Notice2023-13453
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Increase Fees for the ToM Market Data Product and Establish Fees for the cToM Market Data Product
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
June 26, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 121 (Monday, June 26, 2023)</title>
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[Federal Register Volume 88, Number 121 (Monday, June 26, 2023)]
[Notices]
[Pages 41442-41452]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-13453]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97767; File No. SR-EMERALD-2023-13]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Increase Fees for the ToM Market Data Product and Establish Fees for
the cToM Market Data Product
June 20, 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 June 7, 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 the fees for two market data
products by (i) amending the fees for MIAX Emerald Top of Market
(``ToM''); and (ii) establishing fees for MIAX Emerald Complex Top of
Market (``cToM'').
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 its fees for two market data
products by (i) amending the fees for ToM; and (ii) establishing fees
for cToM. The proposed fees will be immediately effective. The Exchange
initially filed the proposal on December 28, 2022 (SR-EMERALD-2022-37)
(the ``Initial Proposal'').\3\ On February 23, 2023, the Exchange
withdrew the Initial Proposal and replaced it with a revised proposal
(SR-EMERALD-2023-04) (the ``Second Proposal'').\4\ On April 11, 2023,
the Exchange withdrew the Second Proposal and replaced it with further
revised proposal (SR-EMERALD-2023-10) (the ``Third Proposal'').\5\ The
Exchange recently withdrew the Third Proposal and replaced it with this
current proposal (SR-EMERALD-2023-13).\6\
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\3\ See Securities Exchange Act Release No. 96625 (January 10,
2023), 88 FR 2688 (January 17, 2023) (SR-EMERALD-2022-37).
\4\ See Securities Exchange Act Release No. 97078 (March 8,
2023), 88 FR 15813 (March 14, 2023) (SR-EMERALD-2023-04).
\5\ See Securities Exchange Act Release No. 97326 (April 19,
2023), 88 FR 25043 (April 25, 2023) (SR-EMERALD-2023-10).
\6\ The Exchange met with Commission Staff to discuss the Third
Proposal during which the Commission Staff provided feedback and
requested additional information, including, most recently,
information about total costs related to certain third party
vendors. Such vendor cost information is subject to confidentiality
restrictions. The Exchange has provided this information to
Commission Staff under separate cover with a request for
confidentiality. While the Exchange will continue to be responsive
to Commission Staff's information requests, the Exchange believes
that the Commission should, at this point, issue substantially more
detailed guidance for exchanges to follow in the process of pursuing
a cost-based approach to fee filings, and that, for the purposes of
fair competition, detailed disclosures by exchanges, such as those
that the Exchange is providing now, should be consistent across all
exchanges, including for those that have resisted a cost-based
approach to fee filings, in the interests of fair and even
disclosure and fair competition.
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The Exchange previously filed several proposals to adopt fees for
cToM.\7\ The
[[Page 41443]]
Exchange notes that these prior proposals included an analysis of the
costs underlying the compilation and dissemination of the proposed cToM
fees. The Exchange previously included a cost analysis in the Initial,
Second and Third Proposals. 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 Miami
International Securities Exchange, LLC (``MIAX,'' together with MIAX
Pearl, 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 markets. Although the
baseline cost analysis used to justify the proposed fees was made in
the Initial, Second and Third Proposals, the fees themselves have not
changed since the Initial Proposal and the Exchange still proposes fees
that are intended to cover the Exchange's cost of providing ToM and
cToM, with a reasonable mark-up over those costs. The proposed fees are
intended to cover the Exchange's cost of compiling and disseminating
ToM and cToM with a reasonable mark-up over those costs, accounting for
ongoing increases in expenses.\8\ Before setting forth the additional
details regarding the proposal as well as the updated Cost Analysis
conducted by the Exchange, immediately below is a description of the
proposed fees.
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\7\ See Securities Exchange Act Release Nos. 92358 (July 9,
2021), 86 FR 37361 (July 15, 2021) (SR-EMERALD-2021-21); SR-EMERALD-
2021-32 (withdrawn without being noticed by the Commission); 93427
(October 26, 2021), 86 FR 60310 (November 1, 2021) (SR-EMERALD-2021-
34); 93811 (December 17, 2021), 86 FR 73051 (December 23, 2021) (SR-
EMERALD-2021-44); 94263 (February 15, 2022), 87 FR 9766 (February
22, 2022) (SR-EMERALD-2022-06); 94715 (April 14, 2022), 87 FR 23674
(April 20, 2022) (SR-EMERALD-2022-14); 94892 (May 11, 2022), 87 FR
29963 (May 17, 2022) (SR-EMERALD-2022-18).
\8\ 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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Proposed Market Data Pricing
The Exchange offers ToM and cToM to subscribers. The Exchange notes
that there is no requirement that any Member \9\ or market participant
subscribe to ToM or cToM or any other data feed offered by the
Exchange. Instead, a Member may choose to maintain subscriptions to ToM
or cToM based on their business model. The proposed fees will not apply
differently based upon the size or type of firm, but rather based upon
the subscriptions a firm has to ToM or cToM and their use thereof,
which are based upon factors deemed relevant by each firm. The proposed
pricing for ToM and cToM is set forth below.
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\9\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
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ToM
ToM is an Exchange-only market data feed that contains top of book
quotations based on options orders \10\ and quotes \11\ entered into
the System \12\ and resting on the Exchange's Simple Order Book \13\ as
well as administrative messages.\14\ The Exchange currently charges
Internal Distributors \15\ $1,250 per month and External Distributors
$1,750 per month for ToM. The Exchange does not currently charge, nor
does it now propose to charge any additional fees based on a
subscriber's use of the ToM and cToM data feeds, e.g., displayed versus
non-displayed use, redistribution fees, or any individual per user
fees. As discussed more fully below, the Exchange recently calculated
its annual aggregate costs for producing ToM to subscribers to be
$317,753, or $26,479 per month (rounded to the nearest dollar when
dividing the annual cost by 12 months). The Exchange proposes to amend
Section 6)a) of the Fee Schedule to now charge Internal Distributors
$2,000 per month and External Distributors $3,000 per month for ToM in
an effort to cover the Exchange's increasing costs with compiling and
producing ToM to market participants as evidenced by the Exchange's
Cost Analysis detailed below.
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\10\ The term ``order'' means a firm commitment to buy or sell
option contracts. See Exchange Rule 100.
\11\ The term ``quote'' or ``quotation'' means a bid or offer
entered by a Market Maker that is firm and may update the Market
Maker's previous quote, if any. The Rules of the Exchange provide
for the use of different types of quotes, including Standard quotes
and eQuotes, as more fully described in Rule 517. A Market Maker
may, at times, choose to have multiple types of quotes active in an
individual option. See Exchange Rule 100.
\12\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
\13\ The term ``Simple Order Book'' means ``the Exchange's
regular electronic book of orders and quotes.'' See Exchange Rule
518(a)(15).
\14\ See Fee Schedule, Section 6)a).
\15\ A ``Distributor'' of MIAX data is any entity that receives
a feed or file of data either directly from MIAX or indirectly
through another entity and then distributes it either internally
(within that entity) or externally (outside that entity). All
Distributors are required to execute a MIAX Distributor Agreement.
See Fee Schedule, Section 6)a).
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cToM
The Exchange previously adopted rules governing the trading of
Complex Orders \16\ on the MIAX Emerald System in 2018,\17\ ahead of
the Exchange's planned launch, which took place on March 1, 2019.
Shortly thereafter, the Exchange adopted the market data product, cToM,
and expressly waived fees for cToM to incentivize market participants
to subscribe.\18\ cToM was provided free of charge for four years and
the Exchange absorbed all costs associated with compiling and
disseminating cToM during that entire time. As discussed more fully
below, the Exchange recently calculated its annual aggregate costs for
producing cToM to subscribers to be $347,543, or $28,962 per month
(rounded to the nearest dollar when dividing the annual cost by 12
months). The Exchange now proposes to amend Section 6)a) of the Fee
Schedule to establish fees for cToM in order to recoup its ongoing
costs going forward.
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\16\ See Exchange Rule 518(a)(5) for the definition of Complex
Orders.
\17\ See Securities Exchange Act Release Nos. 84891 (December
20, 2018), 83 FR 67421 (December 28, 2018) (In the Matter of the
Application of MIAX EMERALD, LLC for Registration as a National
Securities Exchange; Findings, Opinion, and Order of the
Commission); and 85345 (March 18, 2019), 84 FR 10848 (March 22,
2019) (SR-EMERALD-2019-13) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Exchange Rule 518,
Complex Orders).
\18\ See Securities Exchange Act Release No. 85207 (February 27,
2019), 84 FR 7963 (March 5, 2019) (SR-EMERALD-2019-09) (providing a
complete description of the cToM data feed).
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In summary, cToM provides subscribers with the same information as
ToM as it relates to the Strategy Book,\19\ i.e., the Exchange's best
bid and offer for a complex strategy, with aggregate size, based on
displayable orders in the complex strategy on the Exchange. However,
cToM provides subscribers with the following additional information
that is not included in ToM: (i) the identification of the complex
strategies currently trading on the Exchange; (ii) complex strategy
last sale information; and (iii) the status of securities underlying
the complex strategy (e.g., halted, open, or resumed). cToM is
therefore a distinct market data product from ToM in that it includes
additional information that is not available to subscribers that
receive only ToM. ToM subscribers are not required to subscribe to
cToM, and
[[Page 41444]]
cToM subscribers are not required to subscribe to ToM.
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\19\ The ``Strategy Book'' is the Exchange's electronic book of
complex orders and complex quotes. See Exchange Rule 518(a)(17).
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cToM Proposed Fees
The Exchange proposes to amend Section 6)a) of the Fee Schedule to
charge Internal Distributors $2,000 per month and External Distributors
$3,000 per month for the cToM data feed. The proposed fees are
identical to the fees that the Exchange proposes to charge for ToM. The
Exchange does not propose to adopt redistribution fees for the cToM
data feed. However, the recipient of cToM data would be required to
become a data subscriber and would be subject to the applicable data
subscriber fees. The Exchange also does not propose to charge any
additional fees based on a subscriber's use of the cToM data feed,
e.g., displayed versus non-displayed use, and does not propose to
impose any individual per user fees.
As it does today for ToM, the Exchange proposes to assess cToM fees
to Internal and External Distributors in each month the Distributor is
credentialed to use cToM in the production environment. Also, as the
Exchange does today for ToM, market data fees for cToM will be reduced
for new Distributors for the first month during which they subscribe to
cToM, based on the number of trading days that have been held during
the month prior to the date on which that subscriber has been
credentialed to use cToM in the production environment. New cToM
Distributors will be assessed a pro-rata percentage of the fees listed
in the table in Section 6)a) of the Fee Schedule, which is the
percentage of the number of trading days remaining in the affected
calendar month as of the date on which they have been credentialed to
use cToM in the production environment, divided by the total number of
trading days in the affected calendar month.
The Exchange also proposes to amend the paragraph below the table
of fees for ToM and cToM in Section 6)a) of the Fee Schedule to make a
minor, non-substantive correction by deleting the phrase ``(as
applicable)'' in the first sentence following the table of fees for ToM
and cToM. The purpose of this proposed change is to remove unnecessary
text from the Fee Schedule.
cToM Content Is Available From Alternative Sources
cToM is not the exclusive source for Complex Order information from
the Exchange. It is a business decision of market participants whether
to subscribe to cToM or not. Market participants that choose not to
subscribe to cToM can derive much, if not all, of the same information
from other Exchange sources, including, for example, the MIAX Emerald
Order Feed (``MOR'').\20\ The following cToM information is included in
MOR: the Exchange's best bid and offer for a complex strategy, with
aggregate size, based on displayable orders in the complex strategy on
the Exchange; the identification of the complex strategies currently
trading on the Exchange; and the status of securities underlying the
complex strategy (e.g., halted, open, or resumed). In addition to MOR,
complex strategy last sale information can be derived from ToM.
Specifically, market participants may deduce that last sale information
for multiple trades in related options series with the same timestamps
disseminated via ToM are likely part of a Complex Order transaction and
last sale.
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\20\ See MIAX website, Market Data & Offerings, available at
<a href="https://www.miaxglobal.com/company/data/data-products-services/market-data">https://www.miaxglobal.com/company/data/data-products-services/market-data</a> (last visited June 7, 2023). In general, MOR provides
real-time ultra-low latency updates on the following information:
new Simple Orders added to the MIAX Emerald Order Book; updates to
Simple Orders resting on the MIAX Emerald Order Book; new Complex
Orders added to the Strategy Book (i.e., the book of Complex
Orders); updates to Complex Orders resting on the Strategy Book;
MIAX Emerald listed series updates; MIAX Emerald Complex Strategy
definitions; the state of the MIAX Emerald System; and MIAX
Emerald's underlying trading state.
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Additional Discussion--cToM Background
In the six years since the Exchange adopted Complex Order
functionality, the Exchange has grown its monthly complex market share
from 0% to 3.21% of the total electronic complex non-index volume
executed on exchanges offering electronic complex functionality for the
month of April 2023.\21\ During that same period, the Exchange has had
a steady increase in the number of cToM subscribers. Until the Exchange
initially filed to adopt cToM fees in July of 2021, the Exchange did
not charge fees for cToM data provided by the Exchange.
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\21\ The Exchange notes that it receives complex market data for
all U.S. options exchanges that offer complex functionality from
direct feeds from The Options Price Reporting Authority (``OPRA'').
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The objective of this approach was to eliminate any fee-based
barriers for Members when the Exchange launched with Complex Order
functionality in 2019, which the Exchange believes has been helpful in
its ability to attract order flow as a new exchange. As discussed more
fully below, the Exchange recently calculated its annual aggregate
costs for providing cToM at approximately $347,543. In order to
establish fees that are designed to recover the aggregate costs of
providing cToM plus a reasonable mark-up, the Exchange is proposing to
modify its Fee Schedule, as described above. In addition to the Cost
Analysis, described below, the Exchange believes that its proposed
approach to market data fees is reasonable based on a comparison to
competitors.
Additional Discussion--Comparison With Other Exchanges
ToM
The proposed fees for ToM are comparable to the fees currently in
place for the options exchanges, particularly Nasdaq ISE, LLC
(``ISE'').\22\ In April 2023, the Exchange had 3.24% market share of
equity options volume; for that same month, ISE had 5.41% market share
of equity options volume.\23\ The Exchange's proposed fees for ToM are
equal to, and for Internal Distributors, lower than, the rates data
recipients pay for comparable data feeds from ISE. The Exchange notes
that other competitors maintain fees applicable to market data that are
considerably higher than those proposed by the Exchange, including NYSE
Arca, Inc. (``NYSE Arca'').\24\ However, the Exchange has focused its
comparison on ISE because it is the closest market in terms of market
share and offers market data at prices lower than several other
incumbent exchanges. The fees for the Nasdaq ISE Top Quote Feed, which
like ToM, includes top of book, trades, and security status messages,
consists of an internal distributor access fee of $3,000 per month (50%
higher than the Exchange's proposed rate), and an external distributor
access fee of $3,000 per month (equal to the Exchange's proposed
rate).\25\ ISE's overall charge to receive the Nasdaq ISE Top Quote
Feed
[[Page 41445]]
may be even higher than the Exchange's proposed rates because ISE
charges additional per controlled device fees that can cause the
distribution fee to reach up to $5,000 per month.\26\ The Exchange's
proposed rates do not include additional fees.
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\22\ See ISE Options 7 Pricing Schedule, Section 10, H.,
available at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207">https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207</a> (assessing Professional internal and external
distributors $3,000 per month, plus $20 per month per controlled
device for ISE's Top Quote Feed).
\23\ See the ``Market Share'' section of the Exchange's website,
available at <a href="https://www.miaxglobal.com/">https://www.miaxglobal.com/</a> (last visited June 7,
2023).
\24\ Fees for the NYSE Arca Options Top Feed, which is the
comparable product to ToM, are $3,000 per month for access (internal
use) and an additional $2,000 per month for redistribution (external
distribution), compared to the Exchange's proposed fees of $2,000
and $3,000 for Internal and External Distributors, respectively. In
addition, for its NYSE Arca Options Top Feed, NYSE Arca charges for
three different categories of non-display usage, and user fees, both
of which the Exchange does not propose to charge, causing the
overall cost of NYSE Arca Options Top Feed to far exceed the
Exchange's proposed rates. See NYSE Acra Options Proprietary Market
Data Fees, available at: <a href="https://www.nyse.com/publicdocs/nyse/data/NYSE_Arca_Options_Proprietary_Data_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/data/NYSE_Arca_Options_Proprietary_Data_Fee_Schedule.pdf</a>.
\25\ See supra note 22.
\26\ Id.
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cToM
The proposed fees for cToM are comparable to the fees currently in
place for competing options exchanges, particularly NYSE American, LLC
(``NYSE American'').\27\ As noted above, for the month of April 2023,
the Exchange had 3.24% of the total equity options market share and
3.21% of the total electronic complex non-index volume executed on
exchanges offering electronic complex functionality. For that same
month, NYSE American had 7.08% of the total equity options market share
and 6.92% of the total electronic complex non-index volume.\28\ The
Exchange proposes fees for cToM that are comparable to the rates data
recipients pay for comparable data feeds from NYSE American. The
Exchange has focused its comparison on NYSE American because it is the
closest market in terms of market share. The fees for the NYSE American
Options Complex, which, like cToM, includes top of book, trades, and
security status messages for complex orders, consists of an internal
distributor access fee of $1,500 per month (slightly lower than the
Exchange's proposed rate), and an external distributor access fee of
$1,000 per month (resulting in a total external distribution fee of
$2,500 per month).\29\ However, NYSE American's overall charge to
receive NYSE American Options Complex data may be even higher than the
Exchange's proposed rates because NYSE American charges additional non-
displayed usage fees (each are $1,000 per month and a subscriber may
pay multiple non-displayed usage fees), per user fees ($20 per month
for professional users and $1.00 per month for non-professional users),
and multiple data feed fees ($200 per month), all of which the Exchange
does not propose to charge. These additional charges by NYSE American
can cause the total cost to receive NYSE American Complex data to far
exceed the rates that the Exchange proposes to charge.
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\27\ See NYSE American Options Proprietary Market Data Fees,
available at <a href="https://www.nyse.com/publicdocs/nyse/data/NYSE_American_Options_Market_Data_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/data/NYSE_American_Options_Market_Data_Fee_Schedule.pdf</a>.
\28\ See supra note 23.
\29\ Id.
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Additional Discussion--Cost Analysis
In general, 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 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.
Accordingly, in proposing to charge fees for market data, 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--to
ensure the fees 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 does not believe it
needs to otherwise address questions about market competition in the
context of this filing because the proposed fees are so clearly
consistent with the Act based on its Cost Analysis. The Exchange also
believes that this level of diligence and transparency is called for by
the requirements of Section 19(b)(1) under the Act,\30\ and Rule 19b-4
thereunder,\31\ with respect to the types of information self-
regulatory organizations (``SROs'') should provide when filing fee
changes, and Section 6(b) of the Act,\32\ which requires, among other
things, that exchange fees be reasonable and equitably allocated,\33\
not designed to permit unfair discrimination,\34\ and that they not
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\35\ This rule change proposal
addresses those requirements, and the analysis and data in this section
are designed to clearly and comprehensively show how they are met.\36\
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\30\ 15 U.S.C. 78s(b)(1).
\31\ 17 CFR 240.19b-4.
\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(4).
\34\ 15 U.S.C. 78f(b)(5).
\35\ 15 U.S.C. 78f(b)(8).
\36\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While the Exchange understands that the Fee Guidance
does not create new legal obligations on SROs, the Fee Guidance is
consistent with the Exchange's view about the type and level of
transparency that exchanges should meet to demonstrate compliance
with their existing obligations when they seek to charge new fees.
See Staff Guidance on SRO Rule Filings Relating to Fees (May 21,
2019) available at <a href="https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees">https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees</a>.
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As noted above, the Exchange has conducted and recently updated a
study of its aggregate costs to produce the ToM and cToM data feeds--
the Cost Analysis.\37\ 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--
transactions, market data, membership services, physical connectivity,
and ports (which provide order entry, cancellation and modification
functionality, risk functionality, 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 (collectively, ``cost
drivers'').
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\37\ The Exchange notes that its Cost Analysis is based on that
conducted by MEMX, LLC (``MEMX''). See Securities Exchange Act
Release Nos. 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). The Exchange notes that the
percentage allocations and cost levels are based on the Exchange's
2023 estimated budget and may differ from those provided by MEMX for
a number of reasons, including the Exchange's ability to allocate
costs among multiple exchanges while MEMX allocates cost to a single
exchange.
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As an initial step, the Exchange determined the total cost for the
Exchange and the affiliated markets for each cost driver as part of its
2023 budget review process. The 2023 budget review is a company-wide
process that occurs over the course of many months, includes meetings
among senior management, department heads, and the Finance Team. Each
department head is required to send a ``bottoms up'' budget to the
Finance Team allocating costs at the profit and loss account and vendor
levels for each Exchange and 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, simple only or simplex and complex markets, auction
functionality, etc.), which may impact message traffic, individual
system architectures that impact platform
[[Page 41446]]
size,\38\ 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. All these factors result in different
allocation percentages among the Exchange and its affiliated markets,
i.e., the different percentages of the overall cost driver allocated to
the Exchange and its affiliated markets will cause the dollar amount of
the overall cost allocated among the Exchange and its affiliated
markets to also differ. Because the Exchange's parent company currently
owns and operates four separate and distinct marketplaces, the Exchange
must determine the actual costs associated with its actual market--as
opposed to the Exchange's parent company simply summarily concluding
that all costs drivers are the same at each individual marketplace, and
merely dividing total costs by four (evenly for each marketplace).
Rather, the Exchange's parent company determines actual cost for each
marketplace, which results in different allocations and amounts across
exchanges for the same cost drivers, due to the unique factors of each
marketplace as described above. This allocation methodology ensures
that no portion of any cost would be allocated twice or double-counted
between the Exchange and its affiliated markets. The Finance Team then
consolidates the budget and sends it to senior management, including
the Chief Financial Officer and Chief Executive Officer, for review and
approval. Next, the budget is presented to the Board of Directors and
the Finance and Audit Committees for each exchange for approval. The
above steps encompass the first step of the cost allocation process.
---------------------------------------------------------------------------
\38\ 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.
---------------------------------------------------------------------------
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
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. This is the final
step in the cost allocation process and is applied to each of the cost
drivers set forth below. For instance, fixed costs that are not driven
by client activity (e.g., message rates), such as data center costs,
were allocated more heavily to the provision of physical connectivity
(61.9% of total expense amount allocated to 10Gb connectivity), with
smaller allocations to additional Limited Service MEI Ports (4.6%), and
the remainder to the provision of membership services, transaction
execution and market data services (33.5%)). 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
step of the allocation methodology process 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, access, membership,
regulatory, and market data fees. Accordingly, the Exchange generally
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 Cost Analysis, which was again
recently updated, the Exchange analyzed nearly every expense item in
the Exchange's general expense ledger to determine whether each such
expense relates to the provision of ToM and cToM data feeds, and, if
such expense did so relate, what portion (or percentage) of such
expense actually supports the provision of ToM and cToM data feeds, and
thus bears a relationship that is, ``in nature and closeness,''
directly related to ToM and cToM data feeds. Based on its analysis, the
Exchange calculated its aggregate annual costs for providing the ToM
and cToM data feeds to be $665,296. This results in a monthly cost for
providing ToM and cToM data feeds of $55,441 (rounded to the nearest
dollar when dividing the aggregate annual cost by 12 months). In order
to cover operating costs and earn a reasonable profit on its market
data, the Exchange has determined it necessary to charge fees for its
proprietary data products, and, as such, the Exchange is proposing to
modify its Fee Schedule, as set forth above. With the proposed fee
changes, the Exchange anticipates annual revenue for ToM and cToM to be
$804,000 (or $67,000 per month combined).
Costs Related To Offering ToM and cToM Data Feeds
The following chart details the individual line-item (annual) costs
considered by the Exchange to be related to offering the ToM and cToM
data feeds to its Members and other customers, 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 2.8% of its overall
[[Page 41447]]
Human Resources cost to offering ToM and cToM data feeds).
------------------------------------------------------------------------
Allocated % of total
Cost drivers costs cost
------------------------------------------------------------------------
Human Resources......................... $354,553 2.8
Network Infrastructure (fiber 9,428 1.7
connectivity)..........................
Data Center............................. 20,630 1.7
Hardware and Software Maintenance & 22,202 1.7
Licenses...............................
Depreciation............................ 21,167 0.7
Allocated Shared Expenses............... 237,316 3.0
-------------------------------
Total............................... 665,296 2.5
------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
directly providing services necessary to offer the ToM and cToM data
feeds, including performance thereof, as well as personnel with
ancillary functions related to establishing and providing such services
(such as information security and finance personnel). The Exchange
notes that it and its affiliated markets have approximately 184
employees (excluding employees at non-options exchange subsidiaries of
Miami International Holdings, Inc. (``MIH''), the holding company of
the Exchange and its affiliates, MIAX Pearl and MIAX), and each
department leader has direct knowledge of the time 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 the ToM and cToM data feeds,
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 the ToM and cToM data feeds. The Exchange
notes that senior level executives were allocated Human Resources costs
to the extent the Exchange believed they are involved in overseeing
tasks related to providing the ToM and cToM data feeds. The Exchange's
cost allocation for employees who perform work in support of generating
and disseminating the ToM and cToM data feeds on behalf of the
Exchange's options trading platform arrived at a full time equivalent
(``FTE'') of 1.2 FTEs.\39\ This includes personnel from the following
Exchange departments that are predominately involved in producing
Exchange market data: 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 calculated using a blended
rate of compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
---------------------------------------------------------------------------
\39\ The Exchange notes that overall cost percentages allocated
for employees in this and other areas may differ due to differing
levels of compensation for individual employees assigned to similar
projects at different exchanges, which is driven by additional
factors such as overall performance and seniority. So, for example,
as is the case here, the same number of FTEs for similar
responsibilities would not result in the same cost percentage.
---------------------------------------------------------------------------
Network Infrastructure
The Network Infrastructure cost includes cabling and switches
required to generate and disseminate the ToM and cToM data feeds. The
Network Infrastructure cost was narrowly estimated by focusing on the
servers used at the Exchange's primary and back-up data centers
specifically for the ToM and cToM data feeds. Further, as certain
servers are only partially utilized to generate and disseminate the ToM
and cToM data feeds, only the percentage of such servers devoted to
generating and disseminating the ToM and cToM data feeds was included
(i.e., the capacity of such servers allocated to the ToM and cToM data
feeds).\40\
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\40\ The Exchange understands that the Investors Exchange, Inc.
(``IEX'') and MEMX both allocated a percentage of their servers to
the production and dissemination of market data to support proposed
market data fees. See Securities Exchange Act Release No. 94630
(April 7, 2022), 87 FR 21945, at page 21949 (April 13, 2022) (SR-
IEX-2022-02). See also supra note 37. The Exchange does not have
insight into either MEMX's or IEX's technology infrastructure or
what their determinations were based on. However, the Exchange
reviewed its own technology infrastructure and believes based on its
design, it is more appropriate for the Exchange to allocate a
portion of its network infrastructure cost to market data based on a
percentage of overall cost, not on a per server basis.
---------------------------------------------------------------------------
The Exchange notes that while the percentage it and its affiliate,
MIAX, allocated to network infrastructure are nearly identical, the
Exchange's dollar amount is higher than MIAX by approximately $8,000 (a
relatively small amount). It is important to note that, while both
exchanges operate on state-of-the-art technology, the Exchange and MIAX
do not have an identical network architecture and, as a result, do not
have identical needs (and costs) for all other components, including,
cabling and switches. In 2020, MIAX Emerald made significant
enhancements to its network environment to ensure a best-in-class,
transparent and highly deterministic trading system while maintaining
industry leading latency and throughput capabilities. This highly
deterministic system on MIAX Emerald requires different cabling and
switches to support lower latency and to ensure that MIAX Emerald order
book updates sent via the MIAX Emerald ToM and cToM data feeds (and to
OPRA) are disseminated as quickly as possible to all Members and non-
Members. MIAX Emerald's different switches and cabling, and the ongoing
maintenance and monitoring of those cables and switches, results in a
greater allocated dollar amount to its network infrastructure than to
MIAX.
[[Page 41448]]
Data Center
The Exchange does not own the primary data center or the secondary
data center, but instead leases space in data centers operated by third
parties where the Exchange houses servers, switches and related
equipment. Data Center costs include an allocation of the costs the
Exchange incurs to provide the ToM and cToM data feeds in the third-
party data centers where the Exchange maintains its equipment, as well
as related costs. As the Data Center costs are primarily for space,
power, and cooling of servers, the Exchange allocated 1.7% to the
applicable Data Center costs for the ToM and cToM data feeds. The
Exchange believes it is reasonable to apply the same proportionate
percentage of Data Center costs to that of Network Infrastructure.
Hardware and Software Maintenance and Licenses
Hardware and Software Maintenance and Licenses includes those
licenses used to operate and monitor physical assets necessary to offer
the ToM and cToM data feeds. Because the hardware and software license
fees are correlated to the servers used by the Exchange, the Exchange
again applied an allocation of 1.7% of its costs for Hardware and
Software Maintenance and Licenses to the ToM and cToM data feeds.\41\
---------------------------------------------------------------------------
\41\ 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
The vast majority of the software the Exchange uses for its
operations to generate and disseminate the ToM and cToM data feeds has
been developed in-house over an extended period. This software
development also requires quality assurance and thorough testing to
ensure the software works as intended. Hardware used to generate and
disseminate the ToM and cToM data feeds, which includes servers and
other physical equipment the Exchange purchased. Accordingly, the
Exchange included depreciation costs related to depreciated hardware
and software used to generate and disseminate the ToM and cToM data
feeds. The Exchange also included in the Depreciation costs certain
budgeted improvements that the Exchange intends to capitalize and
depreciate with respect to the ToM and cToM data feeds in the near-
term. As with the other allocated costs in the Exchange's updated Cost
Analysis, the Depreciation cost was therefore narrowly tailored to
depreciation related to the ToM and cToM data feeds.
The Exchange 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. For example,
the Exchange notes that percentages it and its affiliate, MIAX,
allocated to the depreciation of software and hardware used to generate
and disseminate their respective ToM and cToM data feeds are nearly
identical. However, the Exchange's dollar amount is lower than that of
MIAX by approximately $13,000 (albeit a relatively small amount). This
is due to two primary factors. First, MIAX has undergone a technology
refresh since the time MIAX Emerald launched in February 2019, leading
to MIAX having more hardware and software that is subject to
depreciation. Second, MIAX maintains 24 matching engines while MIAX
Emerald maintains only 12 matching engines. This also results in less
of the Exchange's hardware and software being subject to depreciation
than MIAX's hardware and software due to the greater amount of
equipment and software necessary to support the greater number of
matching engines on MIAX.
Allocated Shared Expenses
Finally, certain general shared expenses were allocated to the ToM
and cToM data feeds. However, contrary to its prior cost analysis,
rather than taking the whole amount of general shared expenses and
applying an allocated percentage, the Exchange has narrowly selected
specific general shared expenses relevant to the cToM data feed. The
costs included in general shared expenses allocated to the ToM and cToM
data feeds include 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 cost of paying individuals to serve on
the Exchange's Board of Directors or any committee was not allocated to
providing ToM and cToM data feeds.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core service and did not double-count
any expenses. Instead, as described above, the Exchange identified and
allocated applicable cost drivers across its core services and used the
same approach to analyzing costs to form the basis of separate
proposals to amend fees for connectivity and port services \42\ and
this filing proposing fees for ToM and cToM. Thus, 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. The proposed fees for ToM
and cToM data feeds are designed to permit the Exchange to cover the
costs allocated to providing cToM data with a mark-up that the Exchange
believes is modest (approximately 17%, which could decrease over time
\43\), which the Exchange believes is fair and reasonable after taking
into account the costs related to creating, generating, and
disseminating the ToM and cToM data feeds and the fact that the
Exchange will need to fund future expenditures (increased costs,
improvements, etc.). The Exchange also notes that this profit margin
differs slightly from the profit margin set forth in a similar fee
filing by its affiliate, MIAX. This is not atypical among exchanges and
is due to a number of factors that differ between these two exchanges,
including a different number of market data subscribers, different
costs as described in the cost allocation methodology above, and a
different number of matching engines, i.e., MIAX maintains 24 matching
engines while MIAX Emerald maintains only 12 matching engines.
---------------------------------------------------------------------------
\42\ See MIAX Exchange Group Alert, ``MIAX Options, Pearl
Options and Emerald Options Exchanges--January 1, 2023 Non-
Transaction Fee Changes,'' issued December 9, 2022, available at
<a href="https://www.miaxglobal.com/alert/2022/12/09/miax-options-pearl-options-and-emerald-options-exchanges-january-1-2023-non">https://www.miaxglobal.com/alert/2022/12/09/miax-options-pearl-options-and-emerald-options-exchanges-january-1-2023-non</a>.
\43\ The Exchange believes that its profit margins could
decrease if U.S. inflation continues at its current rate. See, e.g.,
<a href="https://www.usinflationcalculator.com/inflation/current-inflation-rates/">https://www.usinflationcalculator.com/inflation/current-inflation-rates/</a> (last visited June 7, 2023).
---------------------------------------------------------------------------
Further, the Exchange and MIAX propose to charge the same rates for
their respective ToM and cToM data feeds, which are comparable to, or
lower than, similar fees for similar products charged by competing
exchanges. For example, for Internal Distributors of ToM and cToM, the
Exchange proposes a lower fee than the fee charged by ISE for ISE's Top
Quote Feed ($2,000 for the
[[Page 41449]]
Exchange vs. $3,000 for ISE).\44\ NYSE Arca charges even higher fees
for the NYSE Arca Options Top Feed than the Exchange's proposed fees
($2,000 for the Exchange vs. $3,000 per month plus an additional $2,000
for redistribution on NYSE Arca).\45\ Accordingly, the Exchange
believes that comparable and competitive pricing are key factors in
determining whether a proposed fee meets the requirements of the Act,
regardless of whether that same fee across the Exchange's affiliated
markets leads to slightly different profit margins due to factors
outside of the Exchange's control (i.e., more subscribers to ToM and/or
cToM on MIAX or MIAX Emerald and vice versa).
---------------------------------------------------------------------------
\44\ See supra note 22.
\45\ See supra note 24.
---------------------------------------------------------------------------
The Exchange also reiterates that prior to July of 2021, the month
in which it first proposed to adopt fees for cToM, the Exchange did not
previously charge any fees for cToM and its allocation of costs to cToM
was part of a holistic allocation that also allocated costs to other
core services without double-counting any expenses. 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 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 that result
from sharing costs across multiple platforms.\46\ The Exchange and its
affiliated markets often share a single cost, which results in cost
efficiencies that can cause a broader gap between the allocated cost
amount and projected revenue, even though the fee levels being proposed
are lower or competitive with 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 should consider whether
the proposed fee level is comparable to, or competitive 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 Commission Staff is making
determinations as to appropriate profit margins, the Exchange believes
that Commission should be clear to all market participants as to what
they have determined 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 are used to
justify fees increases.
---------------------------------------------------------------------------
\46\ 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 37. 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.
---------------------------------------------------------------------------
Accordingly, while the Exchange is supportive of transparency
around costs and potential margins (applied across all exchanges), as
well as periodic review of revenues and applicable costs (as discussed
below), the Exchange does not believe that these estimates should form
the sole basis of whether or not a proposed fee is reasonable or can be
adopted. Instead, the Exchange believes that the information should be
used solely to confirm that an Exchange is not earning--or seeking to
earn--supra-competitive profits, the standard set forth in the Fee
Guidance. The Exchange believes the Cost Analysis and related
projections in this filing demonstrate this fact.
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 ToM and cToM data feeds
it will receive additional revenue to offset future cost increases.
However, if use of ToM and cToM data feeds 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 expects that it would propose to decrease
fees in the event that revenue materially exceeds 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 expects
that it 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 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.
Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \47\ of the Act in general, and
furthers the objectives of Section 6(b)(4) \48\ of the Act, in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities. Additionally, the Exchange
believes that the proposed fees are consistent with the objectives of
[[Page 41450]]
Section 6(b)(5) \49\ of the Act in that they are designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to a free and open market and
national market system, and, in general, to protect investors and the
public interest, and, particularly, are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f.
\48\ 15 U.S.C. 78f(b)(4).
\49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange notes prior to addressing the specific reasons the
Exchange believes the proposed fees and fee structure are reasonable,
equitably allocated and not unreasonably discriminatory, that the
proposed fees are consistent with the fee amounts charged by competing
U.S. securities exchanges. For this reason, the Exchange believes that
the proposed fees are consistent with the Act generally, and Section
6(b)(5) \50\ of the Act in particular.
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As noted above, in the four years since the Exchange launched
operations with Complex Order functionality, the Exchange has grown its
monthly complex market share from 0% to 3.21% of the total electronic
complex non-index volume executed on U.S. options exchanges offering
complex functionality for the month of April 2023.\51\ One of the
primary objectives of the Exchange is to provide competition and to
reduce fixed costs imposed upon the industry. Consistent with this
objective, the Exchange believes that this proposal reflects a simple,
competitive, reasonable, and equitable pricing structure.
---------------------------------------------------------------------------
\51\ See supra note 21.
---------------------------------------------------------------------------
Reasonableness
Overall. With regard to reasonableness, the Exchange understands
that the Commission has traditionally taken a market-based approach to
examine whether the SRO making the fee proposal was subject to
significant competitive forces in setting the terms of the proposal.
The Exchange understands that in general the analysis considers whether
the SRO has demonstrated in its filing that (i) there are reasonable
substitutes for the product or service; (ii) ``platform'' competition
constrains the ability to set the fee; and/or (iii) revenue and cost
analysis shows the fee would not result in the SRO taking supra-
competitive profits. If the SRO demonstrates that the fee is subject to
significant competitive forces, the Exchange understands that in
general the analysis will next consider whether there is any
substantial countervailing basis to suggest the fee's terms fail to
meet one or more standards under the Exchange Act. The Exchange further
understands that if the filing fails to demonstrate that the fee is
constrained by competitive forces, the SRO must provide a substantial
basis, other than competition, to show that it is consistent with the
Exchange Act, which may include production of relevant revenue and cost
data pertaining to the product or service.
The Exchange has not determined its proposed overall market data
fees based on assumptions about market competition, instead relying
upon a cost-plus model to determine a reasonable fee structure that is
informed by the Exchange's understanding of different uses of the
products by different types of participants. In this context, the
Exchange believes the proposed fees overall are fair and reasonable as
a form of cost recovery plus the possibility of a reasonable return for
the Exchange's aggregate costs of offering the ToM and cToM data feeds.
The Exchange believes the proposed fees are reasonable because they are
designed to generate annual revenue to recoup some or all of Exchange's
annual costs of providing ToM and cToM data with a reasonable mark-up.
As discussed in the Purpose section, the Exchange estimates this fee
filing will result in annual revenue of approximately $804,000,
representing a potential mark-up of just 17% over the cost of providing
ToM and cToM data. Accordingly, the Exchange believes that this fee
methodology is reasonable because it allows the Exchange to recoup all
of its expenses for providing the ToM and cToM data products (with any
additional revenue representing no more than what the Exchange believes
to be a reasonable rate of return). The Exchange also believes that the
proposed fees are reasonable because they are generally less than the
fees charged by competing options exchanges for comparable market data
products, notwithstanding that the competing exchanges may have
different system architectures that may result in different cost
structures for the provision of market data.
The Exchange believes the proposed fees for the ToM and cToM data
feeds are reasonable when compared to fees for comparable products,
compared to which the Exchange's proposed fees are generally lower, as
well as other comparable data feeds priced significantly higher than
the Exchange's proposed fees for the ToM and cToM data feeds.\52\
---------------------------------------------------------------------------
\52\ See supra notes 22, 24, and 27, and accompanying text.
---------------------------------------------------------------------------
Internal Distribution Fees. The Exchange believes that it is
reasonable to charge fees to access the ToM and cToM data feeds for
Internal Distribution because of the value of such data to subscribers
in their profit-generating activities. The Exchange also believes that
the proposed monthly Internal Distribution fee for cToM is reasonable
as it is similar to the amount charged by at least one other exchange
of comparable size for comparable data products, and lower than the
fees charged by other exchange for comparable data products.\53\
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
External Distribution Fees. The Exchange believes that it is
reasonable to charge External Distribution fees for the ToM and cToM
data feeds because vendors receive value from redistributing the data
in their business products provided to their customers. The Exchange
believes that charging External Distribution fees is reasonable because
the vendors that would be charged such fees profit by re-transmitting
the Exchange's market data to their customers. These fees would be
charged only once per month to each vendor account that redistributes
any ToM and cToM data feeds, regardless of the number of customers to
which that vendor redistributes the data.
For all of the foregoing reasons, the Exchange believes that the
proposed fees for the ToM and cToM data feeds are reasonable.
Equitable Allocation
Overall. The Exchange believes that its proposed fees are
reasonable, fair, and equitable, and not unfairly discriminatory
because they are designed to align fees with services provided. The
Exchange believes the proposed fees for the ToM and cToM data feeds are
allocated fairly and equitably among the various categories of users of
the feeds, and any differences among categories of users are justified
and appropriate.
The Exchange believes that the proposed fees are equitably
allocated because they will apply uniformly to all data recipients that
choose to subscribe to the ToM and cToM data feeds. Any subscriber or
vendor that chooses to subscribe to the ToM and cToM data feeds is
subject to the same Fee Schedule, regardless of what type of business
they operate, and the decision to subscribe to one or more ToM and cToM
data feeds is based on objective
[[Page 41451]]
differences in usage of ToM and cToM data feeds among different
Members, which are still ultimately in the control of any particular
Member. The Exchange believes the proposed pricing of the ToM and cToM
data feeds is equitably allocated because it is based, in part, upon
the amount of information contained in each data feed and the value of
that information to market participants.
Internal Distribution Fees. The Exchange believes the proposed
monthly fees for Internal Distribution of the ToM and cToM data feeds
are equitably allocated because they would be charged on an equal basis
to all data recipients that receive the ToM and cToM data feeds for
internal distribution, regardless of what type of business they
operate.
External Distribution Fees. The Exchange believes the proposed
monthly fees for External Distribution of the ToM and cToM data feeds
are equitably allocated because they would be charged on an equal basis
to all data recipients that receive the ToM and cToM data feeds that
choose to redistribute the feeds externally, regardless of what
business they operate. The Exchange also believes that the proposed
monthly fees for External Distribution are equitably allocated when
compared to lower proposed fees for Internal Distribution because data
recipients that are externally distributing ToM and cToM data feeds are
able to monetize such distribution and spread such costs amongst
multiple third party data recipients, whereas the Internal Distribution
fee is applicable to use by a single data recipient (and its
affiliates).
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to assess Internal Distributors fees that are
less than the fees assessed for External Distributors for subscriptions
to the ToM and cToM data feeds because Internal Distributors have
limited, restricted usage rights to the market data, as compared to
External Distributors, which have more expansive usage rights. All
Members and non-Members that decide to receive any market data feed of
the Exchange (or its affiliates, MIAX Pearl and MIAX), must first
execute, among other things, the MIAX Exchange Group Exchange Data
Agreement (the ``Exchange Data Agreement'').\54\ Pursuant to the
Exchange Data Agreement, Internal Distributors are restricted to the
``internal use'' of any market data they receive. This means that
Internal Distributors may only distribute the Exchange's market data to
the recipient's officers and employees and its affiliates.\55\ External
Distributors may distribute the Exchange's market data to persons who
are not officers, employees or affiliates of the External
Distributor,\56\ and may charge their own fees for the redistribution
of such market data. External Distributors may monetize their receipt
of the ToM and cToM data feeds by charging their customers fees for
receipt of the Exchange's cToM data. Internal Distributors do not have
the same ability to monetize the Exchange's ToM and cToM data feeds.
Accordingly, the Exchange believes it is fair, reasonable and not
unfairly discriminatory to assess External Distributors a higher fee
for the Exchange's ToM and cToM data feeds as External Distributors
have greater usage rights to commercialize such market data and can
adjust their own fee structures if necessary.
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\54\ See Exchange Data Agreement, available at <a href="https://www.miaxglobal.com/markets/us-options/all-options/market-data-vendor-agreements">https://www.miaxglobal.com/markets/us-options/all-options/market-data-vendor-agreements</a>.
\55\ See id.
\56\ See id.
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The Exchange also utilizes more resources to support External
Distributors versus Internal Distributors, as External Distributors
have reporting and monitoring obligations that Internal Distributors do
not have, thus requiring additional time and effort of Exchange staff.
For example, External Distributors have monthly reporting requirements
under the Exchange's Market Data Policies.\57\ Exchange staff must
then, in turn, process and review information reported by External
Distributors to ensure the External Distributors are redistributing
cToM data in compliance with the Exchange's Market Data Agreement and
Policies.
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\57\ See Section 6 of the Exchange's Market Data Policies,
available at <a href="https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Exchange_Group_Market_Data_Policies_07202021.pdf">https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Exchange_Group_Market_Data_Policies_07202021.pdf</a>.
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The Exchange believes the proposed cToM fees are equitable and not
unfairly discriminatory because the fee level results in a reasonable
and equitable allocation of fees amongst subscribers for similar
services, depending on whether the subscriber is an Internal or
External Distributor. Moreover, the decision as to whether or not to
purchase market data is entirely optional to all market participants.
Potential purchasers are not required to purchase the market data, and
the Exchange is not required to make the market data available.
Purchasers may request the data at any time or may decline to purchase
such data. The allocation of fees among users is fair and reasonable
because, if market participants decide not to subscribe to the data
feed, firms can discontinue their use of the cToM data.
For all of the foregoing reasons, the Exchange believes that the
proposed fees for the ToM and cToM data feeds are equitably allocated.
The Proposed Fees Are Not Unfairly Discriminatory
The Exchange believes the proposed fees for the ToM and cToM data
feeds are not unfairly discriminatory because any differences in the
application of the fees are based on meaningful distinctions between
customers, and those meaningful distinctions are not unfairly
discriminatory between customers.
Overall. The Exchange believes that the proposed fees are not
unfairly discriminatory because they would apply to all data recipients
that choose to subscribe to the same ToM and cToM data feeds. Any
vendor or subscriber that chooses to subscribe to the ToM and cToM data
feeds is subject to the same Fee Schedule, regardless of what type of
business they operate. In sum, each vendor or subscriber has the
ability to choose the best business solution for itself. The Exchange
does not believe it is unfairly discriminatory to base pricing upon the
amount of information contained in each data feed and the value of that
information to market participants.
Internal Distribution Fees. The Exchange believes the proposed
monthly fees for Internal Distribution of the ToM and cToM data feeds
are not unfairly discriminatory because they would be charged on an
equal basis to all data recipients that receive the same ToM and cToM
data feeds for internal distribution, regardless of what type of
business they operate.
External Distribution Fees. The Exchange believes the proposed
monthly fees for redistributing the ToM and cToM data feeds are not
unfairly discriminatory because they would be charged on an equal basis
to all data recipients that receive the same ToM and cToM data feeds
that choose to redistribute the feed(s) externally. The Exchange also
believes that having higher monthly fees for External Distribution than
Internal Distribution is not unfairly discriminatory because data
recipients that are externally distributing ToM and cToM data feeds are
able to monetize such distribution and spread such costs amongst
multiple third party data recipients, whereas the Internal Distribution
fee is applicable to use by a single data recipient (and its
affiliates).
For all of the foregoing reasons, the Exchange believes that the
proposed
[[Page 41452]]
fees for the Exchange Data Feeds are not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\58\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\58\ 15 U.S.C. 78f(b)(8).
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Intra-Market Competition
The Exchange does not believe that the proposed fees place certain
market participants at a relative disadvantage to other market
participants because, as noted above, the proposed fees are associated
with usage of the data feed by each market participant based on whether
the market participant internally or externally distributes the
Exchange data, which are still ultimately in the control of any
particular Member, and such fees do not impose a barrier to entry to
smaller participants. Accordingly, the proposed fees do not favor
certain categories of market participants in a manner that would impose
a burden on competition; rather, the allocation of the proposed fees
reflects the types of data consumed by various market participants and
their usage thereof.
Inter-Market Competition
The Exchange does not believe the proposed fees place an undue
burden on competition on other SROs that is not necessary or
appropriate. In particular, market participants are not forced to
subscribe to either data feed, as described above. Additionally, other
exchanges have similar market data fees with comparable rates in place
for their participants.\59\ The proposed fees are based on actual costs
and are designed to enable the Exchange to recoup its applicable costs
with the possibility of a reasonable profit on its investment as
described in the Purpose and Statutory Basis sections. Competing
exchanges are free to adopt comparable fee structures subject to the
Commission's rule filing process. Allowing the Exchange, or any new
market entrant, to waive fees (as the Exchange did for cToM) for a
period of time to allow it to become established encourages market
entry and thereby ultimately promotes competition.
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\59\ See supra notes 22, 24, and 27, and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
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,\60\ and Rule 19b-4(f)(2) \61\ 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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\60\ 15 U.S.C. 78s(b)(3)(A)(ii).
\61\ 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#dba9aeb7bef6b8b4b6b6beb5afa89ba8beb8f5bcb4ad"><span class="__cf_email__" data-cfemail="ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab">[email protected]</span></a>. Please include
file number SR-EMERALD-2023-13 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-2023-13. 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
a.m. and 3 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-2023-13 and should
be submitted on or before July 17, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(12).
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13453 Filed 6-23-23; 8:45 am]
BILLING CODE 8011-01-P
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