and accessing disaster recovery facilities in the case of
a system outage. Engaging SFTI and other like vendors provides
purchasers of Limited Service MEI Ports connectivity to other national
securities exchanges for purposes of order routing and disaster
recovery. The Exchange did not allocate a portion of this expense that
relates to the receipt of market data from other national securities
exchange and OPRA. The Exchange also did not allocate the remainder of
this expense because it pertains to other areas of the Exchange's
operations and does not directly relate to providing and maintaining
the System Networks or access to its System Networks via Limited
Service MEI Ports. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide and
maintain its System Networks and access to its System Networks via
Limited Service MEI Ports, and not any other service, as supported by
its cost review.
Hardware and Software Providers
The Exchange relies on dozens of third-party hardware and software
providers for equipment necessary to operate its System Networks. This
includes either the purchase or licensing of physical equipment, such
as servers, switches, cabling, and monitoring devices. It also includes
the purchase or license of software necessary for security monitoring,
data analysis and Exchange operations. Hardware and software providers
are necessary to maintain its System Networks and provide access to its
System Networks via Limited Service MEI Ports. Hardware and software
equipment and licenses for that equipment are also necessary to operate
and monitor physical assets necessary to offer physical connectivity to
the Exchange. Hardware and software equipment and licenses are key to
the operation of the Exchange and, without them, the Exchange would not
be able to operate and support its System Networks and provide access
to its Members and their customers. The Exchange does not employ a
separate fee to cover its hardware and software expense and recoups
that expense, in part, by charging for Limited Service MEI Ports.
The Exchange reviewed it hardware and software related costs,
including software patch management, vulnerability management,
administrative activities related to equipment and software management,
professional services for selection, installation and configuration of
equipment and software supporting exchange operations and determined
that 4.95% of the total applicable hardware and software expense is
allocated to providing and maintaining access services and System
Networks associated with Limited Service MEI Ports. Hardware and
software equipment and licenses are key to the operation of the
Exchange and its System Networks. Without them, market participants
would not be able to access the System Networks via Limited Service MEI
Ports. The Exchange only allocated the portion of this expense to the
hardware and software that is related to a market participant's use of
Limited Service MEI Ports, such as operating its matching engines. The
Exchange, therefore, did not allocate portions of its hardware and
software expense that related to other areas of the Exchange's
business, such as hardware and software used for market data or
unrelated administrative services. The Exchange also did not allocate
the remainder of this expense because it pertains to other areas of the
Exchange's operations, such as ports or transaction services, and does
not directly relate to providing and maintaining its System Networks
and access to its System Networks via Limited Service MEI Ports. The
Exchange believes this allocation is reasonable because it represents
the Exchange's cost to provide and maintain its System Networks and
access to its System Networks via Limited Service MEI Ports, and not
any other service, as supported by its cost review.
Internal Expense Allocations
For 2022, total internal expenses relating to the Exchange
providing and maintaining its System Networks and access to its System
Networks via Limited Service MEI Ports is estimated to be $1,008,736.
This includes, but is not limited to, costs associated with: (1)
Employee compensation and benefits for full-time employees that support
the System Networks and access to System Networks via Limited Service
MEI Ports, 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 as well as important system
upgrades; (2) depreciation and amortization of hardware and software
used to provide and maintain access services and System Networks
associated with Limited Service MEI Ports, 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
and maintain the System Networks and access to System Networks via
Limited Service MEI Ports. The breakdown of these costs is more fully
described below.
Employee Compensation and Benefits
Human personnel are key to exchange operations and supporting the
Exchange's ongoing provision and maintenance of the System Networks and
access to System Networks via
[[Page 23640]]
Limited Service MEI Ports. The Exchange reviewed its employee
compensation and benefits expense and the portion of that expense
allocated to providing and maintaining the System Networks and access
to System Networks via Limited Service MEI Ports. As part of this
review, the Exchange considered employees whose functions include
providing and maintaining the System Networks and Limited Service MEI
Ports and used a blended rate of compensation reflecting salary, stock
and bonus compensation, bonuses, benefits, payroll taxes, and 401K
matching contributions.\41\
---------------------------------------------------------------------------
\41\ For purposes of this allocation, the Exchange did not
consider expenses related to supporting employees who support
Limited Service MEI Ports, such as office space and supplies. The
Exchange determined cost allocation for employees who perform work
in support of offering access services and System Networks to arrive
at a full time equivalent (``FTE'') of 2.8 FTEs across all the
identified personnel. The Exchange then multiplied the FTE times a
blended compensation rate for all relevant Exchange personnel to
determine the personnel costs associated with providing the access
services and System Networks associated with Limited Service MEI
Ports.
---------------------------------------------------------------------------
Based on this review, the Exchange determined to allocate $916,303
in employee compensation and benefits expense to providing access to
the System Networks. To determine the appropriate allocation the
Exchange reviewed the time employees allocated to supporting its System
Networks and access to its System Networks via Limited Service MEI
Ports. Senior staff also reviewed these time allocations with
department heads and team leaders to determine whether those
allocations were appropriate. These employees are critical to the
Exchange to provide and maintain access to its System Networks via
Limited Service MEI Ports for its Members, non-Members and their
customers. The Exchange determined the above allocation based on the
personnel whose work focused on functions necessary to provide and
maintain the System Networks and access to System Networks via Limited
Service MEI Ports. The Exchange does not charge a separate fee
regarding employees who support Limited Service MEI Ports and the
Exchange seeks to recoup that expense, in part, by charging for Limited
Service MEI Ports.
Depreciation and Amortization
A key expense incurred by the Exchange relates to the depreciation
and amortization of equipment that the Exchange procured to provide and
maintain the System Networks and access to System Networks via Limited
Service MEI Ports. The Exchange reviewed all of its physical assets and
software, owned and leased, and determined whether each asset is
related to providing and maintaining its System Networks and access to
its System Networks via Limited Service MEI Ports, and added up the
depreciation of those assets. All physical assets and software, which
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. In determining the amount of
depreciation and amortization to apply to providing Limited Service MEI
Ports and the System Networks, the Exchange considered the depreciation
of hardware and software that are key to the operation of the Exchange
and its System Networks. This includes servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were previously purchased to maintain and provide access to its System
Networks via Limited Service MEI Ports. Without them, market
participants would not be able to access the System Networks. The
Exchange seeks to recoup a portion of its depreciation expense by
charging for Limited Service MEI Ports.
Based on this review, the Exchange determined to allocate $81,932
in depreciation and amortization expense to providing access to the
System Networks via Limited Service MEI Ports. The Exchange only
allocated the portion of this depreciation expense to the hardware and
software related to a market participant's use of M [sic] Limited
Service MEI EO [sic] Ports. The Exchange, therefore, did not allocate
portions of depreciation expense that relates to other areas of the
Exchange's business, such as the depreciation of hardware and software
used for market data or unrelated administrative services.\42\
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\42\ All of the expenses outlined in this proposed fee change
refer to the operating expenses of the Exchange. The Exchange did
not included any future capital expenditures within these costs.
Depreciation and amortization represent the expense of previously
purchased hardware and internally developed software spread over the
useful life of the assets. Due to the fact that the Exchange has
only included operating expense and historical purchases, there is
no double counting of expenses in the Exchange's cost estimates.
---------------------------------------------------------------------------
Occupancy
The Exchange rents and maintains multiple physical locations to
house staff and equipment necessary to support access services, System
Networks, and exchange operations. The Exchange's occupancy expense is
not limited to the housing of personnel and includes locations used to
store equipment necessary for Exchange operations. In determining the
amount of its occupancy related expense, the Exchange considered actual
physical space used to house employees whose functions include
providing and maintaining the System Networks and Limited Service MEI
Ports. Similarly, the Exchange also considered the actual physical
space used to house hardware and other equipment necessary to provide
and maintain the System Networks and Limited Service MEI Ports. This
equipment includes computers, servers, and accessories necessary to
support the System Networks and Limited Service MEI Ports. Based on
this review, the Exchange determined to allocate $10,501 of its
occupancy expense to provide and maintain the System Networks and
Limited Service MEI Ports. The Exchange believes this allocation is
reasonable because it represents the Exchange's cost to rent and
maintain a physical location for the Exchange's staff who operate and
support the System Networks, including providing and maintaining access
to its System Networks via Limited Service MEI Ports. The Exchange
considered the rent paid for the Exchange's Princeton and Miami
offices, as well as various related costs, such as physical security,
property management fees, property taxes, and utilities at each of
those locations. The Exchange did not include occupancy expenses
related to housing employees and equipment related to other Exchange
operations, such as market data and administrative services.
* * * * *
The Exchange notes that a material portion of its total overall
expense is allocated to the provision and maintenance of access
services (including connectivity and ports). The Exchange believes this
is reasonable 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. Thus, the
Exchange believes it is reasonable to allocate a material portion of
its total overall expense towards providing and maintaining its System
Networks and access to its System Networks via Limited Service MEI
Ports.
[[Page 23641]]
Allocated Shared Expense
Finally, a limited portion of general shared expenses was allocated
to overall Limited Service MEI Port costs as without these general
shared costs, the Exchange would not be able to operate in the manner
that it does and provide Limited Service MEI Ports. The costs included
in general shared expenses include recruiting and training, marketing
and advertising costs, professional fees for legal, tax and accounting
services, and telecommunications costs. For 2022, the Exchange's
general shared expense allocated to Limited Service MEI Ports and the
System Networks that support those connections is estimated to be
$321,808. The Exchange used the weighted average of the above
allocations to determine the amount of general shared expenses to
allocate to the Exchange. Next, based on additional management and
expense analysis, these fees are allocated to the proposal.
Revenue and Estimated Profit Margin
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 Limited Service MEI Ports), 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.
To determine the Exchange's estimated revenue associated with
Limited Service MEI Ports, the Exchange analyzed the number of Members
currently utilizing Limited Service MEI Ports and used a recent monthly
billing cycle representative of current monthly revenue. The Exchange
also provided its baseline by analyzing March 2022, the monthly billing
cycle prior to the proposed fees and compared this to its expenses for
that month. As discussed below, the Exchange does not believe it is
appropriate to factor into its analysis future revenue growth or
decline into its estimates for purposes of these calculations, given
the uncertainty of such estimates due to the continually changing
access needs of market participants and potential changes in internal
and third-party expenses.
For March 2022, prior to the proposed fees, Members purchased 877
Limited Service MEI Ports, for which the Exchange anticipates charging
$64,100. This will result in a loss of $52,146 ($64,100 in Limited
Service MEI Port revenue, minus $116,246 in monthly Limited Service MEI
Port expenses). For April 2022, assuming the Exchange charges the
proposed fees described herein, the Exchange anticipates Members
purchasing 877 Limited Service MEI Ports, for which the Exchange
anticipates charging $223,400. This will result in a profit of $107,154
($223,400 in Limited Service MEI Port revenue, minus $116,246 in
monthly Limited Service MEI Port expenses) for that month (a 48% profit
margin).
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. The Exchange cautions that this
profit margin may also fluctuate from month to month based on the
uncertainty of predicting how many ports may be purchased from month to
month as Members are free to add and drop ports at any time based on
their own business decisions.
The Exchange believes the proposed margin is reasonable and will
not result in a ``supra-competitive'' profit. The Guidance defines
``supra-competitive profit'' as ``profits that exceed the profits that
can be obtained in a competitive market.'' \43\ Until recently, the
Exchange has operated at a cumulative net annual loss since it launched
operations in 2019.\44\ The Exchange has operated at a net loss due to
a number of factors, one of which is choosing to forgo revenue by
offering certain products, such as Limited Service MEI Ports, at lower
rates than other options exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for now seeking to raise it fees to near market
rates after offering such products as discounted prices.
---------------------------------------------------------------------------
\43\ See supra note 32.
\44\ 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>.
---------------------------------------------------------------------------
The Exchange notes that its revenue estimate is based on estimates
and will only be realized to the extent such revenue actually produces
the revenue estimated. As a generally new entrant to the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such expectations
will be realized. For instance, in order to generate the revenue
expected from Limited Service MEI Ports, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity or obtaining new clients that will purchase such services.
To the extent the Exchange is successful in encouraging new clients to
connect directly to the Exchange, the Exchange does not believe it
should be penalized for such success. The Exchange, like other
exchanges, is, after all, a for-profit business. 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
estimates demonstrate this fact.
Further, the proposed profit margin reflects the Exchange's efforts
to control its costs. A profit margin should not be judged alone based
on its size, but whether the ultimate fee reflects the value of the
services provided and is in line with other exchanges. A profit margin
on one exchange should not be deemed excessive where that exchange has
been successful in control costs, but not excessive where an exchange
is charging the same fee but has a lower profit margin due to higher
costs.
The expected margin is reasonable because the Exchange offers a
premium System Network, System Networks connectivity, and a highly
deterministic trading environment. The Exchange is recognized as a
leader in network monitoring, determinism, risk protections, and
network stability. For example, the Exchange experiences approximately
a 95% determinism rate, system throughput of approximately 18 million
quotes per second and average round trip latency rate of approximately
17 microseconds for a single quote. The Exchange provides extreme
performance and radical scalability designed to match the unique needs
of trading differing asset class/market model combination. Exchange
systems offer two customer interfaces, FIX gateway for orders, and MEI
interfaces and data feeds with best-in-class wire order determinism.
The Exchange also offers automated continuous testing to ensure high
reliability, advanced monitoring and systems security, and employs a
software architecture that results in minimizing the demands on power,
[[Page 23642]]
space, and cooling while allowing for rapid scalability, resiliency and
fault isolation. The Exchange also provides latency equalized cross-
connects in the primary data center ensures fair and cost efficient
access to the MIAX systems. The Exchange, therefore, believes the
anticipated margin is reasonable because it reflect the Exchange cost
controls and the quality of the Exchanges systems.
The Exchange also believes its proposed margin does not exceed what
can be obtained in a competitive market. The Exchange is one of sixteen
registered U.S. options exchanges and maintains an average market share
of approximately 3.95%.\45\ The anticipated rate of return is
reasonable because it is based on a rate that likely remains lower than
what other exchanges with comparable market share charge for similar
connectivity. For example the below table is provided for comparison
purposes only to show how the Exchange's proposed fees compare to fees
currently charged by other options exchanges for similar port access.
As shown by the below table, the Exchange's proposed fee remains less
than fees charged for similar port access provided by other options
exchanges with similar market share, notwithstanding that the competing
exchanges may have different system architectures that may result in
different cost structures for the provision of ports.
---------------------------------------------------------------------------
\45\ See supra note 23.
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of port port)
------------------------------------------------------------------------
MIAX Emerald (as proposed) (equity Limited Service 1-2 ports. FREE
options market share of 3.95% as MEI Port. (not changed in
of March 29, 2022 for the month of this proposal);
March).\46\ 3-4 ports.
$200; 5-6
ports. $300; 7-
12 [sic]. $400.
Amex \47\ (equity options market Order/Quote Entry $450.
share of 7.15% as of March 29, Port.
2022 for the month of March).\48\
NASDAQ \49\ (equity options market SQF Port......... 1-5 ports.
share of 8.62% as of March 29, $1,500.00; 6-20
2022 for the month of March).\50\ ports.
$1,000.00; 21
or more ports.
$500.
------------------------------------------------------------------------
Lastly, the Exchange notes that this is a singular potential profit
margin from a single revenue source and is not reflective of the
Exchange's overall profit margin. This profit margin may be offset by
lower or negative profit margins generated by other areas of the
Exchange's operations that are not subject to this proposed fee change.
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 Limited Service MEI Ports), regulatory fees, and market
data fees. A potential profit margin in one area may be used to offset
a potential loss in another area, and, therefore, a potential profit
margin from a single product is not representative of the Exchange's
overall profitability and whether that singular profit exceeds the
profits that can be obtained in a competitive market.
---------------------------------------------------------------------------
\46\ See ``The market at a glance,'' available at https//
<a href="http://www.miaxoptions.com/">www.miaxoptions.com/</a> (last visited March 29, 2022).
\47\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees.
\48\ See supra note 23.
\49\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule,
Section 3, Nasdaq Options Market--Ports and Other Services.
\50\ See supra note 23.
---------------------------------------------------------------------------
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 exchanges' costs
to provide ports or their fee markup over those costs, and therefore
cannot use other exchange's port fees as a benchmark to determine a
reasonable markup over the costs of providing ports. Nevertheless, the
Exchange believes the other exchanges' port fees are useful examples of
alternative approaches to providing and charging for ports
notwithstanding that the competing exchanges may have different system
architectures that may result in different cost structures for the
provision of connectivity. To that end, the Exchange believes the
proposed fees are reasonable because the proposed fees are still less
than fees charged for similar ports provided by other options exchanges
with comparable market shares.
As described in the above table, the Exchange's proposed fees
remain less than fees charged for similar ports provided by other
options exchanges with similar market share. In each of the above
cases, the Exchange's proposed fees are 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 rates in place at competing options exchanges were filed with
the Commission for immediate effectiveness and remain in place today.
The Proposed Fees Are Equitably Allocated
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, the Exchange notes that the
users who take the maximum amount of Limited Service MEI Ports account
for approximately greater than 99% of message traffic over the network,
while the users of fewer Limited Service MEI Ports account for
approximately less than 1% of message traffic over the network. In the
Exchange's experience, users who only utilize the two free Limited
Service MEI Ports do not have a business need for the high performance
network solutions required by users who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. On an average day,
the Exchange handles over approximately 3 billion total messages. Of
that total, users of the maximum amount of Limited Service MEI Ports
generate approximately 3 billion messages, and users who utilize the
two free Limited Service MEI Ports generate 500,000 messages. However,
in
[[Page 23643]]
order to achieve a consistent, premium network performance, the
Exchange must build out and maintain a network that has the capacity to
handle the message rate requirements of its most heavy network
consumers. 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.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that users who take the most Limited Service MEI Ports
pay for the vast majority of the shared network resources from which
all Member and non-Member users benefit, but is designed and maintained
from a capacity standpoint to specifically handle the message rate and
performance requirements of those users.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
With respect to intra-market competition, the Exchange does not
believe that the proposed rule change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As stated above, the Exchange does not believe
its proposed pricing will impose a barrier to entry to smaller
participants and notes that the proposed pricing structure is
associated with relative usage of the various market participants.
Firms that are primarily order routers seeking best-execution do not
utilize Limited Service MEI Ports on the Exchange and therefore will
not pay the fees associated with the tiered-pricing structure. Rather,
the fees described in the proposed tiered-pricing structure will only
be allocated to Market Making firms that engage in advanced trading
strategies and typically request multiple Limited Service MEI Ports,
beyond the two that are free. Accordingly, the firms engaged in a
Market Making business generate higher costs by utilizing more of the
Exchange's resources. Those Market Making firms that purchase higher
amounts of additional Limited Service MEI Ports tend to have specific
business oriented market making and trading strategies, as opposed to
firms engaging solely in best-execution order routing business.
Additionally, the use of such additional Limited Service MEI Ports is
entirely voluntary.
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to access
all options exchanges. There is no reason to believe that our proposed
price increase will harm another exchange's ability to compete. The
Exchange operates in a highly competitive environment, and as discussed
above, its ability to price access and ports is constrained by
competition among exchanges and third parties. There are other options
markets of which market participants may access in order to trade
options. There is also a possible range of alternative strategies,
including routing to the exchange through another participant or market
center or accessing the Exchange indirectly. Accordingly, the Exchange
does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
One comment letter was submitted on the Fifth Proposed Rule Change
\51\ and the Exchange responds to issues raised in that comment letter
here.
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\51\ See supra note 19.
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First, SIG Letter 4 asserts that the Exchange's motivation for the
proposed fees is not a proper justification and refers to statements
included in withdrawn filings about the Exchange's need to recoup
initial capital expenditures. SIG Letter 4 does not provided a reason
why recoupment of initial capital expenditures is not a proper
justification for a proposed rule change. SIG Letter 4 also asserts
that enhancing profitability is not an appropriate justification for
the proposed fee change. The Exchange never asserted in any of the
preceding versions of this proposed fee change that enhancing
profitability was a motivation for the proposed fee change. Rather, the
Exchange provided numerous reasons for the proposed fee change,
including the need to cover ongoing internal and external expenses and
anticipated increases in those costs due to ongoing inflationary
pressures.
Second, SIG Letter 4 claims that the Exchange omitted the data
necessary to assess the proposed fee change under the Exchange Act. SIG
Letter 4 also asserts that the Exchange's disclosed cost data is not
reliable. With each iteration of this proposed fee change, the Exchange
provided more detail about its cost based analysis and rationale. 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. The Exchange was commended by an
industry group regarding the level of transparency and disclosure
included in the proposed fee changes and that group was supportive of
the efforts made by the Exchange and its affiliates to provide
increased transparency and justification for their proposed fees. The
commenter specifically noted 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. 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.'' \52\
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\52\ See 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)
(``HMA Letter'').
Despite the Exchange refiling its fee proposals to include
significantly greater information about the impact of the proposed fees
on Members and non-Members, primarily at the request of the Commission
Staff and in response to comments from SIG, SIG argues that the data
the Exchange provided is insufficient or unreliable. Section 6(b)(4) of
the Act \53\ requires an exchange to ``provide for the equitable
allocation of reasonable dues, fees and other charges.'' The standard
set by Congress for the Exchange to establish or amend a certain fee is
``reasonableness,'' and the Exchange provided significant detail in
this filing and past filings to support a finding that the proposed
fees are reasonable under the Exchange Act.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78f(b)(4).
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SIG Letter 4 also claims that the Exchange has not shown that the
[[Page 23644]]
estimated profit margin is reasonable. In this filing, the Exchange
enhanced its justification and support to find that the projected
margin is reasonable and would not result in a supra-competitive
profit. SIG Letter 4 states that SIG believes exchanges are utilities
and utilities should only generate single to low double digit profit
margins. This statement assumes that the projected profit margin is
reflective of the Exchange's overall profit margin and ignores that
this is a single profit margin from a single offering that is offset by
lower or negative profit margins for other products and services
offered by the Exchange. SIG's statement that utilities should only
generate single to low double digit profit margins ignores SIG's own
reference to a 14.4%, low double digit profit margin from one of the
Exchange's recent proposed fee changes, as well as single digit to
negative profit margins in other Exchange filings currently pending
before the Commission.
III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\54\ 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,\55\ 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.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78s(b)(3)(C).
\55\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on August
2, 2021. That proposal, SR-EMERALD-2021-25, was published for comment
in the Federal Register on August 19, 2021.\56\ On September 24, 2021,
the Exchange withdrew SR-EMERALD-2021-25 and re-filed its proposal on
September 27, 2021 (SR-EMERALD-2021-30). On September 28, 2021, the
Exchange withdrew SR-EMERALD-2021-30 and filed a proposed rule change
proposing fee changes as proposed herein (SR-EMERALD-2021-31). That
proposal, SR-EMERALD-2021-31, was published for comment in the Federal
Register on October 5, 2021.\57\ The Commission received three comment
letters from two separate commenters on SR-EMERALD-2021-31.\58\ 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.\59\ On December 1, 2021, the Exchange
withdrew SR-EMERALD-2021-31 and filed a proposed rule change proposing
fee changes as proposed herein (SR-EMERALD-2021-43). That filing, SR-
EMERALD-2021-43, was published for comment in the Federal Register on
December 20, 2021.\60\ 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-2021-43); and (2) instituted
proceedings to determine whether to approve or disapprove the
proposal.\61\ On February 1, 2022, the Exchange withdrew SR-EMERALD-
2021-43 and filed a proposed rule change proposing fee changes as
proposed herein (SR-EMERALD-2022-05). On February 15, 2022, pursuant to
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily
suspended the proposed rule change (SR-EMERALD-2022-05); and (2)
instituted proceedings to determine whether to approve or disapprove
the proposal.\62\ The Commission received one comment letter on SR-
EMERALD-2022-05.\63\ On March 30, 2022, the Exchange withdrew SR-
EMERALD-2022-05 and on April 1, 2022, filed the instant filing, which
is substantially similar.
---------------------------------------------------------------------------
\56\ See Securities Exchange Act Release No. 92662 (August 13,
2021), 86 FR 46726. The Commission received one comment letter on
that proposal. Comment on SR-EMERALD-2021-25 can be found at:
<a href="https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm">https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm</a>.
\57\ See Securities Exchange Act Release No. 93188 (September
29, 2021), 86 FR 55052.
\58\ Comment on SR-EMERALD-2021-31 can be found at: <a href="https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm">https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm</a>.
\59\ See Securities Exchange Act Release No. 93640, 86 FR 67745
(November 29, 2021).
\60\ See Securities Exchange Act Release No. 93772 (December 14,
2021), 86 FR 71965.
\61\ See Securities Exchange Act Release No. 94087, 87 FR 5918
(February 2, 2022).
\62\ See Securities Exchange Act Release No. 94260, 87 FR 9695
(February 22, 2022).
\63\ Comment on SR-EMERALD-2022-05 can be found at: <a href="https://www.sec.gov/comments/sr-emerald-2022-05/sremerald202205.htm">https://www.sec.gov/comments/sr-emerald-2022-05/sremerald202205.htm</a>.
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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.\64\ 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.'' \65\
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\64\ 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'').
\65\ See id.
---------------------------------------------------------------------------
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; \66\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not permit unfair discrimination between
customers, issuers, brokers, or dealers; \67\ and (3) not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\68\
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\66\ 15 U.S.C. 78f(b)(4).
\67\ 15 U.S.C. 78f(b)(5).
\68\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposed additional Limited
Service MEI Port fees are consistent with the statutory requirements
applicable to a national securities exchange under the Act. In
particular, the Commission will consider whether the proposed rule
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 be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; and not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\69\
---------------------------------------------------------------------------
\69\ See 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.\70\
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\70\ 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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[[Page 23645]]
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) \71\ and 19(b)(2)(B) \72\ 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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\71\ 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.
\72\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\73\ 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),\74\ 6(b)(5),\75\ and 6(b)(8) \76\ 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.
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\73\ 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.
\74\ 15 U.S.C. 78f(b)(4).
\75\ 15 U.S.C. 78f(b)(5).
\76\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
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:
1. Cost Estimates and Allocation. The Exchange states that it is
not asserting that the proposed fees are constrained by competitive
forces. Rather, the Exchange states that its proposed fees are based on
a ``cost-plus model,'' employing a ``conservative approach,'' and that
the $1,394,961 estimated total annual expense (comprised of $64,417 in
allocated third-party expenses, $1,008,736 in allocated internal
expenses, and $321,808 in allocated general shared expenses) is
``directly related to the access to the Exchange's System Networks via
Limited Service MEI Ports and not any other product or service offered
by the Exchange.'' \77\ With respect to third-party and internal
expenses: Do commenters believe that the Exchange provided sufficient
detail about how it determined which sub-categories of third-party and
internal expenses are directly related to Limited Service MEI Ports?
Should the Exchange be required to identify the sub-categories of
expenses that it deemed not to be directly related to Limited Service
MEI Ports? Do commenters believe that the Exchange provided sufficient
detail about how it determined what percentage or portion of each such
sub-category's total annual expense should be allocated as actually
supporting access to the Exchange's Systems Networks via Limited
Service MEI Ports? The Exchange provided either the percentage or the
portion of a sub-category's total annual expense that it allocated as
supporting access to the Exchange's Systems Networks via Limited
Service MEI Ports, but not both. Nor did the Exchange provide the total
annual expense for each sub-category to which these percentages or
portions apply. Do commenters believe that the Exchange provided
sufficient context to permit an independent review and assessment of
the reasonableness of the selected percentages/portions allocated to
Limited Service MEI Ports? Do commenters believe the percentages/
portions allocated to Limited Service MEI Ports are reasonable? With
respect to general shared expenses: Do commenters believe that the
Exchange provided sufficient detail about the components of general
shared expenses, and why a portion of general shared expenses should be
allocated to Limited Service MEI Ports? Do commenters believe that the
Exchange provided sufficient detail about how it determined to allocate
$321,808 of general shared expenses to Limited Service MEI Ports? Do
commenters believe that the Exchange provided sufficient context to
permit an independent review and assessment of the reasonableness of
this allocation? Do commenters believe that the allocation is
reasonable? In general: Do commenters believe that the Exchange
provided sufficient detail or explanation to support its claim that
``no expense amount is allocated twice,'' \78\ whether among the sub-
categories of expenses in this filing, across the Exchange's fee
filings for other products or services, or over time? Do commenters
believe that the costs projected for 2022 are generally representative
of expected costs going forward, 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?
---------------------------------------------------------------------------
\77\ See supra Section II.A.2.
\78\ See id.
---------------------------------------------------------------------------
2. Revenue Estimates and Profit Margin Range. The Exchange uses a
single monthly revenue figure (April 2022) as the basis for calculating
its projected profit margin of 48%. The Exchange argues that projecting
revenues 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.'' \79\ Yet the Exchange also acknowledges
that ``profit margin may also fluctuate from month to month based on
the uncertainty of predicting how many ports may be purchased from
month to month as Members are free to add and drop ports at any time
based on their own business decisions.'' \80\ Do commenters believe a
single month provides a reasonable basis for a revenue projection? If
not, why not? Should the Exchange provide a range of profit margins
that it believes are reasonably possible, and the reasons therefor? The
Exchange also provided its baseline by analyzing March 2022, the
monthly billing cycle prior to the proposed fees. Do commenters believe
[[Page 23646]]
that March 2022 is an appropriate month for a baseline, given that the
proposed fees were first introduced in August 2021?
---------------------------------------------------------------------------
\79\ See id.
\80\ See id.
---------------------------------------------------------------------------
3. Reasonable Rate of Return. The Exchange states that its proposed
fees are ``designed to cover its costs with a limited return in excess
of such costs.'' \81\ The Exchange offers several justifications for
why its 48% estimated profit margin is not a supra-competitive profit,
including: (a) When it launched operations in 2019, it chose to forgo
revenue by offering certain products, such as Limited Service MEI
Ports, at lower rates than other options exchanges to attract order
flow; (b) the Exchange has been successful in controlling its costs;
(c) a profit margin should not be judged alone based on its size, but
on whether the ultimate fee reflects the value of the services
provided, and Exchange offers a premium System Network, System Networks
connectivity, and a highly deterministic trading environment; (d) the
Exchange's proposed fees remain less than fees charged for similar port
access provided by other options exchanges with similar market share;
and (e) this is a singular potential profit margin from a single
revenue source, and is not reflective of the Exchange's overall profit
margin.\82\ Do commenters agree with the Exchange that its estimated
48% profit margin would constitute a reasonable rate of return over
costs for additional Limited Service MEI Ports? If not, what would
commenters consider to be a reasonable rate of return and/or what
factors would they consider to be appropriate for determining whether a
rate of return is reasonable? 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?
---------------------------------------------------------------------------
\81\ See id.
\82\ See id.
---------------------------------------------------------------------------
4. Periodic Reevaluation. In light of the impact that the number of
ports purchased has on profit margins, and the potential for costs to
decrease (or increase) over time, what are commenters' views on the
need for exchanges to commit to reevaluate, on an ongoing and periodic
basis, their cost-based connectivity fees to ensure that the fees stay
in line with their stated profitability projections and do not become
unreasonable over time, for example, by failing to adjust for
efficiency gains, cost increases or decreases, and changes in
subscribers? How formal should that process be, how often should that
reevaluation occur, and what metrics and thresholds should be
considered? How soon after a new connectivity fee change is implemented
should an exchange assess whether its revenue and/or cost estimates
were accurate and at what threshold should an exchange commit to file a
fee change if its estimates were inaccurate? Should an initial review
take place within the first 30 days after a connectivity fee is
implemented? 60 days? 90 days? Some other period?
5. Tiered Structure for Additional Limited Service MEI Ports. The
Exchange states that the proposed tiered fee structure is equitably
allocated among users of the network connectivity alternatives, because
users of Limited Service MEI Ports ``consume the most bandwidth and
resources of the network.'' \83\ The Exchange states that users of the
``maximum amount of Limited Service MEI Ports'' account for
approximately greater than 99% of message traffic over the network
(approximately 3 billion messages per day handled by the Exchange),
while users of ``fewer Limited Service MEI Ports'' account for
approximately less than 1% of message traffic over the network (users
of the two free Limited Service MEI Ports generate approximately
500,000 messages per day).\84\ According to 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. Given this difference
in network utilization rate, the Exchange believes that its tiered
structure is reasonable, equitable, and not unfairly
discriminatory.\85\ Do commenters believe that the fees for each tier
(including the intermediary tiers), as well as the fee differences
between the tiers, are supported by the Exchange's assertions? If not,
what information do commenters believe would better substantiate, by
tier, the demands on the Exchange's resources as a firm increases the
number of additional Limited Service MEI Ports that it purchases?
---------------------------------------------------------------------------
\83\ See id.
\84\ See id.
\85\ 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.'' \86\ 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,\87\ 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.\88\
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.\89\
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\86\ 17 CFR 201.700(b)(3).
\87\ See id.
\88\ See id.
\89\ 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.\90\
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\90\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by an SRO. See Securities
Acts Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
[[Page 23647]]
disapproved by May 11, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by May 25,
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#8ffdfae3eaa2ece0e2e2eae1fbfccffceaeca1e8e0f9"><span class="__cf_email__" data-cfemail="7200071e175f111d1f1f171c0601320117115c151d04">[email protected]</span></a>. Please include
File No. SR-EMERALD-2022-15 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 No. SR-EMERALD-2022-15. 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 publ. All submissions
should refer to File No. SR-EMERALD-2022-15 and should be submitted on
or before May 11, 2022. Rebuttal comments should be submitted by May
25, 2022.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\91\ that File No. SR-EMERALD-2022-15 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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\91\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\92\
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\92\ 17 CFR 200.30-3(a)(12), (57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08382 Filed 4-19-22; 8:45 am]
BILLING CODE 8011-01-P
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