Home/Federal/Federal Register/2022-08387

Notice2022-08387

Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule To Increase the Monthly Fees for MIAX Express Network Full Service Port; 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

<html>
<head>
<title>Federal Register, Volume 87 Issue 76 (Wednesday, April 20, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 76 (Wednesday, April 20, 2022)]
[Notices]
[Pages 23660-23674]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-08387]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94722; File No. SR-PEARL-2022-12]

Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing
of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule
To Increase the Monthly Fees for MIAX Express Network Full Service
Port; 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 PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i)
Temporarily suspending the rule change; and (ii) instituting
proceedings to determine whether to approve or disapprove the proposed
rule change.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to amend the fees for the
Exchange's MIAX Express Network Full Service (``MEO'') \3\ Ports.
---------------------------------------------------------------------------

\3\ ``MEO Interface'' or ``MEO'' means a binary order interface
for certain order types as set forth in Rule 516 into the MIAX Pearl
System. See the Definitions Section of the Fee Schedule and Exchange
Rule 100.
---------------------------------------------------------------------------

The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/pearl">http://www.miaxoptions.com/rule-filings/pearl</a> at MIAX
Pearl'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

[[Page 23661]]

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 increase the
fees for its Full Service MEO Ports, Bulk and Single, which allow
Members \4\ to submit electronic orders in all products to the
Exchange. The Exchange initially filed this proposal on July 1, 2021,
with the proposed fee changes being immediately effective (``First
Proposed Rule Change'').\5\ The First Proposed Rule Change was
published for comment in the Federal Register on July 15, 2021.\6\ The
Commission received one comment letter on the First Proposed Rule
Change \7\ and subsequently suspended the Frist [sic] Proposed Rule
Change on August 27, 2021.\8\ The Exchange withdrew First Proposed Rule
Change on October 12, 2021 and re-submitted the proposal on November 1,
2021, with the proposed fee changes being immediately effective
(``Second Proposed Rule Change'').\9\ The Second Proposed Rule Change
provided additional justification for the proposed fee changes and
addressed certain points raised in the single comment letter that was
submitted on the First Proposed Rule Change. The Second Proposed Rule
Change was published for comment in the Federal Register on November
17, 2021.\10\ The Commission received no comment letters on the Second
Proposed Rule Change. Nonetheless, the Exchange withdrew the Second
Proposed Rule Change on December 20, 2021 and submitted a revised
proposal for immediate effectiveness (``Third Proposed Rule
Change'').\11\ The Third Proposed Rule Change was published for comment
in the Federal Register on January 10, 2022.\12\ Although the
Commission again did not receive any comment letters on the Third
Proposed Rule Change, the Exchange withdrew the Third Proposed Rule
Change on February 15, 2022 and submitted a revised proposal for
immediate effectiveness, which was noticed and immediately suspended by
the Commission on February 18, 2022 (``Fourth Proposed Rule
Change'').\13\ The Commission received one comment letter on the Fourth
Proposed Rule Change.\14\ The Exchange withdrew the Fourth Proposed
Rule Change on March 30, 2022 and submits this revised proposal to be
effective April 1, 2022 (``Fifth Proposed Rule Change'').
---------------------------------------------------------------------------

\4\ ``Member'' means an individual or organization that is
registered with the Exchange pursuant to Chapter II of Exchange
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See the Definitions Section of
the Fee Schedule and Exchange Rule 100.
\5\ See Securities Exchange Act Release No. 92365 (July 9,
2021), 86 FR 37347 (July 15, 2021) (SR-PEARL-2021-33).
\6\ See id.
\7\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\8\ See Securities Exchange Act Release No. 92798 (August 27,
2021), 86 FR 49360 (September 2, 2021).
\9\ See Securities Exchange Act Release No. 93556 (November 10,
2021), 86 FR 64235 (November 17, 2021) (SR-PEARL-2021-53).
\10\ See id.
\11\ Securities Exchange Act Release No. 93894 (January 4,
2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58).
\12\ Id.
\13\ See Securities Exchange Act Release No. 94286 (February 18,
2022), 87 FR 10860 (February 25, 2022) (SR-PEARL-2022-04) (Notice of
Filing of a Proposed Rule Change to Amend the MIAX PEARL Options Fee
Schedule to Increase the Monthly Fees for MIAX Express Network Full
Service Port; Suspension of and Order Instituting Proceedings to
Determine Whether to Approve or Disapprove the Proposed Rule
Change).
\14\ See Letter from Richard J. McDonald, SIG, to Vanessa
Countryman, Secretary, Commission, dated March 15, 2022 (``SIG
Letter 2'').
---------------------------------------------------------------------------

Full Service MEO Port Fee Changes
The Exchange currently offers different types of MEO Ports
depending on the services required by the Member, including a Full
Service MEO Port-Bulk,\15\ a Full Service MEO Port-Single,\16\ and a
Limited Service MEO Port.\17\ For one monthly price, a Member may be
allocated two (2) Full-Service MEO Ports of either type per matching
engine \18\ and may request Limited Service MEO Ports for which MIAX
Pearl will assess Members Limited Service MEO Port fees per matching
engine based on a sliding scale for the number of Limited Service MEO
Ports utilized each month. The two (2) Full-Service MEO Ports that may
be allocated per matching engine to a Member may consist of: (a) Two
(2) Full Service MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--
Single; or (c) one (1) Full Service MEO Port--Bulk and one (1) Full
Service MEO Port--Single.
---------------------------------------------------------------------------

\15\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\16\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\17\ ``Limited Service MEO Port'' means an MEO port that
supports all MEO input message types, but does not support bulk
order entry and only supports limited order types, as specified by
the Exchange via Regulatory Circular. See the Definitions Section of
the Fee Schedule.
\18\ A ``Matching Engine'' is a part of the MIAX Pearl
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. 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.
---------------------------------------------------------------------------

Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\19\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports (described
above) per matching engine to which that Member connects. The Exchange
currently has twelve (12) matching engines, which means Members may
receive up to twenty-four (24) Full Service MEO Ports for a single
monthly fee, that can vary based on certain volume percentages, as
described below. For illustrative purposes and as described in more
detail below, the Exchange currently assesses a fee of $5,000 per month
for Members that

[[Page 23662]]

reach the highest Full Service MEO Port--Bulk Tier, regardless of the
number of Full Service MEO Ports allocated to the Member. For example,
assuming a Member connects to all twelve (12) matching engines during a
month, with two Full Service MEO Ports per matching engine, this
results in a cost of $208.33 per Full Service MEO Port ($5,000 divided
by 24) for the month. This fee had been unchanged since the Exchange
adopted Full Service MEO Port fees in 2018.\20\ The Exchange proposes
to increase Full Service MEO Port fees as further described below, with
the highest monthly fee of $10,000 for the Full Service MEO Port--Bulk.
Members will continue to receive two (2) Full Service MEO Ports to each
matching engine to which they connect for the single flat monthly fee.
Assuming a Member connects to all twelve (12) matching engines during
the month, with two Full Service MEO Ports per matching engine, this
would result in a cost of $416.67 per Full Service MEO Port ($10,000
divided by 24).
---------------------------------------------------------------------------

\19\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees (each port charged on a per matching engine basis, with NYSE
American having 17 match engines). See NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many matching engines are used
by each exchange?) (September 2020) (providing a link to an Excel
file detailing the number of matching engines per options exchange);
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a
per matching engine basis, NYSE Arca having 19 match engines); and
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How
many matching engines are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the number of matching
engines per options exchange). See NASDAQ Fee Schedule, Nasdaq
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports
and Other Services (each port charged on a per matching engine
basis, with Nasdaq having multiple matching engines). See Nasdaq
Specialized Quote Interface (SQF) Specification, Version 6.5b
(updated February 13, 2020), Section 2, Architecture, available at
<a href="https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf">https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf</a> (the ``NASDAQ SQF Interface Specification''). The
NASDAQ SQF Interface Specification also provides that NASDAQ's
affiliates, Nasdaq PHLX LLC (``Nasdaq Phlx'') and Nasdaq BX, Inc.
(``Nasdaq BX''), have trading infrastructures that may consist of
multiple matching engines with each matching engine trading only a
range of option underlyings. Further, the NASDAQ SQF Interface
Specification provides that the SQF infrastructure is such that the
firms connect to one or more servers residing directly on the
matching engine infrastructure. Since there may be multiple matching
engines, firms will need to connect to each engine's infrastructure
in order to establish the ability to quote the symbols handled by
that engine.
\20\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------

The Exchange assesses Members Full Service MEO Port Fees, either
for a Full Service MEO Port--Bulk and/or for a Full Service MEO Port--
Single, based upon the monthly total volume executed by a Member and
its Affiliates \21\ on the Exchange across all origin types, not
including Excluded Contracts,\22\ as compared to the Total Consolidated
Volume (``TCV''),\23\ in all MIAX Pearl-listed options. The Exchange
adopted a tier-based fee structure based upon the volume-based tiers
detailed in the definition of ``Non-Transaction Fees Volume-Based
Tiers'' described in the Definitions section of the Fee Schedule. The
Exchange assesses these and other monthly Port fees to Members in each
month the market participant is credentialed to use a Port in the
production environment.
---------------------------------------------------------------------------

\21\ ``Affiliate'' means (i) an affiliate of a Member of at
least 75% common ownership between the firms as reflected on each
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market
Maker (who does not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has been appointed by an EEM
and an ``Appointed EEM'' is an EEM (who does not otherwise have a
corporate affiliation based upon common ownership with a MIAX Pearl
Market Maker) that has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl Market Maker
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for
the purposes of the Fee Schedule, by each completing and sending an
executed Volume Aggregation Request Form by email to
<a href="/cdn-cgi/l/email-protection#533e363e313621203b3a23133e3a322b3c23273a3c3d207d303c3e"><span class="__cf_email__" data-cfemail="68050d050a0d1a1b000118280501091007181c0107061b460b0705">[email&#160;protected]</span></a> no later than 2 business days prior to
the first business day of the month in which the designation is to
become effective. Transmittal of a validly completed and executed
form to the Exchange along with the Exchange's acknowledgement of
the effective designation to each of the Market Maker and EEM will
be viewed as acceptance of the appointment. The Exchange will only
recognize one designation per Member. A Member may make a
designation not more than once every 12 months (from the date of its
most recent designation), which designation shall remain in effect
unless or until the Exchange receives written notice submitted 2
business days prior to the first business day of the month from
either Member indicating that the appointment has been terminated.
Designations will become operative on the first business day of the
effective month and may not be terminated prior to the end of the
month. Execution data and reports will be provided to both parties.
See the Definitions Section of the Fee Schedule.
\22\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\23\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
---------------------------------------------------------------------------

Current Full Service MEO Port--Bulk Fees. The Exchange currently
assesses Members monthly Full Service MEO Port--Bulk fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $4,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
Proposed Full Service MEO Port--Bulk Fees. The Exchange proposes to
assess Members monthly Full Service MEO Port--Bulk fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $5,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $7,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $10,000.
Current Full Service MEO Port--Single Fees. The Exchange currently
assesses Members monthly Full Service MEO Port--Single fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,375; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
Proposed Full Service MEO Port--Single Fees. The Exchange proposes
to assess Members monthly Full Service MEO Port--Single fees as
follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $4,500.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers \24\ or high frequency trading firms utilize these ports
(typically coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Certain Members need ports and connections that can
handle using far more of the network's capacity for message throughput,
risk protections, and the amount of information that the System has to
assess. Those Members may account for the vast majority of network
capacity utilization and volume executed on the Exchange, as discussed
throughout.
---------------------------------------------------------------------------

\24\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
---------------------------------------------------------------------------

The Exchange proposes to increase its monthly Full Service MEO Port
fees

[[Page 23663]]

since it has not done so since the fees were adopted in 2018,\25\ which
are designed to recover a portion of the costs associated with directly
accessing the Exchange. The Exchange notes that its affiliates, Miami
International Securities Exchange, LLC (``MIAX'') and MIAX Emerald, LLC
(``MIAX Emerald''), charge fees for their high throughput, low latency
MIAX Express Interface (``MEI'') Ports in a similar fashion as the
Exchange charges for its MEO Ports--generally, the more active user the
Member (i.e., the greater number/greater national ADV of classes
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port
fee.\26\ This concept is not new or novel. The Exchange also notes that
the proposed increased fees for the Exchange's Full Service MEO Ports
are in line with, or cheaper than, the similar port fees for similar
membership fees charged by other options exchanges.\27\
---------------------------------------------------------------------------

\25\ See supra note 20.
\26\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee
Schedule, Section 5)d)ii).
\27\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees; NYSE Arca Options Fee Schedule, Port Fees; Nasdaq Stock Market
LLC (``NASDAQ''), Options 7, Pricing Schedule, Section 3.
---------------------------------------------------------------------------

The Exchange has historically undercharged for Full Service MEO
Ports as compared to other options exchanges because the Exchange
provides Full Service MEO Ports as a package for a single monthly fee.
As described above, this package includes two Full Service MEO Ports
for each of the Exchange's twelve (12) matching engines. The Exchange
understands other options exchanges charge fees on a per port basis.
The Exchange believes 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.

------------------------------------------------------------------------
Exchange Type of port Monthly fee
------------------------------------------------------------------------
MIAX Pearl (as proposed) (equity MEO Full Service-- Tier 1: $5,000 (or
options market share of 4.32% Bulk. $208.33 per
as of March 29, 2022 for the Matching Engine).
month of March).\28\ Tier 2: $7,500 (or
$312.50 per
Matching Engine).
Tier 3: $10,000
(or $416.66 per
Matching Engine).
MEO Full Service-- Tier 1: $2,500 (or
Single. $104.16 per
Matching Engine).
Tier 2: $3,500 (or
$145.83 per
Matching Engine).
Tier 3: $4,500 (or
$187.50 per
Matching Engine).
The NASDAQ Stock Market LLC Order/Quote Entry. Ports 1-40: $450
(``NASDAQ'') \29\ (equity each.
options market share of 8.62% Ports 41 or more:
as of March 29, 2022 for the $150 each.
month of March).\30\
Nasdaq ISE LLC (``ISE'') \31\ Order/Quote Entry. Ports 1-40: $450
(equity options market share of each.
5.83% as of March 29, 2022 for Ports 41 or more:
the month of March).\32\ $150 each.
NYSE American LLC (``Amex'') Specialized Quote Ports 1-5: $1,500
\33\ (equity options market Interface. each.
share of 7.15% as of March 29, Ports 6-20: $1,000
2022 for the month of each.
March).\34\ Ports 21 or more:
$500.
------------------------------------------------------------------------

Implementation
---------------------------------------------------------------------------

\28\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a>(last visited March 29, 2022).
\29\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\30\ See supra note 28.
\31\ See ISE Rules, General 8: Connectivity.
\32\ See supra note 28.
\33\ See NYSE American Options Fee Schedule, Section IV.
\34\ See supra note 28.
---------------------------------------------------------------------------

The proposed fees are effective beginning April 1, 2022.
2. Statutory Basis
The Exchange believes that the proposed increase to the MEO Port
fees is consistent with Section 6(b) of the Act \35\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \36\ 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 proposed MEO Port fees furthers the
objectives of Section 6(b)(5) of the Act \37\ 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.
---------------------------------------------------------------------------

\35\ 15 U.S.C. 78f(b).
\36\ 15 U.S.C. 78f(b)(4).
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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'').\38\ 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.'' \39\ Based on both the BOX Order and the Guidance, the
Exchange believes that the proposed MEO Port fees is consistent with
the Act because it (i) is reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) complies
with the BOX Order and the Guidance; and (iii) is 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.
---------------------------------------------------------------------------

\38\ 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).
\39\ 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'').
---------------------------------------------------------------------------

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

[[Page 23664]]

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.''
\40\ 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.'' \41\ 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.'' \42\ 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 MEO Ports and will not result in the Exchange
generating a supra-competitive profit.
---------------------------------------------------------------------------

\40\ Id.
\41\ Id.
\42\ Id.
---------------------------------------------------------------------------

The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \43\
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.'' \44\ The Exchange provides
this analysis below.
---------------------------------------------------------------------------

\43\ Id.
\44\ Id.
---------------------------------------------------------------------------

The proposed fees are based on a cost-plus model. An MEO Port
provides access to each of the three Exchange networks, extranet,
internal 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 MEO 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 MEO 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 MEO 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 MEO
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 MEO 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 MEO
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 MEO Ports. The Exchange reviewed
each individual expense to determine if such expense was related to MEO
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 MEO 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 MEO 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

[[Page 23665]]

fully support access to the Exchange and its System Networks via MEO
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 MEO 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 MEO Ports.
The Exchange estimated its total annual expense to provide and
maintain access to the Exchange's System Networks via MEO 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 MEO Ports; and (3) general shared
expenses.\45\ The 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.
---------------------------------------------------------------------------

\45\ 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.
---------------------------------------------------------------------------

For 2022, the total annual expense for providing the access
services associated with the MEO Ports is estimated to be $2,923,534,
or $243,627 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.\46\ The $2,923,534 estimated total annual expense is
directly related to the access to the Exchange's System Networks via
MEO 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.
---------------------------------------------------------------------------

\46\ 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. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020)
(SR-PEARL-2019-36). 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.

------------------------------------------------------------------------
External expenses
-------------------------------------------------------------------------
Percentage of
Category total expense
amount allocated
------------------------------------------------------------------------
Data Center Provider................................. 1.80%
Fiber Connectivity Provider.......................... 0.90%
Security Financial Transaction Infrastructure 0.90%
(``SFTI''), and Other Connectivity and Content
Service Providers...................................
Hardware and Software Providers...................... 0.90%
------------------
Total of External Expenses........................... \47\ $295,184
------------------------------------------------------------------------
Internal expenses
------------------------------------------------------------------------
Category Expense amount
allocated
------------------------------------------------------------------------
Employee Compensation................................ $2,066,488
Depreciation and Amortization........................ 161,578
Occupancy............................................ 62,531
------------------
Total of Internal expenses....................... 2,290,597
------------------------------------------------------------------------
Allocated Shared Expenses............................ 337,753
------------------------------------------------------------------------

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 MEO 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

[[Page 23666]]

access to System Networks via MEO Ports.
---------------------------------------------------------------------------

\47\ 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 MEO 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 MEO 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 MEO 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 and MIAX Emerald, as well as the Exchange's
equities market, 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 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 a MEO Port are
estimated to be $295,184. 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 MEO 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 1.80% of the total applicable
data center provider expense is applicable to providing and maintaining
access services and System Networks associated with MEO Ports. The
Exchange believes this allocation is reasonable because MEO 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 MEO 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 MEO Ports.
The Exchange reviewed it 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 0.90% of the total fiber connectivity expense was
applicable to providing and maintaining access services and System
Networks associated with MEO Ports. The Exchange believes this
allocation is reasonable because MEO Ports are a core means of access
to the Exchange's

[[Page 23667]]

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 MEO 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 MEO 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 that are
necessary to provide and maintain its System Networks and access to its
System Networks via MEO 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 MEO 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 0.90%
of the total applicable SFTI and other service provider expense is
allocated to providing the access services associated with MEO 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 MEO 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 MEO 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
MEO 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 MEO 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 MEO 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 MEO 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 0.90% of the total applicable hardware and software expense is
allocated to providing and maintaining access services and System
Networks associated with MEO 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 MEO 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 MEO 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 MEO 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 MEO 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 a MEO Port connection are estimated to be $2,290,597. This
includes, but is not limited to, costs associated with: (1)

[[Page 23668]]

Employee compensation and benefits for full-time employees that support
the System Networks and access to System Networks via MEO 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 MEO
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 MEO 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 MEO 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 MEO Ports. As part of this review, the
Exchange considered employees whose functions include providing and
maintaining the System Networks and MEO Ports and used a blended rate
of compensation reflecting salary, stock and bonus compensation,
bonuses, benefits, payroll taxes, and 401K matching contributions.\48\
---------------------------------------------------------------------------

\48\ For purposes of this allocation, the Exchange did not
consider expenses related to supporting employees who support MEO
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 6.3 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 MEO Ports.
---------------------------------------------------------------------------

Based on this review, the Exchange determined to allocate
$2,066,488 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 MEO 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 MEO 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 MEO Ports. The Exchange does not charge a separate
fee regarding employees who support MEO Ports and the Exchange seeks to
recoup that expense, in part, by charging for MEO 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 MEO
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 MEO 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 MEO 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 MEO 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 MEO Ports.
Based on this review, the Exchange determined to allocate $161,578
in depreciation and amortization expense to providing access to the
System Networks via a MEO Port fees. The Exchange only allocated the
portion of this depreciation expense to the hardware and software
related to a market participant's use of MEO 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.\49\
---------------------------------------------------------------------------

\49\ 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 MEO 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 MEO Ports. This equipment includes computers,
servers, and accessories necessary to support the System Networks and
MEO Ports. Based on this review, the Exchange determined to allocate
$62,531 of its occupancy expense to provide and maintain the System
Networks and MEO 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 MEO 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

[[Page 23669]]

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 MEO Ports.
Allocated Shared Expense
Finally, a limited portion of general shared expenses was allocated
to overall MEO Port costs as without these general shared costs, the
Exchange would not be able to operate in the manner that it does and
provide MEO 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 MEO Ports and the System Networks that support
those connections is estimated to be $337,753. The Exchange used the
average of the above allocations to determine the amount of general
shared expenses to allocate to this proposal. The Exchange believes
this ensures that the allocation correlates to the percentage of the
above internal and external expense applied to the proposed fee change.
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 MEO 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 MEO
Ports, the Exchange analyzed the number of Members currently utilizing
MEO 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 15
Full Service MEO Port--Bulk, for which the Exchange anticipates
charging $60,500, and 4 Full Service MEO Port--Single, for which the
Exchange anticipates charging $11,125, for a total of $71,625 for that
month. This will result in a loss of $171,999 ($71,625 in MEO Port
revenue, minus $243,627 in monthly MEO Port expenses). For April 2022,
assuming the Exchange charges the proposed fees described herein, the
Exchange anticipates Members purchasing 15 Full Service MEO Port--Bulk,
for which the Exchange anticipates charging $112,500, and 4 Full
Service MEO Port--Single, for which the Exchange anticipates charging
$13,000, for a total of $125,500 for that month. This will result in a
loss of $118,127 ($125,500 in MEO Port revenue, minus $243,627 in
monthly MEO Port expenses).
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.'' \50\ Until recently, the
Exchange has operated at a cumulative net annual loss since it launched
operations in 2017.\51\ 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 MEO 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 is not
generating a profit, and therefore, cannot be deemed to be generating a
``supra-competitive'' profit by now increasing the fees for MEO Ports
while still sustaining a loss. 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.
---------------------------------------------------------------------------

\50\ See supra note 35.
\51\ The Exchange has incurred a cumulative loss of $86 million
since its inception in 2017 to 2020. 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://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf</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 MEO 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.
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

[[Page 23670]]

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 the 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 further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee, the Exchange provides each Member two (2)
Full Service MEO Ports for each matching engine to which that Member is
connected. Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\52\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports per matching
engine to which it connects. The Exchange currently has twelve (12)
matching engines, which means Members may receive up to twenty-four
(24) Full Service MEO Ports for a single monthly fee, that can vary
based on certain volume percentages. The Exchange currently assesses
Members a fee of $5,000 per month in the highest Full Service MEO
Port--Bulk Tier, regardless of the number of Full Service MEO Ports
allocated to the Member. Assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port--Bulk ($5,000 divided by 24) for the month. This fee has been
unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\53\ The Exchange now proposes to increase the Full Service MEO
Port fees, with the highest Tier fee for a Full Service MEO Port--Bulk
of $10,000 per month. Members will continue to receive two (2) Full
Service MEO Ports to each matching engine to which they are connected
for the single flat monthly fee. Assuming a Member connects to all
twelve (12) matching engines during the month, and achieves the highest
Tier for that month, with two Full Service MEO Ports--Bulk per matching
engine, this would result in a cost of $416.67 per Full Service MEO
Port ($10,000 divided by 24).
---------------------------------------------------------------------------

\52\ See supra note 19.
\53\ See supra note 20.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on 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.
Intra-Market Competition
The Exchange believes that the proposed fees do not place certain
market participants at a relative disadvantage to other market
participants because the proposed fees do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the proposed fees reflects the
network resources consumed by the various size of market participants--
lowest bandwidth consuming members pay the least, and highest bandwidth
consuming members pays the most, particularly since higher bandwidth
consumption translates to higher costs to the Exchange.
Inter-Market Competition
The Exchange believes the proposed fees do not place an undue
burden on competition on other options exchanges that is not necessary
or appropriate. In particular, options market participants are not
forced to connect to (and purchase MEO Ports from) all options
exchanges. The Exchange also notes that it has far less Members as
compared to the much greater number of members at other options
exchanges. Not only does MIAX Pearl have less than half the number of
members as certain other options exchanges, but there are also a number
of the Exchange's Members that do not connect directly to MIAX Pearl.
There are a number of large users of the MEO Interface and broker-
dealers that are members of other options exchange but not Members of
MIAX Pearl. The Exchange is also unaware of any assertion that its
existing fee levels or the proposed fees would somehow unduly impair
its competition with other options exchanges. To the contrary, if the
fees charged are deemed too high by market participants, they can
simply disconnect.

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 Fourth Proposed Rule Change
\54\ and the Exchange responds to issues raised in that comment letter
here.
---------------------------------------------------------------------------

\54\ See supra note 14.
---------------------------------------------------------------------------

First, SIG Letter 2 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 2 does not provided a reason
why recoupment of initial capital expenditures is not a proper
justification for a proposed rule change. SIG Letter 2 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 2 claims that the Exchange omitted the data
necessary to assess the proposed fee change under the Exchange Act. SIG
Letter 2 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

[[Page 23671]]

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.\55\
---------------------------------------------------------------------------

\55\ 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 \56\ 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.
---------------------------------------------------------------------------

\56\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

SIG Letter 2 also claims that the Exchange has not shown that the
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 2 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,\57\ 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,\58\ 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.
---------------------------------------------------------------------------

\57\ 15 U.S.C. 78s(b)(3)(C).
\58\ 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 July
1, 2021, with the proposed fee changes being immediately effective.
That proposal, SR-PEARL-2021-33, was published for comment in the
Federal Register on July 15, 2021.\59\ On August 27, 2021, pursuant to
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily
suspended the proposed rule change (SR-PEARL-2021-33) and (2)
instituted proceedings to determine whether to approve or disapprove
the proposed rule change.\60\ On October 12, 2021, the Exchange
withdrew SR-PEARL-2021-33. On November 1, 2021, the Exchange filed a
proposed rule change proposing fee changes as proposed herein (SR-
PEARL-2021-53). That proposal, SR-PEARL-2021-53, was published for
comment in the Federal Register on November 17, 2021.\61\ On December
20, 2021, the Exchange withdrew SR-PEARL-2021-53 and filed a proposed
rule change proposing fee changes as proposed herein on December 20,
2021 (PEARL-2022-58). That filing, SR-PEARL-2021-58, was published for
comment in the Federal Register on January 10, 2022.\62\ On February
15, 2022, the Exchange withdrew SR-PEARL-2021-58 and filed a proposed
rule change proposing fee changes as proposed herein (SR-PEARL-2022-
04). On February 18, 2022, pursuant to Section 19(b)(3)(C) of the Act,
the Commission: (1) Temporarily suspended the proposed rule change (SR-
PEARL-2022-04); and (2) instituted proceedings to determine whether to
approve or disapprove the proposal.\63\ The Commission received one
comment letter on SR-PEARL-2022-04.\64\ On April 1, 2022, the Exchange
withdrew SR-PEARL-2022-04 and filed the instant filing, which is
substantially similar.
---------------------------------------------------------------------------

\59\ See Securities Exchange Act Release No. 92365 (July 9,
2021), 86 FR 37347. The Commission received one comment letter on
that proposal. Comment for SR-PEARL-2021-33 can be found at: <a href="https://www.sec.gov/comments/sr-pearl-2021-33/srpearl202133-9208443-250011.pdf">https://www.sec.gov/comments/sr-pearl-2021-33/srpearl202133-9208443-250011.pdf</a>.
\60\ See Securities Exchange Act Release No. 93556, 86 FR 49360
(September 2, 2021).
\61\ See Securities Exchange Act Release No. 93556 (November 19,
2021), 86 FR 64235.
\62\ See Securities Exchange Act Release No. 93894 (January 4,
2022), 87 FR 1203.
\63\ See Securities Exchange Act Release No. 94286, 87 FR 10860
(February 25, 2022).
\64\ Comment on SR-PEARL-2022-04 can be found at: <a href="https://www.sec.gov/comments/sr-emerald-2022-05/sremerald202205-20119633-272460.pdf">https://www.sec.gov/comments/sr-emerald-2022-05/sremerald202205-20119633-272460.pdf</a>.
---------------------------------------------------------------------------

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.\65\ 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.'' \66\
---------------------------------------------------------------------------

\65\ 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'').
\66\ 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; \67\ (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,

[[Page 23672]]

issuers, brokers, or dealers; \68\ and (3) not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\69\
---------------------------------------------------------------------------

\67\ 15 U.S.C. 78f(b)(4).
\68\ 15 U.S.C. 78f(b)(5).
\69\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposal to increase the
monthly fees for MIAX Express Network Full Service Ports is consistent
with the statutory requirements applicable to a national securities
exchange under the Act. In particular, the Commission will consider
whether the proposed rule change satisfies the standards under the Act
and the rules thereunder requiring, among other things, that an
exchange's rules provide for the equitable allocation of reasonable
fees among members, issuers, and other persons using its facilities;
not 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.\70\
---------------------------------------------------------------------------

\70\ 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.\71\
---------------------------------------------------------------------------

\71\ 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).
---------------------------------------------------------------------------

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) \72\ and 19(b)(2)(B) \73\ 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.
---------------------------------------------------------------------------

\72\ 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.
\73\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\74\ 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),\75\ 6(b)(5),\76\ and 6(b)(8) \77\ 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.
---------------------------------------------------------------------------

\74\ 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.
\75\ 15 U.S.C. 78f(b)(4).
\76\ 15 U.S.C. 78f(b)(5).
\77\ 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 MEO Port fee is constrained by
competitive forces, but rather set forth a ``cost-plus model,''
employing 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 MEO Ports.\78\ Setting forth its costs in providing MEO
Ports, and as summarized in greater detail above, the Exchange projects
that the total combined annual expense for providing the access
services associated with the MEO Ports in 2022 will be $2,923,534, the
sum of: (1) $295,184 In third-party expenses paid in total to their
Data Center Provider (1.8% of the total applicable expense) for data
center services; Fiber Connectivity Provider, for network services
(0.90% of the total applicable expense); SFTI and other connectivity
and content service providers for connectivity support (0.90% of the
total applicable expense); and various other hardware and software
providers (0.90% of the total applicable expense), (2) $2,290,597 in
internal expenses, allocated to (a) employee compensation and benefit
costs ($2,066,488); (b) depreciation and amortization ($161,578); and
(c) occupancy costs ($62,531) and (3) $337,753 of allocated general
shared expenses that include recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services, and telecommunications costs. Do commenters believe that
these allocations are reasonable? Should the Exchange be required to
provide more specific information regarding the allocation of third-
party expenses, such as the overall estimated cost for each category of
external expenses or at minimum the total applicable third-party
expenses? Should the Exchange have provided either a percentage
allocation or statements regarding the Exchange's overall estimated
costs for the internal expense categories and general shared expenses
figure? Do commenters believe that the Exchange has provided sufficient
detail about how it determined which costs are associated with
providing and maintaining MEO Ports and why? Do commenters believe that
the Exchange has provided sufficient detail about how it determined
``general shared expenses'' and how it determined what portion should
be associated with providing and maintaining MEO Ports? The Exchange
describes a ``proprietary'' process that was applied in making these
determinations or arriving at particular allocations. Do commenters
believe further explanation is necessary? What are commenters' views on
whether the Exchange has provided sufficient detail on the identity and
nature of services

[[Page 23673]]

provided by third parties? Across all of the Exchange's projected
costs, what are commenters' views on whether the Exchange has provided
sufficient detail on the elements that go into MEO Port costs,
including how shared costs are allocated and attributed to MEO Port
expenses, to permit an independent review and assessment of the
reasonableness of purported cost-based fees and the corresponding
profit margin thereon?
---------------------------------------------------------------------------

\78\ See supra Section II.A.2.
---------------------------------------------------------------------------

2. Revenue Estimates and Profit Margin Range. The Exchange provides
a single monthly revenue figure from March 2022 as the basis for
calculating a revenue loss of $118,127 for April 2022. Previously, the
Exchange stated an estimated profit margin of 38%. What are commenters
views on the significant increases in expenses allocated for this
product? If not, why not? The Exchange states that their proposed
margin is reasonable and is ``designed recover a portion of the costs
associated with directly accessing the Exchange.'' \79\ The profit
margin is also dependent on the accuracy of the cost projections which,
if inflated (intentionally or unintentionally), may render the
projected profit margin meaningless. The Exchange acknowledges that
this margin may fluctuate from month to month due to changes in the
number of ports purchased, and that costs may increase, but that the
number of ports has not materially changed over the prior months and so
the months that the Exchange has used as a baseline to perform its
assessment are representative of reasonably anticipated costs and
expenses.\80\ The Exchange does not account for the possibility of cost
decreases, however. What are commenters' views on the extent to which
actual costs (or revenues) deviate from projected costs (or revenues)?
Do commenters believe that the Exchange's methodology for estimating
the profit or loss margin is reasonable? Should the Exchange provide a
range of profit or loss margins that they believe are reasonably
possible, and the reasons therefor?
---------------------------------------------------------------------------

\79\ See supra Section II.A.2.
\80\ See id.
---------------------------------------------------------------------------

3. Reasonable Rate of Return. As noted, the Exchange previously
stated an estimated profit margin of 38% and now states a loss. What
would commenters consider to be a reasonable rate of return and/or what
methodology would they consider to be appropriate for determining a
reasonable rate of return? What are commenters' views regarding what
factors should be considered in determining what constitutes a
reasonable rate of return for MEO Port fees? Do commenters believe it
relevant to an assessment of reasonableness that the Exchange's
proposed fees for MEO Ports are lower than those of other options
exchanges to which the Exchange has compared? Should an assessment of
reasonable rate of return include consideration of factors other than
costs; and if so, what factors should be considered, and why?
4. Periodic Reevaluation. The Exchange has not stated that it would
re-evaluate the appropriate level of MEO Ports if there is a material
deviation from the anticipated profit margin. In light of the impact
that the number of subscribers has on MEO Port 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 MEO Port fees to ensure
that they stay in line with their stated profitability target and do
not become unreasonable over time, for example, by failing to adjust
for efficiency gains, cost increases or decreases, and changes in
subscribers? How formal should that process be, how often should that
reevaluation occur, and what metrics and thresholds should be
considered? How soon after a new MEO Port fee change is implemented
should an exchange assess whether its subscriber estimates were
accurate and at what threshold should an exchange commit to file a fee
change if its estimates were inaccurate? Should an initial review take
place within the first 30 days after a MEO Port fee is implemented? 60
days? 90 days? Some other period?
5. Tiered Structure for Full Service MEO Ports Fees. The Exchange
states that proposed tiered-pricing structure is reasonable, equitably
allocated, and not unfairly discriminatory because for a flat fee the
Exchange provides each Member two Full Service MEO Ports for each
matching engine to which the Member is connected, and further, it is
the model adopted by the Exchange when it launched operations for its
Full Service MEO Port fees.\81\ What are commenters' views on the
adequacy of the information the Exchange provides regarding the
proposed differentials in fees? Do commenters believe that the proposed
price differences are supported by the Exchange's assertions that it
set the level of each proposed new fee in a manner that it equitable
and not unfairly discriminatory?
---------------------------------------------------------------------------

\81\ 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.'' \82\ 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,\83\ 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.\84\
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.\85\
---------------------------------------------------------------------------

\82\ 17 CFR 201.700(b)(3).
\83\ See id.
\84\ See id.
\85\ 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

[[Page 23674]]

request for an opportunity to make an oral presentation.\86\
---------------------------------------------------------------------------

\86\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by an SRO. See Securities
Acts Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by 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#a5d7d0c9c088c6cac8c8c0cbd1d6e5d6c0c68bc2cad3"><span class="__cf_email__" data-cfemail="3b494e575e16585456565e554f487b485e58155c544d">[email&#160;protected]</span></a>. Please include
File No. SR-PEARL-2022-12 on the subject line.

Paper Comments

<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-PEARL-2022-12. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2022-12 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,\87\ that File Number SR-PEARL-2022-12 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.
---------------------------------------------------------------------------

\87\ 15 U.S.C. 78s(b)(3)(C).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\88\
---------------------------------------------------------------------------

\88\ 17 CFR 200.30-3(a)(12), (57) and (58).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08387 Filed 4-19-22; 8:45 am]
BILLING CODE 8011-01-P

</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on April 20, 2022.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.