Notice2023-18302
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Exchange 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
August 25, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 164 (Friday, August 25, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Notices]
[Pages 58404-58430]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18302]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98180; File No. SR-PEARL-2023-35]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and
Port Fees
August 21, 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 August 8, 2023, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Exchange Fee Schedule (the ``Fee Schedule'') to amend certain
connectivity and port fees.\3\
---------------------------------------------------------------------------
\3\ All references to the ``Exchange'' in this filing mean MIAX
Pearl Options. Any references to the equities trading facility of
MIAX PEARL, LLC, will specifically be referred to as ``MIAX Pearl
Equities.''
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website at <a href="https://www.miaxoptions.com/rule-filings">https://www.miaxoptions.com/rule-filings</a>, at MIAX Pearl's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
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 \4\ and non-Members; (2) amend the
calculation of fees for MIAX Express Network Full Service (``MEO'') \5\
Ports (Bulk and Single); and (3) amend the fees for Full Service MEO
Ports (Bulk and Single). The Exchange and its affiliate, Miami
International Securities Exchange, LLC (``MIAX'') operated 10Gb ULL
connectivity on a single shared network that provided access to both
exchanges via a single 10Gb ULL connection. The Exchange last increased
fees for 10Gb ULL connections from $9,300 to $10,000 per month on
January 1, 2021.\6\ At the same time, MIAX also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000 per month.\7\ The Exchange and
MIAX shared a combined cost analysis in those filings due to the single
shared 10Gb ULL connectivity network for both exchanges. In those
filings, the Exchange and MIAX allocated a combined total of $17.9
million in expenses to providing 10Gb ULL connectivity.\8\
---------------------------------------------------------------------------
\4\ 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.
\5\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Pearl System. See the Definitions Section of the Fee Schedule
and Exchange Rule 100.
\6\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
\7\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
\8\ See id.
---------------------------------------------------------------------------
Beginning in late January 2023, the Exchange also recently
determined a substantial operational need to no longer operate 10Gb ULL
connectivity on a single shared network with MIAX. The Exchange
bifurcated 10Gb ULL connectivity due to ever-increasing capacity
constraints and to enable it to continue to satisfy the anticipated
access needs for Members and other market participants.\9\ Since the
time of the 2021 increase discussed above, \10\ the Exchange
experienced ongoing increases in expenses, particularly internal
expenses.\11\ As discussed more fully below, the Exchange recently
calculated increased annual aggregate costs of $11,567,509 for
providing 10Gb ULL connectivity on a single unshared network (an
overall increase over its prior cost to provide 10Gb ULL connectivity
on a shared network with MIAX) and $1,644,132 for providing Full
Service MEO Ports.\12\
---------------------------------------------------------------------------
\9\ See MIAX Options and MIAX Pearl Options--Announce planned
network changes related to shared 10G ULL extranet, issued August
12, 2022, available at <a href="https://www.miaxglobal.com/alert/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-0">https://www.miaxglobal.com/alert/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-0</a>. The Exchange will continue to provide access to both the
Exchange and MIAX over a single shared 1Gb connection. See
Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87
FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 (December 20,
2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-48).
\10\ The Exchange notes it last filed to amend the fees for Full
Service MEO Ports in 2018 (excluding filings made in July 2021
through early 2022), prior to which the Exchange provided Full
Service MEO Ports free of charge since the it launched operations in
2017 and absorbed all costs since that time. See Securities Exchange
Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR-PEARL-2018-07).
\11\ 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.
\12\ For the avoidance of doubt, all references to costs in this
filing, including the cost categories discussed below, refer to
costs incurred by MIAX Pearl Options only and not MIAX Pearl
Equities, the equities trading facility.
---------------------------------------------------------------------------
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 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 Full Service
[[Page 58405]]
MEO Ports (Bulk and Single) in order to recoup cost related to
bifurcating 10Gb connectivity to the Exchange and MIAX as well as the
ongoing costs and increase in expenses set forth below in the
Exchange's cost analysis.\13\ The Exchange proposes to implement the
changes to the Fee Schedule pursuant to this proposal immediately. The
Exchange initially filed the proposal on December 30, 2022 (SR-PEARL-
2022-62) (the ``Initial Proposal'').\14\ On February 23, 2023, the
Exchange withdrew the Initial Proposal and replaced it with a revised
proposal (SR-PEARL-2023-08) (the ``Second Proposal'').\15\ On April 20,
2023, the Exchange withdrew the Second Proposal and replaced it with a
revised proposal (SR-PEARL-2023-19) (the ``Third Proposal'').\16\ On
June 16, 2023, the Exchange withdrew the Third Proposal and replaced it
with a revised proposal (SR-PEARL-2023-27) (the ``Fourth
Proposal'').\17\ On August 8, 2023, the Exchange withdrew the Fourth
Proposal and replaced it with this further revised proposal (SR-PEARL-
2023-35).
---------------------------------------------------------------------------
\13\ The Exchange notes that MIAX will make a similar filing to
increase its 10Gb ULL connectivity fees.
\14\ See Securities Exchange Act Release No. 96632 (January 10,
2023), 88 FR 2707 (January 17, 2023) (SR-PEARL-2022-62).
\15\ See Securities Exchange Act Release No. 97082 (March 8,
2023), 88 FR 15825 (March 14, 2023) (SR-PEARL-2023-05).
\16\ See Securities Exchange Act Release No. 97420 (May 2,
2023), 88 FR 29701 (May 8, 2023) (SR-PEARL-2023-19).
\17\ 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 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. See Securities Exchange Act Release
No. 97815 (June 27, 2023), 88 FR 42759 (July 3, 2023) (SR-PEARL-
2023-27).
---------------------------------------------------------------------------
The Exchange previously included a cost analysis in the Initial,
Second, Third, and Fourth 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 (separately among MIAX Pearl
Options and MIAX Pearl Equities, MIAX and MIAX Emerald \18\ (together
with MIAX 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
markets. Although the baseline cost analysis used to justify the
proposed fees was made in the Initial, Second, Third, and Fourth
Proposals, the fees themselves have not changed since the Initial,
Second, Third, or Fourth Proposals and the Exchange still proposes fees
that are intended to cover the Exchange's cost of providing 10Gb ULL
connectivity and Full Service MEO Ports with a reasonable mark-up over
those costs.
---------------------------------------------------------------------------
\18\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See
Exchange Rule 100.
---------------------------------------------------------------------------
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \19\ 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.\20\ 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.\21\ 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'').\22\ 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.'' \23\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\24\ 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.'' \25\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
---------------------------------------------------------------------------
\19\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\20\ Id.
\21\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\22\ 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).
\23\ Id. at page 2.
\24\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\25\ Order Denying Reconsideration, 2019 WL 2022819, at * 13.
---------------------------------------------------------------------------
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.\26\ 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.
---------------------------------------------------------------------------
\26\ 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).
---------------------------------------------------------------------------
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
[[Page 58406]]
Exchange Act.'' \27\ 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.'' \28\ 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.'' \29\
---------------------------------------------------------------------------
\27\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at https://<a href="http://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (the ``Staff Guidance'').
\28\ Id.
\29\ Id.
---------------------------------------------------------------------------
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 \30\ and remanded for further proceedings consistent
with its opinion.\31\ 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.'' \32\
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.\33\ 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.''
\34\ 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.\35\
---------------------------------------------------------------------------
\30\ 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.
\31\ 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.
\32\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\33\ 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'').
\34\ Id.
\35\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
---------------------------------------------------------------------------
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.'' \36\
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.
---------------------------------------------------------------------------
\36\ See supra note 31, at page 2.
---------------------------------------------------------------------------
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'').\37\ 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 \38\ 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.\39\ These fees
remain in effect today.
---------------------------------------------------------------------------
\37\ 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>.
\38\ 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.
\39\ 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).
---------------------------------------------------------------------------
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
[[Page 58407]]
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 MIAX Pearl, 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.\40\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-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 \41\ and $80,383,000 for
2021.\42\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \43\ and $22,843,000 for
2021.\44\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \45\ and $44,800,000 for
2021.\46\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \47\ and $30,687,000 for
2021.\48\ 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.\49\ 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.'' \50\
---------------------------------------------------------------------------
\40\ The Exchange has filed, and subsequently withdrew, various
forms of this proposed fee change 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.
\41\ 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>.
\42\ 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>.
\43\ 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>.
\44\ 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>.
\45\ 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>.
\46\ 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>.
\47\ 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>.
\48\ 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>.
\49\ 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>.
\50\ See PHLX 2021 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.
---------------------------------------------------------------------------
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,\51\ 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.
---------------------------------------------------------------------------
\51\ 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>.
---------------------------------------------------------------------------
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 . . .'',\52\ this is not the reality experienced by
exchanges such as MIAX Pearl. 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.\53\
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
[[Page 58408]]
the Act \54\ 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.
---------------------------------------------------------------------------
\52\ See supra note 27, at note 1.
\53\ See Securities Exchange Act Release Nos. 92798 (August 27,
2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-33); 92644
(August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36);
93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-
2021-45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021)
(SR-PEARL-2021-53); 93774 (December 14, 2021), 86 FR 71952 (December
20, 2021) (SR-PEARL-2021-57); 93894 (January 4, 2022), 87 FR 1203
(January 10, 2022) (SR-PEARL-2021-58); 94258 (February 15, 2022), 87
FR 9659 (February 22, 2022) (SR-PEARL-2022-03); 94286 (February 18,
2022), 87 FR 10860 (February 25, 2022) (SR-PEARL-2022-04); 94721
(April 14, 2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11);
94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-
12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR-PEARL-
2022-18).
\54\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
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 standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\55\ 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; \56\ 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.
---------------------------------------------------------------------------
\55\ 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.
\56\ 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_Consulation_Paper.pdf">https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf</a>.
---------------------------------------------------------------------------
In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place 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.\57\
---------------------------------------------------------------------------
\57\ 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.
---------------------------------------------------------------------------
* * * * *
10Gb ULL Connectivity Fee Change
MIAX Pearl Options filed a proposal to no longer operate 10Gb
connectivity to MIAX Pearl Options on a single shared network with its
affiliate, MIAX. This change is an operational necessity due to ever-
increasing capacity constraints and to accommodate anticipated access
needs for Members and other market participants.\58\ This proposal: (i)
sets forth the applicable fees for the bifurcated 10Gb ULL network;
(ii) removes provisions in the Fee Schedule that provide for a shared
10Gb ULL network; and (iii) specifies that market participants may
continue to connect to both MIAX Pearl Options and MIAX via the 1Gb
network.
---------------------------------------------------------------------------
\58\ See supra note 9.
---------------------------------------------------------------------------
MIAX Pearl Options bifurcated the MIAX Pearl Options and MIAX 10Gb
ULL networks in the first quarter of 2023, which change became
effective on January 23, 2023. The Exchange issued an alert on August
12, 2022 publicly announcing the planned network change and
implementation plan and dates to provide market participants adequate
time to prepare.\59\ Upon bifurcation of the 10Gb ULL network,
subscribers need to purchase separate connections to MIAX Pearl Options
and MIAX at the applicable rate. The Exchange's proposed amended rate
for 10Gb ULL connectivity is described below. Prior to the bifurcation
of the 10Gb ULL networks, subscribers to 10Gb ULL connectivity were
able to connect to both MIAX Pearl Options and MIAX at the applicable
rate set forth below.
---------------------------------------------------------------------------
\59\ Id.
---------------------------------------------------------------------------
The Exchange, therefore, proposes to amend the Fee Schedule to
increase the fees for Members and non-Members to access the Exchange's
system networks \60\ via a 10Gb ULL fiber connection and to specify
that this fee is for a dedicated connection to MIAX Pearl Options and
no longer provides access to MIAX. Specifically, MIAX Pearl Options
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'').\61\ The Exchange also
proposes to amend the Fee Schedule to reflect the bifurcation of the
10Gb ULL network and specify that only the 1Gb network provides access
to both MIAX Pearl Options and MIAX.
---------------------------------------------------------------------------
\60\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\61\ 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.miaxglobal.com/markets/us-options/pearl-options/fees">https://www.miaxglobal.com/markets/us-options/pearl-options/fees</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.'').
---------------------------------------------------------------------------
The Exchange proposes to make the following changes to reflect the
bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the
Definitions section of the Fee Schedule, the Exchange proposes to amend
the last sentence in the definition of ``MENI'' to specify that the
MENI can be configured to provide network connectivity to the trading
platforms, market data systems, test systems, and disaster recovery
facilities of the Exchange's affiliate, MIAX, via a single, shared 1Gb
[[Page 58409]]
connection. Next, the Exchange proposes to amend the explanatory
paragraphs below the network connectivity fee tables in Sections 5)a)-
b) of the Fee Schedule to specify that, with the bifurcated 10Gb ULL
network, Members (and non-Members) utilizing the MENI to connect to the
trading platforms, market data systems, test systems, and disaster
recovery facilities of the Exchange and MIAX via a single, can only do
so via a shared 1Gb connection.
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.
Full Service MEO Ports--Bulk and Single
Background
The Exchange also proposes to amend Section 5)d) of the Fee
Schedule to amend the calculation and amount of fees for Full Service
MEO Ports. The Exchange currently offers different types of MEO Ports
depending on the services required by the Member, including a Full
Service MEO Port-Bulk,\62\ a Full Service MEO Port-Single,\63\ and a
Limited Service MEO Port.\64\ For one monthly price, a Member may be
allocated two (2) Full-Service MEO Ports of either type per matching
engine \65\ and may request Limited Service MEO Ports for which MIAX
Pearl will assess Members Limited Service MEO Port fees based on a
sliding scale for the number of Limited Service MEO Ports utilized each
month. The two (2) Full-Service MEO Ports that may be allocated per
matching engine to a Member may consist of: (a) two (2) Full Service
MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--Single; or (c) one
(1) Full Service MEO Port--Bulk and one (1) Full Service MEO Port--
Single.
---------------------------------------------------------------------------
\62.\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\63\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\64\ ``Limited Service MEO Port'' means an MEO port that
supports all MEO input message types, but does not support bulk
order entry and only supports limited order types, as specified by
the Exchange via Regulatory Circular. See the Definitions Section of
the Fee Schedule.
\65\ A ``Matching Engine'' is a part of the Exchange's
electronic system that processes options orders and trades on a
symbol-by-symbol basis. See the Definitions Section of the Fee
Schedule.
---------------------------------------------------------------------------
Currently, the Exchange assesses Members Full Service MEO Port
Fees, either for a Full Service MEO Port--Bulk and/or for a Full
Service MEO Port--Single, based upon the monthly total volume executed
by a Member and its Affiliates \66\ on the Exchange, across all origin
types, not including Excluded Contracts,\67\ as compared to the Total
Consolidated Volume (``TCV''),\68\ in all MIAX Pearl-listed options.
The Exchange adopted a tier-based fee structure based upon the volume-
based tiers detailed in the definition of ``Non-Transaction Fees
Volume-Based Tiers'' described in the Definitions section of the Fee
Schedule. The Exchange assesses these and other monthly Port fees to
Members in each month the market participant is credentialed to use a
Port in the production environment.
---------------------------------------------------------------------------
\66\ ``Affiliate'' means (i) an affiliate of a Member of at
least 75% common ownership between the firms as reflected on each
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). See the Definitions Section of the Fee Schedule.
\67\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\68\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
---------------------------------------------------------------------------
Full Service MEO Port (Bulk) Fee Changes
Current Full Service MEO Port (Bulk) Fees. The Exchange currently
assesses all Members (Market Makers \69\ and Electronic Exchange
Members \70\ (``EEMs'')) monthly Full Service MEO Port--Bulk fees as
follows:
---------------------------------------------------------------------------
\69\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
\70\ The term ``Electronic Exchange Member'' or ``EEM'' means
the holder of a Trading Permit who is a Member representing as agent
Public Customer Orders or Non-Customer Orders on the Exchange and
those non-Market Maker Members conducting proprietary trading.
Electronic Exchange Members are deemed ``members'' under the
Exchange Act. See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
---------------------------------------------------------------------------
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $4,500; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes
to amend the calculation and amount of Full Service MEO Port (Bulk)
fees for EEMs and Market Makers. In particular, for EEMs, the Exchange
proposes to move away from the above-described volume tier-based fee
structure and instead charge all EEMs that utilize Full Service MEO
Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee,
EEMs will continue to be entitled to two (2) Full Service MEO Ports
(Bulk) for each Matching Engine for the single monthly fee of $7,500.
The Exchange now proposes to amend the calculation and amount of Full
Service MEO Port (Bulk) fees for Market Makers by moving away from the
above-described volume tier-based fee structure to harmonize the Full
Service MEO Port (Bulk) fee structure for Market Makers with that of
the Exchange's affiliates, MIAX and MIAX Emerald.\71\ The Exchange
proposes that the amount of the monthly Full Service MEO Port (Bulk)
fees for Market Makers would be based on the lesser of either the per
class traded or percentage of total national average daily volume
(``ADV'') measurement based on classes traded by volume. The amount of
monthly Market Maker Full Service MEO Port (Bulk) fee would be based
upon the number of classes in which the Market Maker was registered to
quote on any given day within the calendar month, or upon the class
volume percentages. This change in how Full Service MEO Port (Bulk)
fees are calculated is identical to how the Exchange assesses Market
Makers Trading Permit fees, which is in line with how numerous
exchanges charge similar membership fees.
---------------------------------------------------------------------------
\71\ See MIAX Fee Schedule, Section 5)d)ii) and MIAX Emerald Fee
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt the following Full
Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market
Maker registrations in
[[Page 58410]]
up to 10 option classes or up to 20% of option classes by national ADV;
(ii) $7,500 for Market Maker registrations in up to 40 option classes
or up to 35% of option classes by ADV; (iii) $10,000 for Market Maker
registrations in up to 100 option classes or up to 50% of option
classes by ADV; and (iv) $12,000 for Market Maker registrations in over
100 option classes or over 50% of option classes by ADV up to all
option classes listed on MIAX Pearl. For example, if Market Maker 1
elects to quote the top 40 option classes which consist of 58% of the
total national average daily volume in the prior calendar quarter, the
Exchange would assess $7,500 to Market Maker 1 for the month which is
the lesser of `up to 40 classes' and `over 50% of classes by volume up
to all classes listed on MIAX Pearl'. If Market Maker 2 elects to quote
the bottom 1000 option classes which consist of 10% of the total
national average daily volume in the prior quarter, the Exchange would
assess $5,000 to Market Maker 2 for the month which is the lesser of
`over 100 classes' and `up to 20% of classes by volume. The Exchange
notes that the proposed tiers (ranging from $5,000 to $12,000) are
lower than the tiers that the Exchange's affiliates charge for their
comparable ports (ranging from $5,000 to $20,500) for similar per class
tier thresholds.\72\
---------------------------------------------------------------------------
\72\ See id.
---------------------------------------------------------------------------
With the proposed changes, a Market Maker would be determined to be
registered in a class if that Market Maker has been registered in one
or more series in that class.\73\ The Exchange will assess MIAX Pearl
Options Market Makers the monthly Market Maker Full Service MEO Port
(Bulk) fee based on the greatest number of classes listed on MIAX Pearl
Options that the MIAX Pearl Options Market Maker registered to quote in
on any given day within a calendar month. Therefore, with the proposed
changes to the calculation of Market Maker Full Service MEO Port (Bulk)
fees, the Exchange's Market Makers would be encouraged to quote in more
series in each class they are registered in because each additional
series in that class would not count against their total classes for
purposes of the Full Service MEO Port (Bulk) fee tiers. The class
volume percentage is based on the total national ADV in classes listed
on MIAX Pearl Options in the prior calendar quarter. Newly listed
option classes are excluded from the calculation of the monthly Market
Maker Full Service MEO Port (Bulk) fee until the calendar quarter
following their listing, at which time the newly listed option classes
will be included in both the per class count and the percentage of
total national ADV.
---------------------------------------------------------------------------
\73\ Pursuant to Exchange Rule 602(a), a Member that has
qualified as a Market Maker may register to make markets in
individual series of options.
---------------------------------------------------------------------------
The Exchange also proposes to adopt an alternative lower Full
Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd,
3rd and 4th levels of the proposed Market Maker Full Service MEO Port
(Bulk) fee table: (i) Market Maker registrations in up to 40 option
classes or up to 35% of option classes by volume; (ii) Market Maker
registrations in up to 100 option classes or up to 50% of option
classes by volume; and (iii) Market Maker registrations in over 100
option classes or over 50% of option classes by volume up to all option
classes listed on MIAX Pearl Options. In particular, the Exchange
proposes to adopt footnote ``**'' following the Market Maker Full
Service MEO Port (Bulk) fee table for these Monthly Full Service MEO
Port (Bulk) tier levels. New proposed footnote ``**'' will provide that
if the Market Maker's total monthly executed volume during the relevant
month is less than 0.040% of the total monthly TCV for MIAX Pearl-
listed option classes for that month, then the fee will be $6,000
instead of the fee otherwise applicable to such level.
The purpose of the alternative lower fee designated in proposed
footnote ``**'' is to provide a lower fixed fee to those Market Makers
who are willing to quote the entire Exchange market (or substantial
amount of the Exchange market), as objectively measured by either
number of classes assigned or national ADV, but who do not otherwise
execute a significant amount of volume on the Exchange. The Exchange
believes that, by offering lower fixed fees to Market Makers that
execute less volume, the Exchange will retain and attract smaller-scale
Market Makers, which are an integral component of the option
marketplace, but have been decreasing in number in recent years, due to
industry consolidation. Since these smaller-scale Market Makers utilize
less Exchange capacity due to lower overall volume executed, the
Exchange believes it is reasonable and equitable to offer such Market
Makers a lower fixed fee. The Exchange notes that the Exchange's
affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express
Interface (``MEI'') Port fees (the comparable ports on those exchanges)
for Market Makers who quote the entire MIAX and MIAX Emerald markets
(or substantial amount of those markets), as objectively measured by
either number of classes assigned or national ADV, but who do not
otherwise execute a significant amount of volume on MIAX or MIAX
Emerald.\74\ The proposed changes to the Full Service MEO Port (Bulk)
fees for Market Makers who fall within the 2nd, 3rd and 4th levels of
the fee table are based upon a business determination of current Market
Maker assignments and trading volume.
---------------------------------------------------------------------------
\74\ See MIAX Fee Schedule, Section 5)d)ii), note ``*'' and MIAX
Emerald Fee Schedule, Section 5)d)ii), note ``[squf]''.
---------------------------------------------------------------------------
Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\75\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports (described
above) per matching engine to which that Member connects. The Exchange
currently has twelve (12) matching engines, which means Market Makers
may receive up to twenty-four (24) Full Service MEO Ports for a single
monthly fee, that can vary based on the lesser of either the per class
traded or percentage of total national ADV measurement based on classes
traded by volume, as described above. For illustrative purposes, the
Exchange currently assesses a fee of $5,000 per month for Market Makers
that reach the highest Full Service MEO Port (Bulk) tier, regardless of
the number of Full Service MEO Ports allocated to the Market Maker. For
example, assuming a Market
[[Page 58411]]
Maker connects to all twelve (12) matching engines during a month, with
two Full Service MEO Ports (Bulk) per matching engine, this results in
an effective fee of $208.33 per Full Service MEO Port ($5,000 divided
by 24) for the month, as compared to other exchanges that charge over
$1,000 per port and require multiple ports to connect to all of their
matching engines.\76\ This fee had been unchanged since the Exchange
adopted Full Service MEO Port fees in 2018.\77\ The Exchange proposes
to increase Full Service MEO Port fees, with the highest monthly fee of
$12,000 for the Full Service MEO Ports (Bulk). Market Makers will
continue to receive two (2) Full Service MEO Ports to each matching
engine to which they connect for the single flat monthly fee. Assuming
a Market Maker connects to all twelve (12) matching engines during the
month, with two Full Service MEO Ports per matching engine, this would
result in an effective fee of $500 per Full Service MEO Port ($12,000
divided by 24).
---------------------------------------------------------------------------
\75\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees (each port charged on a per matching engine basis, with NYSE
American having 17 match engines). See NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many matching engines are used
by each exchange?) (September 2020) (providing a link to an Excel
file detailing the number of matching engines per options exchange);
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a
per matching engine basis, NYSE Arca having 19 match engines); and
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How
many matching engines are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the number of matching
engines per options exchange). See NASDAQ Fee Schedule, NASDAQ
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports
and Other Services (each port charged on a per matching engine
basis, with Nasdaq having multiple matching engines). See NASDAQ
Specialized Quote Interface (SQF) Specification, Version 6.5b
(updated February 13, 2020), Section 2, Architecture, available at
<a href="https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf">https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf</a> (the ``NASDAQ SQF Interface Specification''). The
NASDAQ SQF Interface Specification also provides that NASDAQ's
affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (``BX''), have trading
infrastructures that may consist of multiple matching engines with
each matching engine trading only a range of option classes.
Further, the NASDAQ SQF Interface Specification provides that the
SQF infrastructure is such that the firms connect to one or more
servers residing directly on the matching engine infrastructure.
Since there may be multiple matching engines, firms will need to
connect to each engine's infrastructure in order to establish the
ability to quote the symbols handled by that engine.
\76\ Id. See also infra notes 101 to 108 and accompanying text.
\77\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
Full Service MEO Ports (Bulk)
----------------------------------------------------------------------------------------------------------------
Total number
of ports for
Number of market maker Total fee Effective per
match engines to connect to (monthly) port fee
all match
engines
----------------------------------------------------------------------------------------------------------------
Pricing Based on Market Maker Being Charged the 12 24 $5,000 $208.33
Highest Tier (Current).........................
Pricing Based on Market Maker Being Charged the 12 24 12,000 500
Highest Tier (as proposed).....................
----------------------------------------------------------------------------------------------------------------
Full Service MEO Port (Single) Fee Changes
Current Full Service MEO Port (Single) Fees. The Exchange currently
assesses all Members (Market Makers and EEMs) monthly Full Service MEO
Port (Single) fees as follows:
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,375; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
Proposed Full Service MEO Port (Single) Fees. The Exchange proposes
to amend the calculation and amount of Full Service MEO Port (Single)
fees for EEMs and Market Makers. In particular, the Exchange proposes
to move away from the above-described volume tier-based fee structure
and instead charge all Members that utilize Full Service MEO Ports
(Single) a flat monthly fee of $4,000. For this flat monthly fee, all
Members will continue to be entitled to two (2) Full Service MEO Ports
(Single) for each Matching Engine for the single monthly fee of $4,000.
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, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers or high frequency trading firms utilize these ports (typically
coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Certain Members need ports and connections that can
handle using far more of the network's capacity for message throughput,
risk protections, and the amount of information that the System has to
assess. Those Members account for the vast majority of network capacity
utilization and volume executed on the Exchange, as discussed
throughout. For example, three (3) Members account for 64% of all 10Gb
ULL connections and Full Service MEO Ports purchased.
The Exchange proposes to increase its monthly Full Service MEO Port
fees since it has not done so since the fees were adopted in 2018,\78\
which are designed to recover a portion of the costs associated with
directly accessing the Exchange. As described above, the Exchange's
affiliates, MIAX and MIAX Emerald, also charge fees for their high
throughput, low latency ports in a similar fashion as the Exchange
proposes to charge for its MEO Ports--generally, the more active user
the Member (i.e., the greater number/greater national ADV of classes
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port
fee.\79\ This concept is, therefore, not new or novel.
---------------------------------------------------------------------------
\78\ See id.
\79\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------
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 \80\ in general, and furthers the objectives of
section 6(b)(4) of the Act \81\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of section 6(b)(5) of the Act \82\ 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.
---------------------------------------------------------------------------
\80\ 15 U.S.C. 78f(b).
\81\ 15 U.S.C. 78f(b)(4).
\82\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
[[Page 58412]]
Review Process and as set forth in recent Staff Guidance. Based on both
the BOX Order \83\ and the Staff Guidance,\84\ 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.
---------------------------------------------------------------------------
\83\ See supra note 26.
\84\ See supra note 27.
---------------------------------------------------------------------------
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.''
\85\ 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.'' \86\ 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.'' \87\
---------------------------------------------------------------------------
\85\ Id.
\86\ Id.
\87\ Id.
---------------------------------------------------------------------------
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 (driven by the bifurcation of the 10Gb ULL
network) and Full Service MEO 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 related
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 commenced operations in February 2017 \88\ and adopted
its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500
(the Exchange originally had a non-ULL 10Gb connectivity option, which
it has since removed) and a fee waiver for all Full Service MEO Port
fees.\89\ As a new exchange entrant, the Exchange chose to offer Full
Service MEO Ports free of charge to encourage market participants to
trade on the Exchange and experience, among things, the quality of the
Exchange's technology and trading functionality. This practice is not
uncommon. New exchanges often do not charge fees or charge lower fees
for certain services such as memberships/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
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.\90\
---------------------------------------------------------------------------
\88\ See MIAX PEARL Successfully Launches Trading Operations,
dated February 6, 2017, available at <a href="https://www.miaxglobal.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf">https://www.miaxglobal.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf</a>.
\89\ See Securities Exchange Act Release No. 80061 (February 17,
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
\90\ 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).
---------------------------------------------------------------------------
Later in 2018, as the Exchange's market share increased,\91\ the
Exchange adopted nominal fees for Full Service MEO Ports.\92\ The
Exchange last increased the fees for its 10Gb ULL fiber connections
from $9,300 to $10,000 per
[[Page 58413]]
month on January 1, 2021.\93\ 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.
---------------------------------------------------------------------------
\91\ The Exchange experienced a monthly average trading volume
of 3.94% for the month of March 2018. See the ``Market Share''
section of the Exchange's website, available at <a href="http://www.miaxglobal.com">www.miaxglobal.com</a>.
\92\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\93\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
---------------------------------------------------------------------------
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'. . . .'' \94\
---------------------------------------------------------------------------
\94\ 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.'' \95\
---------------------------------------------------------------------------
\95\ 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.' '' \96\ 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.'' \97\ 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.'' \98\ 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.'' \99\
---------------------------------------------------------------------------
\96\ 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.'').
\97\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\98\ Id.
\99\ See Staff Guidance, supra note 27.
---------------------------------------------------------------------------
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 with a
reasonable 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 connectivity and port rates in place at competing options
exchanges were filed with the Commission for immediate effectiveness
and remain in place today.
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of connection connection or per
or port port)
------------------------------------------------------------------------
MIAX Pearl Options (as 10Gb ULL connection. $13,500.
proposed) (equity options Full Service MEO Lesser of either the
market share of 7.05% for Port (Bulk) for per class basis or
the month of May 2023) \a\. Market Makers. percentage of total
national ADV by the
Market Maker, as
follows:
$5,000--up to 10
classes or up to
20% of classes by
volume.
$7,500 **--up to 40
classes or up to
35% of classes by
volume.
$10,000 **--up to
100 classes or up
to 50% of classes
by volume.
$12,000 **--over 100
classes or over 50%
of all classes by
volume up to all
classes (or $500
per port per
matching engine).
** A lower rate of
$6,000 will apply
to these tiers if
the Market Maker's
total monthly
executed volume is
less than 0.040% of
total monthly TCV
for MIAX Pearl
options.
Full Service MEO $7,500 (or $312.50
Port (Bulk) for per port per
EEMs. matching engine).
Full Service MEO $4,000 (or $166.66
Port (Single) for per port per
Market Makers and matching engine).
EEMs.
[[Page 58414]]
NASDAQ \b\ (equity options 10Gb Ultra fiber $15,000 per
market share of 6.59% for connection. connection.
the month of May 2023) \c\. SQF Port \d\........ 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'') \e\ 10Gb Ultra fiber $15,000 per
(equity options market connection. connection.
share of 6.18% for the SQF Port............ $1,100 per port.
month of May 2023) \f\.
NYSE American LLC (``NYSE 10Gb LX LCN $22,000 per
American'') \g\ (equity connection. connection.
options market share of Order/Quote Entry 1-40 ports: $450 per
7.34% for the month of May Port. port.
2023) \h\. 41 or more ports:
$150 per port.
NASDAQ GEMX, LLC (``GEMX'') 10Gb Ultra $15,000 per
\i\ (equity options market connection. connection.
share of 2.00% for the SQF Port............ $1,250 per port.
month of May 2023) \j\.
------------------------------------------------------------------------
\a\ See the ``Market Share'' section of the Exchange's website,
available at <a href="https://www.miaxglobal.com/">https://www.miaxglobal.com/</a>.
\b\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other
Services and NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\c\ See supra note a.
\d\ Similar to the MIAX Pearl Options' MEO Ports, SQF ports are
primarily utilized by Market Makers.
\e\ See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees
and ISE Rules, General 8: Connectivity.
\f\ See supra note a.
\g\ See NYSE American Options Fee Schedule, Section V.A. Port Fees and
Section V.B. Co-Location Fees.
\h\ See supra note a.
\i\ See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees
and GEMX Rules, General 8: Connectivity.
\j\ See supra note a.
The Exchange acknowledges that, without additional contextual
information, the above table may lead someone to believe that the
Exchange's proposed fees for Full Service MEO Ports is higher than
other exchanges when in fact, that is not true. The Exchange provides
each Member or non-Member access to two (2) ports on all twelve (12)
matching engines for a single fee and a vast majority choose to connect
to all twelve (12) matching engines and utilize both ports for a total
of 24 ports. Other exchanges charge on a per port basis and require
firms to connect to multiple matching engines, thereby multiplying the
cost to access their full market.\100\ On the Exchange, this is not the
case. The Exchange provides each Member or non-Member access, but does
not require they connect to, all twelve (12) matching engines.
---------------------------------------------------------------------------
\100\ See Specialized Quote Interface Specification, Nasdaq
PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a,
Section 2, Architecture (revised August 16, 2019), available at
<a href="http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf">http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf</a>. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
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, one Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes proposed by MIAX Pearl Options.
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.\101\ 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.\102\
---------------------------------------------------------------------------
\101\ 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.''
\102\ 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.\103\ The Exchange and its affiliated
options markets, MIAX and MIAX Emerald, have a total of 46 members. Of
those 46 total members, 37 are members of all three affiliated options
markets, two are members of only two affiliated options markets, and
seven are members of only one affiliated options market. 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
[[Page 58415]]
elect to do so based on their own business decisions and need to
directly access each exchange's liquidity pool.
---------------------------------------------------------------------------
\103\ 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
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. 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 to--the Exchange.\104\ If the Exchange is
not at the national best bid or offer (``NBBO''),\105\ 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.\106\
---------------------------------------------------------------------------
\104\ 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>.
\105\ See Exchange Rule 100.
\106\ 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 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,\107\ or request
sponsored access \108\ through a member of an exchange in order to
submit a trade directly to an options exchange.\109\ 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.
---------------------------------------------------------------------------
\107\ 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.
\108\ 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.
\109\ 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).\110\ 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.\111\ 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 15 options markets. Accordingly,
the Exchange believes that the proposed fees are fair and reasonable
and constrained by competitive forces.
---------------------------------------------------------------------------
\110\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at, US 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).
\111\ 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.
Bifurcation of 10Gb ULL Connectivity and Related Fees
The Exchange began to operate on a single shared network with MIAX
when MIAX Pearl Options commenced operations as a national securities
exchange on February 7, 2017.\112\ The
[[Page 58416]]
Exchange and MIAX operated on a single shared network to provide
Members with a single convenient set of access points for both
exchanges. Both the Exchange and MIAX offer two methods of
connectivity, 1Gb and 10Gb ULL connections. The 1Gb connection services
are supported by a discrete set of switches providing 1Gb access ports
to Members. The 10Gb ULL connection services are supported by a second
and mutually exclusive set of switches providing 10Gb ULL access ports
to Members. Previously, both the 1Gb and 10Gb ULL shared extranet ports
allowed Members to use one connection to access both exchanges, namely
their trading platforms, market data systems, test systems, and
disaster recovery facilities.
---------------------------------------------------------------------------
\112\ See Securities Exchange Act Release No. 80061 (February
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl
Options Fee Schedule and establishing that the MENI can also be
configured to provide network connectivity to the trading platforms,
market data systems, test systems, and disaster recovery facility of
the MIAX Pearl Options' affiliate, MIAX, via a single, shared
connection).
---------------------------------------------------------------------------
The Exchange stresses that bifurcating the 10Gb ULL connectivity
between the Exchange and MIAX was not designed with the objective to
generate an overall increase in access fee revenue. Rather, the
proposed change was necessitated by 10Gb ULL connectivity experiencing
a significant decrease in port availability mostly driven by
connectivity demands of latency sensitive Members that seek to maintain
multiple 10Gb ULL connections on every switch in the network. Operating
two separate national securities exchanges on a single shared network
provided certain benefits, such as streamlined connectivity to multiple
exchanges, and simplified exchange infrastructure. However, doing so
was no longer sustainable due to ever-increasing capacity constraints
and current system limitations. The network is not an unlimited
resource. As described more fully in the proposal to bifurcate the 10Gb
ULL network,\113\ the connectivity needs of Members and market
participants has increased every year since the launch of MIAX Pearl
Options and the operations of the Exchange and MIAX on a single shared
10Gb ULL network is no longer feasible. This required constant System
expansion to meet Member demand for additional ports and 10Gb ULL
connections has resulted in limited available System headroom, which
eventually became operationally problematic for both the Exchange and
its customers.
---------------------------------------------------------------------------
\113\ See Securities Exchange Act Release Nos. 96553 (December
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------
As stated above, the shared network is not an unlimited resource
and its expansion was constrained by MIAX's and MIAX Pearl Options'
ability to provide fair and equitable access to all market participants
of both markets. Due to the ever-increasing connectivity demands, the
Exchange found it necessary to bifurcate 10Gb ULL connectivity to the
Exchange's and MIAX's Systems and networks to be able to continue to
meet ongoing and future 10Gb ULL connectivity and access demands.\114\
---------------------------------------------------------------------------
\114\ Currently, the Exchange maintains sufficient headroom to
meet ongoing and future requests for 1Gb connectivity. Therefore,
the Exchange did not propose to alter 1Gb connectivity and continues
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------
Unlike the switches that provide 1Gb connectivity, the availability
for additional 10Gb ULL connections on each switch had significantly
decreased. This was mostly driven by the connectivity demands of
latency sensitive Members (e.g., Market Makers and liquidity removers)
that sought to maintain connectivity across multiple 10Gb ULL switches.
Based on the Exchange's experience, such Members did not typically use
a shared 10Gb ULL connection to reach both the Exchange and MIAX due to
related latency concerns. Instead, those Members maintain dedicated
separate 10Gb ULL connections for the Exchange and separate dedicated
10Gb ULL connections for MIAX. This resulted in a much higher 10Gb ULL
usage per switch by those Members on the shared 10Gb ULL network than
would otherwise be needed if the Exchange and MIAX had their own
dedicated 10Gb ULL networks. Separation of the Exchange and MIAX 10Gb
ULL networks naturally lends itself to reduced 10Gb ULL port
consumption on each switch and, therefore, increased 10Gb ULL port
availability for current Members and new Members.
Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX
continued to add switches to meet ongoing demand for 10Gb ULL
connectivity. That was no longer sustainable because simply adding
additional switches to expand the current shared 10Gb ULL network would
not adequately alleviate the issue of limited available port
connectivity. While it would have resulted in a gain in overall port
availability, the existing switches on the shared 10Gb ULL network in
use would have continued to suffer from lack of port headroom given
many latency sensitive Members' needs for a presence on each switch to
reach both the Exchange and MIAX. This was because those latency
sensitive Members sought to have a presence on each switch to maximize
the probability of experiencing the best network performance. Those
Members routinely decide to rebalance orders and/or messages over their
various connections to ensure each connection is operating with maximum
efficiency. Simply adding switches to the extranet would not have
resolved the port availability needs on the shared 10Gb ULL network
since many of the latency sensitive Members were unwilling to relocate
their connections to a new switch due to the potential detrimental
performance impact. As such, the impact of adding new switches and
rebalancing ports would not have been effective or responsive to
customer needs. The Exchange has found that ongoing and continued
rebalancing once additional switches are added has had, and would have
continued to have had, a diminishing return on increasing available
10Gb ULL connectivity.
Based on its experience and expertise, the Exchange found the most
practical way to increase connectivity availability on its switches was
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX
by migrating the exchanges' connections from the shared network onto
their own set of switches. Such changes accordingly necessitated a
review of the Exchange's previous 10Gb ULL connectivity fees and
related costs. The proposed fees necessary to allow the Exchange to
cover ongoing costs related to providing and maintaining such
connectivity, described more fully below. The ever increasing
connectivity demands that necessitated this change further support that
the proposed fees are reasonable because this demand reflects that
Members and non-Members believe they are getting value from the 10Gb
ULL connections they purchase.
The Exchange announced on August 12, 2022 the planned network
change and January 23, 2023 implementation date to provide market
participants adequate time to prepare.\115\ Since August 12, 2022, the
Exchange has worked with current 10Gb ULL subscribers to address their
connectivity needs ahead of the January 23, 2023 date. Based on those
interactions and subscriber feedback, the Exchange experienced a
minimal net increase of six (6) overall 10Gb ULL connectivity
subscriptions across MIAX Pearl Options and MIAX. This immaterial
increase in overall connections reflects a minimal fee impact for all
types of subscribers and reflects that subscribers
[[Page 58417]]
elected to reallocate existing 10Gb ULL connectivity directly to the
Exchange or MIAX, or chose to decrease or cease connectivity as a
result of the change.
---------------------------------------------------------------------------
\115\ See supra note 9.
---------------------------------------------------------------------------
Should the Commission Staff disapprove such fees, it would
effectively dictate how an exchange manages its technology and would
hamper the Exchange's ability to continue to invest in and fund access
services in a manner that allows it to meet existing and anticipated
access demands of market participants. Disapproval could also have the
adverse effect of discouraging an exchange from optimizing its
operations and deploying innovative technology to the benefit of market
participants if it believes the Commission would later prevent that
exchange from covering its costs and monetizing its operational
enhancements, thus adversely impacting competition. Also, as noted
above, the economic consequences of not being able to better establish
fee parity with other exchanges for non-transaction fees hampers the
Exchange's ability to compete on transaction fees.
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 and port 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,\116\ and Rule 19b-4
thereunder,\117\ with respect to the types of information exchanges
should provide when filing fee changes, and section 6(b) of the
Act,\118\ which requires, among other things, that exchange fees be
reasonable and equitably allocated,\119\ not designed to permit unfair
discrimination,\120\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\121\ 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.\122\ 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 setting their baseline non-transaction
fees, most of which were put in place before the Revised Review Process
and Staff Guidance.
---------------------------------------------------------------------------
\116\ 15 U.S.C. 78s(b)(1).
\117\ 17 CFR 240.19b-4.
\118\ 15 U.S.C. 78f(b).
\119\ 15 U.S.C. 78f(b)(4).
\120\ 15 U.S.C. 78f(b)(5).
\121\ 15 U.S.C. 78f(b)(8).
\122\ See Staff Guidance, supra note 27.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,567,509 (or approximately $963,959 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Full Service MEO Ports at
$1,644,132 (or approximately $137,012 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 \123\) 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 and to remove language providing for a shared 10Gb ULL
network between the Exchange and MIAX. The Exchange also proposes to
modify its Fee Schedule to charge tiered rates for Full Service MEO
Ports (Bulk) depending on the number of classes assigned or the
percentage of national ADV, which is in line with how the Exchange's
affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI
Ports.
---------------------------------------------------------------------------
\123\ 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 application sessions on behalf of one
or more Members. Extranets offer physical connectivity services to
Members and non-Members.
---------------------------------------------------------------------------
In 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\124\ 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'').
---------------------------------------------------------------------------
\124\ 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 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 ``bottom up'' budget to the
Finance Team allocating costs at the profit and loss account and vendor
levels for the 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 simple and complex markets, auction functionality,
etc.), which may impact message traffic, individual system
architectures that impact platform size,\125\ 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 of 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
[[Page 58418]]
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 costs associated
with each actual market--as opposed to the Exchange's parent company
simply concluding that all costs drivers are the same at each
individual marketplace and dividing total cost by four (4) (evenly for
each marketplace). Rather, the Exchange's parent company determines an
accurate 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 also ensures that no 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 their approval. The above steps
encompass the first step of the cost allocation process.
---------------------------------------------------------------------------
\125\ For example, MIAX Pearl Options maintains 12 matching
engines, MIAX Pearl Equities maintains 24 matching engines, MIAX
maintains 24 matching engines and MIAX Emerald maintains 12 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 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 (60.6% of total expense
amount allocated to 10Gb ULL connectivity), with smaller allocations to
Full Service MEO Ports (3.4%), and the remainder to the provision of
other connectivity, other ports, transaction execution, membership
services and market data services (36%). This next level of the
allocation methodology at the individual exchange level also took into
account 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
allocations for other services. This 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
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, which was
again recently further refined, 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 and port
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of
connectivity and port services, and thus bears a relationship that is,
``in nature and closeness,'' directly related to network connectivity
and port services. In turn, the Exchange allocated certain costs more
to physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the aggregate monthly cost
to provide 10Gb ULL connectivity and Full Service MEO Port services, is
$1,106,971 (utilizing the rounded numbers when dividing the annual cost
for 10Gb ULL connectivity and annual cost for Full Service MEO Ports by
12 months, then adding both numbers together), as further detailed
below.
Lastly, the Exchange notes that, based on: (i) the total expense
amounts contained in this filing (which are 2023 projected expenses),
and (ii) the total expense amounts contained in the related MIAX Pearl
Equities filing (also 2023 projected expenses), MIAX PEARL, LLC's total
costs have increased at a greater rate over the last three years than
the total costs of MIAX PEARL, LLC's affiliated exchanges, MIAX and
MIAX Emerald. This is also reflected in the total costs reported in
MIAX PEARL, LLC's Form 1 filings over the last three years, when
comparing MIAX PEARL, LLC to MIAX PEARL, LLC's affiliated exchanges,
MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC
operates two markets, one for options and one for equities, while MIAX
and MIAX Emerald each operate only one market. This is also due to
higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a
hardware refresh (i.e., replacing old hardware with new equipment) for
MIAX Pearl Options, as well as higher costs associated with MIAX Pearl
Equities due to greater development efforts to grow that newer
marketplace.\126\ The Exchange confirms
[[Page 58419]]
that there is no double counting of expenses between the options and
equities platform of MIAX Pearl; the greater expense amounts of the
MIAX PEARL, LLC (relative to its affiliated exchanges, MIAX and MIAX
Emerald) is solely attributed to the unique factors of MIAX Pearl
discussed above.
---------------------------------------------------------------------------
\126\ See, e.g., Securities Exchange Act Release Nos. 94301
(February 23, 2022), 87 FR 11739 (March 2, 2022) (SR-PEARL-2022-06)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and
To Make Related Changes and Clarifications to Rules 2614(a)(2)(B)
and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022)
(SR-PEARL-2022-15) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change To Adopt Exchange Rule 532, Order Price
Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87
FR 43579 (July 21, 2022) (SR-PEARL-2022-29) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC
To Amend the Route to Primary Auction Routing Option Under Exchange
Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866
(September 12, 2022) (SR-PEARL-2022-34) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg
Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7,
2022) (SR-PEARL-2022-43) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders
and Order Instructions and Rule 2618, Risk Settings and Trading Risk
Metrics To Enhance Existing Risk Controls); 96905 (February 13,
2023), 88 FR 10391 (February 17, 2023) (SR-PEARL-2023-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Exchange Rule 2618 To Add Optional Risk Control Settings);
97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR-PEARL-2023-
15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders
Routed Pursuant to the Route to Primary Auction Routing Option).
---------------------------------------------------------------------------
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 each cost
driver (e.g., as set forth below, the Exchange allocated approximately
26.9% of its overall Human Resources cost to offering physical
connectivity).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost % of all
\k\ \l\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $3,675,098 $306,258 26.3
Connectivity (external fees, cabling, switches, etc.)........... 70,163 5,847 60.6
Internet Services and External Market Data...................... 322,388 26,866 73.3
Data Center..................................................... 739,983 61,665 60.6
Hardware and Software Maintenance and Licenses.................. 959,157 79,930 58.6
Depreciation.................................................... 1,885,969 157,164 58.2
Allocated Shared Expenses....................................... 3,914,751 326,229 49.2
-----------------------------------------------
Total....................................................... 11,567,509 963,959 40.5
----------------------------------------------------------------------------------------------------------------
\k\ The Annual Cost includes figures rounded to the nearest dollar.
\l\ 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.
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity. While some costs were attempted to be allocated as
equally as possible among the Exchange and its affiliated markets, the
Exchange notes that some of its cost allocation percentages for certain
cost drivers differ when compared to the same cost drivers for the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because MIAX Pearl Options' cost
allocation methodology utilizes the actual projected costs of MIAX
Pearl Options (which are specific to MIAX Pearl Options, and are
independent of the costs projected and utilized by MIAX Pearl Options'
affiliated markets) to determine its actual costs, which may vary
across the Exchange and its affiliated markets based on factors that
are unique to each marketplace. MIAX Pearl Options provides additional
explanation below (including the reason for the deviation) for the
significant differences.
Human Resources
The Exchange notes that it and its affiliated markets have 184
employees (excluding employees at non-options/equities exchange
subsidiaries of Miami International Holdings, Inc. (``MIH''), the
holding company of the Exchange and its affiliated markets), 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 each market's individual Human
Resources expense. Then, 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.
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). As described more fully above, the Exchange's parent
company allocates costs to the Exchange and its affiliated markets and
then a portion of the Human Resources costs allocated to the Exchange
is then allocated to connectivity. From that portion allocated to the
Exchange that applied to connectivity, the Exchange then allocated a
weighted average of 42.9% of each employee's time from the above group.
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, sales, membership, and finance personnel). The
Exchange allocated cost on an employee-by-employee basis (i.e., only
including those personnel who support functions related to providing
physical connectivity) and then applied a smaller allocation to such
employees (less than 17%).
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
[[Page 58420]]
were reasonable based on an understanding of the percentage of time
such employees devote to those tasks. This includes personnel from the
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. Again, the Exchange allocated 42.9% of each of their
employee's time assigned to the Exchange for 10Gb ULL connectivity, as
stated above. Employees from these departments perform numerous
functions to support 10Gb ULL connectivity, such as the installation,
re-location, configuration, and maintenance of 10Gb ULL connections and
the hardware they access. This hardware includes servers, routers,
switches, firewalls, and monitoring devices. These employees also
perform software upgrades, vulnerability assessments, remediation and
patch installs, equipment configuration and hardening, as well as
performance and capacity management. These employees also engage in
research and development analysis for equipment and software supporting
10Gb ULL connectivity and design, and support the development and on-
going maintenance of internally-developed applications as well as data
capture and analysis, and Member and internal Exchange reports related
to network and system performance. The above list of employee functions
is not exhaustive of all the functions performed by Exchange employees
to support 10Gb ULL connectivity, but illustrates the breath of
functions those employees perform in support of the above cost and time
allocations.
Lastly, the Exchange notes that senior level executives' time was
only allocated to the 10Gb ULL connectivity related Human Resources
costs to the extent that 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 (External Fees, Cabling, Switches, Etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity cost driver is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity providers for
connectivity to the entire U.S. options industry, 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 providers to connect to other national securities
exchanges and the Options Price Reporting Authority (``OPRA''). 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 provided by 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 expense and recoups that expense, in
part, by charging for 10Gb ULL connectivity.
Internet Services and External Market Data
The next cost driver consists of internet Services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami.
External market data includes fees paid to third parties, including
other exchanges, to receive market data. The Exchange includes external
market data fee costs towards the provision of 10Gb ULL connectivity
because such market data is necessary for certain services related to
connectivity, including pre-trade risk checks and checks for other
conditions (e.g., re-pricing of orders to avoid locked or crossed
markets and trading collars). Since external market data from other
exchanges is consumed at the Exchange's matching engine level, (to
which 10Gb ULL connectivity provides access) in order to validate
orders before additional orders enter the matching engine or are
executed, the Exchange believes it is reasonable to allocate an amount
of such costs to 10Gb ULL connectivity.
The Exchange relies on content service providers for data feeds for
the entire U.S. options industry, as well as content 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 content service
providers to receive market data from OPRA, 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. 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 receive market data and, therefore, would not be able to
operate and support its System Networks. The Exchange does not employ a
separate fee to cover its content service provider expense and recoups
that expense, in part, by charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the actual dollar amounts allocated
as part of the second step of the 2023 budget process differ among the
Exchange and its affiliated markets for the Internet Services and
External Market Data cost driver, even though, but for MIAX Emerald,
the allocation percentages are generally consistent across markets
(e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities
allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost
driver). This is because: (i) a different percentage of the overall
Internet Services and External Market Data cost driver was allocated to
MIAX Emerald and its affiliated markets due to the factors set forth
under the first step of the 2023 budget review process described above
(unique technical architecture, market structure, and business
requirements of each marketplace); and (ii) MIAX Emerald itself
allocated a larger portion of this cost driver to 10Gb ULL connectivity
because of recent initiatives to improve the latency and determinism of
its systems. The Exchange notes while the percentage MIAX Emerald
allocated to the Internet Services and External Market Data cost driver
is greater than the Exchange and its other affiliated
[[Page 58421]]
markets, the overall dollar amount allocated to the Exchange under the
initial step of the 2023 budget process is lower than its affiliated
markets. However, the Exchange believes that this is not, in dollar
amounts, a significant difference. This is because the total dollar
amount of expense covered by this cost driver is relatively small
compared to other cost drivers and is due to nuances in exchange
architecture that require different initial allocation amount under the
first step of the 2023 budget process described above. Thus, non-
significant differences in percentage allocation amounts in a smaller
cost driver create the appearance of a significant difference, even
though the actual difference in dollar amounts is small.
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 (60.6%) 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 by
market 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.
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.\127\ The Exchange notes that
this allocation is greater than MIAX and MIAX Emerald options exchanges
by a significant amount as MIAX Pearl Options allocated 58.6% of its
Hardware and Software Maintenance and License expense towards 10Gb ULL
connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%,
respectively, to the same category of expense. This is because MIAX
Pearl Options is in the process of replacing and upgrading various
hardware and software used to operate its options trading platform in
order to maintain premium network performance. At the time of this
filing, the Exchange is undergoing a major hardware refresh, replacing
older hardware with new hardware. This hardware includes servers,
network switches, cables, optics, protocol data units, and cabinets, to
maintain a state-of-the-art technology platform. Because of the timing
of the hardware refresh with the timing of this filing, the Exchange
has materially higher expense than its affiliates. Also, MIAX Pearl
Equities allocated a higher percentage of the same category of expense
(58%) towards its Hardware and Software Maintenance and License expense
for 10Gb ULL connectivity, which MIAX Pearl Equities explains in its
own proposal to amend its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------
\127\ This expense may be greater than the Exchange's affiliated
markets, specifically MIAX and MIAX Emerald, because, unlike the
MIAX and MIAX Emerald, MIAX Pearl (the options and equities markets)
maintains an additional gateway to accommodate its Members' and
Equity Members' access and connectivity needs. This added gateway
contributes to the difference in allocations between MIAX Pearl,
MIAX and MIAX Emerald. This expense also differs in dollar amount
among the MIAX Pearl (options and equities markets), MIAX, and MIAX
Emerald because each market may maintain and utilize a different
amount of hardware and software based on its market model and
infrastructure needs. The Exchange allocated a percentage of the
overall cost based on actual amounts of hardware and software
utilized by that market, which resulted in different cost
allocations and dollar amounts.
---------------------------------------------------------------------------
Depreciation
All physical assets, software and hardware used to provide 10Gb ULL
connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated or leased over periods ranging from three to five years.
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. The Exchange also included in the
Depreciation cost driver certain budgeted improvements that the
Exchange intends to capitalize and depreciate with respect to 10Gb ULL
connectivity 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 10Gb ULL connectivity. As
noted above, the Exchange allocated 58.2% of its allocated depreciation
costs to providing physical 10Gb ULL 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.
For example, the percentages the Exchange and its affiliate, MIAX,
allocated to the depreciation of hardware and software used to provide
10Gb ULL connectivity are nearly identical. However, the Exchange's
dollar amount is less than that of MIAX by approximately $35,000 per
month due to two factors: first, MIAX has undergone a technology
refresh since the time MIAX Pearl Options launched in 2017, leading to
it having more hardware that software that is subject to depreciation.
Second, MIAX maintains 24 matching engines while MIAX Pearl Options
maintains only 12 matching engines. This also results in more of MIAX's
hardware and software being subject to depreciation than MIAX Pearl
Options' 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, as with other exchange products and services, a portion of
general shared expenses was allocated to overall physical connectivity
costs. These general shared costs are integral to exchange operations,
including its ability to provide physical connectivity. Costs included
in general shared expenses 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. Similarly, the cost of paying
directors to serve on the Exchange's Board of Directors is also
included in the Exchange's general shared expense cost driver.\128\
These general shared expenses are incurred by the Exchange's parent
company, MIH, as
[[Page 58422]]
a direct result of operating the Exchange and its affiliated markets.
---------------------------------------------------------------------------
\128\ 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.
---------------------------------------------------------------------------
The Exchange employed a process to determine a reasonable
percentage to allocate general shared expenses to 10Gb ULL connectivity
pursuant to its multi-layered allocation process. First, general
expenses were allocated among the Exchange and affiliated markets as
described above. Then, the general shared expense assigned to the
Exchange was allocated across core services of the Exchange, including
connectivity. Then, these costs were further allocated to sub-
categories within the final categories, i.e., 10Gb ULL connectivity as
a sub-category of connectivity. In determining the percentage of
general shared expenses allocated to connectivity that ultimately apply
to 10Gb ULL connectivity, the Exchange looked at the percentage
allocations of each of the cost drivers and determined a reasonable
allocation percentage. The Exchange also held meetings with senior
management, department heads, and the Finance Team to determine the
proper amount of the shared general expense to allocate to 10Gb ULL
connectivity. The Exchange, therefore, believes it is reasonable to
assign an allocation, in the range of allocations for other cost
drivers, while continuing to ensure that this expense is only allocated
once. Again, the general shared expenses are incurred by the Exchange's
parent company as a result of operating the Exchange and its affiliated
markets and it is therefore reasonable to allocate a percentage of
those expenses to the Exchange and ultimately to specific product
offerings such as 10Gb ULL connectivity.
The Exchange notes that the 49.2% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for Full Service MEO Ports. This
is based on its allocation methodology that weighted costs attributable
to each core service. While physical connectivity has several areas
where certain tangible costs are heavily weighted towards providing
such service (e.g., Data Center, as described above), Full Service MEO
Ports do not require as many broad or indirect resources as other core
services.
* * * * *
Approximate Cost per 10Gb Connection per Month
After determining the approximate allocated monthly cost related to
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of
$963,959 was divided by the number of physical 10Gb ULL connections the
Exchange maintained at the time that proposed pricing was determined
(108), to arrive at a cost of approximately $8,925 per month, per
physical 10Gb ULL connection. Due to the nature of this particular
cost, this allocation methodology results in an allocation among the
Exchange and its affiliated markets based on set quantifiable criteria,
i.e., actual number of 10Gb ULL connections.
* * * * *
Costs Related To Offering Full Service MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Full 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 8.3% of its overall Human Resources cost to
offering Full Service MEO Ports).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost % of all
\m\ \n\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $1,159,831 $96,653 8.3
Connectivity (external fees, cabling, switches, etc.)........... 1,589 132 1.4
Internet Services and External Market Data...................... 6,033 503 1.4
Data Center..................................................... 41,881 3,490 3.4
Hardware and Software Maintenance and Licenses.................. 22,438 1,870 1.4
Depreciation.................................................... 127,986 10,666 3.9
Allocated Shared Expenses....................................... 284,374 23,698 3.6
-----------------------------------------------
Total....................................................... 1,644,132 137,012 5.8
----------------------------------------------------------------------------------------------------------------
\m\ See supra note k (describing rounding of Annual Costs).
\n\ See supra note l (describing rounding of Monthly Costs based on Annual Costs).
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering Full Service MEO
Ports. While some costs were attempted to be allocated as equally as
possible among the Exchange and its affiliated markets, the Exchange
notes that some of its cost allocation percentages for certain cost
drivers differ when compared to the same cost drivers for the
Exchange's affiliated markets 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 affiliated markets) to
determine its actual costs, which may vary across the Exchange and its
affiliated markets based on factors that are unique to each
marketplace. The Exchange provides additional explanation below
(including the reason for the deviation) for the significant
differences.
Human Resources
With respect to Full Service MEO Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Full Service MEO 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 Full Service MEO 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 Full Service MEO Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing Full
Service MEO Ports: Business Systems Development, Trading
[[Page 58423]]
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
allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Full Service MEO
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing Full Service MEO Ports. 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 (External Fees, Cabling, Switches, etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Full Service MEO
Ports, the Exchange also includes a portion of its costs related to
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 includes external market data costs
towards the provision of Full Service MEO Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\129\ Thus, since market data from other exchanges is
consumed at the Exchange's Full Service MEO Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Full Service MEO Ports.
---------------------------------------------------------------------------
\129\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------
The Exchange notes that the allocation for the Internet Services
and External Market Data cost driver is lower than that of its
affiliate, MIAX, as MIAX allocated 7.2% of its Internet Services and
External Market Data expense towards Limited Service MEI Ports, while
MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports for the
same cost driver. The allocation percentages set forth above differ
because they directly correspond with the number of applicable ports
utilized on each exchange. For May 2023, MIAX Market Makers utilized
1,770 Limited Service MEI ports and MIAX Emerald Market Makers utilized
1,017 Limited Service MEI Ports. When compared to Full Service Port
(Bulk and Single) usage, for May 2023, MIAX Pearl Options Members
utilized only 384 Full Service MEO Ports (Bulk and Single), far fewer
than number of Limited Service MEI Ports utilized by Market Makers on
MIAX and 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 and
internet Service), thus the Exchange allocates a higher percentage of
expense than MIAX Pearl Options, which has a lower port count.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Full Service MEO Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's system via Full Service MEO
Ports (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).
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.
The Exchange notes that this allocation is less than its affiliate,
MIAX, as MIAX allocated 7.2% of its Hardware and Software Maintenance
and License expense towards Limited Service MEI Ports, while MIAX Pearl
Options allocated 1.4% 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 May 2023, MIAX Market Makers
utilized 1,770 Limited Service MEI ports and MIAX Emerald Market Makers
utilized 1,017 Limited Service MEI Ports. When compared to Full Service
Port (Bulk and Single) usage, for May 2023, MIAX Pearl Options Members
utilized only 384 Full Service MEO Ports (Bulk and Single), far fewer
than number of Limited Service MEI Ports utilized by Market Makers on
MIAX and 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.
Depreciation
The vast majority of the software the Exchange uses to provide Full
Service MEO Ports has been developed in-house and the cost of such
development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production environment.
Hardware used to provide Full Service MEO Ports includes equipment used
for testing and monitoring of order entry infrastructure and other
physical equipment the Exchange purchased and is also depreciated over
time.
All hardware 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 3.9% of
all depreciation costs to providing Full Service MEO Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange to Full Service MEO Ports because
such software is related to the provision of Full Service MEO Ports. As
with the other allocated costs in the Exchange's updated Cost Analysis,
the Depreciation cost driver was therefore narrowly tailored to
depreciation related to Full Service MEO Ports.
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
[[Page 58424]]
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 the percentage it allocated to
the depreciation cost driver for Full Service MEO Ports and the
percentage its affiliate, MIAX, allocated to the depreciation cost
driver for MIAX's Limited Service MEI Ports, differ by only 2.4%.
However, MIAX's approximate dollar amount is greater than that of MIAX
Pearl Options by approximately $9,000 per month. This is due to two
primary factors. First, MIAX has under gone a technology refresh since
the time MIAX Pearl Options launched in 2017, leading to it having more
hardware that software that is subject to depreciation. Second, MIAX
maintains 24 matching engines while MIAX Pearl Options maintains only
12 matching engines. This also results in more of MIAX's hardware and
software being subject to depreciation than MIAX Pearl Options'
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, a portion of general shared expenses was allocated to
overall Full Service MEO Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 4.0% of the overall cost for
directors was allocated to providing Full Service MEO Ports. The
Exchange notes that the 3.6% allocation of general shared expenses for
Full Service MEO 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 Full Service MEO 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.
Lastly, the Exchange notes that this allocation is less than its
affiliate, MIAX, as MIAX allocated 9.8% 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 May 2023, MIAX Market Makers utilized 1,770 Limited
Service MEI Ports and MIAX Emerald Market Makers utilized 1,017 Limited
Service MEI ports. When compared to Full Service Port (Bulk and Single)
usage, for May 2023, MIAX Pearl Options Members utilized only 384 Full
Service MEO Ports (Bulk and Single), far fewer than number of Limited
Service MEI Ports utilized by Market Makers on MIAX, 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.
* * * * *
Approximate Cost per Full Service MEO Port per Month
Based on May 2023 data, the total monthly cost allocated to Full
Service MEO Ports of $137,012 was divided by the number of chargeable
Full Service MEO Ports the Exchange maintained at the time that
proposed pricing was determined (25 total; 25 Full Service MEO Port,
Bulk, and 0 Full Service MEO Port, Single), to arrive at a cost of
approximately $5,480 per month, per charged Full Service MEO Port.
* * * * *
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 Full Service MEO 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 (42.9%) given their focus on functions
necessary to provide physical connections. The salaries of those same
personnel were allocated only 12.3% to Full Service MEO Ports and the
remaining 44.8% 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 16.9% for 10Gb ULL connectivity or 17.3% 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
(6.0% or less) across a wider range of personnel groups in order to
allocate Human Resources costs to providing Full Service MEO Ports.
This is because a much wider range of personnel are involved in
functions necessary to offer, monitor and maintain Full Service MEO
Ports but the tasks necessary to do so are not a primary or full-time
function.
In total, the Exchange allocated 26.9% of its personnel costs to
providing 10Gb ULL and 1Gb ULL connectivity and 8.3% of its personnel
costs to providing Full Service MEO Ports, for a total allocation of
35.2% Human Resources expense to provide these specific connectivity
and port services. In turn, the Exchange allocated the remaining 64.8%
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 core services, including physical connections and Full Service MEO
Ports, but in different amounts. The Exchange believes it is reasonable
to allocate the identified portion of such expense because such expense
includes
[[Page 58425]]
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 62.1% of the Exchange's overall depreciation and
amortization expense to connectivity services (58.2% attributed to 10Gb
ULL physical connections and 3.9% to Full Service MEO Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 37.9%) 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 Full Service MEO 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 actual costs may be higher or lower. 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 may
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, we believe that it is appropriate for an exchange to
refresh and update information about its relevant costs and revenues in
seeking any future changes to fees, and the Exchange commits to do so.
Projected Revenue \130\
---------------------------------------------------------------------------
\130\ For purposes of calculating revenue for 10Gb ULL
connectivity, the Exchange used revenues for February 2023, the
first full month for which it provided dedicated 10Gb ULL
connectivity to MIAX Pearl Options and ceased operating a shared
10Gb ULL network with MIAX.
---------------------------------------------------------------------------
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 and port 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 will equal $11,567,509. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $17,496,000. The Exchange believes this
represents a modest profit of 34% when compared to the cost of
providing 10Gb ULL connectivity services, which could decrease over
time.\131\ The Exchange's Cost Analysis estimates the annual cost to
provide Full Service MEO Port services will equal $1,644,132. Based on
current Full Service MEO Port services usage, the Exchange would
generate annual revenue of approximately $1,644,000. The Exchange
believes this would result in a small negative margin after calculating
the cost of providing Full Service MEO Port services, which could
decrease further over time.\132\
---------------------------------------------------------------------------
\131\ 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 August 4, 2023).
\132\ Id.
---------------------------------------------------------------------------
Based on the above discussion, even if the Exchange earns the above
revenue or incrementally more or less, the proposed fees are fair and
reasonable because they will not result in excessive pricing that
deviates from that of other exchanges or a supra-competitive profit,
when comparing the total expense of the Exchange associated with
providing 10Gb ULL connectivity and Full Service MEO Port services
versus the total projected revenue of the Exchange associated with
network 10Gb ULL connectivity and Full Service MEO Port services.
The Exchange also notes that this the resultant profit margin
differs slightly
[[Page 58426]]
from the profit margins set forth in similar fee filings by its
affiliated markets. This is not atypical among exchanges and is due to
a number of factors that differ between these four markets, including:
different market models, market structures, and product offerings
(equities, options, price-time, pro-rata, simple, and complex);
different pricing models; different number of market participants and
connectivity subscribers; different maintenance and operations costs,
as described in the cost allocation methodology above; different
technical architecture (e.g., the number of matching engines per
exchange, i.e., the Exchange maintains 12 matching engines while MIAX
maintains 24 matching engines); and different maturity phase of the
Exchange and its affiliated markets (i.e., start-up versus growth
versus more mature). All of these factors contribute to a unique and
differing level of profit margin per exchange.
Further, the Exchange proposes to charge rates that are comparable
to, or lower than, similar fees for similar products charged by
competing exchanges. For example, for 10Gb ULL connectivity, the
Exchange proposes a lower fee than the fee charged by Nasdaq for its
comparable 10Gb Ultra fiber connection ($13,500 per month for the
Exchange vs. $15,000 per month for Nasdaq).\133\ NYSE American charges
even higher fees for its comparable 10GB LX LCN connection than the
Exchange's proposed fees ($13,500 for the Exchange vs. $22,000 per
month for NYSE American).\134\ 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 10Gb ULL connectivity on
the Exchange than its affiliated markets or vice versa).
---------------------------------------------------------------------------
\133\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\134\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------
* * * * *
The Exchange has operated at a cumulative net annual loss since it
launched operations in 2017.\135\ This is due to a number of factors,
one of which is choosing to forgo revenue by offering certain products,
such as low latency 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 does not believe it should now
be penalized for seeking to raise its fees as it now needs to upgrade
its technology and absorb increased costs. 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 Full Service MEO 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 Full Service MEO Ports.
---------------------------------------------------------------------------
\135\ The Exchange has incurred a cumulative loss of $83 million
since its inception in 2017 through full year 2022. See Exchange's
Form 1/A, Application for Registration or Exemption from
Registration as a National Securities Exchange, filed June 26, 2023,
available at <a href="https://www.sec.gov/Archives/edgar/vprr/2300/23007743.pdf">https://www.sec.gov/Archives/edgar/vprr/2300/23007743.pdf</a>.
---------------------------------------------------------------------------
The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
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 Full Service MEO Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Full Service MEO 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 Full Service MEO 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 connectivity clients or in
transaction activity, the Exchange could experience a net reduction in
revenue. 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 Exchange believes the Cost Analysis and
related projections in this filing demonstrate this fact.
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. 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 Exchange believes that
Commission Staff should also 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. Further, if Commission Staff is making
determinations as to appropriate profit margins in their approval of
exchange fees, the Exchange believes that the 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, as is reflected in the proposal, the Exchange continuously
and aggressively works to control its costs as a matter of good
business practice. A potential profit margin should not be evaluated
solely on its size; that assessment should also consider cost
management and whether the ultimate fee reflects the value of the
[[Page 58427]]
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 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.\136\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
---------------------------------------------------------------------------
\136\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
Full Service MEO Ports
The tiered pricing structure for Full Service MEO Ports has been in
effect since 2018.\137\ The Exchange now proposes a pricing structure
that is used by the Exchange's affiliates, MIAX and MIAX Emerald,
except with lower pricing for each tier for Full Service MEO Ports
(Bulk) and a flat fee for Full Service MEO Ports (Single). Members that
are frequently in the highest tier for Full Service MEO Ports consume
the most bandwidth and resources of the network. Specifically, as noted
above for 10Gb ULL connectivity, Market Makers who reach the highest
tier for Full Service MEO Ports (Bulk) account for greater than 84% of
ADV on the Exchange, while Market Makers that are typically in the
lowest Tier for Full Service MEO Ports, account for less than 14% of
ADV on the Exchange. The remaining 1% is accounted for by Market Makers
who are frequently in the middle Tier for Full Service MEO Ports
(Bulk).
---------------------------------------------------------------------------
\137\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------
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
during anticipated peak market conditions. The need to support 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.\138\ 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.
---------------------------------------------------------------------------
\138\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange further believes that the p
[…truncated; see source link]Indexed from Federal Register on August 25, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.