Notice2023-09685
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity and Port 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
May 8, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 88 (Monday, May 8, 2023)</title>
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[Federal Register Volume 88, Number 88 (Monday, May 8, 2023)]
[Notices]
[Pages 29750-29769]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-09685]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97422; File No. SR-EMERALD-2023-12]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX
Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity
and Port Fees
May 2, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 20, 2023, MIAX Emerald, LLC (``MIAX Emerald'' 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 Emerald Fee
Schedule (the ``Fee Schedule'') to amend certain connectivity and port
fees.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/emerald">http://www.miaxoptions.com/rule-filings/emerald</a>, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; and (2) adopt a
tiered-pricing structure for Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \4\ available to Market Makers.\5\ The
Exchange last increased the fees for both 10Gb ULL fiber connections
and Limited Service MEI Ports beginning with a series of filings on
October 1, 2020 (with the final filing made on March 24, 2021).\6\
Prior to that fee change, the Exchange provided Limited Service MEI
Ports for $50 per port, after the first two Limited Service MEI Ports
that are provided free of charge, and the Exchange incurred all the
costs associated to provide those first two Limited Service MEI Ports
since it commenced operations in March 2019. The Exchange then
increased the fee by $50 to a modest $100 fee per Limited Service MEI
Port and increased the fee for 10Gb ULL fiber connections from $6,000
to $10,000 per month.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
\6\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
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Also, in that fee change, the Exchange adopted fees for providing
five different types of ports for the first time. These ports were FIX
Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and
Purge Ports.\7\ Again, the Exchange absorbed all costs associated with
providing these ports since its launch in March 2019. As explained in
that filing, expenditures, as well as research and development
(``R&D'') in numerous areas resulted in a material increase in expense
to the Exchange and were the primary drivers for that proposed fee
change. In that filing, the Exchange allocated a total of $9.3 million
in expenses to providing 10Gb ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop
Ports, FIX Drop Copy Ports, and Purge Ports.\8\
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\7\ See id. for a description of each of these ports.
\8\ Id.
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Since the time of 2021 increase discussed above, the Exchange
experienced ongoing increases in expenses, particularly internal
expenses.\9\ As discussed more fully below, the Exchange recently
calculated increased annual aggregate costs of $11,361,586 for
providing 10Gb ULL connectivity and $1,779,066 for providing Limited
Service MEI Ports.
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\9\ For example, the New York Stock Exchange, Inc.'s (``NYSE'')
Secure Financial Transaction Infrastructure (``SFTI'') network,
which contributes to the Exchange's connectivity cost, increased its
fees by approximately 9% since 2021. Similarly, since 2021, the
Exchange, and its affiliates, experienced an increase in data center
costs of approximately 17% and an increase in hardware and software
costs of approximately 19%. These percentages are based on the
Exchange's actual 2021 and proposed 2023 budgets.
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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance
[[Page 29751]]
they expect. This differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order
to recoup ongoing costs and increase in expenses set forth below in the
Exchange's cost analysis. The Exchange initially filed this proposal on
December 30, 2022 as SR-EMERALD-2022-38. On January 9, 2023, the
Exchange withdrew SR-EMERALD-2022-38 and resubmitted this proposal as
SR-EMERALD-2023-01 (the ``Initial Proposal'').\10\ On, February 23,
2023, the Exchange withdrew the Initial Proposal and replaced it with a
revised proposal (SR-EMERALD-2023-05) (the ``Second Proposal'').\11\ On
April 20, 2023, the Exchange withdrew the Second Proposal and replaced
it with this revised proposal (SR-EMERALD-2023-12).
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\10\ See Securities Exchange Act Release No. 96628 (January 10,
2023), 88 FR 2651 (January 17, 2023) (SR-EMERALD-2023-01).
\11\ See Securities Exchange Act Release No. 97079 (March 8,
2023), 88 FR 15764 (March 14, 2023) (SR-EMERALD-2023-05).
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The Exchange previously included a cost analysis in the Initial
Proposal. As described more fully below, the Exchange provides an
updated cost analysis that includes, among other things, additional
descriptions of how the Exchange allocated costs among it and its
affiliated exchanges (MIAX PEARL, LLC (``MIAX Pearl'') (separately
among MIAX Pearl Options and MIAX Pearl Equities) and MIAX \12\
(together with MIAX Pearl Options and MIAX Pearl Equities, the
``affiliated markets'')) to ensure no cost was allocated more than
once, as well as additional detail supporting its cost allocation
processes and explanations as to why a cost allocation in this proposal
may differ from the same cost allocation in a similar proposal
submitted by one of its affiliated exchanges. Although the baseline
cost analysis used to justify the proposed fees was made in the Initial
Proposal and Second Proposal, the fees themselves have not changed
since the Initial Proposal or Second Proposal and the Exchange still
proposes fees that are intended to cover the Exchange's cost of
providing 10Gb ULL connectivity and Limited Service MEI Ports with a
reasonable mark-up over those costs.
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\12\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
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* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \13\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\14\ Then, on October
16, 2018, the Commission issued an opinion in Securities Industry and
Financial Markets Association finding that exchanges failed both to
establish that the challenged fees were constrained by significant
competitive forces and that these fees were consistent with the
Act.\15\ On that same day, the Commission issued an order remanding to
various exchanges and national market system (``NMS'') plans challenges
to over 400 rule changes and plan amendments that were asserted in 57
applications for review (the ``Remand Order'').\16\ The Remand Order
directed the exchanges to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review.'' \17\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\18\ However, the Commission did
extend the deadlines in the Remand Order ``so that they d[id] not begin
to run until the resolution of the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the court's mandate.'' \19\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\13\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\14\ Id.
\15\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\16\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C.
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR
242.608(d) (asserted as an alternative basis of jurisdiction in some
applications).
\17\ Id. at page 2.
\18\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\19\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\20\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\20\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
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Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \21\ In the Staff
Guidance, the Commission Staff states that, ``[a]s an initial step in
assessing the reasonableness of a fee, staff considers whether the fee
is constrained by significant competitive forces.'' \22\ The Staff
Guidance also states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \23\
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\21\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (the ``Staff Guidance'').
\22\ Id.
\23\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC[hairsp] \24\ and remanded for further proceedings
consistent with its
[[Page 29752]]
opinion.\25\ That same day, the D.C. Circuit issued an order remanding
the Remand Order to the Commission for reconsideration in light of
NASDAQ. The court noted that the Remand Order required the exchanges
and NMS plan participants to consider the challenges that the
Commission had remanded in light of the SIFMA Decision. The D.C.
Circuit concluded that because the SIFMA Decision ``has now been
vacated, the basis for the [Remand Order] has evaporated.'' \26\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing whether the holding
in NASDAQ v. SEC that Exchange Act section 19(d) does not permit
challenges to generally applicable fee rules requiring dismissal of the
challenges the Commission previously remanded.\27\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of Nasdaq v. SEC.''
\28\ Without resolving the above issues, on October 5, 2020, the
Commission issued an order granting SIFMA and Bloomberg's request to
withdraw their applications for review and dismissed the
proceedings.\29\
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\24\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324,--Fed. App'x,--
2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate was
issued on August 6, 2020.
\25\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020).
The court's mandate issued on August 6, 2020. The D.C. Circuit held
that Exchange Act ``section 19(d) is not available as a means to
challenge the reasonableness of generally-applicable fee rules.''
Id. The court held that ``for a fee rule to be challengeable under
section 19(d), it must, at a minimum, be targeted at specific
individuals or entities.'' Id. Thus, the court held that ``section
19(d) is not an available means to challenge the fees at issue'' in
the SIFMA Decision. Id.
\26\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\27\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order
Vacating Prior Order and Requesting Additional Briefs'').
\28\ Id.
\29\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \30\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings to the new Revised Review Process, while allowing the
previously challenged fee filings, mostly submitted by incumbent
exchanges prior to 2019, to remain in effect and not subject to the
``record'' or ``review'' earlier intended by the Commission.
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\30\ See supra note 25, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\31\ The legacy exchanges all
established a significantly higher baseline for access and market data
fees prior to the Revised Review Process. From 2011 until the issuance
of the Staff Guidance in 2019, national securities exchanges filed, and
the Commission Staff did not abrogate or suspend (allowing such fees to
become effective), at least 92 filings \32\ to amend exchange
connectivity or port fees (or similar access fees). The support for
each of those filings was a simple statement by the relevant exchange
that the fees were constrained by competitive forces.\33\ These fees
remain in effect today.
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\31\ Commission Chair Gary Gensler recently reiterated the
Commission's mandate to ensure competition in the equities markets.
See ``Statement on Minimum Price Increments, Access Fee Caps, Round
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022
(stating ``[i]n 1975, Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the establishment of
the national market system and enhance competition in the securities
markets, including the equity markets'' (emphasis added)). In that
same statement, Chair Gary Gensler cited the five objectives laid
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1),
including ensuring ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets. . . .'' (emphasis added). Id. at note
1. See also Securities Acts Amendments of 1975, available at <a href="https://www.govtrack.us/congress/bills/94/s249">https://www.govtrack.us/congress/bills/94/s249</a>.
\32\ This timeframe also includes challenges to over 400 rule
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin.
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL
5023230 (Oct. 16, 2018). Those filings were left to stand, while at
the same time, blocking newer exchanges from the ability to
establish competitive access and market data fees. See The Nasdaq
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020).
The expectation at the time of the litigation was that the 400 rule
flings challenged by SIFMA and Bloomberg would need to be justified
under revised review standards.
\33\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\34\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-
[[Page 29753]]
transaction fees, or by failing to provide any alternative means for
smaller markets to establish ``fee parity'' with legacy exchanges, the
Commission is stifling competition: non-legacy exchanges are, in
effect, being deprived of the revenue necessary to compete on a level
playing field with legacy exchanges. This is particularly harmful,
given that the costs to maintain exchange systems and operations
continue to increase. The Commission Staff's change in position impedes
the ability of non-legacy exchanges to raise revenue to invest in their
systems to compete with the legacy exchanges who already enjoy
disproportionate non-transaction fee based revenue. For example, the
Cboe Exchange, Inc. (``Cboe'') reported ``access and capacity fee''
revenue of $70,893,000 for 2020 \35\ and $80,383,000 for 2021.\36\ Cboe
C2 Exchange, Inc. (``C2'') reported ``access and capacity fee'' revenue
of $19,016,000 for 2020 \37\ and $22,843,000 for 2021.\38\ Cboe BZX
Exchange, Inc. (``BZX'') reported ``access and capacity fee'' revenue
of $38,387,000 for 2020 \39\ and $44,800,000 for 2021.\40\ Cboe EDGX
Exchange, Inc. (``EDGX'') reported ``access and capacity fee'' revenue
of $26,126,000 for 2020 \41\ and $30,687,000 for 2021.\42\ For 2021,
the affiliated Cboe, C2, BZX, and EDGX (the four largest exchanges of
the Cboe exchange group) reported $178,712,000 in ``access and capacity
fees'' in 2021. NASDAQ Phlx, LLC (``NASDAQ Phlx'') reported ``Trade
Management Services'' revenue of $20,817,000 for 2019.\43\ The Exchange
notes it is unable to compare ``access fee'' revenues with NASDAQ Phlx
(or other affiliated NASDAQ exchanges) because after 2019, the ``Trade
Management Services'' line item was bundled into a much larger line
item in PHLX's Form 1, simply titled ``Market services.'' \44\
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\34\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee numerous times since August 2021 with
each proposal containing hundreds of cost and revenue disclosures
never previously disclosed by legacy exchanges in their access and
market data fee filings prior to 2019.
\35\ According to Cboe's 2021 Form 1 Amendment, access and
capacity fees represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See Cboe 2021 Form
1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf</a>.
\36\ See Cboe 2022 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf">https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf</a>.
\37\ See C2 2021 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf</a>.
\38\ See C2 2022 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf">https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf</a>.
\39\ See BZX 2021 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf</a>.
\40\ See BZX 2022 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf">https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf</a>.
\41\ See EDGX 2021 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf</a>.
\42\ See EDGX 2022 Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf">https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf</a>.
\43\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available
at <a href="https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf">https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf</a>.
\44\ See PHLX Form 1 Amendment, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf">https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf</a>. The Exchange
notes that this type of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and has the effect
of perpetuating fee and revenue advantages of legacy exchanges.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\45\ new products and other
innovations. Second, higher non-transaction fees provide the legacy
exchanges with greater flexibility to lower their transaction fees (or
use the revenue from the higher non-transaction fees to subsidize
transaction fee rates), which are more immediately impactful in
competition for order flow and market share, given the variable nature
of this cost on member firms. The prohibition of a reasonable path
forward denies the Exchange (and other non-legacy exchanges) this
flexibility, eliminates the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share with legacy exchanges. While one could debate whether the
pricing of non-transaction fees are subject to the same market forces
as transaction fees, there is little doubt that subjecting one exchange
to a materially different standard than that historically applied to
legacy exchanges for non-transaction fees leaves that exchange at a
disadvantage in its ability to compete with its pricing of transaction
fees.
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\45\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
<a href="https://www.cnbc.com/id/46517876">https://www.cnbc.com/id/46517876</a>.
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content . . .'',\46\ this is not the reality experienced by
exchanges such as MIAX Emerald. As such, non-legacy exchanges are
forced to rely on an opaque cost-based justification standard. However,
because the Staff Guidance is devoid of detail on what must be
contained in cost-based justification, this standard is nearly
impossible to meet despite repeated good-faith efforts by the Exchange
to provide substantial amount of cost-related details. For example, the
Exchange has attempted to increase fees using a cost-based
justification numerous times, having submitted over six filings.\47\
However, despite providing 100+ page filings describing in extensive
detail its costs associated with providing the services described in
the filings, Commission Staff continues to suspend such filings, with
the rationale that the Exchange has not provided sufficient detail of
its costs and without ever being precise about what additional data
points are required. The Commission Staff appears to be interpreting
the reasonableness standard set forth in section 6(b)(4) of the Act
\48\ in a manner that is not possible to achieve. This essentially
nullifies the cost-based approach for exchanges as a legitimate
alternative as laid out in the Staff Guidance. By refusing to accept a
reasonable cost-based argument to justify non-transaction fees (in
addition to refusing to accept a competition-based argument as
described above), or by failing to provide the detail required to
achieve that standard, the Commission Staff is effectively preventing
non-legacy exchanges from making any non-transaction fee changes, which
benefits the legacy exchanges and is anticompetitive to the non-legacy
exchanges. This does not meet the fairness standard under the Act and
is discriminatory.
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\46\ See supra note 21, at note 1.
\47\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13);
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4,
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
\48\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based
[[Page 29754]]
standard can be met, including a clear and exhaustive articulation of
required data and its views on acceptable margins,\49\ to the extent
that this is pertinent; (b) establish a framework to provide for
commensurate non-transaction based fees among competing exchanges to
ensure fee parity; \50\ or (c) accept that certain competition-based
arguments are applicable given the linkage between non-transaction fees
and transaction fees, especially where non-transaction fees among
exchanges are based upon disparate standards of review, lack parity,
and impede fair competition. Considering the absence of any such
framework or clarity, the Exchange believes that the Commission does
not have a reasonable basis to deny the Exchange this change in fees,
where the proposed change would result in fees meaningfully lower than
comparable fees at competing exchanges and where the associated non-
transaction revenue is meaningfully lower than competing exchanges.
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\49\ To the extent that the cost-based standard includes
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Exchange believes that Staff should be
clear as to what they determine is an appropriate profit margin.
\50\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at <a href="https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consultation_Paper.pdf">https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consultation_Paper.pdf</a>.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and places a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\51\
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\51\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the exchange to
withdraw and re-file numerous times.\52\ Recently, the Commission Staff
has not afforded the Exchange the same flexibility.\53\ This again is
evidence that the Commission Staff is not treating non-transaction fee
filings in a consistent manner and is holding exchanges to different
levels of scrutiny in reviewing filings.
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\52\ See, e.g., Securities Exchange Act Release Nos. 93937
(January 10, 2022), 87 FR 2466 (January 14, 2022) (SR-MEMX-2021-22);
94419 (March 15, 2022), 87 FR 16046 (March 21, 2022) (SR-MEMX-2022-
02); SR-MEMX-2022-12 (withdrawn before being noticed); 94924 (May
16, 2022), 87 FR 31026 (May 20, 2022) (SR-MEMX-2022-13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR-MEMX-2022-17); SR-MEMX-
2022-24 (withdrawn before being noticed); 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26); 94901 (May
12, 2022), 87 FR 30305 (May 18, 2022) (SR-MRX-2022-04); SR-MRX-2022-
06 (withdrawn before being noticed); 95262 (July 12, 2022), 87 FR
42780 (July 18, 2022) (SR-MRX-2022-09); 95710 (September 8, 2022),
87 FR 56464 (September 14, 2022) (SR-MRX-2022-12); 96046 (October
12, 2022), 87 FR 63119 (October 18, 2022) (SR-MRX-2022-20); 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26); and 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022)
(SR-MEMX-2022-32).
\53\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15).
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* * * * *
10Gb ULL Connectivity Fee Change
The Exchange proposes to amend the Fee Schedule to increase the
fees for Members and non-Members to access the Exchange's system
networks \54\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend sections (5)(a)-(b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $13,500 per month (``10Gb ULL Fee'').\55\
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\54\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\55\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange's fee schedule. See Section
(4)(c) of the Exchange's fee schedule available at <a href="https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf">https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf</a> (providing that ``Network
Connectivity Testing and Certification Fees will not be assessed in
situations where the Exchange initiates a mandatory change to the
Exchange's system that requires testing and certification. Member
Network Connectivity Testing and Certification Fees will not be
assessed for testing and certification of connectivity to the
Exchange's Disaster Recovery Facility.'').
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The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend section (5)(d) of the Fee
Schedule to adopt a tiered-pricing structure for Limited Service MEI
Ports available to Market Makers. The Exchange allocates two (2) Full
Service MEI Ports \56\ and two (2) Limited Service MEI Ports \57\ per
matching engine \58\ to which each
[[Page 29755]]
Market Maker connects. Market Makers may also request additional
Limited Service MEI Ports for each matching engine to which they
connect. The Full Service MEI Ports and Limited Service MEI Ports all
include access to the Exchange's primary and secondary data centers and
its disaster recovery center. Market Makers may request additional
Limited Service MEI Ports. Currently, Market Makers are assessed a $100
monthly fee for each Limited Service MEI Port for each matching engine
above the first two Limited Service MEI Ports that are included for
free.
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\56\ The term ``Full Service MEI Ports'' means a port which
provides Market Makers with the ability to send Market Maker simple
and complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\57\ The term ``Limited Service MEI Ports'' means a port which
provides Market Makers with the ability to send simple and complex
eQuotes and quote purge messages only, but not Market Maker Quotes,
to the MIAX Emerald System. Limited Service MEI Ports are also
capable of receiving administrative information. Market Makers
initially receive two Limited Service MEI Ports per Matching Engine.
See the Definitions Section of the Fee Schedule.
\58\ The term ``Matching Engine'' means a part of the MIAX
Emerald electronic system that processes options orders and trades
on a symbol-by-symbol basis. Some Matching Engines will process
option classes with multiple root symbols, and other Matching
Engines may be dedicated to one single option root symbol (for
example, options on SPY may be processed by one single Matching
Engine that is dedicated only to SPY). A particular root symbol may
only be assigned to a single designated Matching Engine. A
particular root symbol may not be assigned to multiple Matching
Engines. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
Limited Service MEI Port Fee Changes
The Exchange now proposes to move from a flat monthly fee per
Limited Service MEI Port for each matching engine to a tiered-pricing
structure for Limited Service MEI Ports for each matching engine under
which the monthly fee would vary depending on the number of Limited
Service MEI Ports each Market Maker elects to purchase. Specifically,
the Exchange will continue to provide the first and second Limited
Service MEI Ports for each matching engine free of charge. For Limited
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) the third and fourth Limited Service MEI Ports
for each matching engine will increase from the current flat monthly
fee of $100 to $200 per port; (ii) the fifth and sixth Limited Service
MEI Ports for each matching engine will increase from the current flat
monthly fee of $100 to $300 per port; and (iii) the seventh or more
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $400 per port.\59\ The Exchange believes a tiered-
pricing structure will encourage Market Makers to be more efficient
when determining how to connect to the Exchange. This should also
enable the Exchange to better monitor and provide access to the
Exchange's network to ensure sufficient capacity and headroom in the
System \60\ in accordance with its fair access requirements under
section 6(b)(5) of the Act.\61\
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\59\ As noted in the Fee Schedule, Market Makers will continue
to be limited to fourteen Limited Service MEI Ports per Matching
Engine. The Exchange also proposes to make a ministerial clarifying
change to remove the defined term ``Additional Limited Service MEI
Ports'' as a result of moving to a tiered pricing structure where
the first two Limited Service MEI Ports continue to be provided free
of charge. The Exchange proposes to make a related change to add the
term ``Limited Service MEI Ports'' after the word ``fourteen'' in
the Fee Schedule.
\60\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
\61\ See 15 U.S.C. 78f(b). The Exchange may offer access on
terms that are not unfairly discriminatory among its Members, and
ensure sufficient capacity and headroom in the System. The Exchange
monitors the System's performance and makes adjustments to its
System based on market conditions and Member demand.
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The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, Market Makers who take the maximum amount of Limited
Service MEI Ports account for approximately greater than 99% of message
traffic over the network, while Market Makers with fewer Limited
Service MEI Ports account for approximately less than 1% of message
traffic over the network. In the Exchange's experience, Market Makers
who only utilize the two free Limited Service MEI Ports do not have a
business need for the high performance network solutions required by
Market Makers who take the maximum amount of Limited Service MEI Ports.
The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 18 million
quote messages per second. Based on November 2022 trading results, on
an average day, the Exchange handles over approximately 6.9 billion
quotes, and more than 146 billion quotes over the entire month. Of that
total, Market Makers with the maximum amount of Limited Service MEI
Ports generated over 4 billion quotes, and Market Makers who utilized
the two free Limited Service MEI Ports generated approximately 1.6
billion quotes. Also for November 2022, Market Makers who utilized 7 to
9 Limited Service MEI ports submitted an average of 1,264,703,600
quotes per day. To achieve a consistent, premium network performance,
the Exchange must build out and maintain a network that has the
capacity to handle the message rate requirements of its most heavy
network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of its surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\62\ Thus, as
the number of connections a Market Maker has increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) also increase. The Exchange
sought to design the proposed tiered-pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange. With this in mind, the Exchange proposes no fee or
lower fees for those Market Makers who receive fewer Limited Service
MEI Ports since those Market Makers generally tend to send the least
amount of orders and messages over those connections. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers who take the most Limited Service MEI Ports pay for the vast
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity
standpoint to specifically handle the message rate and performance
requirements of those Market Makers.
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\62\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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The Exchange proposes to increase its monthly Limited Service MEI
Port fees to recover a portion of the costs associated with directly
accessing the Exchange.
Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
section 6(b) of the Act \63\ in general, and furthers the objectives of
section 6(b)(4) of the Act \64\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of section
[[Page 29756]]
6(b)(5) of the Act \65\ in that they are designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general protect investors and the public interest and are not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
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\63\ 15 U.S.C. 78f(b).
\64\ 15 U.S.C. 78f(b)(4).
\65\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes under the Revised Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \66\ and
the Staff Guidance,\67\ the Exchange believes that the proposed fees
are consistent with the Act because they are: (i) reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition; (ii) comply with the BOX Order and the Staff Guidance; and
(iii) supported by evidence (including comprehensive revenue and cost
data and analysis) that they are fair and reasonable and will not
result in excessive pricing or supra-competitive profit.
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\66\ See supra note 20.
\67\ See supra note 21.
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The Exchange believes that exchanges, in setting fees of all types,
should meet high standards of transparency to demonstrate why each new
fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Staff Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\68\ The Staff Guidance further states that, ``. . . even where an SRO
cannot demonstrate, or does not assert, that significant competitive
forces constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \69\ In the Staff Guidance, the Commission Staff further states
that, ``[i]f an SRO seeks to support its claims that a proposed fee is
fair and reasonable because it will permit recovery of the SRO's costs,
. . . , specific information, including quantitative information,
should be provided to support that argument.'' \70\
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\68\ Id.
\69\ Id.
\70\ Id.
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The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed
above, the Revised Review Process and Staff Guidance have created an
uneven playing field between legacy and non-legacy exchanges by
severely restricting non-legacy exchanges from being able to increase
non-transaction relates fees to provide them with additional necessary
revenue to better compete with legacy exchanges, which largely set fees
prior to the Revised Review Process. The much higher non-transaction
fees charged by the legacy exchanges provides them with two significant
competitive advantages: (i) additional non-transaction revenue that may
be used to fund areas other than the non-transaction service related to
the fee, such as investments in infrastructure, advertising, new
products and other innovations; and (ii) greater flexibility to lower
their transaction fees by using the revenue from the higher non-
transaction fees to subsidize transaction fee rates. The latter is more
immediately impactful in competition for order flow and market share,
given the variable nature of this cost on Member firms. The absence of
a reasonable path forward to increase non-transaction fees to
comparable (or lower rates) limits the Exchange's flexibility to, among
other things, make additional investments in infrastructure and
advertising, diminishes the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share. Again, while one could debate whether the pricing of non-
transaction fees are subject to the same market forces as transaction
fees, there is little doubt that subjecting one exchange to a
materially different standard than that applied to other exchanges for
non-transaction fees leaves that exchange at a disadvantage in its
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange initially adopted a fee of $50 per port, after the
first two Limited Service MEI Ports that are provided free of charge,
and the Exchange incurred all the costs associated to provide those
first two Limited Service MEI Ports since it commenced operations in
March 2019. At that same time, the Exchange only charged $6,000 per
month for each 10Gb ULL connection. As a new exchange entrant, the
Exchange chose to offer connectivity and ports at very low fees 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/trading permits to attract order flow to an exchange, 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 fee parity, which promotes competition
among exchanges. It also enables new
[[Page 29757]]
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.\71\
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\71\ 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) (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's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and 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); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (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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Later in 2020, as the Exchange's market share increased,\72\ the
Exchange then increased the fee by $50 to a modest $100 fee per Limited
Service MEI Port and increased the fee for 10Gb ULL fiber connections
from $6,000 to $10,000 per month.\73\ The Exchange balanced business
and competitive concerns with the need to financially compete with the
larger incumbent exchanges that charge higher fees for similar
connectivity and use that revenue to invest in their technology and
other service offerings.
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\72\ The Exchange experienced a monthly average trading volume
of 3.43% for the month of October 2020. See Market at a Glance,
available at <a href="http://www.miaxoptions.com">www.miaxoptions.com</a>.
\73\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
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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, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. 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'. . . .'' \74\
---------------------------------------------------------------------------
\74\ 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)).
---------------------------------------------------------------------------
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.'' \75\
---------------------------------------------------------------------------
\75\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------
Congress directed the Commission to ``rely on `competition,
whenever possible, in meeting its regulatory responsibilities for
overseeing the SROs and the national market system.' '' \76\ As a
result, and as evidenced above, the Commission has historically relied
on competitive forces to determine whether a fee proposal is equitable,
fair, reasonable, and not unreasonably or unfairly discriminatory. ``If
competitive forces are operative, the self-interest of the exchanges
themselves will work powerfully to constrain unreasonable or unfair
behavior.'' \77\ Accordingly, ``the existence of significant
competition provides a substantial basis for finding that the terms of
an exchange's fee proposal are equitable, fair, reasonable, and not
unreasonably or unfairly discriminatory.'' \78\ In the Revised Review
Process and Staff Guidance, Commission Staff indicated that they would
look at factors beyond the competitive environment, such as cost, only
if a ``proposal lacks persuasive evidence that the proposed fee is
constrained by significant competitive forces.'' \79\
---------------------------------------------------------------------------
\76\ See NetCoalition, 615 F.3d at 534-35; see also H.R. Rep.
No. 94-229 at 92 (1975) (``[I]t is the intent of the conferees that
the national market system evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are
removed.'').
\77\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\78\ Id.
\79\ See Staff Guidance, supra note 21.
\80\ See supra note 72.
---------------------------------------------------------------------------
The Exchange believes the competing exchanges' 10Gb connectivity
and port fees are useful examples of alternative approaches to
providing and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are competitive and reasonable because the proposed
fees are similar to or less than fees charged for similar connectivity
and port access provided by other options exchanges with comparable
market shares. As such, the Exchange believes that denying its ability
to institute fees that allow the Exchange to recoup its costs and some
margin in a manner that is closer to parity with legacy exchanges, in
effect, impedes its ability to compete, including in its pricing of
transaction fees and ability to invest in competitive infrastructure
and other offerings.
The following table shows how the Exchange's proposed fees remain
similar to or less than fees charged for similar connectivity and port
access provided by other options exchanges with similar market share.
Each of the market data rates in place at competing options exchanges
were filed with the Commission for immediate effectiveness and remain
in place today.
------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX Emerald (as proposed) 10Gb ULL $13,500.
(equity options market share connection. 1-2 ports: FREE (not
of 3.27% for the month of Limited Service changed in this
March 2023) \80\ MEI Ports. proposal); 3-4
ports: $200 each; 5-
6 ports: $300 each;
7 or more ports:
$400 each.
[[Page 29758]]
NASDAQ \81\ (equity options 10Gb Ultra fiber $15,000 per
market share of 7.51% for the connection. connection.
month of March 2023) \82\ SQF Port......... 1-5 ports: $1,500 per
port; 6-20 ports:
$1,000 per port; 21
or more ports: $500
per port.
NASDAQ ISE LLC (``ISE'') \83\ 10Gb Ultra fiber $15,000 per
(equity options market share connection. connection.
of 5.91% for the month of SQF Port \85\.... $1,100 per port.
March 2023) \84\
NYSE American LLC (``NYSE 10Gb LX LCN $22,000 per
American'') \86\ (equity connection. connection.
options market share of 7.50% Order/Quote Entry 1-40 Ports: $450 per
for the month of March 2023) Port. port; 41 or more
\87\ Ports: $150 per
port.
NASDAQ GEMX, LLC (``GEMX'') 10Gb Ultra $15,000 per
\88\ (equity options market connection connection.
share of 2.00% for the month SQF Port......... $1,250 per port.
of March 2023) \89\
------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, the Exchange's affiliate, MIAX Pearl Options, experienced a
decrease in membership as the result of similar fees proposed herein.
One MIAX Pearl Options Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023, as a direct result of the
proposed connectivity and port fee changes on MIAX Pearl Options.
---------------------------------------------------------------------------
\81\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\82\ See supra note 72.
\83\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\84\ See supra note 72.
\85\ Similar to the Exchange's MEI Ports, SQF ports are
primarily utilized by Market Makers.
\86\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\87\ See supra note 72.
\88\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\89\ See supra note 72.
---------------------------------------------------------------------------
It is not a requirement for market participants to become members
of all options exchanges, in fact, certain market participants conduct
an options business as a member of only one options market.\90\ A very
small number of market participants choose to become a member of all
sixteen options exchanges. Most firms that actively trade on options
markets are not currently Members of the Exchange and do not purchase
connectivity or port services at the Exchange. Connectivity and ports
are only available to Members or service bureaus, and only a Member may
utilize a port.\91\
---------------------------------------------------------------------------
\90\ BOX recently adopted an electronic market maker trading
permit fee. See Securities Exchange Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17). In that
proposal, BOX stated that, ``. . . it is not aware of any reason why
Market Makers 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 Maker, did not make business or economic sense for such
Market Maker to access such exchange. [BOX] again notes that no
market makers are required by rule, regulation, or competitive
forces to be a Market Maker on [BOX].'' Also in 2022, MEMX
established a monthly membership fee. See Securities Exchange Act
Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022)
(SR-MEMX-2021-19). In that proposal, MEMX reasoned that that there
is value in becoming a member of the exchange and stated that it
believed that the proposed membership fee ``is not unfairly
discriminatory because no broker-dealer is required to become a
member of the Exchange'' and that ``neither the trade-through
requirements under Regulation NMS nor broker-dealers' best execution
obligations require a broker-dealer to become a member of every
exchange.''
\91\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------
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.\92\ The Exchange and its affiliates,
MIAX Pearl and MIAX, have a total of 47 members. Of those 47 total
members, 35 are members of all three affiliated exchanges, four are
members of only two (2) affiliated exchanges, and eight (8) are members
of only one affiliated exchange. The Exchange also notes that no firm
is a Member of the Exchange only. The above data evidences that a
broker-dealer need not have direct connectivity to all options
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------
\92\ 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.
---------------------------------------------------------------------------
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
broker-dealer membership analysis of the options exchanges discussed
above. As noted above, this is evidenced by the fact that one MIAX
Options Pearl Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes on MIAX Pearl Options (which are
similar to the changes proposed herein). Indeed, broker-dealers choose
if and how to access a particular exchange and because it is a choice,
the Exchange must set reasonable pricing, otherwise prospective members
would not connect and existing members would disconnect from the
Exchange. The decision to become a member of an exchange, particularly
for registered market makers, is complex, and not solely based on the
non-transactional costs assessed by an exchange. As noted herein,
specific factors include, but are not limited to: (i) an exchange's
available liquidity in options series; (ii) trading functionality
offered on a particular market; (iii) product offerings; (iv) customer
service on an exchange; and (v) transactional pricing. Becoming a
member of the exchange does not ``lock'' a potential member into a
market or diminish the overall competition for exchange services.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at--or establish connectivity
[[Page 29759]]
to--the Exchange.\93\ If the Exchange is not at the NBBO, the Exchange
will route an order to any away market that is at the NBBO to ensure
that the order was executed at a superior price and prevent a trade-
through.\94\
---------------------------------------------------------------------------
\93\ See Options Order Protection and Locked/Crossed Market Plan
(August 14, 2009), available at <a href="https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf">https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf</a>.
\94\ Members may elect to not route their orders by utilizing
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------
With respect to the submission of orders, Members may also choose
not to purchase any connection at all from the Exchange, and instead
rely on the port of a third party to submit an order. For example, a
third-party broker-dealer Member of the Exchange may be utilized by a
retail investor to submit orders into an Exchange. An institutional
investor may utilize a broker-dealer, a service bureau,\95\ or request
sponsored access \96\ through a member of an exchange in order to
submit a trade directly to an options exchange.\97\ A market
participant may either pay the costs associated with becoming a member
of an exchange or, in the alternative, a market participant may elect
to pay commissions to a broker-dealer, pay fees to a service bureau to
submit trades, or pay a member to sponsor the market participant in
order to submit trades directly to an exchange.
---------------------------------------------------------------------------
\95\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be a Member. Some Members utilize a Service Bureau for
connectivity and that Service Bureau may not be a Member. Some
market participants utilize a Service Bureau who is a Member to
submit orders.
\96\ Sponsored Access is an arrangement whereby a Member permits
its customers to enter orders into an exchange's system that bypass
the Member's trading system and are routed directly to the Exchange,
including routing through a service bureau or other third-party
technology provider.
\97\ This may include utilizing a floor broker and submitting
the trade to one of the five options trading floors.
---------------------------------------------------------------------------
Non-Member third-parties, such as service bureaus and extranets,
resell the Exchange's connectivity. This indirect connectivity is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees), which alternative is already being
used by non-Members and further constrains the price that the Exchange
is able to charge for connectivity and other access fees to its market.
The Exchange notes that it could, but chooses not to, preclude market
participants from reselling its connectivity. Unlike other exchanges,
the Exchange also does not currently assess fees on third-party
resellers on a per customer basis (i.e., fees based on the number of
firms that connect to the Exchange indirectly via the third-party).\98\
Indeed, the Exchange does not receive any connectivity revenue when
connectivity is resold by a third-party, which often is resold to
multiple customers, some of whom are agency broker-dealers that have
numerous customers of their own.\99\ Particularly, in the event that a
market participant views the Exchange's direct connectivity and access
fees as more or less attractive than competing markets, that market
participant can choose to connect to the Exchange indirectly or may
choose not to connect to the Exchange and connect instead to one or
more of the other 16 options markets. Accordingly, the Exchange
believes that the proposed fees are fair and reasonable and constrained
by competitive forces.
---------------------------------------------------------------------------
\98\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at, U.S. Direct-Extranet Connection
(<a href="http://nasdaqtrader.com">nasdaqtrader.com</a>); and Securities Exchange Act Release Nos. 74077
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022)
(SR-NASDAQ-2017-114).
\99\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------
The Exchange is obligated to regulate its Members and secure access
to its environment. In order to properly regulate its Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Members secure
access to communicate with the Exchange and exercise trading rights.
When a market participant elects to be a Member, and is approved for
membership by the Exchange, the Member is granted trading rights to
enter orders and/or quotes into Exchange through secure connections.
Again, there is no legal or regulatory requirement that a market
participant become a Member of the Exchange. This is again evidenced by
the fact that one MIAX Pearl Options Market Maker terminated their MIAX
Pearl Options membership effective January 1, 2023 as a direct result
of the proposed connectivity and port fee changes on MIAX Pearl
Options. If a market participant chooses to become a Member, they may
then choose to purchase connectivity beyond the one connection that is
necessary to quote or submit orders on the Exchange. Members may freely
choose to rely on one or many connections, depending on their business
model.
Cost Analysis
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
is especially diligent in assessing those fees in a transparent way
against its own aggregate costs of providing the related service, and
in 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,\100\ and Rule 19b-4 thereunder,\101\ with respect to the
types of information SROs should provide when filing fee changes, and
section 6(b) of the Act,\102\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\103\ not designed
to permit unfair discrimination,\104\ and that they not impose a burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act.\105\ 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.\106\ The Exchange reiterates that the legacy exchanges with whom
the Exchange vigorously competes for order flow and market share, were
not subject to any such diligence or transparency in
[[Page 29760]]
setting their baseline non-transaction fees, most of which were put in
place before the Revised Review Process and Staff Guidance.
---------------------------------------------------------------------------
\100\ 15 U.S.C. 78s(b)(1).
\101\ 17 CFR 240.19b-4.
\102\ 15 U.S.C. 78f(b).
\103\ 15 U.S.C. 78f(b)(4).
\104\ 15 U.S.C. 78f(b)(5).
\105\ 15 U.S.C. 78f(b)(8).
\106\ See Staff Guidance, supra note 21.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,361,586 (or approximately $946,799 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Limited Service MEI Ports at
$1,799,066 (or approximately $148,255 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its Users (both
Members and non-Members \107\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection. The Exchange also proposes to modify its Fee Schedule
to charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------
\107\ 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, and thus, may access Limited Service MEI Ports on behalf
of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
---------------------------------------------------------------------------
In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\108\ The
Cost Analysis required a detailed analysis of the Exchange'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 port access
(which provide order entry, cancellation and modification
functionality, risk functionality, the ability to receive drop copies,
and other functionality). The Exchange 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'').
---------------------------------------------------------------------------
\108\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------
As an initial step, the Exchange determined the total cost for the
Exchange and the affiliated markets). That total cost was then divided
among the Exchange and each of its affiliated markets based on a number
of factors, including server counts, additional hardware and software
utilization, current or anticipated functional or non-functional
development projects, capacity needs, end-of-life or end-of-service
intervals, number of members, market model (e.g., price time or pro-
rata), which may impact message traffic, individual system
architectures that impact platform size,\109\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time. This will result
in different allocation percentages among the Exchange and its
affiliated markets. Meanwhile this allocation methodology ensures that
no portion of any cost was allocated twice or double-counted between
the Exchange and its affiliated markets.
---------------------------------------------------------------------------
\109\ For example, the Exchange maintains 12 matching engines,
MIAX Pearl Options maintains 12 matching engines, MIAX Pearl
Equities maintains 24 matching engines, and MIAX maintains 24
matching engines.
---------------------------------------------------------------------------
Next, the Exchange adopted an allocation methodology with
thoughtful and consistently applied principles to guide how much of a
particular cost amount allocated to the Exchange pursuant to the above
methodology should be allocated within the Exchange 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 1Gb and 10Gb ULL
connectivity (62%), with smaller allocations to all ports (10%), and
the remainder to the provision of transaction execution, membership
services and market data services (28%). This next level of the
allocation methodology at the individual exchange level also took into
account a number of factors similar to those set forth under the first
allocation methodology described above, to determine the appropriate
allocation to connectivity or market data versus what is to be
allocated to providing other services. The allocation methodology was
developed through an assessment of costs with senior management
intimately 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. Each of the below
cost allocations is unique to the Exchange and represents a percentage
of overall cost that was allocated to the Exchange pursuant to the
initial allocation described above.
By allocating segmented costs to each core service, the Exchange
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 five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
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. While there is no standardized and generally accepted
methodology for the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated 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 ports, while certain costs were
[[Page 29761]]
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, the Exchange estimates that the cost drivers to provide
10Gb ULL connectivity and Limited Service MEI Port services, including
both physical 10Gb connections and Limited Service MEI Ports, result in
an aggregate monthly cost of approximately $1,095,054 (utilizing the
rounded numbers when dividing the annual cost for 10Gb ULL connectivity
and annual cost for Limited Service MEI Ports by 12 months, then adding
both numbers together), as further detailed below.
Costs Related to Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for such area
(e.g., as set forth below, the Exchange allocated approximately 28.1%
of its overall Human Resources cost to offering physical connectivity).
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \110\ \111\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $3,520,856 $293,405 28
Connectivity (external fees, cabling, switches, etc.)........... 71,675 5,973 61.9
Internet Services, including External Market Data............... 373,249 31,104 84.8
Data Center..................................................... 752,545 62,712 61.9
Hardware and Software Maintenance and Licenses.................. 666,208 55,517 50.9
Depreciation.................................................... 1,929,118 160,760 63.8
Allocated Shared Expenses....................................... 4,047,935 337,328 51.3
-----------------------------------------------
Total....................................................... 11,361,586 946,799 42.8
----------------------------------------------------------------------------------------------------------------
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity. The Exchange notes that some of its cost allocation
percentages for certain categories of expense differ when compared to
the same categories of expense described by the Exchange's affiliates
in their similar proposed fee changes for connectivity and ports. This
is because the Exchange's cost allocation methodology utilizes the
actual projected costs of the Exchange (which are specific to the
Exchange, and are independent of the costs projected and utilized by
the Exchange's affiliates) to determine its actual costs. The Exchange
provides additional explanation below (including the reason for the
deviation) where the Exchange considers such deviation in allocations
to be non de minimis.
---------------------------------------------------------------------------
\110\ The Annual Cost includes figures rounded to the nearest
dollar.
\111\ The Monthly Cost was determined by dividing the Annual
Cost for each line item by twelve (12) months and rounding up or
down to the nearest dollar.
---------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated a percentage of
42.4% of each employee's time assigned to the Exchange based on the
above-described allocation methodology. 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 and its affiliated markets have 184 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. Specifically, twice a year and as
needed with additional new hires and new project initiatives, in
consultation with employees as needed, managers and department heads
assign a percentage of time to every employee and then allocate that
time amongst the Exchange and its affiliated markets to determine that
market's individual Human Resources expense. Then, again managers and
department heads assign a percentage of each employee's time allocated
to the Exchange into buckets including network connectivity, ports,
market data, and other exchange services. This process ensures that
every employee is 100% allocated, ensuring there is no double counting
between the Exchange and its affiliated markets.
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. This includes
personnel from the following Exchange departments that are
predominately involved in providing 1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading Systems Development, Systems
Operations and Network Monitoring, Network and Data Center Operations,
Listings, Trading Operations, and Project Management. 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 and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties, cabling and switches required to
operate the Exchange. 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
[[Page 29762]]
to run the Exchange's matching engine and basic operations compliant
with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity and content service
providers for connectivity and data feeds for the entire U.S. options
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity
and content service providers to connect to other national securities
exchanges, the Options Price Reporting Authority (``OPRA''), and to
receive market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or OPRA and, therefore, would not be able to operate
and support its System Networks. The Exchange does not employ a
separate fee to cover its connectivity and content service provider
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity.
Lastly, the Exchange notes that this allocation percentage appears
to be greater than its affiliates by more than a de minimis amount as
MIAX Emerald allocated 84.8% of its Internet Services, including
External Market Data expense towards 10Gb ULL connectivity, while MIAX,
MIAX Pearl Options and MIAX Pearl Equities allocated 73.3%, 73.3% and
72.5%, respectively, to the same category of expense. However, the
Exchange believes that this is not, in dollar amounts, a non de minimis
difference. This is because the total dollar amount of expense covered
by this expense category is relatively small. Thus, non de minimis
differences in total amounts create the appearance of non de minimis
differences in allocation percentages when compared across markets. For
instance, despite the non de minimis difference in cost allocation
percentages for the Internet Services, including External Market Data
cost driver across the Exchange and its affiliates' platforms, the
actual dollar amount difference is approximately only $44,000.
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 (61.9%) to
physical 10Gb ULL 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 included External Market Data fees to the provision of
10Gb ULL connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., re-pricing of orders to avoid lock or crossed
markets, trading collars). This allocation was included as part of the
Internet Services cost described above. Thus, as market data from other
exchanges is consumed at the matching engine level, (to which 10Gb ULL
connectivity provides access to) in order to validate orders before
additional entering the matching engine or being executed, the Exchange
believes it is reasonable to allocate a small amount of such costs to
10Gb ULL connectivity.
Hardware and Software Maintenance and 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.\112\
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\112\ This expense may be less than the Exchange's affiliated
markets, specifically MIAX Pearl, because, unlike the Exchange, MIAX
Pearl (the options and equities markets) maintains an additional
gateway to accommodate its member's access and connectivity needs.
This added gateway contributes to the difference in allocations
between the Exchange and MIAX Pearl.
---------------------------------------------------------------------------
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 63.8% of all depreciation costs to providing physical 10Gb
ULL 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. The Exchange also notes that
this allocation differs from its affiliated markets due to a number of
factors, such as the age of physical assets and software (e.g., older
physical assets and software were previously depreciated and removed
from the allocation), or certain system enhancements that required new
physical assets and software, thus providing a higher contribution to
the depreciated cost.
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.\113\ The Exchange notes that the
51.3%
[[Page 29763]]
allocation of general shared expenses for physical 10Gb ULL
connectivity is higher than that allocated to general shared expenses
for Limited Service MEI Ports 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),
Limited Service MEI Ports do not require as many broad or indirect
resources as other Core Services. The total monthly cost for 10Gb ULL
connectivity of $946,799 was divided by the number of physical 10Gb ULL
connections the Exchange maintained at the time that proposed pricing
was determined (102), to arrive at a cost of approximately $9,282 per
month, per physical 10Gb ULL connection.
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\113\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. The Exchange does not calculate is expenses at that
granular a level. Instead, director costs are included as part of
the overall general allocation.
---------------------------------------------------------------------------
Costs Related to Offering Limited Service MEI Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEO Ports 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 5.9% of its overall Human Resources
cost to offering Limited Service MEI Ports).
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \114\ \115\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $737,784 $61,482 5.9
Connectivity (external fees, cabling, switches, etc.)........... 3,713 309 3.2
Internet Services............................................... 14,102 1,175 3.2
Data Center..................................................... 55,686 4,641 4.6
Hardware and Software Maintenance and Licenses.................. 41,951 3,496 3.2
Depreciation.................................................... 112,694 9,391 3.7
Allocated Shared Expenses....................................... 813,136 67,761 10.3
-----------------------------------------------
Total....................................................... 1,779,066 148,255 6.7
----------------------------------------------------------------------------------------------------------------
The Exchange notes that some of its cost allocation percentages for
certain categories of expense differ when compared to the same
categories of expense described by the Exchange's affiliates in their
similar proposed fee changes for connectivity and ports. This is
because the Exchange's cost allocation methodology utilizes the actual
projected costs of the Exchange (which are specific to the Exchange,
and are independent of the costs projected and utilized by the
Exchange's affiliates) to determine its actual costs. The Exchange
provides additional explanation below (including the reason for the
deviation) where the Exchange considers such deviation in allocations
to be non de minimis.
---------------------------------------------------------------------------
\114\ See supra note 110 (describing rounding of Annual Costs).
\115\ See supra note 111 (describing rounding of Monthly Costs
based on Annual Costs).
---------------------------------------------------------------------------
Human Resources
With respect to Limited Service MEI Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Limited Service MEI Ports
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).
Just as described above for 10Gb ULL connectivity, the estimates of
Human Resources cost were again determined by consulting with
department leaders, determining which employees are involved in tasks
related to providing Limited Service MEI Ports 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 Limited Service MEI
Ports 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 Limited Service MEI Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing 1Gb
and 10Gb ULL connectivity: Business Systems Development, Trading
Systems Development, Systems Operations and Network Monitoring, Network
and Data Center Operations, Listings, Trading Operations, and Project
Management. 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 and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of Limited Service MEI Ports, the Exchange also includes a portion of
its costs related to External Market Data, as described below.
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 included External Market Data fees to the provision of
Limited Service MEI Ports 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). This
allocation was included as part of the Internet Services cost described
above.\116\ Thus, as market data from other Exchanges is consumed at
the Limited Service MEI Port level in order to validate orders before
additional processing occurs with respect to such orders, the Exchange
believes it is
[[Page 29764]]
reasonable to allocate a small amount of such costs to Limited Service
MEI Ports.
---------------------------------------------------------------------------
\116\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
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 3.7% of
all depreciation costs to providing Limited Service MEI Ports. In
contrast to physical connectivity, described above, the Exchange did
allocate depreciation costs for depreciated software necessary to
operate the Exchange to Limited Service MEI Ports because such software
is related to the provision of such connectivity. The Exchange also
notes that this allocation differs from its affiliated markets due to a
number of factors, such as the age of physical assets and software
(e.g., older physical assets and software were previously depreciated
and removed from the allocation), or certain system enhancements that
required new physical assets and software, thus providing a higher
contribution to the depreciated cost.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall Limited Service MEI Ports costs as without these general
shared costs the Exchange would not be able to operate in the manner
that it does and provide Limited Service MEI Ports. The costs included
in general shared expenses include 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 11% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 10.3% allocation of general shared expenses for
Limited Service MEI Ports is lower 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 Limited Service MEI Ports have
several areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above), 10Gb
ULL connectivity requires 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 $148,255 was
divided by the number of chargeable Limited Service MEI Ports
(excluding the two free Limited Service MEI Ports per matching engine
that each Member receives) the Exchange maintained at the time that
proposed pricing was determined (706), to arrive at a cost of
approximately $210 per month, per charged Limited Service MEI Port.
Lastly, the Exchange notes that this allocation is greater than its
affiliate, MIAX Pearl Options, by more than a de minimis amount as MIAX
Emerald allocated 10.3% of its Allocated Shared Expense towards Limited
Service MEI Ports, while MIAX Pearl Options allocated 3.6% to its Full
Service MEO Ports (Bulk and Single) for the same category of expense.
The allocation percentages set forth above differ because they
correspond with the number of applicable ports utilized on each
exchange. For March 2023, MIAX Market Makers utilized 1,782 Limited
Service MEI ports and MIAX Emerald Market Makers utilized 1,028 Limited
Service MEI Ports. When compared to Full Service Port (Bulk and Single)
usage, for March 2023, MIAX Pearl Options Members utilized only 432
Full Service MEO Ports (Bulk and Single), far fewer than number of
Limited Service MEI Ports utilized by Market Makers on MIAX Emerald,
thus resulting in a smaller cost allocation. There is increased cost
associated with supporting a higher number of ports (requiring more
hardware and other technical infrastructure), thus the Exchange
allocates a higher percentage of expense than MIAX Pearl Options which
has a lower port count.
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 Limited Service MEI Ports) 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 filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, 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 (42.4%) given their focus on functions
necessary to provide physical connections. The salaries of those same
personnel were allocated only 8.0% to Limited Service MEI Ports and the
remaining 49.6% was allocated to 1Gb connectivity, other port services,
transaction services, membership services 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 of 19.8% for 10Gb ULL connectivity or 19.9% for the entire
network, 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 (5%
or less) across a wider range of personnel groups in order to allocate
Human Resources costs to providing Limited Service MEI Ports. This is
because a much wider range of personnel are involved in functions
necessary to offer, monitor and maintain Limited Service MEI Ports but
the tasks necessary to do so are not a primary or full-time function.
In total, the Exchange allocated 28.1% of its personnel costs to
providing physical connections and 5.9% of its personnel costs to
providing Limited Service MEI Ports, for a total allocation of 34%
Human Resources expense to provide these specific connectivity
services. In turn, the Exchange allocated the remaining 66% of its
Human Resources expense to membership services, transaction services,
other port services and market data. 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
[[Page 29765]]
core services, including physical connections and Limited Service MEI
Ports, 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 67.5% of the Exchange's overall depreciation and
amortization expense to connectivity services (63.8% attributed to 10Gb
ULL physical connections and 3.7% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 32.5%) toward the cost of providing transaction
services, membership services, other port services and market data.
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. 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 Limited Service MEI Ports 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 is based on the
Exchange's 2023 fiscal year of operations and projections. 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, the Exchange believes 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.
Projected Revenue
The proposed fees 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. Much of the cost relates to monitoring and
analysis of data and performance of the network via the subscriber's
connection(s). The above cost, namely those associated with hardware,
software, and human capital, enable the Exchange to measure network
performance with nanosecond granularity. These same costs are also
associated with time and money spent seeking to continuously improve
the network performance, improving the subscriber's experience, based
on monitoring and analysis activity. 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 amending fees for connectivity services.
Subscribers, particularly those of 10Gb ULL connectivity, expect the
Exchange to provide this level of support to connectivity so they
continue to receive the performance they expect. This differentiates
the Exchange from its competitors. As detailed above, the Exchange has
five 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 five primary sources of
revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services at $11,361,586. Based on current 10Gb
ULL connectivity services usage, the Exchange would generate annual
revenue of approximately $16,524,000. This represents a modest profit
of 31% when compared to the cost of providing 10Gb ULL connectivity
services which will decrease over time.\117\ The Exchange's Cost
Analysis estimates the annual cost to provide Limited Service MEI Port
services at $1,779,066. Based on current Limited Service MEI Port
services usage, the Exchange would generate annual revenue of
approximately $2,809,200. This represents an estimated profit margin of
37% when compared to the cost of providing Limited Service MEI Port
services, which will decrease over time.\118\ Even if the Exchange
earns those amounts or incrementally more or less, the Exchange
believes the proposed fees are fair and reasonable because they will
not result in pricing that deviates from that of other exchanges or
supra-competitive profit, when comparing the total expense of the
Exchange associated with providing 10Gb ULL connectivity and Limited
Service MEI Port services versus the total projected revenue of the
Exchange associated with network 10Gb ULL connectivity and Limited
Service MEI Port services.
---------------------------------------------------------------------------
\117\ Assuming the U.S. inflation rate continues at its current
rate, the Exchange believes that the projected profit margins in
this proposal will decrease; however, the Exchange cannot predict
with any certainty whether the U.S. inflation rate will continue at
its current rate or its impact on the Exchange's future profits or
losses. See, e.g., <a href="https://www.usinflationcalculator.com/inflation/current-inflation-rates/">https://www.usinflationcalculator.com/inflation/current-inflation-rates/</a> (last visited April 18, 2023).
\118\ Id.
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* * * * *
The Exchange has operated at a cumulative net annual loss since it
[[Page 29766]]
launched operations in 2019.\119\ The Exchange has operated at a net
loss due to a number of factors, one of which is choosing to forgo
revenue by offering certain products, such as connectivity, at lower
rates than other options exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for seeking to raise its fees in light of
necessary technology changes and its increased costs after offering
such products as discounted prices. Therefore, the Exchange believes
the proposed fees are reasonable because they are based on both
relative costs to the Exchange to provide dedicated 10Gb ULL
connectivity and Limited Service MEI Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------
\119\ The Exchange has incurred a cumulative loss of $9 million
since its inception in 2019. See Exchange's Form 1/A, Application
for Registration or Exemption from Registration as a National
Securities Exchange, filed June 29, 2022, available at <a href="https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf">https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf</a>.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports
and/or obtaining new clients that will purchase such access. To the
extent the Exchange is successful in encouraging new clients to utilize
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does
not believe it should be penalized for such success. To the extent the
Exchange has mispriced and experiences a net loss in clients, the
Exchange could experience a net reduction in revenue. While the
Exchange believes in transparency around costs and potential revenue,
the Exchange does not believe that these estimates should form the sole
basis of whether or not a proposed fee is reasonable or can be adopted.
The Exchange is owned by a holding company that is the parent
company of four exchange markets and, therefore, the Exchange and its
affiliated markets must allocate shared costs across all of those
markets accordingly, pursuant to the above-described allocation
methodology. In contrast, the Investors Exchange LLC (``IEX'') and
MEMX, which are currently each operating only one exchange, in their
recent non-transaction fee filings can allocate the entire amount of
that same cost to a single exchange. This can result in lower profit
margins for the non-transaction fees proposed by IEX and MEMX because
the single allocated cost does not experience the efficiencies and
synergies associated with shared costs across multiple platforms. The
Exchange and its affiliated markets must share a single cost, which
results in cost efficiencies that cause a broader gap between the
allocated cost amount and projected revenue, even though the fee levels
being proposed are lower or similar to competing markets (as described
above). To the extent that the application of a cost-based standard
results in Commission Staff making determinations as to the
appropriateness of certain profit margins, the Commission Staff must
consider whether the proposed fee level is comparable to, or on parity
with, the same fee charged by competing exchanges and how different
cost allocation methodologies (such as across multiple markets) may
result in different profit margins for comparable fee levels. If it is
the case that the Commission Staff is making determinations as to
appropriate profit margins, the Exchange believes that Staff should be
clear to all market participants as to what they determine is an
appropriate profit margin and should apply such determinations
consistently and, in the case of certain legacy exchanges,
retroactively, if such standards are to avoid having a discriminatory
effect.
Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone could be used to justify fees
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\120\ Thus, as the number of messages
[[Page 29767]]
an entity increases, certain other costs incurred by the Exchange that
are correlated to, though not directly affected by, connection costs
(e.g., storage costs, surveillance costs, service expenses) also
increase. Given this difference in network utilization rate, the
Exchange believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
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\120\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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Limited Service MEI Ports
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, like above for the 10Gb ULL
connectivity, the Exchange notes that the Market Makers who take the
maximum amount of Limited Service MEI Ports account for approximately
greater than 99% of message traffic over the network, while Market
Makers with fewer Limited Service MEI Ports account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, Market Makers who only utilize the two free Limited Service
MEI Ports do not have a business need for the high performance network
solutions required by Market Makers who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. Based on November
2022 trading results, on an average day, the Exchange handles over
approximately 6.9 billion quotes, and more than 146 billion quotes over
the entire month. Of that total, Market Makers with the maximum amount
of Limited Service MEI Ports generate over 4 billion quotes, and Market
Makers who utilize the two free Limited Service MEI Ports generate
approximately 1.6 billion quotes. Also for November 2022, Market Makers
who utilized 7 to 9 Limited Service MEI ports submitted an average of
1,264,703,600 quotes per day. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\121\ Thus, as
the number of connections a Market Maker has increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) also increase. The Exchange
sought to design the proposed tiered-pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange. With this in mind, the Exchange proposes no fee or
lower fees for those Market Makers who receive fewer Limited Service
MEI Ports since those Market Makers generally tend to send the least
amount of orders and messages over those connections. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers who take the most Limited Service MEI Ports pay for the vast
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity
standpoint to specifically handle the message rate and performance
requirements of those Market Makers.
---------------------------------------------------------------------------
\121\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers.
Billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\122\ Thus, as the number of connections a
Market Maker has increases, the related pull on Exchange resources also
increases. The Exchange sought to design the proposed tiered-pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases. The more connections purchased by a
Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange.
---------------------------------------------------------------------------
\122\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange operated at a cumulative net annual loss
since its launch in 2019 \123\ due to providing a low-cost alternative
to attract order flow and encourage market participants to experience
the high determinism and resiliency of the Exchange's trading Systems.
To do so, the Exchange chose to waive the fees for some non-transaction
related services and Exchange products or provide them at a very lower
fee, which was not profitable to the Exchange. This resulted in the
Exchange forgoing revenue it could have generated from assessing any
fees or higher fees. The Exchange could have sought to charge higher
fees at the outset, but that could have served to discourage
participation on the Exchange. Instead, the Exchange chose to provide a
low-cost exchange alternative to the options industry, which resulted
in lower initial revenues. Examples of this are 10Gb ULL connectivity
and Limited Service MEI Ports, for which the Exchange only now seeks to
adopt fees at a level similar to or lower than those of other options
exchanges.
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\123\ See supra note 119.
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Further, the Exchange does not believe that the proposed fee
increase
[[Page 29768]]
for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
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, Exchange
personnel has 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 does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Market Maker terminated their
MIAX Pearl membership on January 1, 2023 as a direct result of the
similar proposed fee changes by MIAX Pearl.\124\ 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
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 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.
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\124\ The Exchange acknowledges that IEX included in its
proposal to adopt market data fees after offering market data for
free an analysis of what its projected revenue would be if all of
its existing customers continued to subscribe versus what its
projected revenue would be if a limited number of customers
subscribed due to the new fees. See Securities Exchange Act Release
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its
recent non-transaction fee proposals. See, e.g., supra note 52. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost.
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Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options at higher rates than the Exchange's. There
is also a range of alternative strategies, including routing to the
exchange through another participant or market center or accessing the
Exchange indirectly. Market participants are free to choose which
exchange or reseller to use to satisfy their business needs.
Accordingly, the Exchange does not believe its proposed fee changes
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial Proposal
and one comment letter on the Second Proposal from the same
commenter.\125\ In their letters, the sole commenter seeks to
incorporate comments submitted on previous Exchange proposals to which
the Exchange has previously responded. To the extent the sole commenter
has attempted to raise new issues in its letters, the Exchange believes
those issues are not germane to this proposal in particular, but rather
raise larger issues with the current environment surrounding exchange
non-transaction fee proposals that should be addressed by the
Commission through rule making, or Congress, more holistically and not
through an individual exchange fee filing. Among other things, the
commenter is requesting additional data
[[Page 29769]]
and information that is both opaque and a moving target and would
constitute a level of disclosure materially over and above that
provided by any competitor exchanges.
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\125\ See letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP (``SIG''), to Vanessa
Countryman, Secretary, Commission, dated February 7, 2023 and letter
from Gerald D. O'Connell, SIG, to Vanessa Countryman, Secretary,
Commission, dated March 21, 2023.
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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,\126\ and Rule 19b-4(f)(2) \127\ 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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\126\ 15 U.S.C. 78s(b)(3)(A)(ii).
\127\ 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#186a6d747d357b7775757d766c6b586b7d7b367f776e"><span class="__cf_email__" data-cfemail="2654534a430b45494b4b434852556655434508414950">[email protected]</span></a>. Please include
File Number SR-EMERALD-2023-12 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-EMERALD-2023-12. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://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. Do
not include personal identifiable information in submissions; you
should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-EMERALD-2023-12 and
should be submitted on or before May 30, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\128\
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\128\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09685 Filed 5-5-23; 8:45 am]
BILLING CODE 8011-01-P
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