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Notice2022-10507

Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing of a Proposed Rule Change To Amend Its Fee Schedule To Increase Certain Connectivity Fees and Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX Express Interface Ports; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change

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Published

May 17, 2022

Issuing agencies

Securities and Exchange Commission

Full Text

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<title>Federal Register, Volume 87 Issue 95 (Tuesday, May 17, 2022)</title>
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[Federal Register Volume 87, Number 95 (Tuesday, May 17, 2022)]
[Notices]
[Pages 29945-29962]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10507]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94890; File No. SR-MIAX-2022-20]

Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing of a Proposed Rule Change To Amend Its
Fee Schedule To Increase Certain Connectivity Fees and Adopt a Tiered-
Pricing Structure for Additional Limited Service MIAX Express Interface
Ports; Suspension of and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove the Proposed Rule Change

May 11, 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 May 2, 2022, Miami International Securities Exchange, LLC (``MIAX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons and is, pursuant to Section 19(b)(3)(C)
of the Act, hereby: (i) Temporarily suspending the proposed rule
change; and (ii) instituting proceedings to determine whether to
approve or disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange is filing a proposal to amend the MIAX Options Fee
Schedule (the ``Fee Schedule'') to amend certain connectivity and port
fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings">http://www.miaxoptions.com/rule-filings</a>, at MIAX's principal
office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV [sic] below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to amend its Fee Schedule to increase the
fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') fiber
connection and adopt a tiered-pricing structure for Limited Service
MIAX Express Interface (``MEI'') Ports \3\ available to Market
Makers.\4\ The Exchange last increased the fees for its 10Gb ULL fiber
connections in a filing that became effective beginning January 1, 2021
(subsequently withdrawn and refiled one time).\5\ In that fee change,
the Exchange increased the fee for 10Gb ULL fiber connections from
$9,300 to $10,000 per month.
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\3\ MIAX Express Interface is a connection to MIAX systems that
enables Market Makers to submit simple and complex electronic quotes
to MIAX. See Fee Schedule, note 26.
\4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See Exchange Rule 100.
\5\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
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Also, in connection with that fee change, the Exchange's affiliate,
MIAX PEARL, LLC (``MIAX Pearl Options''), increased its 10Gb ULL
connectivity fee to $10,000 per month.\6\ The Exchange and MIAX Pearl
Options shared a combined cost analysis in those filings. In those
filings, the Exchange and MIAX Pearl Options allocated a combined total
of $17.9 million in expenses to providing 10Gb ULL fiber connectivity.
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\6\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
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Since the time of that filing, the Exchange and MIAX Pearl Options
have experienced an increase in expenses, particularly regarding
internal expenses. For example, from January 2021 to March 2022
expenses related to employee compensation for 10Gb ULL connectivity
increased from a combined $6,892,689 to $7,063,801 and occupancy
increased from $560,408 to $701,437. In addition, from January 2021 to
March 2022, the Exchange's third party related expense increased as
well. In January 2021, the Exchange and MIAX Pearl Options allocated a
combined $4,079,910 of their shared third party expenses to providing
the 10Gb ULL fiber connectivity. As described more fully below, the
Exchange and MIAX Pearl Options are now allocating $4,382,307 of their
shared third party expense to 10Gb ULL fiber connectivity, which
represents only a portion of the total combined third party expense of
$7,575,888. As discussed more fully below, the Exchange and MIAX Pearl
Options recently calculated the combined annual aggregate costs for
providing 10Gb ULL connectivity, plus the cost of providing Limited
Service MEI Ports (on MIAX only) to be $21,407,728, or $1,783,977 per
month. The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity to recoup these ongoing costs and as a
result of the increase in expenses described above.\7\
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\7\ The Exchange notes that MIAX Pearl Options will make a
similar filing to increase its 10Gb ULL connectivity fees.
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The same is true for its proposal to amend its fees for Limited
Service MEI Ports. Beginning with a series of filings first filed on
April 9, 2021 (with the final filing made May 10, 2021), the Exchange
removed the cap on the number of additional Limited Service MEI Ports
available to Market Makers from the Fee Schedule.\8\ In that filing,
the Exchange sought only to remove the cap on the number of Limited
Service MEI Ports a Market Maker may purchase from its Fee Schedule.
Although the Exchange did not modify the fees for

[[Page 29946]]

Limited Service MEI Ports in that filing, the Exchange did provide a
cost analysis showing the cost to the Exchange to add two Limited
Service MEI Ports to its System. That filing contained lower allocation
percentages and allocated expenses than included herein because that
cost analysis focused solely on the providing two Limited Service MEI
Ports and not all Limit Service MEI Ports generally as is the case in
this proposed fee change. Since the time of that April 2021 filing, the
Exchange's expenses have increased, leading to the increased fees for
Limited Service MEI Ports proposed herein. For example, in April 2021,
the Exchange set forth a total internal expense of $14,957,861 as part
of its cost analysis to provide two additional Limited Service MEI
Ports. As described below, the Exchange's total internal expenses have
increased since April 2021 and are now $19,862,263, of which the
Exchange is now allocating $1,281,113 of to providing Limited Service
MEI Ports generally.
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\8\ See Securities Exchange Act Release No. 91857 (May 12,
2021), 86 FR 26973 (May 18, 2021) (SR-MIAX-2021-19).
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First, the Exchange proposes to amend the Fee Schedule to increase
the fees for Members \9\ and non-Members to access the Exchange's
System Networks \10\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend Sections 5)a)-b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $12,000 per month (``10Gb ULL Fee''). Prior to the
proposed fee change, the Exchange assessed Members and non-Members a
flat monthly fee of $10,000 per 10Gb ULL connection for access to the
Exchange's primary and secondary facilities.\11\
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\9\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\10\ The Exchange's System Networks consist of the Exchange's
extranet, internal network, and external network.
\11\ The Exchange notes that it employed a tiered pricing
structure for 10Gb ULL connectivity from August 2021 through March
2022. See infra notes 27-29.
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The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange proposes to pro-rate the fees when a Member
or non-Member makes a change to the connectivity (by adding or deleting
connections) with such pro-rated fees based on the number of trading
days that the Member or non-Member has been credentialed to utilize any
of the Exchange APIs or market data feeds in the production environment
through such connection, divided by the total number of trading days in
such month multiplied by the applicable monthly rate. The Exchange will
continue to assess monthly Member and non-Member network connectivity
fees for connectivity to the disaster recovery facility in each month
during which the Member or non-Member has established connectivity with
the disaster recovery facility.
The Exchange's MIAX Express Network Interconnect (``MENI'') can be
configured to provide Members and non-Members of the Exchange network
connectivity to the trading platforms, market data systems, test
systems, and disaster recovery facilities of both the Exchange and its
affiliate, MIAX Pearl Options, via a single, shared connection. Members
and non-Members utilizing the MENI to connect to the trading platforms,
market data systems, test systems, and disaster recovery facilities of
the Exchange and MIAX Pearl Options via a single, shared connection
will continue to only be assessed one monthly connectivity fee per
connection, regardless of the trading platforms, market data systems,
test systems, and disaster recovery facilities accessed via such
connection.
Second, the Exchange proposes to amend Section 5)d) of the Fee
Schedule to adopt a tiered-pricing structure for Limited Service MEI
Ports available to Market Makers. The Exchange allocates two (2) Full
Service MEI Ports \12\ and two (2) Limited Service MEI Ports \13\ per
matching engine \14\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports and Limited
Service MEI Ports all include access to the Exchange's primary and
secondary data centers and its disaster recovery center. Market Makers
may request additional Limited Service MEI Ports. Prior to the proposed
fee change, Market Makers were assessed a $100 monthly fee for each
Limited Service MEI Port for each matching engine above the first two
Limited Service MEI Ports that are included for free. This fee was
unchanged since 2016.\15\ The Exchange now proposes to move from a flat
monthly fee per Limited Service MEI Port for each matching engine to a
tiered-pricing structure for Limited Service MEI Ports for each
matching engine under which the monthly fee would vary depending on the
number of Limited Service MEI Ports each Market Maker elects to
purchase. Specifically, the Exchange will continue to provide the first
and second Limited Service MEI Ports for each matching engine free of
charge. For Limited Service MEI Ports, the Exchange proposes to adopt
the following tiered-pricing structure: (i) The third and fourth
Limited Service MEI Ports for each matching engine will increase from
the current flat monthly fee of $100 to $150 per port; (ii) the fifth
and sixth Limited Service MEI Ports for each matching engine will
increase from the current flat monthly fee of $100 to $200 per port;
and (iii) the seventh or more Limited Service MEI Ports will increase
from the current monthly flat fee of $100 to $250 per port. The
Exchange believes a tiered-pricing structure will encourage Market
Makers to be more efficient when determining how to connect to the
Exchange. This should also enable the Exchange to better monitor and
provide access to the Exchange's network to ensure sufficient capacity
and headroom in the System \16\ in accordance with its fair access
requirements under Section 6(b)(5) of the Act.\17\
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\12\ Full Service MEI Ports provide Market Makers with the
ability to send Market Maker quotes, eQuotes, and quote purge
messages to the MIAX System. Full Service MEI Ports are also capable
of receiving administrative information. Market Makers are limited
to two Full Service MEI Ports per matching engine. See Fee Schedule,
Section 5)d)ii), note 27.
\13\ Limited Service MEI Ports provide Market Makers with the
ability to send eQuotes and quote purge messages only, but not
Market Maker Quotes, to the MIAX System. Limited Service MEI Ports
are also capable of receiving administrative information. Market
Makers initially receive two Limited Service MEI Ports per matching
engine. See Fee Schedule, Section 5)d)ii), note 28.
\14\ A ``matching engine'' is a part of the MIAX electronic
system that processes options quotes and trades on a symbol-by-
symbol basis. Some matching engines will process option classes with
multiple root symbols, and other matching engines will be dedicated
to one single option root symbol (for example, options on SPY will
be processed by one single matching engine that is dedicated only to
SPY). A particular root symbol may only be assigned to a single
designated matching engine. A particular root symbol may not be
assigned to multiple matching engines. See Fee Schedule, Section
5)d)ii), note 29.
\15\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
\16\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
\17\ See 15 U.S.C. 78f(b). The Exchange may offer access on
terms that are not unfairly discriminatory among its Members, and
ensure sufficient capacity and headroom in the System. The Exchange
monitors the System's performance and makes adjustments to its
System based on market conditions and Member demand.
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The Exchange believes that other exchanges' connectivity and port
fees

[[Page 29947]]

are useful examples and provides the following table for comparison
purposes only to show how the Exchange's proposed fees compare to fees
currently charged by other options exchanges for similar connectivity
and port access. As shown by the below table, the Exchange's proposed
fees are similar to or less than fees charged for similar access to
other options exchanges.

------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX (as proposed) (equity 10Gb ULL $12,000.
options market share of 5.67% connection. 1-2 ports. FREE (not
as of April 29, 2022 for the Limited Service changed in this
month of April) \18\. MEI Port. proposal). 3-4
ports. $150. 5-6
ports. $200. 7 or
more ports. $250.
The NASDAQ Stock Market LLC 10Gb Ultra fiber $15,000.
(``NASDAQ'') \19\. connection. 1-5 ports. $1,500. 6-
(equity options market share of SQF Port........ 20 ports. $1,000. 21
8.47% as of April 29, 2022 for or more ports. $500.
the month of April) \20\.
Nasdaq ISE LLC (``ISE'') \21\ 10Gb Ultra fiber $15,000.
(equity options market share connection. $1,100.
of 5.48% as of April 29, 2022 SQF Port........
for the month of April) \22\.
NYSE American LLC (``NYSE 10Gb LX LCN $22,000.
American'') \23\ (equity connection. Ports 1-40. $450.
options market share of 8.13% Order/Quote Ports 41 and
as of April 29, 2022 for the Entry Port. greater. $150.
month of April) \24\.
Nasdaq GEMX, LLC (``GEMX'') 10Gb Ultra $15,000.
\25\ (equity options market connection. $1,250.
share of 2.36% as of April 29, SQF Port........
2022 for the month of April)
\26\.
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Implementation and Procedural History
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\18\ See ``The market at a glance,'' available at <a href="https://www.miaxoptions.com/">https://www.miaxoptions.com/</a> (last visited April 29, 2022).
\19\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\20\ See supra note 18.
\21\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\22\ See supra note 18.
\23\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\24\ See supra note 18.
\25\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\26\ See supra note 18.
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The proposed rule change will be effective May 2, 2022. The
Exchange initially filed proposals to adopt tiered-pricing structures
for the 10Gb ULL connections and Limited Service MEI Ports, with the
proposed fees being effective beginning August 1, 2021. Between August
2021 and February 2022, the Exchange withdrew and refiled the proposed
rule changes, each time to meaningfully attempt to provide additional
justification for the proposed fee changes, provide enhanced details
regarding the Exchange's cost methodology, and address questions
contained in the Commission's suspension orders. The Exchange received
six comment letters from three separate commenters on the filings.\27\
This revised proposal provided additional details regarding the
Exchange's cost methodology, revenue projections, and responded to
various questions and requests for information contained in the
Commission's suspension orders.\28\ On April 1, 2022, the Exchange
submitted revised proposals to provide additional clarity regarding the
Exchange's cost justification and those proposals were subsequently
suspended by the Commission.\29\ The Exchange withdrew those revised
proposals and submitted this filing on May 2, 2022. This newest revised
filing builds upon the additional details regarding the Exchange's cost
methodology and revenue projections, as well as the Exchange's
responses to various questions and requests for information contained
in the Commission's suspension orders.
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\27\ See letters from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021, October 1, 2021,
October 26, 2021, and March 15, 2022 (``SIG Letters''). See also
letter from Tyler Gellasch, Executive Director, Healthy Markets
Association (``HMA''), to Hon. Gary Gensler, Chair, Commission,
dated October 29, 2021 (``HMA Letter''); and letter from Ellen
Green, Managing Director, Equity and Options Market Structure,
Securities Industry and Financial Markets Association (``SIFMA''),
to Vanessa Countryman, Secretary, Commission, dated November 26,
2021 (``SIFMA Letter'').
\28\ See Securities Exchange Act Release Nos. 92643 (August 11,
2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-2021-35); 93165
(September 28, 2021), 86 FR 54750 (October 4, 2021) (SR-MIAX-2021-
41); 93639 (November 22, 2021), 86 FR 67758 (November 29, 2021) (SR-
MIAX-2021-41); 93775 (December 14, 2021), 86 FR 71996 (December 20,
2021) (SR-MIAX-2021-59); 94088 (January 27, 2022), 87 FR 5901
(February 2, 2022) (SR-MIAX-2021-59); and 94256 (February 15, 2022),
87 FR 9711 (February 22, 2022) (SR-MIAX-2022-07).
\29\ See Securities Exchange Act Release Nos. 94720 (April 14,
2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16) and 94719
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14).
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2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \30\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \31\ 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 which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \32\ in that
they are designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general protect investors
and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(4).
\32\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes as set forth in recent Commission and
Commission Staff guidance. On March 29, 2019, the Commission issued an
Order disapproving a proposed fee change by the BOX Market LLC Options
Facility to establish connectivity fees for its BOX Network (the ``BOX
Order'').\33\ 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

[[Page 29948]]

Act.'' \34\ Based on both the BOX Order and the Guidance, the Exchange
believes that the proposed fees are consistent with the Act because
they are: (i) Reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) comply
with the BOX Order and the Guidance; and (iii) supported by evidence
(including comprehensive revenue and cost data and analysis) that they
are fair and reasonable and will not result in excessive pricing or
supra-competitive profit.
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\33\ 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).
\34\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (the ``Guidance'').
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The Proposed Fees Will Not Result in a Supra-Competitive Profit
The Exchange believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\35\ 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.'' \36\ 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.'' \37\ 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 10Gb ULL connectivity and Limited Service MEI Ports
and will not result in the Exchange generating a supra-competitive
profit.
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\35\ See id.
\36\ Id.
\37\ Id.
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The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \38\
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.'' \39\ The Exchange provides
this analysis below.
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\38\ Id.
\39\ Id.
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The proposed fees are based on a cost-plus model. The Exchange
believes that it is important to demonstrate that the proposed fees are
based on its costs and reasonable business needs and believes the
proposed fees will allow the Exchange to begin to offset expenses.
However, as discussed more fully below, such fees may also result in
the Exchange recouping less than, or more than, all of its costs of
providing 10Gb ULL connectivity and Limited Service MEI Ports because
of the uncertainty of forecasting subscriber decision making with
respect to firms' 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 suspension orders sought additional information and comments on
various aspects of the prior proposed fee changes. In many respects,
the Commission's questions about the prior proposed fee changes raise
broader questions around the factors the Commission should consider and
the type of data and analysis an exchange should provide in considering
whether market data, port fees, or connectivity fees are fair and
reasonable under a cost-based methodology. The suspension orders also
sought 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 and percentage allocation or statements regarding the
Exchange's overall estimated costs for the internal expense categories
and general shared expenses figure. The Exchange added this additional
information below.
In this filing, the Exchange offers a conceptual framework for
further considering the Commission's questions that draws on the
Exchange's own experience over several years of analyzing its own
costs. The elements of that framework are as follows:
First, the Exchange proposes a flat, simple 10Gb ULL Fee that
imposes a single monthly fee for Members and non-Members. The Exchange
believes this relatively simple, flat fee structure is transparent and
easy for users to apply, and also helps show that it meets the
objectives of the Act. The Exchange also proposes a tiered-pricing
structure for its Limited Service MEI Ports that continues to provide
the first and second Limited Service MEI Ports free of charge. The
Exchange believes the proposed tiered-pricing structure for Limited
Service MEI Ports is also transparent and easy for users to apply, and
is a common pricing method used by other options exchanges when
charging for port connectivity.\40\
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\40\ See supra notes 19 and 23.
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The Exchange then 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
providing 10Gb ULL connectivity and Limited Service MEI Ports. That
methodology does not allow for ``double-counting'' of the same costs
for different classes of exchange products--for example transaction
services, market data, physical connectivity, ``logical'' port
connections or regulatory resources. As a result of this review, the
Exchange determined that it experienced an increase in costs since
January and April 2021 as set forth above and determined to propose to
increase select connectivity fees as described herein to attempt to
recoup this increased expense.
The Exchange then sought to narrowly allocate specific costs to
10Gb ULL connectivity and Limited Service MEI Ports to which the
proposed fees would apply. In this filing, the Exchange provided more
detail about how that allocation was determined and included
information about tangential cost items that were not included. 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 10Gb ULL connectivity and
Limited

[[Page 29949]]

Service MEI Ports. This included numerous meetings between the
Exchange's Chief Information Officer, Chief Financial Officer, Head of
Strategic Planning and Operations, Chief Technology Officer, various
members of the Legal Department, and other group leaders. The analysis
also included each department head meeting with the divisions of teams
within each department to determine the amount of time and resources
allocated by employees within each division towards the access services
and System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports. The Exchange reviewed each individual expense to
determine if such expense was related to 10Gb ULL connectivity and
Limited Service MEI Ports. Once the expenses were identified, the
Exchange department heads, with the assistance of the Exchange's
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 10Gb ULL connectivity and
Limited Service MEI Ports. For the avoidance of doubt, no expense
amount is allocated twice. Specifically, no expense amount is allocated
to more than one expense category within this filing and no expense
amount that is allocated as a cost to provide and maintain access to
the 10Gb ULL connectivity and Limited Service MEI Ports in this filing
have been or will be allocated as a cost to provide any other exchange
product or service in any other fee filing. In the suspension orders,
the Commission questioned whether further explanation of the Exchange's
cost analysis was necessary. The Exchange provides further details
concerning its cost analysis in response to this question.
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.
Finally, the Exchange acknowledges that it is difficult to predict
how much revenue the Exchange will receive from the proposed fees with
precision. The analysis conducted by the Exchange is designed to make a
fair and reasonable assessment of costs and resources allocated to
support the provision of access services associated with the proposed
fees. The Exchange further 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 basis,
reviews its costs and resource allocations to ensure it appropriately
allocates resources to properly provide services to the Exchange's
constituents. As part of this proposed rule change, and as described
further below, the Exchange is committing to conduct an annual cost
review with respect to fees that are cost justified in this proposed
rule change beginning one year from the date of this proposal, and
annually thereafter. The Exchange expects that it may propose to adjust
fees at that time, either to increase fees in the event that revenues
fail to reasonably cover costs at the estimated margin set forth below,
or to decrease fees in the event that revenue materially exceeds the
Exchange's current projections. In the event that the Exchange
determines to propose a fee change, updated cost estimates will be
included in a rule filing proposing the fee change.
The Exchange believes applying this framework to the proposed fees
shows that they are consistent with the requirements of the Act,
leaving aside that the proposed fees are relatively similar to fees
charged by other exchanges for connectivity and port access.
Exchange Costs and Cost Methodology
The Exchange notes that there are material costs associated with
providing the infrastructure and headcount to fully support access to
the Exchange via connectivity and ports. As described below, 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 10Gb ULL connectivity and Limited Service MEI Ports. For
example, to accommodate new Members, the Exchange may need to purchase
additional hardware to support those Members and provide access through
10Gb ULL connectivity and Limited Service MEI Ports.\41\ 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 those
costs associated with providing access to and maintaining its System
Networks' infrastructure.
---------------------------------------------------------------------------

\41\ The Exchange is not considering future costs associated
with accommodating new 10Gb ULL connectivity and Limited Service MEI
Ports subscriptions.
---------------------------------------------------------------------------

The Exchange estimated its total annual expense to provide 10Gb ULL
connectivity and Limited Service MEI Ports based on the following
general expense categories: (1) External expenses, which include fees
paid to third parties for certain products and services; (2) internal
expenses relating to the internal costs to provide the services
associated with 10Gb ULL connectivity and Limited Service MEI Ports;
and (3) general shared expenses.\42\ The below table details each of
these individual external and internal annual costs considered by the
Exchange to be directly related to offering 10Gb ULL connectivity and
Limited Service MEI Ports, and not any other product or service offered
by the Exchange. The below table also details the general shared
expense allocated to this proposal. Each of these expenses are
discussed in more detail further below.
---------------------------------------------------------------------------

\42\ The percentage allocations used in this proposed rule
change may differ from past filings from the Exchange or its
affiliates due to 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 providing 10Gb ULL connectivity for MIAX and
MIAX Pearl Options combined, and Limited Service MEI Ports for MIAX
only, is estimated to be $21,407,728, or $1,783,977 per month. The
Exchange utilized its estimated 2022 revenue and costs, which utilize
the same methodology set forth in the Exchange's previously-issued
Audited Unconsolidated Financial Statements.\43\
---------------------------------------------------------------------------

\43\ 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. 87875 (December 31, 2019), 85 FR 770 (January 7, 2020)
(SR-MIAX-2019-51). Accordingly, the third-party expense described in
this filing is attributed to the same line item for the Exchange's
2022 Form 1 Amendment, which will be filed in 2023. In its
suspension orders, the Commission also asked should the Exchange use
cost projections or actual costs estimated for 2021 in a filing made
in 2022, or make cost projections for 2022. The Exchange utilized
expenses from its most recent audited financial statement as those
numbers are more reliable than more recent unaudited numbers, which
may be subject to change.

[[Page 29950]]

----------------------------------------------------------------------------------------------------------------
External expenses
-----------------------------------------------------------------------------------------------------------------
Percentage of total expense amount allocated
--------------------------------------------------------------------------
Category 10Gb ULL connectivity 10Gb ULL connectivity Limited service MEI
(MIAX) (MIAX pearl options) ports (MIAX only)
----------------------------------------------------------------------------------------------------------------
Data Center Provider................. 61%.................... 61%.................... 4.8%.
Fiber Connectivity Provider.......... 61%.................... 61%.................... 2.6%.
Security Financial Transaction 73.6%.................. 73.6%.................. 4.8%.
Infrastructure (``SFTI''), and Other
Connectivity and Content Service
Providers.
Hardware and Software Providers...... 50%.................... 50%.................... 4.8%.
--------------------------------------------------------------------------
Total of External Expenses....... $4,556,734. \44\
----------------------------------------------------------------------------------------------------------------

Internal expenses
-----------------------------------------------------------------------------------------------------------------
Expense amount allocated
--------------------------------------------------------------------------
Category 10Gb ULL connectivity 10Gb ULL connectivity Limited service MEI
(MIAX) (MIAX pearl options) ports (MIAX only)
----------------------------------------------------------------------------------------------------------------
Employee Compensation................ $4,108,382............. $2,955,419............. $1,057,907
(representing 27.5% of (representing 27.5% of (representing 7.1% of
total $14,957,861 total $10,760,135 total $14,957,861
expense). expense). expense).
Depreciation and Amortization........ $2,724,062............. $1,460,789............. $186,118
(representing 66% of (representing 61.3% of (representing 4.5% of
total $4,135,294 total $2,382,314 total $4,135,294
expense). expense). expense).
Occupancy............................ $399,859............... $301,578............... $37,088
(representing 52% of (representing 52% of (representing 4.8% of
total $769,108 total $580,068 total $769,108
expense). expense). expense).
--------------------------------------------------------------------------
Total of Internal Expenses....... $13,231,202.
--------------------------------------------------------------------------
Allocated Shared Expenses............ $1,982,793............. $1,351,081............. $285,918
(representing 49% of (representing 44% of (representing 7.1% of
total $4,042,629 total $3,060,734 total $4,042,629
expense). expense). expense).
--------------------------------------------------------------------------
Total of Allocated Shared $3,619,792.
Expenses.
--------------------------------------------------------------------------
Total External + Internal + $21,407,728.
Allocated Shared Expenses.
----------------------------------------------------------------------------------------------------------------

In its suspension orders, the Commission solicited commenters'
views on whether the Exchange has provided sufficient detail on the
identity and nature of services provided by third parties. The
Commission further solicited commenters' views on whether the Exchange
has provided sufficient detail on the elements that go into
connectivity and port costs, including how shared costs are allocated
and attributed to connectivity and port expenses, to permit an
independent review and assessment of the reasonableness of purported
cost-based fees and the corresponding profit margin thereon. In
response, the Exchange provides additional detail regarding the
identity and nature of services provided by third parties, the elements
that go into connectivity and port costs, and how expenses are
allocated. The Exchange believes this additional detail is sufficient
to support a finding that the proposed fees are consistent with the
Exchange Act.
---------------------------------------------------------------------------

\44\ 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 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange describes below the analysis conducted for each
expense and the resources or determinations that were considered when
determining the amount necessary to allocate to each expense. The
Exchange notes that, without the specific external and internal expense
items, the Exchange would not be able to provide access to its System
Networks through 10Gb ULL connectivity and Limited Service MEI Ports.
Each of these expense items, including physical hardware, software,
employee compensation and benefits, occupancy costs, and the
depreciation and amortization of equipment, were identified through a
line-by-line cost analysis and determined to be integral to providing
access to its System Networks through 10Gb ULL connectivity and Limited
Service MEI Ports for the reasons discussed below. Only a portion of
all fees paid to such third parties are included in the third party
expenses described herein, and,

[[Page 29951]]

again, no expense amount is allocated twice. For example, the Exchange
does not allocate its entire information technology and communication
costs to providing access to its System Networks through 10Gb ULL
connectivity and Limited Service MEI Ports because it determined that a
portion of those costs are attributable to other areas of the
Exchange's operations, such as transaction services, market data, and
other forms of connectivity offered by the Exchange. This may result in
the Exchange under allocating an expense to provide access to its
System Networks through 10Gb ULL connectivity and Limited Service MEI
Ports, and such expenses may actually be higher than what the Exchange
allocated as part of this proposal.\45\
---------------------------------------------------------------------------

\45\ The Exchange notes that expenses associated with its
affiliates, Emerald and MIAX Pearl's equities trading platform, 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 as compared to prior versions of this
proposed fee change that were previously withdrawn by the Exchange. The
revised percentages are, among other things, the result of the shifting
of internal resources in response to business objectives. Therefore,
the percentage allocations used in this proposed rule change may differ
from past filings from the Exchange or its affiliates due to
adjustments to internal resource allocations, and different system
architecture of the Exchange as compared to its affiliates.\46\
---------------------------------------------------------------------------

\46\ See supra notes 5, 6, and 8 and accompanying text.
---------------------------------------------------------------------------

The Exchange believes it is reasonable to consider the expense and
revenue for 10Gb ULL connectivity and Limited Service MEI Ports
together because ports and connectivity are inextricably linked
components of the network infrastructure, and that both are necessary
for a market participant to access the Exchange. The various types of
connectivity and port alternatives that the Exchange offers provide a
wide array of access alternatives necessary for a market participant to
conduct its business using the Exchange, which is a business decision
to be made by each particular type of market participant. The different
types of connectivity and port alternatives allows Members to conduct
their different business strategies--some Members put an emphasis on
speed, while others emphasize other strategies, such as redundancy and
certainty of execution. The Exchange does not require a Member to have
a certain framework for accessing the Exchange, but provides various
connectivity and port alternatives for each Member's distinct business
lines.
External Expense Allocations
For 2022, annual expenses relating to fees paid by the Exchange to
third parties for products and services necessary to provide 10Gb ULL
connectivity and Limited Service MEI Ports are estimated to be
$4,556,734.\47\ This includes 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) SFTI and
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) hardware and software providers, which support the production
environment in which Members and non-Members connect to the network to
trade and receive market data.\48\
---------------------------------------------------------------------------

\47\ See supra note 44.
\48\ Id.
---------------------------------------------------------------------------

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, provide a trading platform for
market participants, and produce and distribute market data. The
Exchange does not employ a separate fee to cover its data center
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity and Limited Service MEI Ports.
The Exchange reviewed its data center footprint and space utilized,
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,
connectivity (10Gb ULL and 1Gb ULL separately), and ports based on
space utilized by each area.\49\ Based on this review, the Exchange and
MIAX Pearl Options determined that 61% of the total applicable data
center provider expense for each is applicable to providing 10Gb ULL
connectivity and 4.8% for Limited Service MEI Ports for MIAX. The
Exchange reviewed space utilized to house rack space, cage usage,
servers, switches, cabling, storage space, heating and cooling of
physical space, and monitoring, and identified that a small portion of
that footprint is dedicated to equipment used to support 10Gb ULL
connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

\49\ The Investors Exchange, Inc. (``IEX'') also allocated data
center costs to produce market data based on space utilized. See
Securities Exchange Act Release No. 94630 (April 7, 2022), 87 FR
21945, at page 21949 (April 13, 2022) (SR-IEX-2022-02) (``IEX Market
Data Fee Proposal'') (noting that ``[d]ata Center costs consist of
the fees charged by the third-party data centers used by IEX and
represent less than 10% the Exchange's total data center costs based
on space utilized'' (emphasis added)).
---------------------------------------------------------------------------

The Exchange believes this allocation is reasonable because it
represents the costs associated with housing the Exchange's equipment
dedicated to supporting 10Gb ULL connectivity and Limited Service MEI
Ports. 10Gb ULL connectivity and Limited Service MEI Ports are core
means of access to the Exchange's network, providing several methods
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 space utilized to provide and maintain
connectivity and port access 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 and space that are dedicated to market data. The
Exchange also did not allocate the remainder of the data center expense
because it pertains to space utilized by other areas of the Exchange's
operations, such as 1Gb ULL connectivity, other types of ports, market
data, and transaction services.

[[Page 29952]]

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. Fiber
connectivity is also necessary for personnel responsible for overseeing
and providing customer service related to supporting 10Gb ULL
connectivity and Limited Service MEI Ports, receiving relevant data and
being able to communicate between the Exchange's various locations and
data centers. 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 10Gb ULL connectivity
and Limited Service MEI Ports to its Members and their customers.
Without the retention of a third party fiber connectivity provider, the
Exchange would not be able to communicate between its data centers and
office locations in a manner necessary to maintain and support 10Gb ULL
connectivity and Limited Service MEI Ports. Fiber connectivity is a
necessary integral means to disseminate information, including data
related to supporting 10Gb ULL connectivity and Limited Service MEI
Ports, from the Exchange's primary data center to other Exchange
locations. It is necessary for Exchange employees located in various
locations to be able to communicate and receive the necessary data to
maintain and provide customer support related to 10Gb ULL connectivity
and Limited Service MEI Ports. The Exchange would not be able to
operate and support the network and provide and maintain access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports without third party fiber connectivity. The
Exchange does not employ a separate fee to cover its fiber connectivity
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity and Limited Service MEI 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.
Based on this review, the Exchange and MIAX Pearl Options determined
that 61% of the total fiber connectivity expense for each was
applicable to providing and maintaining access services and System
Networks associated with 10Gb ULL connectivity and 2.6% for Limited
Service MEI Ports for MIAX. The Exchange reviewed its total fiber
connectivity expense and allocated it among transaction services,
connectivity, ports, market data, and administrative operations, based
on usage. The Exchange then further divided up its fiber connectivity
costs related to connectivity and ports and identified the portion that
is attributable to supporting 10Gb ULL connectivity and Limited Service
MEI Ports, also based on usage. This allocation is, therefore, based on
the amount of bandwidth and fiber connectivity the Exchange calculated
is utilized to support exchange operations, and ongoing network
monitoring and maintenance that are necessary to provide 10Gb ULL
connectivity and Limited Service MEI Ports. The Exchange believes this
allocation is reasonable because 10Gb ULL connectivity and Limited
Service MEI Ports are core means of access to the Exchange's network,
providing several methods 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. The Exchange also excluded from this
allocation fiber connectivity usage related to other business lines,
such as transaction services, market data, and other forms of
connectivity offered by the Exchange, 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
and does not directly relate to providing and maintaining access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports. The Exchange believes this allocation is
reasonable because it represents the Exchange's cost to providing and
maintaining access services and System Networks associated with 10Gb
ULL connectivity and Limited Service MEI Ports.
Connectivity and Content Services Provided by SFTI and Other Providers
The Exchange relies on SFTI and various other connectivity and
content service providers for connectivity and data feeds for the
entire U.S. options industry, as well as content, connectivity, and
infrastructure services for critical components of the network that are
necessary to provide and maintain its System Networks and access to its
System Networks via 10Gb ULL connectivity and Limited Service MEI
Ports. Specifically, the Exchange utilizes SFTI and other content
service provider to connect to other national securities exchanges, the
Options Price Reporting Authority (``OPRA''), and to receive market
data from other exchanges and market data providers. SFTI is operated
by the Intercontinental Exchange, the parent company of five registered
exchanges, and has become integral to the U.S. markets. The Exchange
understands SFTI provides services to most, if not all, of the other
U.S. exchanges and other market participants. Connectivity and market
data provided by SFTI and other service is critical to the Exchanges
daily operations and performance of its System Networks to which market
participants connect to via 10Gb ULL connectivity and Limited Service
MEI Ports. 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 10Gb ULL connectivity and Limited Service MEI Ports.
The Exchange reviewed it costs to retain SFTI and other content
service providers, including network monitoring and maintenance,
remediation of connectivity related issues, and ongoing administrative
activities related to connectivity management. Based on this review,
the Exchange and MIAX Pearl determined that 73.6% of the total
applicable SFTI and other service provider expense for each is
allocated to providing and maintaining access services and System
Networks associated with 10Gb ULL connectivity and 4.8% for Limited
Service MEI Ports for MIAX. The Exchange reviewed its total SFTI and

[[Page 29953]]

other service provider expense and allocated it among transaction
services, connectivity, ports, other market data products, and
administrative operations, based on usage. The Exchange then further
divided up its SFTI and other service provider costs related to
connectivity and ports and identified the portion that is attributable
to supporting 10Gb ULL connectivity and Limited Service MEI Ports, also
based on usage. This allocation is, therefore, based on the amount of
SFTI and other service provider resources utilized to support exchange
operations, and ongoing network monitoring and maintenance that are
necessary to provide 10Gb ULL connectivity and Limited Service MEI
Ports. SFTI and other content service providers are key vendors and
necessary components in providing access 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 10Gb ULL connectivity and
Limited Service MEI Ports. Connectivity via SFTI is necessary for
purposes of order routing and accessing disaster recovery facilities in
the case of a system outage. Engaging SFTI and other like vendors
provides purchasers of 10Gb ULL 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
exchanges 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 10Gb ULL
connectivity or Limited Service MEI Ports, such as transaction
services, market data, other forms of connectivity offered by the
Exchange, or unrelated administrative services. 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 10Gb ULL connectivity and Limited Service MEI Ports, and
not any other service, as supported by its cost review.
Hardware and Software Providers
The Exchange relies on dozens of third-party hardware and software
providers for equipment necessary to operate its System Networks. This
includes either the purchase or licensing of physical equipment, such
as servers, switches, cabling, and devices needed by Exchange personnel
to monitor servers and the health 10Gb ULL connectivity and Limited
Service MEI Ports. This consists of real-time monitoring of system
performance, integrity, and latency of 10Gb ULL connectivity and
Limited Service MEI Ports. It also includes the Exchange purchasing or
licensing 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 a 10Gb ULL connectivity and Limited Service MEI Ports. Hardware and
software equipment and licenses for that equipment are also necessary
to operate and monitor physical assets necessary to offer physical
connectivity to the Exchange. Hardware and software equipment and
licenses are key to the operation of the Exchange and, without them,
the Exchange would not be able to operate and support its System
Networks and provide access to its Members and their customers. The
Exchange does not employ a separate fee to cover its hardware and
software expense and recoups that expense, in part, by charging for
10Gb ULL connectivity and Limited Service MEI Ports.
The Exchange reviewed its 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. The Exchange
then divided those costs among transaction services, ports,
connectivity, market data, and other Exchange operations based on
whether all of that hardware or software is based on usage. The
Exchange then reviewed the amount allocated to connectivity and ports
generally and what portion of that hardware and software equipment or
license is used to support 10Gb ULL connectivity and Limited Service
MEI Ports specifically. Based on this review, the Exchange and MIAX
Pearl determined that 50% of the total applicable hardware and software
expense for each is allocated to providing and maintaining access
services and System Networks associated with 10Gb ULL connectivity and
4.8% for Limited Service MEI Ports for MIAX. These percentages reflect
the amount of hardware and software equipment and licenses dedicated to
support 10Gb ULL connectivity and Limited Service MEI Ports.\50\
Hardware and software equipment and licenses are key to the operation
of the Exchange and its System Networks. Without them, the Exchange
would not be able to provide and maintain access services and System
Networks associated with 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange only allocated the portion of this expense to the
hardware and software that is related to 10Gb ULL connectivity and
Limited Service MEI Ports, such as operating servers and equipment
necessary to provide and maintain access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports.
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 transaction services, market data, and
other forms of connectivity offered by the Exchange, and is not
directly relate to providing 10Gb ULL connectivity or Limited Service
MEI Ports. The Exchange believes this allocation is reasonable because
it represents the Exchange's cost to provide and maintain access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports, and not any other service, as supported by
its cost review.
---------------------------------------------------------------------------

\50\ The Exchange notes that IEX used a similar methodology to
allocate hardware costs to market data. See IEX Market Data Fee
Proposal, supra note 49 at page 21950 (noting that ``IEX only
included hardware specifically dedicated to the market data feeds in
calculating the costs of providing market data'').
---------------------------------------------------------------------------

Internal Expense Allocations
For 2022, total combined internal annual expense relating to the
Exchange and MIAX Pearl Options to provide and maintain their System
Networks and access to their System Networks for 10Gb ULL connectivity,
and for access via Limited Service MEI Ports for MIAX, is estimated to
be $13,231,202. This includes costs associated with: (1) Employee
compensation and benefits for full-time employees that support the
System Networks and access to System Networks via 10Gb ULL connectivity
and Limited Service MEI Ports, including staff in network operations,
trading operations, development, system operations, business, as well
as staff in

[[Page 29954]]

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 the 10Gb ULL connectivity and Limited Service MEI
Ports, including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the network for trading; and (3) occupancy costs for leased
office space for staff that provide and maintain the System Networks
and access to System Networks via 10Gb ULL connectivity and Limited
Service MEI Ports.
Employee Compensation and Benefits
Human personnel are key to exchange operations and supporting the
Exchange's ongoing provision of 10Gb ULL connectivity and Limited
Service MEI Ports. The Exchange reviewed its employee compensation and
benefits expense and the portion of that expense allocated to providing
10Gb ULL connectivity and Limited Service MEI Ports. As part of this
review, the Exchange considered employees whose functions include
providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports and
used a blended rate of compensation reflecting salary, stock and bonus
compensation, bonuses, benefits, payroll taxes, and 401K matching
contributions.\51\
---------------------------------------------------------------------------

\51\ For purposes of this allocation, the Exchange did not
consider expenses related to office space, supplies, or equipment
use by employees who support 10Gb ULL connectivity and Limited
Service MEI Ports.
---------------------------------------------------------------------------

In its suspension orders, the Commission asked the Exchange provide
more detail about the methodology the Exchange used to determine how
much of an employee's time is devoted to connectivity and port related
activities. In considering the cost of personnel, the Exchange
generally considered the time spent on various access service projects
and initiatives through project management tracking tools and analysis
of employee resource allocations, among its Technology Team in the
following areas: Technical Operations, Software Engineering, Quality
Assurance, and Infrastructure. The Exchange did not consider non-
Technology Teams such as Market Operations, Project Management,
Regulatory, Legal, and Accounting/Finance.\52\
---------------------------------------------------------------------------

\52\ The Exchange notes that IEX used a similar methodology to
allocate employee compensation related costs to market data. See IEX
Market Data Fee Proposal, supra note 49 at page 29150 (noting that
``[f]or personnel costs, IEX calculated an allocation of employee
time for employees whose functions include providing and maintaining
IEX Data and/or the proprietary market data feeds used to transmit
IEX Data, and used a blended rate of compensation reflecting salary,
stock and bonus compensation, benefits, payroll taxes, and 401(k)
matching contributions'').
---------------------------------------------------------------------------

Based on this review, the Exchange and MIAX Pearl Options
determined to allocate a combined $8,121,708 in combined employee
compensation and benefits expense to provide and maintain access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports. This is only a portion of the $25,717,996
total projected combined expense for employee compensation and benefits
for MIAX and MIAX Pearl Options. Of that total, the Exchange and MIAX
Pearl Options allocated approximately 27.5% of the total applicable
employee compensation and benefits expense for each to providing and
maintaining access services and System Networks associated with 10Gb
ULL connectivity and 7.1% for Limited Service MEI Ports for MIAX. The
Exchange and MIAX Pearl Options determined the cost allocations for
employees who perform work in support of providing and maintaining
access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports to arrive at full time
equivalents (``FTE'') of 12.0 FTEs for MIAX and 8.9 FTEs for MIAX Pearl
Options across all the identified personnel related to 10Gb ULL
connectivity, and 3.1 FTEs across all the identified personnel related
to Limited Service MEI Ports for MIAX. The Exchange then multiplied the
FTE times a blended compensation rate for all relevant Exchange
personnel to determine the personnel costs associated with providing
and maintaining access services and System Networks associated with
10Gb ULL connectivity and Limited Service MEI Ports. Senior staff also
reviewed these time allocations with department heads and team leaders
to determine whether those allocations were appropriate. These
employees are critical to the Exchange to providing and maintaining
access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports. The Exchange determined the
above allocation based on the personnel whose work focused on functions
necessary to providing and maintaining access services and System
Networks associated with 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange does not charge a separate fee regarding employees
who support 10Gb ULL connectivity and Limited Service MEI Ports and the
Exchange seeks to recoup those expenses, in part, by charging for 10Gb
ULL connectivity and Limited Service MEI Ports.
The Exchange believes it is appropriate to include incentive
compensation in the blended personnel compensation rate on the same
basis as other personnel costs for in-scope employees because incentive
compensation is a part of the total personnel costs associated with the
Exchange's provision of 10Gb ULL connectivity and Limited Service MEI
Ports. Moreover, the Exchange notes that it has taken a conservative
approach in determining which employees to include in its cost
analysis, in terms of function and percent allocation, so that the
included personnel costs are directly and closely tied to the costs of
providing 10Gb ULL connectivity and Limited Service MEI Ports. The FTE
allocations represent just 31.5% of the Exchange's and MIAX Pearl's
overall personnel costs. Consistent with the Exchange's conservative
methodology to limit costs allocated to 10Gb ULL connectivity and
Limited Service MEI Ports, this approach includes only a de minimis
personnel cost allocation for senior level executives and no allocation
for members of the Exchange's board of directors. Accordingly, the
Exchange believes that the allocated personnel expenses included are
appropriately attributable to 10Gb ULL connectivity and Limited Service
MEI Ports.
Depreciation and Amortization
A key expense incurred by the Exchange relates to the depreciation
and amortization of equipment that the Exchange procured to provide and
maintain access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports. The Exchange reviewed all
of its physical assets and software, owned and leased, and determined
whether each asset is related to providing and maintaining the 10Gb ULL
connectivity and Limited Service MEI Ports, and added up the
depreciation of those assets. All physical assets and software, which
includes assets used for testing and monitoring of Exchange
infrastructure, were valued at cost and depreciated or leased over
periods ranging from three to five years. Based on the Exchange's
experience, this depreciation period equals the typical life expectancy
of those assets. In determining the amount of depreciation and
amortization to apply to providing

[[Page 29955]]

and maintaining access services and System Networks associated with
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange
considered the depreciation of hardware and software that are key to
the operation of the Exchange and its provision of 10Gb ULL
connectivity and Limited Service MEI Ports. 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 provide and
maintain access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports. Without them, market
participants would not be able to access the Exchange. The Exchange
seeks to recoup a portion of its depreciation expense by charging for
10Gb ULL connectivity and Limited Service MEI Ports.
Based on this review, the Exchange and MIAX Pearl Options
determined to allocate a combined $4,370,969 in combined depreciation
and amortization expense to provide and maintain access services and
System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports. This is only a portion of the $6,517,608 total
projected combined expense for depreciation and amortization for MIAX
and MIAX Pearl Options. This allocation represents approximately 66%
for MIAX and 61.3% for MIAX Pearl Options of the total applicable
depreciation expenses to providing and maintaining access services and
System Networks associated with 10Gb ULL connectivity and 4.5% for
Limited Service MEI Ports for MIAX. For purposes of the allocation of
these costs to 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange allocates the annual depreciation (i.e., one-third or one-
fifth of the initial asset value based on the typical life expectancy
of those assets). One-third or one-fifth of the cost of each asset is
included in the annual costs allocated to 10Gb ULL connectivity and
Limited Service MEI Ports. The Exchange only included assets
specifically dedicated to 10Gb ULL connectivity and Limited Service MEI
Ports in calculating the costs of providing 10Gb ULL connectivity and
Limited Service MEI Ports. This means that physical assets used for
such as transaction services, market data, other forms of connectivity
offered by the Exchange, or other Exchange operations were excluded
from the calculation.\53\ 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, unrelated administrative services, or other
connectivity or ports offered by the Exchange. All of the expenses
outlined in this proposed fee change refer to the operating expenses of
the Exchange. In the suspension orders, the Commission asked for
additional detail or explanation to ensure that no expense amount is
allocated twice. The Exchange did not included any future capital
expenditures within these costs ensuring that no cost is counted twice.
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.
---------------------------------------------------------------------------

\53\ The Exchange notes that IEX used a similar methodology to
allocate hardware costs to market data. See IEX Market Data Fee
Proposal at note 54, supra note 49 at page 21950 (noting that
``[h]ardware is depreciated on a straight-line three-year period,
which in IEX's experience, is equal to the typical life expectancy
of those assets. As noted above, one-third of the cost of each
hardware asset is included in the annual costs allocated to market
data. IEX only included hardware specifically dedicated to the
market data feeds in calculating the costs of providing market data.
This means that physical assets used for both order entry and market
data were excluded from the calculation'').
---------------------------------------------------------------------------

Occupancy
The Exchange rents and maintains multiple physical locations to
house staff and equipment necessary to support access to System
Networks via 10Gb ULL connectivity and Limited Service MEI Ports. 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 access services and
System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports. Similarly, the Exchange also considered the actual
physical space used to house hardware and other equipment necessary to
provide and maintain the 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange maintains staff that support 10Gb ULL connectivity
and Limited Service MEI Ports in various locations and needs to provide
workplaces for that staff as well as space to house hardware and
equipment necessary for those employees to perform those functions.\54\
This equipment includes computers, servers, and accessories necessary
to support the access to the System Networks via 10Gb ULL connectivity
and Limited Service MEI Ports. Based on this review, the Exchange and
MIAX Pearl Options determined to allocate a combined $738,525 in
occupancy expense to providing and maintaining access services and
System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports for MIAX. According to the Exchange's calculations,
MIAX and MIAX Pearl Options each allocated approximately 52% of their
total applicable occupancy expense to providing and maintaining access
services and System Networks associated with 10Gb ULL connectivity and
4.8% for Limited Service MEI Ports for MIAX. This is only a portion of
the $1,349,176 total projected combined expense for occupancy for MIAX
and MIAX Pearl Options. 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 10Gb ULL connectivity and Limited Service MEI Ports. The
Exchange considered the rent paid for the Exchange's Princeton and
Miami offices, as well as various related costs, such as physical
security, property management fees, property taxes, and utilities at
each of those locations. The Exchange did not include occupancy
expenses related to housing employees and equipment related to other
Exchange operations, such as transaction and administrative services.
---------------------------------------------------------------------------

\54\ For the avoidance of doubt, the Exchange did not include
within this cost any portion of its costs related to third party
fiber connectivity used by Exchange staff in different office
locations to communicate as part of their role in supporting 10Gb
ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

Allocated Shared Expense
Finally, a limited portion of general shared expenses was allocated
to providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports as
without these general shared costs, the Exchange would not be able to
operate in the manner that it does. 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 and
MIAX Pearl Options's

[[Page 29956]]

combined general shared expense allocated to 10Gb ULL connectivity and
Limited Service MEI Ports for MIAX is estimated to be $3,619,792. This
represents approximately 49% for MIAX and 44% for MIAX Pearl Options
for 10Gb ULL connectivity, and 7.1% for MIAX for Limited Service MEI
Ports, of the $7,103,363 total projected combined general shared
expense for MIAX and MIAX Pearl Options. The Exchange used the weighted
average of the above allocations to determine the amount of general
shared expenses to allocate to the Exchange. Next, based on additional
management and expense analysis, these fees are allocated to the
proposal.
Revenue and Estimated Profit Margin
The Exchange only has four primary sources of revenue and cost
recovery mechanisms to fund all of its operations: Transaction fees,
access fees, 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 and MIAX Pearl Option's estimated
revenue associated with 10Gb ULL connectivity and Limited Service MEI
Ports for MIAX, the Exchange and MIAX Pearl Options analyzed the number
of subscribers currently utilizing 10Gb ULL connectivity (for both on
the shared network) and Limited Service MEI Ports (for MIAX) 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 external expenses, as well as because the
Exchange is committing to review this cost analysis for these fees on
an annual basis going forward.
For March 2022, prior to the proposed fees, the Exchange and MIAX
Pearl Options had a combined 173 10Gb ULL connections and MIAX had
1,645 Limited Service MEI Ports purchased, for which the Exchange and
MIAX Pearl Options charged a total of $1,829,387 (including charges for
connections that were dropped or added mid-month, resulting in pro-
rated charges). This resulted in a profit of $45,410 for that month (a
profit margin of 2.5%). For April 2022, the Exchange and MIAX Pearl
Options anticipate that a combined 174 10Gb ULL connections and 1,677
Limited Service MEI Ports for MIAX will be charged for (as of the date
of this filing).\55\ Assuming the Exchange and MIAX Pearl Options
charge the proposed monthly rate of $12,000 per 10Gb ULL connection and
the proposed tiered-pricing rates for Limited Service MEI Ports for
MIAX, the Exchange and MIAX Pearl Options would generate revenue of
$2,329,450 for April 2022 (not including potential pro-rated connection
charges for mid-month connections) for 10Gb ULL connectivity for both
exchanges and Limited Service MEI Ports for MIAX combined. This would
result in a profit of $545,473 ($2,329,450 minus $1,783,977) for that
month (a 23.4% profit margin). As discussed above, the Exchange
believes it is reasonable to consider the expense and revenue for 10Gb
ULL connectivity and Limited Service MEI Ports together because ports
and connectivity are inextricably linked components of the network
infrastructure, and that both are necessary for a market participant to
access the Exchange.
---------------------------------------------------------------------------

\55\ The Exchange notes that the number of subscribers of 10Gb
ULL connections and Limited Service MEI Ports may change over time.
For example, from June 2021 to April 2022, MIAX and MIAX Pearl
Options had the following number of combined subscribers of 10Gb ULL
connectivity per month: June (152); July (156); August (154);
September (154); October (154); November (152); December (159);
January (174); February (171); March (173); April (174). From June
2021 to April 2022, MIAX had the following number of Limited Service
MEI Ports utilized per month: June (1,246); July (1,248); August
(1.720); September (1,729); October (1,681); November (1,674);
December (1,628); January (1,670); February (1,638); March (1,645);
April (1,677).
---------------------------------------------------------------------------

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 connections and ports may be
purchased from month to month as Members and non-Members are free to
add and drop connections and ports at any time based on their own
business decisions.
The Exchange believes the proposed profit 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.'' \56\ Until recently, the
Exchange has operated at a cumulative net annual loss since it launched
operations in 2008.\57\ 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 connectivity, at lower rates than
other options exchanges to attract order flow and encourage market
participants to experience the high determinism, low latency, and
resiliency of the Exchange's trading systems. The Exchange should not
now be penalized for seeking to raise it fees to near market rates
after offering such products as discounted prices. Therefore, the
Exchange believes the proposed fees are reasonable because they are
based on both relative costs to the Exchange to provide 10Gb ULL
connectivity and Limited Service MEI Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

\56\ See supra note 34.
\57\ The Exchange has incurred a cumulative loss of $175 million
since its inception in 2008 to 2020, the last year for which the
Exchange's Form 1 data is available. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed July 28, 2021, available at
<a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000460.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000460.pdf</a>.
---------------------------------------------------------------------------

The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent such revenue
actually produces the revenue estimated. As a competitor in 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 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports or
obtaining new clients that will purchase such access. To the extent the
Exchange is successful in encouraging new clients to utilize 10Gb ULL
connectivity and Limited Service MEI Ports, the Exchange does not
believe it should be penalized for such

[[Page 29957]]

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 this
proposal demonstrates this fact.
Further, the proposed profit margin reflects the Exchange's efforts
to control its costs. A profit margin should not be judged alone based
on its size, but whether the ultimate fee reflects the value of the
services provided and is in line with other exchanges. A profit margin
on one exchange should not be deemed excessive where that exchange has
been successful in controlling costs, but not excessive where an
exchange is charging the same fee but has a lower profit margin due to
higher costs.
The expected profit margin is reasonable because the Exchange
offers a premium System Network, System Networks connectivity, and a
highly deterministic trading environment. The Exchange is recognized as
a leader in network monitoring, determinism, risk protections, and
network stability. For example, the Exchange experiences approximately
a 95% determinism rate, system throughput of approximately 36 million
quotes per second and average round trip latency rate of approximately
19 microseconds for a single quote. The Exchange provides extreme
performance and radical scalability designed to match the unique needs
of trading differing asset class/market model combinations. Exchange
systems offer two customer interfaces, FIX gateway for orders, and
ultra-low latency interfaces and data feeds with best-in-class wire
order determinism. The Exchange also offers automated continuous
testing to ensure high reliability, advanced monitoring and systems
security, and employs a software architecture that results in
minimizing the demands on power, space, and cooling while allowing for
rapid scalability, resiliency and fault isolation. The Exchange also
provides latency equalized cross-connects in the primary data center
ensures fair and cost efficient access to the Exchange's Systems. The
Exchange, therefore, believes the anticipated profit margin is
reasonable because it reflects the Exchange's cost controls and the
quality of the Exchanges systems.
Finally, the Exchange believes that the proposed fees are
reasonable because they will not impose onerous audit requirements on
subscribers, because there will be no need to substantiate the number
of users of 10Gb ULL connectivity and Limited Service MEI Ports or the
manner in which it is being used.
Annual Review of Fees
In its suspension orders, the Commission asks whether exchanges
should periodically reevaluate fees on an ongoing and periodic basis in
order to assure that actual revenue aligns with a reasonable cost-plus
model. As described above and as part of this proposed rule change, the
Exchange is committing to conduct a one year review of the fees that
are cost justified as part of this proposed rule change after the date
of this proposal, and annually thereafter. The Exchange expects that it
may propose to adjust fees at that time, either to increase fees in the
event that revenues fail to reasonably cover costs at the estimated
margin set forth below [sic], or to decrease fees in the event that
revenue materially exceeds the Exchange's current projections. In the
event that the Exchange determines to propose a fee change, updated
cost estimates will be included in a rule filing proposing the fee
change. The Exchange believes this approach will further increase
transparency around market data costs and help to ensure that Exchange
fees continue to be reasonably related to costs.
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 options exchanges'
costs to provide connectivity and port access or their fee markup over
those costs, and therefore cannot use other exchange's connectivity and
port fees as benchmarks to determine a reasonable markup over the costs
of providing such access. Nevertheless, the Exchange believes the other
exchanges' 10Gb connectivity and port fees are useful examples of
alternative approaches to providing and charging for access
notwithstanding that the competing exchanges may have different system
architectures that may result in different cost structures for the
provision of connectivity and ports. To that end, the Exchange believes
the proposed fees are reasonable because the proposed fees are similar
to or less than fees charged for similar connectivity and port access
provided by other options exchanges with comparable market shares.
As described in the table below, the Exchange's proposed fees
remain similar to or less than fees charged for similar connectivity
and port access provided by other options exchanges with similar market
share. In the each of the below cases, the Exchange's proposed fees are
still significantly lower than that of competing options exchanges with
similar market share. Each of the market data rates in place at
competing options exchanges were filed with the Commission for
immediate effectiveness and remain in place today.

------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX (as proposed) (equity 10Gb ULL $12,000.
options market share of 5.67% connection. 1-2 ports. FREE (not
as of April 29, 2022 for the Limited Service changed in this
month of April) \58\. MEI Port. proposal).
3-4 ports. $150.
5-6 ports. $200.
7 or more ports.
$250.
NASDAQ \59\ (equity options 10Gb Ultra fiber $15,000.
market share of 8.47% as of connection. 1-5 ports. $1,500.
April 29, 2022 for the month SQF Port........ 6-20 ports. $1,000.
of April) \60\. 21 or more ports.
$500.
ISE \61\ (equity options market 10Gb Ultra fiber $15,000.
share of 5.48% as of April 29, connection SQF $1,100
2022 for the month of April) Port.
\62\.
NYSE American\63\ (equity 10Gb LX LCN $22,000.
options market share of 8.13% connection Ports 1-40. $450.
as of April 29, 2022 for the Order/Quote Ports 41 and greater.
month of April) \64\. Entry Port. $150.

[[Page 29958]]

GEMX \65\ (equity options 10Gb Ultra $15,000.
market share of 2.36% as of connection SQF $1,250.
April 29, 2022 for the month Port.
of April) \66\.
------------------------------------------------------------------------

The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
---------------------------------------------------------------------------

\58\ See supra note 18.
\59\ See supra note 19.
\60\ See supra note 18.
\61\ See supra note 21.
\62\ See supra note 18.
\63\ See supra note 23.
\64\ See supra note 18.
\65\ See supra note 25.
\66\ See supra note 18.
---------------------------------------------------------------------------

The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because, for one
10Gb ULL connection, the Exchange provides each Member or non-Member
access to all twenty-four (24) matching engines on MIAX and a vast
majority choose to connect to all twenty-four (24) matching engines.
The Exchange believes that other exchanges require firms to connect to
multiple matching engines.\67\
---------------------------------------------------------------------------

\67\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at <a href="http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf">http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf</a>. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------

The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume the more
bandwidth and network resources than users of 1Gb ULL connection.
Specifically, the Exchange notes that 10Gb ULL connection users account
for approximately more than 99% of message traffic over the network,
while the users of the 1Gb ULL connections account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have a business need
for the high performance network solutions required by 10Gb ULL users.
The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets and the capacity to handle approximately 38
million quote messages per second. On an average day, the Exchange and
MIAX Pearl handle over approximately 8,304,500,000 billion total
messages. Of that total, users of the 10Gb ULL connections generate
approximately 8.3 billion messages, and users of the 1Gb connections
generate approximately 4.5 million messages. To achieve a consistent,
premium network performance, the Exchange must build out and maintain a
network that has the capacity to handle the message rate requirements
of its most heavy network consumers. These billions of messages per day
consume the Exchange's resources and significantly contribute to the
overall network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\68\ Thus, as
the number of messages an entity increases, certain other costs
incurred by the Exchange that are correlated to, though not directly
affected by, connection costs (e.g., storage costs, surveillance costs,
service expenses) also increase. Given this difference in network
utilization rate, the Exchange believes that it is reasonable,
equitable, and not unfairly discriminatory that the 10Gb ULL users pay
for the vast majority of the shared network resources from which all
market participants' benefit.
---------------------------------------------------------------------------

\68\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

The Exchange also believes that the connectivity fees are equitably
allocated amongst users of the network connectivity alternatives, when
these fees are viewed in the context of the overall trading volume on
the Exchange. To illustrate, the purchasers of the 10Gb ULL
connectivity account for approximately 94% of the volume on the
Exchange. This overall volume percentage (94% of total Exchange volume)
is in line with the amount of network connectivity revenue collected
from 10Gb ULL purchasers (87% of total Exchange connectivity revenue).
For example, utilizing a recent billing cycle, Exchange Members and
non-Members that purchased 10Gb ULL connections accounted for
approximately 87% of the total network connectivity revenue collected
by the Exchange from all connectivity alternatives; and Members and
non-Members that purchased 1Gb and 10Gb connections accounted for
approximately 13% of the revenue collected by the Exchange from all
connectivity alternatives.
Limited Service MEI Ports
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, like above for the 10Gb ULL
connectivity, the Exchange notes that the Market Makers who take the
maximum amount of Limited Service MEI Ports account for approximately
greater than 99% of message traffic over the network, while Market
Makers with fewer Limited Service MEI Ports account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, Market Makers who only utilize the two free Limited Service
MEI Ports do not have a business need for the high performance network
solutions required by Market Makers who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. On an average day,
the Exchange handles over approximately 9.1 billion total quotes. Of
that total, Market Makers with the maximum amount of Limited Service
MEI Ports generate approximately 6 billion messages, and Market Makers
who utilize the two free Limited Service MEI Ports generate 1.5

[[Page 29959]]

billion messages. Specifically, Market Makers who receive 1 to 2
Limited Service MEI ports for free submitted an average of 312,274,040
quotes per day for the month of April 2022. Also for April 2022, Market
Makers who purchased 3 to 4 Limited Service MEI ports submitted an
average of 774,859,930 quotes per day and Market Makers who purchased 7
or more Limited Service MEI ports submitted an average of 1,198,621,664
quotes per day.\69\ To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\70\ Thus, as
the number of connections a Market Maker has increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) also increase. The Exchange
sought to design the proposed tiered-pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange. With this in mind, the Exchange proposes no fee or
lower fees for those Market Makers who receive fewer Limited Service
MEI Ports since those Market Makers generally tend to send the least
amount of orders and messages over those connections. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers who take the most Limited Service MEI Ports pay for the vast
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity
standpoint to specifically handle the message rate and performance
requirements of those Market Makers.
---------------------------------------------------------------------------

\69\ No one purchased 5 or 6 Limited Service Ports in April
2022.
\70\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2008 \71\ due to providing a low
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very marginal cost, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low cost exchange alternative to the
options industry, which resulted in lower initial revenues. Examples of
this are 10Gb ULL connectivity and Limited Service MEI Ports, for which
the Exchange only now seeks to adopt fees at a level similar to or
lower than those of other options exchanges.
---------------------------------------------------------------------------

\71\ See supra note 57.
---------------------------------------------------------------------------

Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. Market participants are free to choose which exchange or
reseller to use to satisfy their business needs. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Suspension of the Proposed Rule Change

Pursuant to Section 19(b)(3)(C) of the Act,\72\ 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,\73\ 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.
---------------------------------------------------------------------------

\72\ 15 U.S.C. 78s(b)(3)(C).
\73\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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

[[Page 29960]]

rules and regulations thereunder applicable to the exchange.\74\ 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.'' \75\
---------------------------------------------------------------------------

\74\ 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'').
\75\ See id.
---------------------------------------------------------------------------

Among other things, exchange proposed rule changes are subject to
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which
requires the rules of an exchange to: (1) Provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \76\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \77\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\78\
---------------------------------------------------------------------------

\76\ 15 U.S.C. 78f(b)(4).
\77\ 15 U.S.C. 78f(b)(5).
\78\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposed fees are consistent
with the statutory requirements applicable to a national securities
exchange under the Act. In particular, the Commission will consider
whether the proposed rule change satisfies the standards under the Act
and the rules thereunder requiring, among other things, that an
exchange's rules provide for the equitable allocation of reasonable
fees among members, issuers, and other persons using its facilities;
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers; and do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\79\
---------------------------------------------------------------------------

\79\ 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.\80\
---------------------------------------------------------------------------

\80\ 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) \81\ and 19(b)(2)(B) \82\ 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.
---------------------------------------------------------------------------

\81\ 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.
\82\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\83\ 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),\84\ 6(b)(5),\85\ and 6(b)(8) \86\ 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.
---------------------------------------------------------------------------

\83\ 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.
\84\ 15 U.S.C. 78f(b)(4).
\85\ 15 U.S.C. 78f(b)(5).
\86\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, in addition to any
other comments they may wish to submit about the proposed rule change.
In particular, the Commission seeks comment on the following aspects of
the proposal and asks commenters to submit data where appropriate to
support their views:
1. Cost Estimates and Allocation. The Exchange states that it is
not asserting that the proposed fees are constrained by competitive
forces.\87\ Rather, the Exchange states that its proposed fees are
based on a ``cost-plus model,'' employing a ``conservative approach,''
and that the expenses are ``directly related'' to 10Gb ULL connectivity
and Limited Service MEI Ports, and not any other product or service
offered by the Exchange.\88\ In explaining its costs, should the
Exchange identify more specifically which, if any, of its costs are
incurred solely to provide 10Gb ULL connectivity and solely to provide
Limited Service MEI Ports? Regarding the allocations provided by the
Exchange as described in greater detail above, do commenters believe
that the Exchange provided sufficient detail about how it determined
these allocations and why they are reasonable? \89\ Why or why not? Do
commenters believe that the Exchange provided sufficient context to
permit an independent review and assessment of the reasonableness of
the allocations? Do commenters believe that the Exchange provided
sufficient detail or explanation to support its claim that ``no expense
amount is allocated twice,'' \90\ whether among the sub-categories of
expenses in this filing, across the Exchange's fee filings for other
products or services, or over time?
---------------------------------------------------------------------------

\87\ See supra Section II.A.2.
\88\ See id.
\89\ See id.
\90\ See id.
---------------------------------------------------------------------------

2. Revenue Estimates and Profit Margin Range. The Exchange uses a
single monthly revenue figure (April 2022) as the basis for calculating
its projected combined profit margin of 23.4%.\91\ The Exchange argues
that projecting revenues on a per month basis is reasonable ``as the
revenue generated from access services subject to

[[Page 29961]]

the proposed fee generally remains static from month to month.'' \92\
Yet the Exchange also acknowledges that ``profit margin may also
fluctuate from month to month based on the uncertainty of predicting
how many connections and ports may be purchased from month to month as
Members and non-Members are free to add and drop connections and ports
at any time based on their own business decisions.'' \93\ Do commenters
believe a single month provides a reasonable basis for a revenue
projection? If not, why not? Should the Exchange provide a range of
profit margins that it believes are reasonably possible, and the
reasons therefor? The Exchange also provided its baseline by analyzing
March 2022.\94\ Do commenters believe that March 2022 is an appropriate
month for a baseline? What are commenters' views on the Exchange
providing a combined profit margin for both 10Gb ULL connectivity and
Limited Service MEI Ports, rather than separate margins for each?
---------------------------------------------------------------------------

\91\ See id.
\92\ See id.
\93\ See id.
\94\ See id.
---------------------------------------------------------------------------

3. Reasonableness. The Exchange states that its proposed fees are
``reasonable because they will permit recovery of the Exchange's costs
in providing access services to supply 10Gb ULL connectivity and
Limited Service MEI Ports and will not result in the Exchange
generating a supra-competitive profit.'' \95\ The Exchange offers
several justifications for why its estimated profit margin (which is
blended and not discussed separately for each service) is not a supra-
competitive profit, including: (a) When it launched operations in 2008,
it chose to forgo revenue by offering certain products at lower rates
than other options exchanges to attract order flow; (b) the Exchange
has been successful in controlling its costs; (c) a profit margin
should not be judged alone based on its size, but on whether the
ultimate fee reflects the value of the services provided, and (d) the
Exchange's proposed fees remain similar to or less than fees charged
for access provided by other options exchanges with similar market
share. Do commenters agree that these factors are relevant to
assessment of whether the fees are reasonable for each service? Should
such an assessment include consideration of any factors other than
costs; and if so, what factors should be considered, and why?
---------------------------------------------------------------------------

\95\ See id.
---------------------------------------------------------------------------

4. Periodic Reevaluation. The Exchange has stated that it will
conduct a review of the cost-based fees subject to this proposal one
year after the date of the proposal, and annually thereafter.\96\ In
light of the impact that the number of connections and ports purchased
has on profit margins, and the potential for costs to decrease (or
increase) over time, what are commenters' views on the need for
exchanges to commit to reevaluate, on an ongoing and periodic basis,
their cost-based fees to ensure that the fees stay in line with their
stated profitability projections and do not become unreasonable over
time, for example, by failing to adjust for efficiency gains, cost
increases or decreases, and changes in amounts purchased? 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
fee change is implemented should an exchange assess whether its revenue
and/or cost estimates were accurate and at what threshold should an
exchange commit to file a fee change if its estimates were inaccurate?
---------------------------------------------------------------------------

\96\ See id.
---------------------------------------------------------------------------

5. Tiered Structure for Additional Limited Service MEI Ports. The
Exchange states that the proposed tiered fee structure is equitably
allocated among users of the network connectivity alternatives, because
users of Limited Service MEI Ports ``consume the most bandwidth and
resources of the network.'' \97\ The Exchange states that users of the
``maximum amount of Limited Service MEI Ports'' account for
approximately greater than 99% of message traffic over the network,
while users of ``fewer Limited Service MEI Ports'' account for
approximately less than 1% of message traffic over the network.\98\
Specifically, the Exchange states that Market Makers who utilize 1-2,
3-4, or 7 or more Limited Service MEI ports submit an average of
312,274,040 quotes per day, 774,859,930 quotes per day, and
1,198,621,664 quotes per day, respectively, for the month of April
2022.\99\ According to the Exchange, these billions of messages per day
consume the Exchange's resources and significantly contribute to the
overall network connectivity expense for storage and network transport
capabilities.\100\ Given this difference in network utilization rate,
the Exchange believes that its tiered structure is reasonable,
equitable, and not unfairly discriminatory.\101\ Do commenters believe
that the fees for each tier (including the intermediary tiers), as well
as the fee differences between the tiers, are supported by the
Exchange's assertions? If not, is there an alternative basis on which
increased demand by a market-making firm on the Exchange's resources
would justify a tiered fee structure for additional Limited Service MEI
Ports?
---------------------------------------------------------------------------

\97\ See id.
\98\ See id.
\99\ See id.
\100\ See id.
\101\ 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.'' \102\ 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,\103\ 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.\104\
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.\105\
---------------------------------------------------------------------------

\102\ 17 CFR 201.700(b)(3).
\103\ See id.
\104\ See id.
\105\ 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

[[Page 29962]]

support of the proposal, in addition to any other comments they may
wish to submit about the proposed rule change. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\106\
---------------------------------------------------------------------------

\106\ 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 June 7, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 21,
2022.
Comments may be submitted by any of the following methods:

Electronic Comments

<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1163647d743c727e7c7c747f6562516274723f767e67"><span class="__cf_email__" data-cfemail="acded9c0c981cfc3c1c1c9c2d8dfecdfc9cf82cbc3da">[email&#160;protected]</span></a>. Please include
File No. SR-MIAX-2022-20 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-MIAX-2022-20. 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 No. SR-MIAX-2022-20 and should be submitted on or
before June 7, 2022. Rebuttal comments should be submitted by June 21,
2022.

VI. Conclusion

It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\107\ that File No. SR-MIAX-2022-20 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.
---------------------------------------------------------------------------

\107\ 15 U.S.C. 78s(b)(3)(C).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\108\
---------------------------------------------------------------------------

\108\ 17 CFR 200.30-3(a)(12), (57) and (58).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10507 Filed 5-16-22; 8:45 am]
BILLING CODE 8011-01-P

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