Notice2022-21339
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange's Fee Schedule To Adopt Connectivity Fees
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 3, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 190 (Monday, October 3, 2022)</title>
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[Federal Register Volume 87, Number 190 (Monday, October 3, 2022)]
[Notices]
[Pages 59845-59856]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-21339]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95936; File No. SR-MEMX-2022-26]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend the
Exchange's Fee Schedule To Adopt Connectivity Fees
September 27, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 15, 2022, MEMX LLC (``MEMX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to amend the Exchange's fee schedule applicable to Members \3\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and
(c). The Exchange proposes to implement the changes to the Fee Schedule
pursuant to this proposal immediately. The text of the proposed rule
change is provided in Exhibit 5.
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\3\ See Exchange Rule 1.5(p).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchange is re-filing its proposal to amend the Fee Schedule
regarding fees the Exchange charges to Members and non-Members for
physical connectivity to the Exchange and for application sessions
(otherwise known as ``logical ports'') that a Member utilizes in
connection with their participation on the Exchange (together with
physical connectivity, collectively referred to in this proposal as
``connectivity services,'' as described in greater detail below and in
Exhibit 5). The Exchange is proposing to implement the proposed fees
immediately.
The Exchange filed its Initial Proposal on December 30, 2021, and
began charging fees for connectivity services for the first time in
January of 2022. On February 28, 2022, the Commission suspended the
Initial Proposal and asked for comments on several questions.\4\ The
Exchange then filed the
[[Page 59846]]
Second Proposal, which was subsequently withdrawn and replaced with the
Third Proposal. The Third Proposal was subsequently withdrawn and
replaced with the Fourth Proposal. As set forth below, the Exchange
believes that both the Initial Proposal, the Second Proposal, the Third
Proposal, and the Fourth Proposal provided a great deal of transparency
regarding the cost of providing connectivity services and anticipated
revenue and that each of the prior proposals was consistent with the
Act and associated guidance. The Exchange is re-filing this proposal
promptly following the withdrawal of the Fourth Proposal with the
intention of maintaining the existing fees for connectivity services
while at the same time revising the proposal to focus on its Cost
Analysis, as described below. The Exchange believes that this approach
is appropriate and fair for competitive reasons as several other
exchanges currently charge for similar services, as described below,
and because others have followed a similar approach when adopting
fees.\5\
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\4\ See Securities Exchange Act Release No. 94332 (February 28,
2022) (SR-MEMX-2021-22) (Suspension of and Order Instituting
Proceedings to Determine Whether to Approve or Disapprove Proposed
Rule Change to Amend the Exchange's Fee Schedule to Adopt
Connectivity Fees) (the ``OIP'').
\5\ See, e.g., Securities Exchange Act Release No. 87875
(December 31, 2019), 85 FR 770 (January 7, 2020) (SR-MIAX-2019-51)
(notice of filing and immediate effectiveness of changes to the
Miami International Securities Exchange LLC, or ``MIAX'', fee
schedule). The Exchange notes that the MIAX filing was the eighth
filing by MIAX to adopt the fees proposed for certain connectivity
services following multiple times of withdrawing and re-filing the
proposal. The Exchange notes that MIAX charged the applicable fees
throughout this period while working to develop a filing that met
the new standards being applied to fee filings. See also Fee
Guidance, infra note 12.
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As set forth in the Initial Proposal, the Second Proposal, the
Third Proposal, the Fourth Proposal, and this filing, the Exchange does
incur significant costs related to the provision of connectivity
services and believes it should be permitted to continue charging for
such services while also providing additional time for public comment
on the level of detail contained in this proposal and other questions
posed in the OIP. Finally, the Exchange does not believe that the
ability to charge fees for connectivity services or the level of the
Exchange's proposed fees are at issue, but rather, that the level of
detail required to be included by the Exchange when adopting such fees
is at issue. For these reasons, the Exchange believes it is appropriate
to re-file this proposal and to continue charging for connectivity
services.
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
has sought to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\6\ and Rule 19b-4
thereunder,\7\ with respect to the types of information self-regulatory
organizations (``SROs'') should provide when filing fee changes, and
Section 6(b) of the Act,\8\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\9\ not designed to
permit unfair discrimination,\10\ and that they not impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\11\ This rule change proposal addresses those requirements,
and the analysis and data in each of the sections that follow are
designed to clearly and comprehensively show how they are met.\12\
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\6\ 15 U.S.C. 78s(b)(1).
\7\ 17 CFR 240.19b-4.
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(8).
\12\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While MEMX understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with MEMX's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. See Staff Guidance on
SRO Rule Filings Relating to Fees (May 21, 2019) available at
<a href="https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees">https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees</a>.
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Prior to January 3, 2022, MEMX did not charge fees for connectivity
to the Exchange, including fees for physical connections or application
sessions for order entry purposes or receipt of drop copies. The
objective of this approach was to eliminate any fee-based barriers to
connectivity for Members when MEMX launched as a national securities
exchange in 2020, and it was successful in achieving this objective in
that a significant number of Members are directly or indirectly
connected to the Exchange.
As detailed below, MEMX recently calculated its aggregate monthly
costs for providing physical connectivity to the Exchange at $795,789
and its aggregate monthly costs for providing application sessions at
$347,936. Because MEMX offered all connectivity free of charge until
January of this year, MEMX has borne 100% of all connectivity costs. In
order to cover the aggregate costs of providing connectivity to its
Users (both Members and non-Members \13\) going forward and to make a
modest profit, as described below, the Exchange is proposing to modify
its Fee Schedule, pursuant to MEMX Rules 15.1(a) and (c), to charge a
fee of $6,000 per month for each physical connection in the data center
where the Exchange primarily operates under normal market conditions
(``Primary Data Center'') and a fee of $3,000 per month for each
physical connection in the Exchange's geographically diverse data
center, which is operated for backup and disaster recovery purposes
(``Secondary Data Center''), each as further described below. The
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX
Rules 15.1(a) and (c), to charge a fee of $450 per month for each
application session used for order entry (``Order Entry Port'') and
application session for receipt of drop copies (``Drop Copy Port'') in
the Exchange's Primary Data Center, as further described below.\14\
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\13\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services to Members, and thus, may access application sessions on
behalf of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
\14\ As proposed, fees for connectivity services would be
assessed based on each active connectivity service product at the
close of business on the first day of each month. If a product is
cancelled by a Member's submission of a written request or via the
MEMX User Portal prior to such fee being assessed then the Member
will not be obligated to pay the applicable product fee. MEMX will
not return pro-rated fees even if a product is not used for an
entire month.
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[[Page 59847]]
Cost Analysis
Background on Cost Analysis
In October 2021, MEMX completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis''). The Cost
Analysis required a detailed analysis of MEMX's aggregate baseline
costs, including a determination and allocation of costs for core
services provided by the Exchange--transaction execution, market data,
membership services, physical connectivity, and application sessions
(which provide order entry, cancellation and modification
functionality, risk functionality, ability to receive drop copies, and
other functionality). MEMX separately divided its costs between those
costs necessary to deliver each of these core services, including
infrastructure, software, human resources (i.e., personnel), and
certain general and administrative expenses (``cost drivers''). Next,
MEMX adopted an allocation methodology with various principles to guide
how much of a particular cost should be allocated to each core service.
For instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of physical connectivity (75%), with smaller
allocations to logical ports (2.6%), and the remainder to the provision
of transaction execution and market data services (22.4%). In contrast,
costs that are driven largely by client activity (e.g., message rates),
were not allocated to physical connectivity at all but were allocated
primarily to the provision of transaction execution and market data
services (90%) with a smaller allocation to application sessions (10%).
The allocation methodology was decided through conversations with
senior management familiar with each area of the Exchange's operations.
After adopting this allocation methodology, the Exchange then applied
an estimated allocation of each cost driver to each core service,
resulting in the cost allocations described below.
By allocating segmented costs to each core service, MEMX was able
to estimate by core service the potential margin it might earn based on
different fee models. The Exchange notes that as a non-listing venue it
has four primary sources of revenue that it can potentially use to fund
its operations: transaction fees, fees for connectivity services,
membership and regulatory fees, and market data fees. Accordingly, the
Exchange must cover its expenses from these four primary sources of
revenue. The Exchange also notes that as a general matter each of these
sources of revenue is based on services that are interdependent. For
instance, the Exchange's system for executing transactions is dependent
on physical hardware and connectivity, only Members and parties that
they sponsor to participate directly on the Exchange may submit orders
to the Exchange, many Members (but not all) consume market data from
the Exchange in order to trade on the Exchange, and the Exchange
consumes market data from external sources in order to comply with
regulatory obligations. Accordingly, given this interdependence, the
allocation of costs to each service or revenue source required judgment
of the Exchange and was weighted based on estimates of the Exchange
that the Exchange believes are reasonable, as set forth below.
Through the Exchange's extensive Cost Analysis, the Exchange
analyzed every expense item in the Exchange's general expense ledger to
determine whether each such expense relates to the provision of
connectivity services, and, if such expense did so relate, what portion
(or percentage) of such expense actually supports the provision of
connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. In turn, the Exchange allocated certain costs more to
physical connectivity and others to applications, while certain costs
were only allocated to such services at a very low percentage or not at
all, using consistent allocation methodologies as described above.
Based on this analysis, MEMX estimates that the cost drivers to provide
connectivity services, including both physical connections and
application sessions, result in an aggregate monthly cost of
$1,143,715, as further detailed below.
Costs Related to Offering Physical Connectivity
The following chart details the individual line-item costs
considered by MEMX to be related to offering physical connectivity as
well as the percentage of the Exchange's overall costs such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 13.8% of its overall Human Resources cost to
offering physical connectivity).
------------------------------------------------------------------------
Costs Drivers Costs Percent of all
------------------------------------------------------------------------
Human Resources......................... $262,129 13.8
Connectivity (external fees, cabling, 162,000 75.0
switches, etc.)........................
Data Center............................. 219,000 75.0
External Market Data.................... n/a n/a
Hardware and Software Licenses.......... 4,507 1.2
Monthly Depreciation.................... 99,328 18.5
Allocated Shared Expenses............... 48,826 10.0
-------------------------------
Total............................... 795,789 20.1
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Below are additional details regarding each of the line-item costs
considered by MEMX to be related to offering physical connectivity.
Human Resources
For personnel costs (Human Resources), MEMX calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the MEMX network infrastructure team, which spends most of
their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated 75% of each
employee's time. The Exchange also allocated Human Resources costs to
provide physical connectivity to a limited subset of personnel with
ancillary functions related to establishing and maintaining such
connectivity (such as information security and finance personnel), for
which the Exchange allocated cost on an employee-by-employee basis
(i.e., only including those personnel who do support functions related
to providing physical connectivity) and then applied a smaller
allocation to such employees (less than 20%). The Exchange notes that
it has fewer than seventy (70)
[[Page 59848]]
employees and each department leader has direct knowledge of the time
spent by those spent by each employee with respect to the various tasks
necessary to operate the Exchange. The estimates of Human Resources
cost were therefore determined by consulting with such department
leaders, determining which employees are involved in tasks related to
providing physical connectivity, and confirming that the proposed
allocations were reasonable based on an understanding of the percentage
of their time such employees devote to tasks related to providing
physical connectivity. The Exchange notes that senior level executives
were only allocated Human Resources costs to the extent the Exchange
believed they are involved in overseeing tasks related to providing
physical connectivity. The Human Resources cost was calculated using a
blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties, cabling and switches required to
operate the Exchange. The Exchange notes that it previously labeled
this line item as ``Infrastructure and Connectivity'' but has
eliminated the reference to Infrastructure because several other line-
item costs could be considered infrastructure given the generality of
that term. The Connectivity line-item is more narrowly focused on
technology used to complete connections to the Exchange and to connect
to external markets. The Exchange notes that its connectivity to
external markets is required in order to receive market data to run the
Exchange's matching engine and basic operations compliant with existing
regulations, primarily Regulation NMS.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (75%) to
physical connectivity because the third-party data centers and the
Exchange's physical equipment contained therein is the most direct cost
in providing physical access to the Exchange. In other words, for the
Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange notes that it did not allocate any External Market Data
fees to the provision of physical connectivity as market data is not
related to such services.
Hardware and Software Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 18.5% of all depreciation costs to providing physical
connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as such software does not impact
the provision of physical connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall physical connectivity costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide physical connectivity. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange notes that the cost of paying
directors to serve on its Board of Directors is also included in the
Exchange's general shared expenses, and thus a portion of such overall
cost amounting to 10% of the overall cost for directors was allocated
to providing physical connectivity. The Exchange notes that the 10%
allocation of general shared expenses for physical connectivity is
lower than that allocated to general shared expenses for application
sessions based on its allocation methodology that weighted costs
attributable to each Core Service based on an understanding of each
area. While physical connectivity has several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), physical connectivity does
not require as many broad or indirect resources as other Core Services.
The total monthly cost of $795,789 was divided by the number of
physical connections the Exchange maintained at the time that proposed
pricing was determined (143), to arrive at a cost of approximately
$5,565 per month, per physical connection.
Costs Related to Offering Application Sessions
The following chart details the individual line-item costs
considered by MEMX to be related to offering application sessions as
well as the percentage of the Exchange's overall costs such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 7.7% of its overall Human Resources cost to
offering application sessions).
------------------------------------------------------------------------
Costs drivers Costs Percent of all
------------------------------------------------------------------------
Human Resources......................... $147,029 7.7
Connectivity (external fees, cabling, 5,520 2.6
switches, etc.)........................
Data Center............................. 7,462 2.6
External Market Data.................... 10,734 7.5
[[Page 59849]]
Hardware and Software Licenses.......... 37,771 10.1
Monthly Depreciation.................... 44,843 8.3
Allocated Shared Expenses............... 94,567 19.4
-------------------------------
Total............................... 347,926 8.8
------------------------------------------------------------------------
Human Resources
With respect to application sessions, MEMX calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing application sessions and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). The
estimates of Human Resources cost were again determined by consulting
with department leaders, determining which employees are involved in
tasks related to providing application sessions and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing application
sessions and maintaining performance thereof. The Exchange notes that
senior level executives were only allocated Human Resources costs to
the extent the Exchange believed they are involved in overseeing tasks
related to providing application sessions and maintaining performance
thereof. The Human Resources cost was again calculated using a blended
rate of compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange allocated a small portion of External Market Data fees
(7.5%) to the provision of application sessions as such market data is
necessary to offer certain services related to such sessions, such as
validating orders on entry against the national best bid and national
best offer and checking for other conditions (e.g., whether a symbol is
halted or subject to a short sale circuit breaker). Thus, as market
data from other Exchanges is consumed at the application session level
in order to validate orders before additional processing occurs with
respect to such orders, the Exchange believes it is reasonable to
allocate a small amount of such costs to application sessions.
Hardware and Software Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 8.3% of
all depreciation costs to providing application sessions. In contrast
to physical connectivity, described above, the Exchange did allocate
depreciation costs for depreciated software necessary to operate the
Exchange to application sessions because such software is related to
the provision of such connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall application session costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 20% of the overall cost for
directors was allocated to providing application sessions. The Exchange
notes that the 19.4% allocation of general shared expenses for
application sessions is higher than that allocated to general shared
expenses for physical connectivity based on its allocation methodology
that weighted costs attributable to each Core Service based on an
understanding of each area. While physical connectivity has several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above),
application sessions require a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange. The total monthly cost of $347,926 was
divided by the number of application sessions the Exchange maintained
at the time that proposed pricing was determined (835), to arrive at a
cost of approximately $417 per month, per application session.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or application sessions) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filing it recently
submitted proposing fees for proprietary data feeds offered by the
Exchange. For instance, in calculating the Human
[[Page 59850]]
Resources expenses to be allocated to physical connections, the
Exchange has a team of employees dedicated to network infrastructure
and with respect to such employees the Exchange allocated network
infrastructure personnel with a high percentage of the cost of such
personnel (75%) given their focus on functions necessary to provide
physical connections. The salaries of those same personnel were
allocated only 2.5% to application sessions and the remaining 22.5% was
allocated to transactions and market data. The Exchange did not
allocate any other Human Resources expense for providing physical
connections to any other employee group outside of a smaller allocation
(19%) of the cost associated with certain specified personnel who work
closely with and support network infrastructure personnel. In contrast,
the Exchange allocated much smaller percentages of costs (11% or less)
across a wider range of personnel groups in order to allocate Human
Resources costs to providing application sessions. This is because a
much wider range of personnel are involved in functions necessary to
offer, monitor and maintain application sessions but the tasks
necessary to do so are not a primary or full-time function.
In total, the Exchange allocated 13.8% of its personnel costs to
providing physical connections and 7.7% of its personnel costs to
providing application sessions, for a total allocation of 21.5% Human
Resources expense to provide connectivity services. In turn, the
Exchange allocated the remaining 78.5% of its Human Resources expense
to membership (less than 1%) and transactions and market data (77.5%).
Thus, again, the Exchange's allocations of cost across core services
were based on real costs of operating the Exchange and were not double-
counted across the core services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and application
sessions, but in different amounts. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
such expense includes the actual cost of the computer equipment, such
as dedicated servers, computers, laptops, monitors, information
security appliances and storage, and network switching infrastructure
equipment, including switches and taps that were purchased to operate
and support the network. Without this equipment, the Exchange would not
be able to operate the network and provide connectivity services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 27% of the Exchange's overall depreciation and
amortization expense to connectivity services (18.5% attributed to
physical connections and 8.3% to application sessions). The Exchange
allocated the remaining depreciation and amortization expense
(approximately 73%) toward the cost of providing transaction services
and market data.
Looking at the Exchange's operations holistically, the total
monthly costs to the Exchange for offering core services is $3,954,537.
Based on the initial four months of billing for connectivity services,
the Exchange expects to collect its original estimate of $1,233,750 on
a monthly basis for such services.\15\ Incorporating this amount into
the Exchange's overall projected revenue, including projections related
to market data fees adopted earlier this year, the Exchange anticipates
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources
(i.e., connectivity fees and membership fees that were introduced in
January 2022, transaction fees, and revenue from market data, both
through the fees adopted in April 2022 and through the revenue received
from the SIPs). As such, applying the Exchange's holistic Cost Analysis
to a holistic view of anticipated revenues, the Exchange would earn
approximately 8.5% to 15% margin on its operations as a whole. The
Exchange believes that this amount is reasonable.
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\15\ The Exchange notes that it has charged connectivity
services for four months and so far the average amount expected is
very close to the estimated revenue provided in the Initial
Proposal. Specifically, the Exchange has earned an estimated
$1,254,000 ($20,250 more than projected) for connectivity services
on an average basis over January through July. The Exchange believes
this difference is immaterial for purposes of this proposal and
thus, will continue to use the original estimated revenue of
$1,233,750 for purposes of this proposal.
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The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. As a new entrant to the hyper-competitive exchange
environment, and an exchange focused on driving competition, the
Exchange does not yet know whether such expectations will be realized.
For instance, in order to generate the revenue expected from
connectivity, the Exchange will have to be successful in retaining
existing clients that wish to maintain physical connectivity and/or
application sessions or in obtaining new clients that will purchase
such services. Similarly, the Exchange will have to be successful in
retaining a positive net capture on transaction fees in order to
realize the anticipated revenue from transaction pricing.
The Exchange notes that the Cost Analysis was based on the
Exchange's first year of operations and projections for the next year
(which is currently underway). As such, the Exchange believes that its
costs will remain relatively similar in future years. It is possible
however that such costs will either decrease or increase. To the extent
the Exchange sees growth in use of connectivity services it will
receive additional revenue to offset future cost increases. However, if
use of connectivity services is static or decreases, the Exchange might
not realize the revenue that it anticipates or needs in order to cover
applicable costs. Accordingly, the Exchange is committing to conduct a
one-year review after implementation of these fees. The Exchange
expects that it may propose to adjust fees at that time, to increase
fees in the event that revenues fail to cover costs and a reasonable
mark-up of such costs. Similarly, the Exchange would propose to
decrease fees in the event that revenue materially exceeds our current
projections. In addition, the Exchange will periodically conduct a
review to inform its decision making on whether a fee change is
appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, we believe that it is appropriate for an exchange to
refresh and update information about its relevant costs and revenues in
seeking any future changes to fees, and the Exchange commits to do so.
Proposed Fees
Physical Connectivity Fees
MEMX offers its Members the ability to connect to the Exchange in
order to transmit orders to and receive information from the Exchange.
Members can also choose to connect to
[[Page 59851]]
MEMX indirectly through physical connectivity maintained by a third-
party extranet. Extranet physical connections may provide access to one
or multiple Members on a single connection. Users of MEMX physical
connectivity services (both Members and non-Members \16\) seeking to
establish one or more connections with the Exchange submit a request to
the Exchange via the MEMX User Portal or directly to Exchange
personnel. Upon receipt of the completed instructions, MEMX establishes
the physical connections requested by the User. The number of physical
connections assigned to each User as of August 31, 2022, ranges from
one to ten, depending on the scope and scale of the Member's trading
activity on the Exchange as determined by the Member, including the
Member's determination of the need for redundant connectivity. The
Exchange notes that 44% of its Members do not maintain a physical
connection directly with the Exchange in the Primary Data Center
(though many such Members have connectivity through a third-party
provider) and another 44% have either one or two physical ports to
connect to the Exchange in the Primary Data Center. Thus, only a
limited number of Members, 12%, maintain three or more physical ports
to connect to the Exchange in the Primary Data Center.
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\16\ See supra note 13.
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As described above, in order to cover the aggregate costs of
providing physical connectivity to Users and make a modest profit, as
described below, the Exchange is proposing to charge a fee of $6,000
per month for each physical connection in the Primary Data Center and a
fee of $3,000 per month for each physical connection in the Secondary
Data Center. There is no requirement that any Member maintain a
specific number of physical connections and a Member may choose to
maintain as many or as few of such connections as each Member deems
appropriate. The Exchange notes, however, that pursuant to Rule 2.4
(Mandatory Participation in Testing of Backup Systems), the Exchange
does require a small number of Members to connect and participate in
functional and performance testing as announced by the Exchange, which
occurs at least once every 12 months. Specifically, Members that have
been determined by the Exchange to contribute a meaningful percentage
of the Exchange's overall volume must participate in mandatory testing
of the Exchange's backup systems (i.e., such Members must connect to
the Secondary Data Center). The Exchange notes that Members that have
been designated are still able to use third-party providers of
connectivity to access the Exchange at its Secondary Data Center, and
that one such designated Member does use a third-party provider instead
of connecting directly to the Secondary Data Center through
connectivity provided by the Exchange.\17\ Nonetheless, because some
Members are required to connect to the Secondary Data Center pursuant
to Rule 2.4 and to encourage Exchange Members to connect to the
Secondary Data Center generally, the Exchange has proposed to charge
one-half of the fee for a physical connection in the Primary Data
Center. The Exchange notes that its costs related to operating the
Secondary Data Center were not separately calculated for purposes of
this proposal, but instead, all costs related to providing physical
connections were considered in aggregate. The Exchange believes this is
appropriate because had the Exchange calculated such costs separately
and then determined the fee per physical connection that would be
necessary for the Exchange to cover its costs for operating the
Secondary Data Center, the costs would likely be much higher than those
proposed for connectivity at the Primary Data Center because Members
maintain significantly fewer connections at the Secondary Data Center.
The Exchange believes that charging a higher fee for physical
connections at the Secondary Data Center would be inconsistent with its
objective of encouraging Members to connect at such data center and is
inconsistent with the fees charged by other exchanges, which also
provide connectivity for disaster recovery purposes at a discounted
rate.\18\
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\17\ The Exchange also notes that a second designated Member
that is required to participate in mandatory testing with the
Exchange for the first time this year has not yet connected to the
Exchange in the Secondary Data Center and has indicated that it is
likely to use a third-party provider.
\18\ See, e.g., the BZX equities fee schedule, available at:
<a href="https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/">https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/</a>.
---------------------------------------------------------------------------
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
physical connections a User requests, based upon factors deemed
relevant by each User (either a Member, service bureau or extranet).
The Exchange believes these factors include the costs to maintain
connectivity, business model and choices Members make in how to
participate on the Exchange, as further described below.
The proposed fee of $6,000 per month for physical connections at
the Primary Data Center is designed to permit the Exchange to cover the
costs allocated to providing connectivity services with a modest markup
(approximately 8%), which would also help fund future expenditures
(increased costs, improvements, etc.). The Exchange believes it is
appropriate to charge fees that represent a reasonable markup over cost
given the other factors discussed above and the need for the Exchange
to maintain a highly performant and stable platform to allow Members to
transact with determinism. The Exchange also reiterates that the
Exchange did not charge any fees for connectivity services prior to
January 2022, and its allocation of costs to physical connections was
part of a holistic allocation that also allocated costs to other core
services without double-counting any expenses.
As noted above, the Exchange proposes a discounted rate of $3,000
per month for physical connections at its Secondary Data Center. The
Exchange has proposed this discounted rate for Secondary Data Center
connectivity in order to encourage Members to establish and maintain
such connections. Also, as noted above, a small number of Members are
required pursuant to Rule 2.4 to connect and participate in testing of
the Exchange's backup systems, and the Exchange believes it is
appropriate to provide a discounted rate for physical connections at
the Secondary Data Center given this requirement. The Exchange notes
that this rate is well below the cost of providing such services and
the Exchange will operate its network and systems at the Secondary Data
Center without recouping the full amount of such cost through
connectivity services.
The proposed fee for physical connections is effective on filing
and will become operative immediately.
Application Session Fees
Similar to other exchanges, MEMX offers its Members application
sessions, also known as logical ports, for order entry and receipt of
trade execution reports and order messages. Members can also choose to
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one
or multiple Members on a single session. Users of MEMX connectivity
services (both Members and non-Members \19\) seeking to establish one
or more application sessions with the Exchange submit a request to the
Exchange via the MEMX User Portal or directly to Exchange personnel.
Upon receipt of the completed instructions,
[[Page 59852]]
MEMX assigns the User the number of sessions requested by the User. The
number of sessions assigned to each User as of August 31, 2022, ranges
from one to more than 100, depending on the scope and scale of the
Member's trading activity on the Exchange (either through a direct
connection or through a service bureau) as determined by the Member.
For example, by using multiple sessions, Members can segregate order
flow from different internal desks, business lines, or customers. The
Exchange does not impose any minimum or maximum requirements for how
many application sessions a Member or service bureau can maintain, and
it is not proposing to impose any minimum or maximum session
requirements for its Members or their service bureaus.
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\19\ See supra note 13.
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As described above, in order to cover the aggregate costs of
providing application sessions to Users and to make a modest profit, as
described below, the Exchange is proposing to charge a fee of $450 per
month for each Order Entry Port and Drop Copy Port in the Primary Data
Center. The Exchange notes that it does not propose to charge for: (1)
Order Entry Ports or Drop Copy Ports in the Secondary Data Center, or
(2) any Test Facility Ports or MEMOIR Gap Fill Ports. The Exchange has
proposed to provide Order Entry Ports and Drop Copy Ports in the
Secondary Data Center free of charge in order to encourage Members to
connect to the Exchange's backup trading systems. Similarly, because
the Exchange wishes to encourage Members to conduct appropriate testing
of their use of the Exchange, the Exchange has not proposed to charge
for Test Facility Ports. With respect to MEMOIR Gap Fill ports, such
ports are exclusively used in order to receive information when a
market data recipient has temporarily lost its view of MEMX market
data. The Exchange has not proposed charging for such ports because the
costs of providing and maintaining such ports is more directly related
to producing market data.
The proposed fee of $450 per month for each Order Entry Port and
Drop Copy Port in the Primary Data Center is designed to permit the
Exchange to cover the costs allocated to providing application sessions
with a modest markup (approximately 8%), which would also help fund
future expenditures (increased costs, improvements, etc.). The Exchange
also reiterates that the Exchange did not charge any fees for
connectivity services prior to January 2022, and its allocation of
costs to application sessions was part of a holistic allocation that
also allocated costs to other core services without double-counting any
expenses.
The proposed fee is also designed to encourage Users to be
efficient with their application session usage, thereby resulting in a
corresponding increase in the efficiency that the Exchange would be
able to realize in managing its aggregate costs for providing
connectivity services. There is no requirement that any Member maintain
a specific number of application sessions and a Member may choose to
maintain as many or as few of such ports as each Member deems
appropriate. The Exchange has designed its platform such that Order
Entry Ports can handle a significant amount of message traffic (i.e.,
over 50,000 orders per second), and has no application flow control or
order throttling. In contrast, other exchanges maintain certain
thresholds that limit the amount of message traffic that a single
logical port can handle.\20\ As such, while several Members maintain a
relatively high number of ports because that is consistent with their
usage on other exchanges and is preferable for their own reasons, the
Exchange believes that it has designed a system capable of allowing
such Members to significantly reduce the number of application sessions
maintained.
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\20\ See, e.g., Cboe US Equities BOE Specification,available at:
<a href="https://cdn.cboe.com/resources/membership/Cboe_US_Equities_BOE_Specification.pdf">https://cdn.cboe.com/resources/membership/Cboe_US_Equities_BOE_Specification.pdf</a> (describing a 5,000 message
per second Port Order Rate Threshold on Cboe BOE ports).
---------------------------------------------------------------------------
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
application sessions a User requests, based upon factors deemed
relevant by each User (either a Member or service bureau on behalf of a
Member). The Exchange believes these factors include the costs to
maintain connectivity and choices Members make in how to segment or
allocate their order flow.\21\
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\21\ The Exchange understands that some Members (or service
bureaus) may also request more Order Entry Ports to enable the
ability to send a greater number of simultaneous order messages to
the Exchange by spreading orders over more Order Entry Ports,
thereby increasing throughput (i.e., the potential for more orders
to be processed in the same amount of time). The degree to which
this usage of Order Entry Ports provides any throughput advantage is
based on how a particular Member sends order messages to MEMX,
however the Exchange notes that its architecture reduces the impact
or necessity of such a strategy. All Order Entry Ports on MEMX
provide the same throughput, and as noted above, the throughput is
likely adequate even for a Member sending a significant amount of
volume at a fast pace, and is not artificially throttled or limited
in any way by the Exchange.
---------------------------------------------------------------------------
The proposed fee for application sessions is effective on filing
and will become operative immediately.
Proposed Fees--Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (1) consume the most bandwidth and resources
of the network; (2) transact the vast majority of the volume on the
Exchange; and (3) require the high-touch network support services
provided by the Exchange and its staff, including network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange to provide such connectivity services. For these reasons, MEMX
believes it is not unfairly discriminatory for the Members with higher
message traffic and/or Members with more complicated connections to pay
a higher share of the total connectivity services fees. While Members
with a business model that results in higher relative inbound message
activity or more complicated connections are projected to pay higher
fees, the level of such fees is based solely on the number of physical
connections and/or application sessions deemed necessary by the Member
and not on the Member's business model or type of Member. The Exchange
notes that the correlation between message traffic and usage of
connectivity services is not completely aligned because Members
individually determine how many physical connections and application
sessions to request, and Members may make different decisions on the
appropriate ways based on facts unique to their individual businesses.
Based on the Exchange's architecture, as described above, the Exchange
believes that a Member even with high message traffic would be able to
conduct business on the Exchange with a relatively small connectivity
services footprint.
Because the Exchange has already adopted fees for connectivity
services, the Exchange has initial results of the
[[Page 59853]]
impact such fees have had on Member and non-Member usage of
connectivity services. Since the fees went into effect as set forth in
the Initial Proposal, nine (9) customers with physical connectivity to
the Exchange have canceled one or more of their physical connections.
These cancellations resulted in an approximate 6% drop in the physical
connectivity offered by the Exchange prior to the Exchange charging for
such connectivity.\22\ In each instance, the customer told the Exchange
that its reason for cancelling its connectivity was the imposition of
fees. Of these customers, two (2) customers canceled services entirely,
three (3) maintained at least one physical connection provided directly
by the Exchange, and the remaining four (4) customers migrated to
alternative sources of connectivity through a third-party provider. As
such, some market participants (one market data provider and one
extranet) determined that they no longer wanted to connect to the
Exchange directly or through a third party as it was not necessary for
their business and their initial connection was only worthwhile so long
as services were provided free of charge. Other market participants
(one market data provider, one extranet and one Member) determined that
they still wished to be directly connected to the Exchange but did not
need as many connections. Finally, some market participants (one market
data provider, one service bureau and two trading participants)
determined that there was a more affordable alternative through a
third-party provider of connectivity services. As a general matter, the
customers that discontinued use of physical connectivity or
transitioned to a third-party provider of connectivity services were
either connected purely to consume market data for their own purposes
or distribution to others, were themselves extranets or service bureaus
providing alternatives to the Exchange's connectivity services, or were
smaller trading firms that elected not to participate on the Exchange
directly and likely connected initially due to the fact that there were
no fees to connect.
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\22\ The Exchange notes that despite these cancellations, the
Exchange has since had existing customers and new customers order
physical connectivity that has resulted in the Exchange maintaining
nearly the same amount of physical connections for customers as it
did prior to the imposition of fees.
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Additionally, since the Exchange began charging for application
sessions, five (5) customers have canceled a total of thirty (30)
application sessions (approximately 3.5% of all customer application
sessions) due to the fees adopted by the Exchange.\23\ As a general
matter, these customers determined that the number of application
sessions that they maintained was not necessary in order to participate
on the Exchange.
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\23\ The Exchange notes that, as was the case with respect to
physical connectivity, the Exchange has since had existing customers
and new customers order additional application sessions that has
resulted in the Exchange maintaining nearly the same amount of
application sessions for customers as it did prior to the imposition
of fees.
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Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\24\ Reg SCI Rule 1001(a) requires that the Exchange establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure (among other things) that its Reg SCI systems have
levels of capacity adequate to maintain the Exchange's operational
capability and promote the maintenance of fair and orderly markets.\25\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. As noted above,
based on early results, the adoption of fees has led to certain firms
reducing the number of application sessions maintained now that such
sessions are no longer provided free of charge. Additionally, because
the Exchange will charge a lower rate for a physical connection to the
Secondary Data Center and will not charge any fees for application
sessions at the Secondary Data Center or its Test Facility, the
proposed fee structure will further support the Exchange's Reg SCI
compliance by reducing the potential impact of a disruption should the
Exchange be required to switch to its Disaster Recovery Facility and
encouraging Members to engage in any necessary system testing with low
or no cost imposed by the Exchange.\26\
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\24\ 17 CFR 242.1000-1007.
\25\ 17 CFR 242.1001(a).
\26\ While some Members might directly connect to the Secondary
Data Center and incur the proposed $3,000 per month fee, there are
other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not imposing fees
for application sessions in the Secondary Data Center, a Member
connecting through another method would not incur any fees charged
directly by the Exchange. However, the Exchange notes that a third-
party service provider providing connectivity to the Exchange likely
would charge a fee for providing such connectivity; such fees are
not set by or shared in by the Exchange.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \27\ of the Act in general, and
furthers the objectives of Section 6(b)(4) \28\ of the Act, in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities. Additionally, the Exchange
believes that the proposed fees are consistent with the objectives of
Section 6(b)(5) \29\ of the Act in that they are designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to a free and open market and
national market system, and, in general, to protect investors and the
public interest, and, particularly, are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\27\ 15 U.S.C. 78f.
\28\ 15 U.S.C. 78f(b)(4).
\29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed fees for connectivity
services are reasonable, equitable and not unfairly discriminatory
because, as described above, the proposed pricing for connectivity
services is directly related to the relative costs to the Exchange to
provide those respective services and does not impose a barrier to
entry to smaller participants.
The Exchange recognizes that there are various business models and
varying sizes of market participants conducting business on the
Exchange. The Exchange's incremental aggregate costs for all
connectivity services are disproportionately related to Members with
higher message traffic and/or Members with more complicated connections
established with the Exchange, as such Members: (1) consume the most
bandwidth and resources of the network; (2) transact the vast majority
of the volume on the Exchange; and (3) require the high-touch network
support services provided by the Exchange and its staff, including
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services.
Accordingly, the Exchange believes the allocation of the proposed fees
that increase based on the number of physical connections or
application
[[Page 59854]]
sessions is reasonable based on the resources consumed by the
respective type of market participant (i.e., lowest resource consuming
Members will pay the least, and highest resource consuming Members will
pay the most), particularly since higher resource consumption
translates directly to higher costs to the Exchange.
With regard to reasonableness, the Exchange understands that when
appropriate given the context of a proposal the Commission has taken a
market-based approach to examine whether the SRO making the proposal
was subject to significant competitive forces in setting the terms of
the proposal. In looking at this question, the Commission considers
whether the SRO has demonstrated in its filing that: (i) there are
reasonable substitutes for the product or service; (ii) ``platform''
competition constrains the ability to set the fee; and/or (iii) revenue
and cost analysis shows the fee would not result in the SRO taking
supra-competitive profits. If the SRO demonstrates that the fee is
subject to significant competitive forces, the Commission will next
consider whether there is any substantial countervailing basis to
suggest the fee's terms fail to meet one or more standards under the
Exchange Act. If the filing fails to demonstrate that the fee is
constrained by competitive forces, the SRO must provide a substantial
basis, other than competition, to show that it is consistent with the
Exchange Act, which may include production of relevant revenue and cost
data pertaining to the product or service.
MEMX believes the proposed fees for connectivity services are fair
and reasonable as a form of cost recovery for the Exchange's aggregate
costs of offering connectivity services to Members and non-Members. The
proposed fees are expected to generate monthly revenue of $1,233,750
providing cost recovery to the Exchange for the aggregate costs of
offering connectivity services, based on a methodology that narrowly
limits the cost drivers that are allocated cost to those closely and
directly related to the particular service. In addition, this revenue
will allow the Exchange to continue to offer, to enhance, and to
continually refresh its infrastructure as necessary to offer a state-
of-the-art trading platform. The Exchange believes that, consistent
with the Act, it is appropriate to charge fees that represent a
reasonable markup over cost given the other factors discussed above.
The Exchange also believes the proposed fee is a reasonable means of
encouraging Users to be efficient in the connectivity services they
reserve for use, with the benefits to overall system efficiency to the
extent Members and non-Members consolidate their usage of connectivity
services or discontinue subscriptions to unused physical connectivity.
The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (1) consume
the most bandwidth and resources of the network; (2) transact the vast
majority of the volume on the Exchange; and (3) require the high-touch
network support services provided by the Exchange and its staff,
including network monitoring, reporting and support services, resulting
in a much higher cost to the Exchange to provide such connectivity
services.
Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering
whether an exchange's proposed fees are consistent with the Act.\30\ As
described in the Fee Guidance, the term ``supra-competitive profits''
refers to profits that exceed the profits that can be obtained in a
competitive market. The proposed fee structure would not result in
excessive pricing or supra-competitive profits for the Exchange. The
proposed fee structure is merely designed to permit the Exchange to
cover the costs allocated to providing connectivity services with a
modest markup (approximately 8%), which would also help fund future
expenditures (increased costs, improvements, etc.). The Exchange
believes that this is fair, reasonable, and equitable. Accordingly, the
Exchange believes that its proposal is consistent with Section 6(b)(4)
\31\ of the Act because the proposed fees will permit recovery of the
Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
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\30\ See Fee Guidance, supra note 12.
\31\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The proposed fees for connectivity services will allow the Exchange
to cover certain costs incurred by the Exchange associated with
providing and maintaining necessary hardware and other network
infrastructure as well as network monitoring and support services;
without such hardware, infrastructure, monitoring and support the
Exchange would be unable to provide the connectivity services. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by adopting fees for
connectivity services. As detailed above, the Exchange has four primary
sources of revenue that it can potentially use to fund its operations:
transaction fees, fees for connectivity services, membership and
regulatory fees, and market data fees. Accordingly, the Exchange must
cover its expenses from these four primary sources of revenue. The
Exchange's Cost Analysis estimates the costs to provide connectivity
services at $1,143,715. Based on current connectivity services usage,
the Exchange would generate monthly revenues of approximately
$1,233,750.\32\ This represents a modest profit when compared to the
cost of providing connectivity services. Even if the Exchange earns
that amount or incrementally more, the Exchange believes the proposed
fees for connectivity services are fair and reasonable because they
will not result in excessive pricing or supra-competitive profit, when
comparing the total expense of MEMX associated with providing
connectivity services versus the total projected revenue of the
Exchange associated with network connectivity services. As noted above,
when incorporating the projected revenue from connectivity services
into the Exchange's overall projected revenue, including projections
related to recently adopted market data fees, the Exchange anticipates
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources.
As such, applying the Exchange's holistic Cost Analysis to a holistic
view of anticipated revenues, the Exchange would earn approximately
8.5% to 15% margin on its operations as a whole. The Exchange believes
that this amount is reasonable and is again evidence that the Exchange
will not earn a supra-competitive profit.
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\32\ See supra note 15.
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The Exchange notes that other exchanges offer similar connectivity
options to market participants and that the Exchange's fees are a
discount as
[[Page 59855]]
compared to the majority of such fees.\33\ With respect to physical
connections, each of the Nasdaq Stock Market LLC (``Nasdaq''), NYSE,
NYSE Arca, Inc. (``Arca''), BZX and Cboe EDGX Exchange, Inc. (``EDGX'')
charges between $7,500-$22,000 per month for physical connectivity at
their primary data centers that is comparable to that offered by the
Exchange.\34\ Nasdaq, NYSE and Arca also charge installation fees,
which are not proposed to be charged by the Exchange. With respect to
application sessions, each of Nasdaq, NYSE, Arca, BZX and EDGX charges
between $500-$575 per month for order entry and drop ports.\35\ The
Exchange further notes that several of these exchanges each charge for
other logical ports that the Exchange will continue to provide for
free, such as application sessions for testing and disaster recovery
purposes.\36\ While the Exchange's proposed connectivity fees are lower
than the fees charged by Nasdaq, NYSE, Arca, BZX and EDGX, MEMX
believes that it offers significant value to Members over these other
exchanges in terms of bandwidth available over such connectivity
services, which the Exchanges believes is a competitive advantage, and
differentiates its connectivity versus connectivity to other
exchanges.\37\ Additionally, the Exchange's proposed connectivity fees
to its disaster recovery facility are within the range of the fees
charged by other exchanges for similar connectivity alternatives.\38\
The Exchange believes that its proposal to offer certain application
sessions free of charge is reasonable, equitably allocated and not
unfairly discriminatory because such proposal is intended to encourage
Member connections and use of backup and testing facilities of the
Exchange, and, with respect to MEMOIR Gap Fill ports, such ports are
used exclusively in connection with the receipt and processing of
market data from the Exchange.
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\33\ One significant differentiation between the Exchanges is
that while it offers different types of physical connections,
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does
not propose to charge different prices for such connections. In
contrast, most of the Exchange's competitors provide scaled pricing
that increases depending on the size of the physical connection. The
Exchange does not believe that its costs increase incrementally
based on the size of a physical connection but instead, that
individual connections and the number of such separate and disparate
connections are the primary drivers of cost for the Exchange.
\34\ See the Nasdaq equities fee schedule, available at: <a href="http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2">http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2</a>; the NYSE fee
schedule, available at: <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a>; the NYSE Arca equities fee
schedule, available at: <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf</a>; the BZX equities
fee schedule, available at: <a href="https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/">https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/</a>; the EDGX equities fee schedule,
available at: <a href="https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/">https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/</a>. This range is based on a review of the fees
charged for 10-40Gb connections at each of these exchanges and
relates solely to the physical port fee or connection charge,
excluding co-location fees and other fees assessed by these
exchanges. The Exchange notes that it does not offer physical
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the
Exchange through third-party extranets or service bureaus.
\35\ See id.
\36\ See id.
\37\ As noted above, all physical connections offered by MEMX
are at least 10Gb capable and physical connections provided with
larger bandwidth capabilities will be provided at the same rate as
such connections. In contrast to other exchanges, MEMX has not
proposed different types of physical connections with higher pricing
for those with greater capacity. See supra note 33. The Exchange
also reiterates that MEMX application sessions are capable of
handling significant amount of message traffic (i.e., over 50,000
orders per second), and have no application flow control or order
throttling, in contrast to competitors that have imposed message
rate thresholds. See supra note 20 and accompanying text.
\38\ See supra note 34.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\39\ for the reasons discussed above in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
its Members and other persons using its facilities, does not permit
unfair discrimination between customers, issuers, brokers, or dealers,
and is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and in general to protect investors
and the public interest, particularly as the proposal neither targets
nor will it have a disparate impact on any particular category of
market participant.
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\39\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\40\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\40\ 15 U.S.C. 78f(b)(8).
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Intra-Market Competition
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, while
the Exchange did not officially propose fees until late December of
2021 when it filed the Initial Proposal, Exchange personnel had been
informally discussing potential fees for connectivity services with a
diverse group of market participants that are connected to the Exchange
(including large and small firms, firms with large connectivity service
footprints and small connectivity service footprints, as well as
extranets and service bureaus) for several months leading up to that
time. The Exchange received no official complaints from Members, non-
Members (extranets or service bureaus), third-parties that purchase the
Exchange's connectivity and resell it, and customers of those
resellers, that the Exchange's fees or the proposed fees for
connectivity services would negatively impact their abilities to
compete with other market participants or that they are placed at a
disadvantage.
As expected, the Exchange did, however, have several market
participants reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the fees adopted by
the Exchange. The Exchange does not believe that the proposed fees for
connectivity services place certain market participants at a relative
disadvantage to other market participants because the proposed
connectivity pricing is associated with relative usage of the Exchange
by each market participant and does not impose a barrier to entry to
smaller participants. The Exchange notes that two smaller trading firms
cancelled connectivity services and elected not to participate on the
Exchange directly due to the imposition of fees but these participants
were not actively participating on the Exchange prior to disconnecting
and likely connected initially due to the fact that there were no fees
to connect. The Exchange believes its proposed pricing is reasonable
and, when coupled with the availability of third-party providers that
also offer connectivity solutions, that participation on the Exchange
is affordable for all market participants, including smaller trading
firms. As described above, the connectivity services purchased by
market participants typically increase based on their additional
message traffic and/or the complexity of their operations. The market
participants that utilize more connectivity services typically utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the proposed fees for
[[Page 59856]]
connectivity services do not favor certain categories of market
participants in a manner that would impose a burden on competition;
rather, the allocation of the proposed connectivity fees reflects the
network resources consumed by the various size of market participants
and the costs to the Exchange of providing such connectivity services.
Inter-Market Competition
The Exchange does not believes the proposed fees place an undue
burden on competition on other SROs that is not necessary or
appropriate. Additionally, other exchanges have similar connectivity
alternatives for their participants, but with higher rates to
connect.\41\ The Exchange is also unaware of any assertion that the
proposed fees for connectivity services would somehow unduly impair its
competition with other exchanges.
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\41\ See supra notes 33-38 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \42\ and Rule 19b-4(f)(2) \43\ thereunder.
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\42\ 15 U.S.C. 78s(b)(3)(A)(ii).
\43\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#156760797038767a7878707b6166556670763b727a63"><span class="__cf_email__" data-cfemail="3745425b521a54585a5a525943447744525419505841">[email protected]</span></a>. Please include
File Number SR-MEMX-2022-26 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MEMX-2022-26. 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; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-MEMX-2022-26 and should be
submitted on or before October 24, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21339 Filed 9-30-22; 8:45 am]
BILLING CODE 8011-01-P
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