Notice2022-24650
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule To Remove a Monthly Credit Associated With Trading Permit 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
November 14, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 218 (Monday, November 14, 2022)</title>
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[Federal Register Volume 87, Number 218 (Monday, November 14, 2022)]
[Notices]
[Pages 68217-68222]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-24650]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96249; File No. SR-PEARL-2022-47]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
PEARL Options Fee Schedule To Remove a Monthly Credit Associated With
Trading Permit Fees
November 7, 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 November 2, 2022, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, 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 a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to remove a monthly credit
associated with Trading Permit (defined below) fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/pearl">http://www.miaxoptions.com/rule-filings/pearl</a> at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the 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.
[[Page 68218]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange commenced operations in February 2017 \3\ and adopted
its initial fee schedule that waived fees for Trading Permits \4\ to
trade on the Exchange.\5\ In 2018, as the Exchange's market share
increased,\6\ the Exchange adopted nominal fees for Trading Permits
based on the type of interface used--MEO \7\ or FIX \8\--and according
to the volume-based tier \9\ each Member \10\ achieved during the month
along with that of its Affiliates.\11\ At the same time, the Exchange
adopted a nominal monthly credit known as the ``Trading Permit Fee
Credit,'' a $100 per month credit for Members that connected to the
Exchange via both the MEO and FIX Interfaces.\12\
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\3\ See MIAX PEARL Successfully Launches Trading Operations,
dated February 6, 2017, available at <a href="https://www.miaxoptions.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf">https://www.miaxoptions.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf</a>.
\4\ The term ``Trading Permit'' means a permit issued by the
Exchange that confers the ability to transact on the Exchange. See
Exchange Rule 100.
\5\ See Securities Exchange Act Release No. 80061 (February 17,
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
\6\ The Exchange experienced a monthly average trading volume in
equity options of 3.94% for the month of March 2018. See Market at a
Glance, available at <a href="http://www.miaxoptions.com">www.miaxoptions.com</a> (last visited November 2,
2022).
\7\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Pearl System. See the Definitions Section of the Fee Schedule
and Exchange Rule 100.
\8\ The term ``FIX Interface'' means the Financial Information
Exchange interface for certain order types as set forth in Exchange
Rule 516. See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
\9\ The tiers were determined by the defined term ``Non-
Transaction Fees Volume Based Tiers''. See the Definitions Section
of the Fee Schedule.
\10\ The term ``Member'' means an individual or organization
that is registered with the Exchange pursuant to Chapter II of
Exchange Rules for purposes of trading on the Exchange as an
``Electronic Exchange Member'' or ``Market Maker.'' Members are
deemed ``members'' under the Exchange Act. See Exchange Rule 100 and
the Definitions Section of the Fee Schedule.
\11\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07). See the
Definitions Section of the Fee Schedule for the definition of
``Affiliate.''
\12\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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The Exchange has two types of Members, Electronic Exchange Members
(``EEMs'') \13\ and Market Makers.\14\ The Exchange recently filed a
proposal with the Commission to amend the calculation and amount of
Trading Permit fees assessed to Market Makers, and adopt a flat Trading
Permit fee for EEMs, based on the type of interface used, MEO and/or
FIX. Pursuant to that proposal, the Exchange moved away from the volume
tier-based Trading Permit fee structure for Market Maker Trading Permit
fees; instead, Market Makers are assessed Trading Permit fees based
upon the number of classes in which the Market Maker was registered to
quote on any given day within the calendar month, or upon the class
volume percentages set forth in the table in Section 3)b) of the Fee
Schedule.\15\
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\13\ ``Electronic Exchange Member'' or ``EEM'' means the holder
of a Trading Permit who is a Member representing as agent Public
Customer Orders or Non-Customer Orders on the Exchange and those
non-Market Maker Members conducting proprietary trading. Electronic
Exchange Members are deemed ``members'' under the Exchange Act. See
the Definitions Section of the Fee Schedule and Exchange Rule 100.
\14\ The term ``Market Maker'' or ``MM'' means a Member
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI of the Exchange
Rules. See the Definitions Section of the Fee Schedule and Exchange
Rule 100.
\15\ See Securities Exchange Act Release No. 95780 (September
15, 2022), 87 FR 57732 (September 21, 2022) (SR-PEARL-2022-39).
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The Exchange established the Trading Permit Fee Credit to continue
to attract order flow and increase membership by lowering Trading
Permit costs for Members.\16\ The Exchange adopted the Trading Permit
Fee Credit to incentivize market participants to trade on the Exchange
and help the Exchange's market share grow.\17\ This practice is not
uncommon. New exchanges often do not charge fees or offer pricing
incentives for certain services such as memberships/trading permits to
attract order flow to an exchange, and later amend their fees to
reflect the true value of those services, absorbing costs to provide
those services in the meantime. Allowing new exchange entrants time to
build and sustain market share through various pricing incentives
before increasing non-transaction fees encourages market entry and
promotes competition. It also enables new exchanges to mature their
markets and allow market participants to trade on the new exchanges
without fees serving as a potential barrier to attracting memberships
and order flow.\18\ Not allowing exchanges to modify or amend such
pricing incentives as their markets mature, especially when other
options exchanges do not offer similar incentives, could discourage
exchanges from offering such incentives if they believe the Commission
would later require that exchange to continue to offer such incentives,
like a nominal $100 credit that is the subject of this proposal, and
lower prices than those of its competitor exchanges. In that case, the
Commission alone, and not market forces, would dictate exchange
pricing.
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\16\ See supra note 12.
\17\ The Exchange experienced a monthly average trading volume
in equity options of 4.35% for the month of October 2022. See Market
at a Glance, supra note 6 (last visited November 2, 2022).
\18\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX. . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (``MEMX Membership Fee
Proposal'') (proposing to adopt the initial fee schedule and stating
that ``[u]nder the initial proposed Fee Schedule, the Exchange
proposes to make clear that it does not charge any fees for
membership, market data products, physical connectivity or
application sessions.''). MEMX has seen its market share increase
and recently proposed to adopt a membership fee and fees for
connectivity. See Securities Exchange Act Release Nos. 93927
(January 7, 2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19)
(proposing to adopt membership fees); and 95299 (July 15, 2022), 87
FR 43563 (July 21, 2022) (SR-MEMX-2022-17) (proposing to adopt fees
for connectivity). See also, e.g., Securities Exchange Act Release
No. 88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf</a> (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
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The Exchange proposes to amend Section (3)(b) of the Fee Schedule
to remove the Trading Permit Fee Credit that is denoted in footnote
``*'' below the Trading Permit fee table. During periods when the
Trading Permit Fee Credit was in effect (the history of filings to
remove the Trading Permit Fee Credit is described below), the Trading
Permit Fee Credit was applicable to Members that connected via both the
MEO and FIX Interfaces. Members who connected via both the MEO and FIX
Interfaces were assessed the rates for both types of Trading Permits,
but these Members received a $100 monthly credit towards the Trading
Permit fees applicable to the MEO Interface. The Exchange proposes to
remove the Trading Permit Fee Credit and delete footnote ``*'' from
Section (3)(b) of the Fee Schedule.
The Exchange established the Trading Permit fee credit when it
first launched operations to attract order flow and increase membership
by lowering the costs for Members that connect via the
[[Page 68219]]
MEO Interface and FIX Interface. The Exchange believes the Trading
Permit Fee Credit has achieved its purpose and the Exchange believes
that it is appropriate to remove this credit in light of the current
operating conditions and membership population on the Exchange.
Implementation and Procedural History
The proposed rule change will be immediately effective. The
Exchange initially filed this proposal on July 1, 2021 (along with the
removal of a separate credit), with the proposed changes being
immediately effective.\19\ In that proposal, the Exchange also proposed
to increase its Trading Permit fees. Between August 2021 and September
2022, the Exchange withdrew and refiled the proposed rule change, each
time to meaningfully attempt to provide additional justification for
the proposed fee changes, provide enhanced details regarding the
Exchange's cost methodology or to supplement its competition based
arguments.\20\ The Commission received three comment letters from one
commenter on the various filings.\21\ On October 25, 2022, the Exchange
withdrew its latest proposal and submitted a revised proposal to only
remove the Trading Permit Fee Credit (SR-PEARL-2022-45, which was not
noticed by the Commission). On November 2, 2022, the Exchange withdrew
SR-PEARL-2022-45 and now resubmits a revised proposal to only remove
the Trading Permit Fee Credit.
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\19\ See Securities Exchange Act Release No. 92366 (July 9,
2021), 86 FR 37379 (SR-PEARL-2021-32).
\20\ See Securities Exchange Act Release Nos. 92797 (August 27,
2021), 86 FR 49399 (September 2, 2021) (SR-PEARL-2021-32)
(``Suspension Order 1''); 93555 (November 10, 2021), 86 FR 64254
(November 17, 2021) (SR-PEARL-2021-54); 93895 (January 4, 2022), 87
FR 1217 (January 10, 2022) (SR-PEARL-2021-59); 94287 (February 18,
2022), 87 FR 10837 (February 25, 2022) (SR-PEARL-2022-05)
(``Suspension Order 2''); 94696 (April 12, 2022), 87 FR 22987 (April
18, 2022) (SR-PEARL-2022-09); 94993 (May 26, 2022), 87 FR 33518
(June 2, 2022) (SR-PEARL-2022-23); SR-PEARL-2022-28; 95419 (August
4, 2022), 87 FR 48702 (August 10, 2022 (SR-PEARL-2022-30); 95775
(September 15, 2022), 87 FR 57544 (September 20, 2022) (SR-PEARL-
2022-35).
\21\ See Letters from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 28, 2021 and March 15, 2022,
and Letter from Brian Sopinsky, General Counsel, SIG, to Vanessa
Countryman, Secretary, Commission, dated May 9, 2022.
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2. Statutory Basis
The Exchange believes that its proposal to amend the Fee Schedule
is consistent with Section 6(b) of the Act \22\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \23\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act in that it is not designed
to permit unfair discrimination between customers, issuers, brokers and
dealers.\24\
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(4).
\24\ 15 U.S.C. 78f(b)(5).
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The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces in the market for order flow, which constrains its
pricing determinations. The fact that the market for order flow is
competitive has long been recognized by the courts. In NetCoalition v.
Securities and Exchange Commission, the D.C. Circuit stated, ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers' . . . .'' \25\
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\25\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention to determine
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues, and also recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \26\
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\26\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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The Exchange believes its proposal to remove the nominal Trading
Permit Fee Credit of $100 for EEMs that connect via both the MEO
Interface and FIX Interface is reasonable, equitable and not unfairly
discriminatory because all market participants will no longer be
offered the ability to receive the credit. The Exchange believes it is
reasonable and equitable to remove the nominal $100 Trading Permit Fee
Credit for business and competitive reasons. The Exchange established
the Trading Permit Fee Credit to lower the costs for EEMs that connect
via the MEO Interface and FIX Interface as a means to attract order
flow and memberships after the Exchange first launched operations. The
Exchange now believes that it is appropriate to remove this credit in
light of the current operating conditions and membership on the
Exchange.
The Exchange commenced operations in February 2017 \27\ and adopted
its initial fee schedule that waived fees for Trading Permits to trade
on the Exchange.\28\ Although Trading Permit fees were waived, an
initial fee structure was put in place to communicate the Exchange's
intent to charge Trading Permit fees in the future. As a new exchange
entrant, the Exchange chose to offer Trading Permits free of charge to
encourage market participants to trade on the Exchange and experience,
among things, the quality of the Exchange's technology and trading
functionality. This practice is not uncommon. New exchanges often do
not charge fees or charge lower fees for certain services such as
memberships or trading permits to attract order flow to a new market,
and later amend their fees to reflect the true value of those services,
absorbing all costs to provide those services in the meantime. Allowing
new exchange entrants time to build and sustain market share through
various pricing incentives before increasing non-transaction fees
encourages market entry and promotes competition. It also enables new
exchanges to mature their markets and allow market participants to
trade on the new exchanges without fees serving as a potential barrier
to attracting memberships and order flow.\29\ Later in 2018, as the
Exchange's market share increased,\30\ the Exchange adopted nominal
fees for Trading Permits along with the Trading Permit Fee Credit.\31\
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\27\ See supra note 3.
\28\ See supra note 5.
\29\ See supra note 18.
\30\ The Exchange experienced a monthly average trading volume
of 3.94% for the month of March 2018. See supra note 6, Market at a
Glance (last visited November 2, 2022).
\31\ See supra note 12. At that time, the Exchange chose to
adopt a volume tier-based fee for Trading Permits along with the
type of interface used--FIX or MEO--as a way to provide different
choices regarding how potential Members could access the Exchange's
System. This was for business and competitive reasons and to provide
choice regarding Trading Permits and membership that had not
previously existed. The Exchange has since proposed to move away
from the volume tier-based Trading Permit fee structure and filed a
proposal with the Commission so that its Trading Permit fee
structure aligns with that of the Exchange's affiliates, MIAX and
MIAX Emerald, as well as other options exchanges by assessing Market
Makers Trading Permit fees based on options classes assigned. See
also Securities Exchange Act Release No. 95780 (September 15, 2022),
87 FR 57732 (September 21, 2022) (SR-PEARL-2022-39) (amending the
Trading Permit Fees in the MIAX Pearl Options Fee Schedule).
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[[Page 68220]]
The Exchange recently reviewed the calculation and amount of its
Trading Permit fees. In its review, the Exchange determined that the
nominal Trading Permit Fee Credit of $100 is no longer necessary to
attract market share or memberships. The Exchange believes that even
with the proposal to remove the nominal $100 Trading Permit Fee Credit,
the Exchange's Trading Permit fees for EEMs ($1,000 for EEMs that
connect via the FIX Interface and $3,000 for EEMs that connect via the
MEO Interface) will be similar to the rates charged by the Exchange's
affiliates, Miami International Securities Exchange, LLC (``MIAX'')
\32\ and MIAX Emerald, LLC (``MIAX Emerald''),\33\ and competing
options exchanges in the industry for similar Trading Permits for such
market participants. For example, BOX Options Exchange LLC (``BOX'')
\34\ assesses a ``Participant Fee'' of $1,500 per month; NYSE Arca,
Inc. (``NYSE Arca'') \35\ assesses Office and Clearing Firms Trading
Permit fees of $1,000 per month; NYSE American, LLC (``NYSE American'')
\36\ assesses Clearing Members and Order Flow Providers ``ATP Trading
Permit'' fees of $1,000 per month; Nasdaq ISE LLC (``Nasdaq ISE'') \37\
assesses Electronic Access Members ``Access Fees'' of $500 per month;
Cboe Exchange, Inc. (``Cboe'') \38\ assesses Electronic Access Permit
fees of $3,000 per month and Clearing TPH Permit fees of $2,000 per
month; and Cboe C2 Exchange, Inc. (``Cboe C2'') \39\ assesses
Electronic Access Permit fees of $1,000 per month. None of these
exchanges offer a related credit.
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\32\ See MIAX Fee Schedule, Section (3)(b) (assessing MIAX EEMs
a flat fee of $1,500 per month for Trading Permits).
\33\ See MIAX Emerald Fee Schedule, Section (3)(b) (assessing
MIAX Emerald EEMs a flat fee of $1,500 per month for Trading
Permits).
\34\ See BOX fee schedule, Section 1, available at <a href="https://boxexchange.com/assets/BOX-Fee-Schedule-as-of-June-1-2022-1.pdf">https://boxexchange.com/assets/BOX-Fee-Schedule-as-of-June-1-2022-1.pdf</a>
(last visited October 19, 2022). BOX's Participant Fee is the analog
to the Exchange's Trading Permit fee for EEMs who use the FIX
interface. BOX had an average daily market share of 6.64% for the
month of October (as of October 19, 2022). See supra note 6, Market
at a Glance.
\35\ See NYSE Arca Options Fees and Charges, OTP Trading
Participant Rights, p. 1, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf</a> (last visited October 19, 2022).
\36\ See NYSE American Options Fee Schedule, Section III,
Monthly Trading Permit, Rights, Floor Access and Premium Product
Fees, p. 23-24, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf</a>
(last visited October 19, 2022). NYSE American's ATP Trading Permit
fee for Clearing Members and Order Flow Providers is the analog for
the Exchange's Trading Permit fee for EEMs that use the FIX
interface.
\37\ See Nasdaq ISE Options 7 Pricing Schedule, Section 8.A.
Access Services, available at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207">https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207</a> (last visited October 19,
2022). Nasdaq ISE Options' EAM Access Fee is the analog to the
Exchange's Trading Permit fee for EEMs that use the FIX Interface.
Nasdaq ISE had an average daily market share of 6.35% for the month
of October (as of October 19, 2022). See supra note 6, Market at a
Glance.
\38\ See Cboe Fee Schedule, Electronic Trading Permit Fees,
available at <a href="https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf">https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf</a> (last visited October 19, 2022). Cboe's
Electronic Access Permit fee and Clearing TPH fee are the analog to
the Exchange's Trading Permit fee for EEMs that use the FIX
Interface.
\39\ See Cboe C2 Fee Schedule, Access Fees, available at <a href="https://www.cboe.com/us/options/membership/fee_schedule/ctwo/">https://www.cboe.com/us/options/membership/fee_schedule/ctwo/</a> (last visited
October 19, 2022). Cboe C2's Electronic Access Permit fee is the
analog to the Exchange's Trading Permit fee for EEMs that use the
FIX Interface. Cboe C2 had an average daily market share of 4.65%
for the month of October (as of October 19, 2022). See supra note 6,
Market at a Glance.
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There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. One other exchange recently noted in a proposal to amend
their own trading permit fees that of the 62 market making firms that
are registered as Market Makers across Cboe, MIAX, and BOX, 42 firms
access only one of the three exchanges.\40\ Further, the Exchange and
its affiliates, MIAX and MIAX Emerald, have a total of 47 members. Of
those 47 total members, 35 are members of all three exchanges, four are
members of only two (2) exchanges, and eight (8) are members of only
one exchange. Of those that are Market Makers today on the Exchange,
two (2) are not registered as Market Makers on MIAX and one (1) is not
registered as a Market Maker on MIAX Emerald. Broken down even further,
of those Market Makers that use the MEO Interface and reached the
Exchange's top tier for the Trading Permit fee for June 2022, one (1)
Market Maker was only a Member of the Exchange and not its two
affiliates, MIAX and MIAX Emerald. The above data evidences that a
Member need not be a member of all options exchanges, let alone the
Exchange and its two affiliates, and market participants elect to do so
based on their own business decisions and need to directly access each
exchange's liquidity pool. Not only is there not an actual regulatory
requirement to connect to every options exchange, the Exchange believes
there is also no ``de facto'' or practical requirement as well, as
further evidenced by the market maker membership analysis of the
options exchanges discussed above. Indeed, Members choose if and how to
access a particular exchange and because it is a choice, the Exchange
must set reasonable pricing, otherwise prospective market makers would
not connect and existing Market Makers would disconnect from the
Exchange.
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\40\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change to Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees). The Exchange believes
that BOX's observation demonstrates that market making firms can,
and do, select which exchanges they wish to access, and,
accordingly, options exchanges must take competitive considerations
into account when setting fees for such access.
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The Exchange believes that elasticity of demand for Exchange
Membership exists when it comes to purchasing a Trading Permit and, as
evidenced by the below data, prior fee proposals have resulted in
Members terminating their memberships.\41\ For example, over the course
of those prior filings, three (3) Members terminated their memberships
in the time since the proposed fee increase first went into effect. In
June 2021, the month immediately preceding the initial implementation
of the prior proposed fee change, the Exchange had 20 users of the MEO
Interface and 28 users of the FIX Interface. These numbers remained
stagnant until August 2021, where one Member that utilized the MEO
Interface ceased utilizing the MEO Interface and again in December 2021
where one Member that utilized the FIX Interface ceased utilizing the
FIX Interface. These numbers again remained stagnant until March 2022,
where another Member that utilized the FIX Interface ceased utilizing
the FIX Interface. This resulted in 19 users of the MEO Interface and
26 users of the FIX Interface. Further, other exchanges have also
experienced termination of memberships if their members deem permit or
membership fees to be unreasonable or excessive. For example, the
Exchange notes that a BOX participant modified its access to BOX in
connection with the implementation of a proposed change to BOX's permit
fees.\42\ The absence of new memberships
[[Page 68221]]
coupled with the termination of two memberships on the Exchange, as
well as similar membership changes on another options exchange in
relation to a trading permit fee increase, clearly shows that
elasticity of demand exists.
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\41\ See Securities Exchange Act Release No. 95419 (August 4,
2022), 87 FR 48702 (August 10, 2022) (SR-PEARL-2022-30).
\42\ According to BOX, a Market Maker on BOX terminated its
status as a Market Maker in response to BOX's proposed modification
of Market Maker trading permit fees. See Securities Exchange Act
Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR-
BOX-2022-17). BOX noted, and the Exchange agrees, that this Market
Maker's decision demonstrates that Market Makers can, and do, alter
their membership status if they deem permit fees at an exchange to
be unsuitable for their business needs, thus demonstrating the
competitive environment for Market Maker permit fees and the
constraints on options exchanges when setting Market Maker permit
fees.
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The Exchange notes that there are material costs associated with
providing the infrastructure and headcount to fully-support access to
the Exchange. The Exchange incurs technology expenses related to
establishing and maintaining Information Security services, enhanced
network monitoring and customer reporting associated with its network
technology. While some of the expense is fixed, much of the expense is
not fixed, and thus increases as the expenses associated with access
services for Members increases. For example, new Members to the
Exchange may require the purchase of additional hardware to support
those Members as well as enhanced monitoring and reporting of customer
performance that the Exchange provides. Further, as the total number of
Members increase, the Exchange may need to increase its 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 to provide access to its Members is not fixed. The Exchange
believes the proposal to remove the Trading Permit Fee Credit is
reasonable in order to offset a portion of the costs to the Exchange
associated with providing access to its quote and order infrastructure.
The Exchange again notes that it operates in a highly competitive
market in which market makers can readily favor competing venues if
they deem fee levels at a particular venue to be excessive. In such an
environment, the Exchange must continually adjust its fees for services
and products, in addition to order flow, to remain competitive with
other exchanges. The Exchange believes that the proposed changes
reflect this competitive environment. The Exchange again notes it is
not aware of any reason why Members could not simply drop their access
to an exchange (or not initially access an exchange) if an exchange
were to establish prices for its non-transaction fees that, in the
determination of such market participant, did not make business or
economic sense to access such exchange. The Exchange again notes that
no broker-dealer is required by rule, regulation, or competitive forces
to be a Member on the Exchange.
Accordingly, the Exchange believes removal of the nominal $100
Trading Permit Fee Credit is reasonable and equitable. It is also not
unfairly discriminatory as the removal of the credit applies equally to
all EEMs and the Exchange's Trading Permit fees for EEMs are in line
with similar fees charged by competitor exchanges.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\43\ the Exchange
believes that the proposed rule change would not impose any burden on
intermarket or intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
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\43\ 15 U.S.C. 78f(8).
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Intra-Market Competition
The Exchange believes the removal of the Trading Permit fee credit
will not place certain market participants at a relative disadvantage
to other market participants because, in order to attract order flow
when the Exchange first launched operations, the Exchange established
this credit to lower the initial fixed cost for Members. The Exchange
now believes that it is appropriate to remove this credit in light of
the current operating conditions, including the Exchange's overall
membership and the current type and amount of volume executed on the
Exchange. The Exchange believes that the Exchange's current rebates and
fees will still allow the Exchange to remain highly competitive such
that the Exchange should continue to attract order flow and maintain
market share. The proposed fee change will not impact intra-market
competition because it will apply to all Members equally.
Inter-Market Competition
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than approximately 16% market
share. Therefore, no exchange possesses significant pricing power
regarding memberships or in the execution of multiply-listed equity and
exchange-traded fund (``ETF'') options order flow. Over the course of
2021 and 2022, the Exchange's market share has fluctuated between
approximately 3-6% of the U.S. equity options industry.\44\ The
Exchange is not aware of any evidence that a market share of
approximately 3-6% provides the Exchange with anti-competitive pricing
power when it comes to competition for memberships. The Exchange
believes that the ever-shifting market share among exchanges from month
to month demonstrates that market participants can discontinue
memberships in response to fee changes. In such an environment, the
Exchange must continually adjust its fees to remain competitive with
other exchanges and to attract and retain memberships on the Exchange.
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\44\ See supra note 6.
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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 responded to comment letters in a prior proposal.\45\
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\45\ See supra note 20.
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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,\46\ and Rule 19b-4(f)(2) \47\ thereunder.
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 should be approved or disapproved.
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\46\ 15 U.S.C. 78s(b)(3)(A)(ii).
\47\ 17 CFR 240.19b-4(f)(2).
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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
[[Page 68222]]
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9"><span class="__cf_email__" data-cfemail="6113140d044c020e0c0c040f1512211204024f060e17">[email protected]</span></a>. Please include
File Number SR-PEARL-2022-47 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2022-47. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2022-47 and should be submitted on
or before December 5, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24650 Filed 11-10-22; 8:45 am]
BILLING CODE 8011-01-P
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