Notice2023-21933
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities 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
October 4, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 191 (Wednesday, October 4, 2023)</title>
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[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68736-68758]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21933]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98584; File No. SR-PEARL-2023-51]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Equities Fee Schedule To Modify Certain Connectivity and Port
Fees
September 28, 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 September 27, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the fee schedule (the
``Fee Schedule'') applicable to MIAX Pearl Equities, an equities
trading facility, to amend certain connectivity and port fees.\3\
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\3\ All references to the ``Exchange'' in this filing refer to
MIAX Pearl Equities. Any references to the options trading facility
of MIAX PEARL, LLC will specifically be referred to as ``MIAX Pearl
Options.''
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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 to amend fees for:
(1) the 1 gigabit (``Gb'') and 10Gb ultra-low latency (``ULL'') fiber
connections for Equity Members \4\ and non-Members; (2) the Financial
Information Exchange (``FIX'') Ports,\5\ and the MIAX Express Orders
Interface (``MEO'') Ports.\6\ The Exchange adopted connectivity and
port fees in September 2020,\7\ and has not changed those fees since
they were adopted. Since that time, the Exchange experienced ongoing
increases in expenses, particularly internal expenses.\8\ As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL
connectivity combined and $3,951,993 for providing FIX and MEO
Ports.\9\
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\4\ The term ``Equity Member'' means a Member authorized by the
Exchange to transact business on MIAX PEARL Equities. See Exchange
Rule 1901.
\5\ ``FIX Order Interface'' or ``FOI'' means the Financial
Information Exchange interface for certain order types as set forth
in Exchange Rule 2614. See the Definitions section of the Fee
Schedule.
\6\ Each MEO interface will have one Full Service Port (``FSP'')
and one Purge Port. ``Full Service Port'' or ``FSP'' means an MEO
port that supports all MEO order input message types. See the
Definitions section of the Fee Schedule.
\7\ See Securities Exchange Act Release No. 90651 (December 11,
2020), 85 FR 81971 (December 17, 2020) (SR-PEARL-2020-33).
\8\ For example, the New York Stock Exchange, Inc.'s (``NYSE'')
Secure Financial Transaction Infrastructure (``SFTI'') network,
which contributes to the Exchange's connectivity cost, increased its
fees by approximately 9% since 2021. Similarly, since 2021, the
Exchange, and its affiliates, experienced an increase in data center
costs of approximately 17% and an increase in hardware and software
costs of approximately 19%. These percentages are based on the
Exchange's actual 2021 and proposed 2023 budgets.
\9\ 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 Equities only and not MIAX Pearl
Options, the options trading facility.
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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity and port
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 1Gb connectivity, 10Gb ULL connectivity and FIX and MEO Ports
in order to recoup ongoing costs and increased expenses set forth below
in the Exchange's cost analysis. 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-
2022-61) (the ``Initial Proposal'').\10\ On February 23, 2023, the
Exchange withdrew the Initial Proposal and replaced it with a revised
proposal (SR-PEARL-2023-06) (the ``Second Proposal'').\11\ On April 20,
2023, the Exchange withdrew the Second Proposal and replaced it with a
revised proposal (SR-PEARL-2023-18) (the ``Third Proposal'').\12\ On
June 16, 2023, the Exchange withdrew the Third Proposal and replaced it
with a revised proposal (SR-PEARL-2023-28) (the ``Fourth
Proposal'').\13\ On August 8, 2023, the Exchange withdrew the Fourth
Proposal and replaced it with a revised proposal (SR-PEARL-2023-36)
(the ``Fifth Proposal'').\14\ On September 27, 2023, the Exchange
withdrew the Fifth Proposal and replaced it with this
[[Page 68737]]
further revised proposal (SR-PEARL-2023-51) (the ``Sixth Proposal'').
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\10\ See Securities Exchange Act Release No. 96631 (January 10,
2023), 88 FR 2671 (January 17, 2023) (SR-PEARL-2022-61).
\11\ See Securities Exchange Act Release No. 97077 (March 8,
2023), 88 FR 15746 (March 14, 2023) (SR-PEARL-2023-06).
\12\ See Securities Exchange Act Release No. 97417 (May 2,
2023), 88 FR 29730 (May 8, 2023) (SR-PEARL-2023-18).
\13\ 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. 97816 (June 28, 2023), 88 FR 42976 (July 5, 2023) (SR-PEARL-
2023-28).
\14\ See Securities Exchange Act Release No. 98170 (August 18,
2023), 88 FR 57982 (August 24, 2023) (SR-PEARL-2023-36).
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The Exchange previously included a cost analysis in the Initial
Proposal, Second, Third, Fourth, and Fifth 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
,\15\ and MIAX Emerald,\16\ together with MIAX and MIAX Pearl Options,
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, Fourth and Fifth Proposals, the fees themselves have not
changed since the Initial, Second, Third, Fourth or Fifth Proposals and
the Exchange still proposes fees that are intended to cover the
Exchange's cost of providing 1Gb and 10Gb ULL connectivity and FIX and
MEO Ports.
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\15\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
\16\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See
Exchange Rule 100.
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* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \17\ 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's 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.\18\ 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.\19\ 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'').\20\ 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.'' \21\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\22\ 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.'' \23\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\17\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\18\ Id.
\19\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\20\ 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).
\21\ Id. at page 2.
\22\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\23\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\24\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\24\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
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Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \25\ 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.'' \26\ 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.'' \27\
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\25\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (the ``Staff Guidance'').
\26\ Id.
\27\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \28\ and remanded for further proceedings consistent
with its opinion.\29\ 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.'' \30\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing
[[Page 68738]]
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.\31\ 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.'' \32\ 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.\33\
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\28\ 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.
\29\ 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.
\30\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\31\ 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'').
\32\ Id.
\33\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \34\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings to the new Revised Review Process, while allowing the
previously challenged fee filings, mostly submitted by incumbent
exchanges prior to 2019, to remain in effect and not subject to the
``record'' or ``review'' earlier intended by the Commission.
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\34\ See supra note 28, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\35\ 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 \36\ 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.\37\ These fees
remain in effect today.
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\35\ 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>.
\36\ 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.
\37\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\38\
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.
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\38\ For example, the options exchange affiliates of MIAX Pearl
Equities, MIAX, MIAX Pearl Options, and MIAX Emerald, have filed,
and subsequently withdrawn, various forms of connectivity and port
fee changes at least seven (7) times since August 2021. Each of the
proposals contained hundreds of cost and revenue disclosures never
previously disclosed by legacy exchanges in their access and market
data fee filings prior to 2019.
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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 \39\ and $80,383,000
[[Page 68739]]
for 2021.\40\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \41\ and $22,843,000 for
2021.\42\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \43\ and $44,800,000 for
2021.\44\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \45\ and $30,687,000 for
2021.\46\ 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.\47\ 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.'' \48\
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\39\ 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>.
\40\ 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>.
\41\ 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>.
\42\ 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>.
\43\ 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>.
\44\ 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>.
\45\ 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>.
\46\ 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>.
\47\ 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>.
\48\ 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 Exchanges
notes that this type of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and has the effect
of perpetuating fee and revenue advantages of legacy exchanges.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\49\ 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),\50\ 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. 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.
---------------------------------------------------------------------------
\49\ 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>.
\50\ See, e.g., Cboe Fee Schedule, Page 4, Affiliate Volume
Plan, available at <a href="https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf">https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf</a> (providing that if a market maker or its
affiliate receives a credit under Cboe's Volume Incentive Program
(``VIP''), the market maker will receive an access credit on their
BOE Bulk Ports corresponding to the VIP tier reached and the market
maker will receive a transaction fee credit on their sliding scale
market maker transaction fees) and NYSE American Options Fee
Schedule, Section III, E, Floor Broker Incentive and Rebate
Programs, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf">https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf</a> (providing
floor brokers the opportunity to prepay certain non-transaction fees
for the following calendar year by achieving certain amounts of
volume executed on NYSE American).
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content . . .'',\51\ 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,
MIAX Pearl Options has attempted to increase similar fees using a cost-
based justification numerous times, having submitted over six
filings.\52\ However, despite providing 100+ page filings describing in
extensive detail its costs associated with providing the services
described in the filings, Commission Staff continues to suspend such
filings, with the rationale that the Exchange has not provided
sufficient detail of its costs and without ever being precise about
what additional data points are required. The Commission Staff appears
to be interpreting the reasonableness standard set forth in Section
6(b)(4) of the Act \53\ in a manner that is not possible to achieve.
This essentially nullifies the cost-based approach for exchanges as a
legitimate alternative as laid out in the Staff Guidance. By refusing
to accept a reasonable cost-based argument to justify non-transaction
fees (in addition to refusing to accept a competition-based argument as
described above), or by failing to provide the detail required to
achieve that standard, the Commission Staff is effectively preventing
non-legacy exchanges from making any non-transaction fee changes, which
benefits the legacy exchanges and is anticompetitive to the non-legacy
exchanges. This does not meet the fairness standard under the Act and
is discriminatory.
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\51\ See supra note 25, at note 1.
\52\ See, e.g., 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).
\53\ 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,\54\ 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; \55\ or (c)
[[Page 68740]]
accept that certain competition-based arguments are applicable given
the linkage between non-transaction fees and transaction fees,
especially where non-transaction fees among exchanges are based upon
disparate standards of review, lack parity, and impede fair
competition. Considering the absence of any such framework or clarity,
the Exchange believes that the Commission does not have a reasonable
basis to deny the Exchange this change in fees, where the proposed
change would result in fees meaningfully lower than comparable fees at
competing exchanges and where the associated non-transaction revenue is
meaningfully lower than competing exchanges.
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\54\ 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.
\55\ 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>.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and 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 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 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.\56\
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\56\ 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.
---------------------------------------------------------------------------
* * * * *
1Gb and 10Gb ULL Connectivity Fee Change
Sections 2a) and b) of the Fee Schedule describe network
connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which
are charged to both Equity Members and non-Members for connectivity to
the Exchange's primary and secondary facilities. The Exchange offers
its Equity Members the ability to connect to the Exchange in order to
transmit orders to and receive information from the Exchange. Equity
Members can also choose to connect to the Exchange indirectly through
physical connectivity maintained by a third-party extranet. Extranet
physical connections may provide access to one or multiple Equity
Members on a single connection. The number of physical connections
assigned to each User \57\ as of May 31, 2023, ranges from one to
thirteen, depending on the scope and scale of the Equity Member's
trading activity on the Exchange as determined by the Equity Member,
including the Equity Member's determination of the need for redundant
connectivity. The Exchange notes that 40% of its Equity Members do not
maintain a physical connection directly with the Exchange in the
Primary Data Center (though many such Equity Members have connectivity
through a third-party provider) and another 46% have either one or two
physical ports to connect to the Exchange in the Primary Data Center.
Thus, only a limited number of Equity Members, 14%, maintain three or
more physical ports to connect to the Exchange in the Primary Data
Center.
---------------------------------------------------------------------------
\57\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Exchange Rule 2602. See Exchange Rule 1901.
---------------------------------------------------------------------------
In order to partially cover the continuous increase in aggregate
costs of providing physical connectivity to Equity Members and non-
Equity Members, as described below, the Exchange proposes to amend the
monthly connectivity fees as follows: (a) increase the 1Gb ULL
connection from $1,000 to $2,500; and (b) increase the 10Gb ULL
connection from $3,500 to $8,000.\58\
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\58\ The Exchange notes that while its proposed fee of $8,000
per 10Gb ULL connection is higher than MEMX's $6,000 monthly fee for
its xNet Physical Connection, MEMX does not offer any other physical
connectivity, such as a 1Gb connection, for a lower fee. See
Securities Exchange Act Release No. 95936 (September 27, 2022), 87
FR 59845 (October 3, 2022) (SR-MEMX-2022-26). See MEMX Fee Schedule,
Connectivity and Application Sessions, available at <a href="https://info.memxtrading.com/fee-schedule/">https://info.memxtrading.com/fee-schedule/</a> (last visited August 4, 2023).
---------------------------------------------------------------------------
FIX and MEO Ports
Similar to other exchanges, the Exchange offers its Equity Members
application sessions, also known as ports, for order entry and receipt
of trade execution reports and order messages. Equity Members can also
choose to connect to the Exchange indirectly through a session
maintained by a third-party service bureau. Service bureau sessions may
provide access to one or multiple Equity Members on a single session.
The number of sessions assigned to each User as of April 18, 2023,
ranges from one to more than 100, depending on the scope and scale of
the Equity Member's trading activity on the Exchange (either through a
direct connection or through a service bureau) as determined by the
Equity Member. For example, by using multiple sessions, Equity Members
can segregate order flow from different internal desks, business lines,
or customers. The Exchange does not impose any minimum or maximum
requirements for how many application sessions an Equity Member or
service bureau can maintain, and does not propose to impose any minimum
or maximum session requirements for its Equity Members or their service
bureaus.
Section 2)d), Port Fees, of the Fee Schedule describes fees for
access and services used by Equity Members and non-Members. The
Exchange provides the following types of ports: (i) FIX Ports, which
allow Equity Members to send orders and other messages using the FIX
protocol; and (ii) MEO Ports, which allow Equity Members order entry
capabilities to all Exchange matching engines.
The Exchange operates a primary and secondary data center as well
as a disaster recovery center. Each Port provides access to all
Exchange data centers for a single fee. The Exchange currently provides
the first twenty-five (25) FIX and MEO Ports free of charge and
absorbed all associated costs since the launch of MIAX Pearl Equities.
The Exchange charges the following separate monthly fees for FIX and
MEO Ports: $450 for ports 26--50, $400 for ports 51--75, $350 for ports
76--100, and $300 for ports 101 and higher. The Exchange now proposes
to provide the first five (5) FIX or MEO Ports free of charge, then
charge a flat rate of $450 per port for port six (6) and above.\59\
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\59\ The Exchange notes that the proposed fee of $450 per port
equals the amount charged by MEMX for MEMX's application sessions
(order entry and drop copy ports), but MEMX does not offer any ports
free of charge. See MEMX Fee Schedule, Connectivity and Application
Sessions, available at <a href="https://info.memxtrading.com/fee-schedule/">https://info.memxtrading.com/fee-schedule/</a>
(last visited August 4, 2023). See Securities Exchange Act Release
No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-
MEMX-2022-26). Unlike MEMX and other exchanges, the Exchange also
continues to provide FXD Ports (i.e., Drop Copy Ports) free of
charge.
---------------------------------------------------------------------------
Implementation
The proposed fee changes are immediately effective.
[[Page 68741]]
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \60\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \61\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Equity 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 \62\
in that they are designed to promote just and equitable principles of
trade, remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general protect
investors and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\60\ 15 U.S.C. 78f(b).
\61\ 15 U.S.C. 78f(b)(4).
\62\ 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 Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \63\ and
the Staff Guidance,\64\ 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.
---------------------------------------------------------------------------
\63\ See supra note 24.
\64\ See supra note 25.
---------------------------------------------------------------------------
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.''
\65\ 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.'' \66\ 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.'' \67\
---------------------------------------------------------------------------
\65\ Id.
\66\ Id.
\67\ 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 begin to recover its costs to provide
dedicated access via 1Gb and 10Gb ULL connectivity as well as FIX and
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 Equity 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,
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 September 2020 and adopted its
initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL
connectivity fees set at $3,500, and provided the first twenty-five
(25) FIX and MEO Ports for free.\68\ As a new exchange entrant, the
Exchange chose to offer such services at a discounted rate or 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.\69\
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\68\ See supra note 7.
\69\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX. . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf</a> (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
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[[Page 68742]]
The Exchange has not amended any of its non-transaction fees since
its launch in September 2022. 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.
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'. . . .'' \70\
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\70\ 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.'' \71\
---------------------------------------------------------------------------
\71\ 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.' '' \72\ 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.'' \73\ 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.'' \74\ 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.'' \75\
---------------------------------------------------------------------------
\72\ 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.'').
\73\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\74\ Id.
\75\ See Staff Guidance, supra note 25.
---------------------------------------------------------------------------
The Exchange believes the competing exchanges' 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 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 exchanges with similar market share. Each of
the connectivity or port rates in place at competing exchanges were
filed with the Commission for immediate effectiveness and remain in
place today.
------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX Pearl Equities (as 1Gb ULL $2,500.
proposed) (market share of connection. $8,000.
1.74% for the month of August 10Gb ULL
2023 \a\. connection.
FIX and MEO Ports 1-5 ports: FREE; 6
ports or more: $450
per port.
FXD Ports (i.e., FREE.
Drop Copy Ports.
MEMX \b\ (market share of 1Gb connection... Not available.
3.04% for the month of August xNet Physical $6,000 per
2023) \c\. connection. connection.
Order Entry Ports $450 per port.
Drop Copy Ports.. $450 per port.
NASDAQ PSX LLC (``PSX'') \d\ 1Gb connection... $2,500 per connection
(market share of 0.32% for 10Gb connection.. (plus $1,500
the month of August 2023) \e\. installation fee).
$7,500 per connection
(plus $1,500
installation fee).
Order Entry Ports $400 per port.
Drop Copy Ports.. $400 per port.
NASDAQ BX LLC (``BX'') \f\ 1Gb Ultra $2,500 per connection
(market share of 0.37% for connection. (plus $1,500
the month of August 2023) \g\. 10Gb Ultra installation fee).
connection. $15,000 (plus $1,500
installation fee).
Order Entry Ports $500 per port.
Drop Copy Ports.. $500 per port.
------------------------------------------------------------------------
\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 MEMX Fee Schedule, Connectivity and Application Sessions,
available at <a href="https://info.memxtrading.com/fee-schedule/">https://info.memxtrading.com/fee-schedule/</a>.
\c\ See supra note a.
[[Page 68743]]
\d\ See PSX Pricing Schedule, available at <a href="https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing">https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing</a>; and PSX Rules, General 8: Connectivity,
Section 2, Direct Connectivity.
\e\ See supra note a.
\f\ See BX Pricing Schedule, available at <a href="https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing">https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing</a>; and BX Rules, General 8: Connectivity,
Section 2, Direct Connectivity.
\g\ See supra note a.
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available equity
exchanges. Market participants may choose to become a member of one or
more equities 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 of MIAX Pearl Options terminated their
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes by MIAX Pearl Options.
It is not a requirement for market participants to become members
of all equities exchanges; in fact, certain market participants conduct
an equities business as a member of only one market.\76\ A very small
number of market participants choose to become a member of all sixteen
(16) equities exchanges. Most firms that actively trade on equities
markets are not currently Equity Members of the Exchange and do not
purchase connectivity or port services at the Exchange. Connectivity
and ports are only available to Equity Members or service bureaus, and
only an Equity Member may utilize a port.\77\
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\76\ 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.''
\77\ Service Bureaus may obtain ports on behalf of Equity
Members.
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BOX 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.\78\ MIAX Pearl Equities currently has 50 Equity
Members. Also, MEMX noted in a January 2022 filing that it had only 66
members, and, based on publicly available information regarding a
sample of the Exchange's competitors, NYSE has 142 members, Cboe BZX
has 140 members, and Investors Exchange LLC (``IEX'') has 133
members.\79\ MIAX Pearl Options 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 believes
that significant differences in membership numbers describes by the
Exchange, BOX, and MEMX demonstrate that firms can, and do, select
which exchanges they wish to access, and, accordingly, exchanges must
take competitive considerations into account when setting fees for such
access. The Exchange also notes that no firm is an Equity Member of the
Exchange only. The above data evidences that a broker-dealer need not
have direct connectivity to all exchanges, let alone the Exchange and
its affiliates, and broker-dealers may elect to do so based on their
own business decisions and need to directly access each exchange's
liquidity pool.
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\78\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17).
\79\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
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Not only is there not an actual regulatory requirement to connect
to every equities 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 exchanges discussed above. 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, 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 equities securities; (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 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 an Equity Member
at--or establish connectivity to--the Exchange.\80\ If the Exchange is
not at the national best bid and offer (``NBBO''),\81\ 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.\82\
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\80\ See 17 CFR 242.611.
\81\ See Exchange Rule 1901.
\82\ Equity Members may elect to not route their orders by
utilizing the Do Not Route or Post Only order type instructions. See
Exchange Rule 2614(c)(1) and (2).
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With respect to the submission of orders, Equity 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 Equity 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,\83\ or request sponsored access \84\ through a member of an
exchange in order to submit a trade directly to an equities
exchange.\85\ A market participant may
[[Page 68744]]
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.
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\83\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be an Equity Member. Some Equity Members utilize a
Service Bureau for connectivity and that Service Bureau may not be
an Equity Member. Some market participants utilize a Service Bureau
who is an Equity Member to submit orders.
\84\ Sponsored Access is an arrangement whereby an Equity Member
permits its customers to enter orders into an exchange's system that
bypass the Equity Member's trading system and are routed directly to
the Exchange, including routing through a service bureau or other
third-party technology provider.
\85\ This may include utilizing a floor broker and submitting
the trade to an equities trading floor.
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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-Equity 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).\86\ 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.\87\ 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 equities markets. Accordingly,
the Exchange believes that the proposed fees are fair and reasonable
and constrained by competitive forces.
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\86\ 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).
\87\ 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 Equity Members and secure
access to its environment. To properly regulate its Equity 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 Equity Members
secure access to communicate with the Exchange and exercise trading
rights. When a market participant elects to be an Equity Member, and is
approved for membership by the Exchange, the Equity 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 an Equity Member of the Exchange, or, if it is an
Equity Member, to purchase connectivity beyond the one connection that
is necessary to quote or submit orders on the Exchange. Equity Members
may freely choose to rely on one or many connections, depending on
their business model. 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 by MIAX Pearl Options. If a market
participant chooses to become an Equity Member, they may then choose to
purchase connectivity beyond the one connection that is necessary to
quote or submit orders on the Exchange. Members may freely choose to
rely on one or many connections, depending on their business model.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity 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 Equity Members--both generally and in relation to other
Equity 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 Equity Members and competition among Equity
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,\88\ and Rule 19b-4 thereunder,\89\ with respect to the
types of information exchanges should provide when filing fee changes,
and Section 6(b) of the Act,\90\ which requires, among other things,
that exchange fees be reasonable and equitably allocated,\91\ not
designed to permit unfair discrimination,\92\ and that they not impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\93\ 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.\94\ 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.
---------------------------------------------------------------------------
\88\ 15 U.S.C. 78s(b)(1).
\89\ 17 CFR 240.19b-4.
\90\ 15 U.S.C. 78f(b).
\91\ 15 U.S.C. 78f(b)(4).
\92\ 15 U.S.C. 78f(b)(5).
\93\ 15 U.S.C. 78f(b)(8).
\94\ See Staff Guidance, supra note 25.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 1Gb and 10Gb ULL connectivity to
the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL
connectivity and $604,851 for 1Gb connectivity) (or approximately
$1,527,637 per month for combined connectivity costs, rounded to the
nearest dollar when dividing the combined annual cost by 12 months).
The Exchange also recently calculated its aggregate annual costs for
providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX
Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per
month for combined FIX and MEO Port costs, rounded to the nearest
dollar when dividing the combined annual cost by 12 months). In order
to cover a portion of the aggregate costs of providing connectivity to
its Users (both Equity Members and non-Equity Members \95\)
[[Page 68745]]
going forward, as described below, the Exchange proposes to modify its
Fee Schedule as described above.
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\95\ Types of market participants that obtain connectivity
services from the Exchange but are not Equity 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 Equity Members. Extranets offer physical connectivity
services to Equity Members and non-Equity Members.
---------------------------------------------------------------------------
In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\96\ 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'').
---------------------------------------------------------------------------
\96\ 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,\97\ 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 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.
---------------------------------------------------------------------------
\97\ For example, MIAX Pearl Equities maintains 24 matching
engines, MIAX Pearl Options maintains 12 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 (60.0% of total expense
amount allocated to 10Gb ULL connectivity), with smaller allocations to
FIX Ports (1.2%) and MEO Ports (3.8%), and the remainder to the
provision of other connectivity, other ports, transaction execution,
membership services and market data services (35%). 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
Equity Members and parties that they sponsor to participate directly on
the Exchange may submit orders to the Exchange; many Equity 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
[[Page 68746]]
the allocation of exchanges' interdependent costs, the Exchange is left
with its best efforts 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 1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports,
is $1,856,970, 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
Options 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, all of which are discussed in more detail below. MIAX
PEARL, LLC confirms that there is no double counting of expenses
between the options and equities platform of MIAX PEARL, LLC; the
greater expense amounts of MIAX PEARL, LLC (relative to its affiliated
exchanges, MIAX and MIAX Emerald) is solely attributed to the unique
factors of MIAX PEARL, LLC discussed above.
Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
1Gb and 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 47.6% of its overall Human Resources cost to offering
physical 1Gb and 10Gb ULL connectivity).
10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost Percent of all
\h\ \i\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $5,936,741 $494,728 46.1
Connectivity (external fees, cabling, switches, etc.)........... 69,451 5,788 60.0
Internet Services and External Market Data...................... 1,818,808 151,567 72.5
Data Center..................................................... 1,052,797 87,733 60.0
Hardware and Software Maintenance and Licenses.................. 642,112 53,509 58.0
Depreciation.................................................... 3,448,206 287,351 73.6
Allocated Shared Expenses....................................... 4,758,684 396,557 48.6
-----------------------------------------------
Total....................................................... 17,726,799 1,477,233 54
----------------------------------------------------------------------------------------------------------------
\h\ The Annual Cost includes figures rounded to the nearest dollar.
\i\ 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.
1Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost Percent of all
\j\ \k\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $202,566 $16,880 1.6
Connectivity (external fees, cabling, switches, etc.)........... 2,370 197 2.0
Internet Services and External Market Data...................... 62,059 5,172 2.5
Data Center..................................................... 35,922 2,993 2.0
Hardware and Software Maintenance and Licenses.................. 21,909 1,826 2.0
Depreciation.................................................... 117,655 9,805 2.5
Allocated Shared Expenses....................................... 162,370 13,531 1.7
-----------------------------------------------
Total....................................................... 604,851 50,404 1.8
----------------------------------------------------------------------------------------------------------------
\j\ See supra note h.
\k\ See supra note i.
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 1Gb and
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
cost drivers differ when compared to the same cost drivers described by
the Exchange's affiliated
[[Page 68747]]
markets in their similar proposed fee changes for connectivity and
ports. This is because MIAX Pearl Equities' cost allocation methodology
utilizes the actual projected costs of MIAX Pearl Equities (which are
specific to MIAX Pearl Equities, and are independent of the costs
projected and utilized by MIAX Pearl Equities' 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
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
weighted average percentages of 58% for 10Gb ULL connectivity and 2.0%
for 1Gb connectivity 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' time to 10Gb ULL connectivity (less than
37%). This other group of personnel with a smaller allocation of Human
Resources costs also have a direct nexus to 10Gb ULL connectivity,
whether it is a sales person selling a connection, finance personnel
billing for connectivity or providing budget analysis, or information
security ensuring that such connectivity is secure and adequately
defended from an outside intrusion.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of 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 58% for 10Gb ULL connectivity and 2.0% for 1Gb ULL
connectivity 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.
Lastly, the Exchange notes that the above allocation for 10Gb ULL
connectivity is greater than its affiliate options exchanges as MIAX
Pearl Equities allocated 46.1% of its Human Resources expense towards
10Gb ULL connectivity, while MIAX, MIAX Pearl Options and MIAX Emerald
allocated 25%, 26.3% and 28%, respectively, to the same category of
expense. This difference is due to meaningfully more current and
anticipated business and technology initiatives dedicated to MIAX Pearl
Equities than its affiliate options exchanges at the time of this
filing. These initiatives include: enhancements to routing options,
expanding the available order types, adding direct market data
connectivity to competing exchanges, and adopting additional risk
controls.\98\ MIAX Pearl
[[Page 68748]]
Equities is a relatively new market (launched in September of 2020),
and, as a result, more personnel are allocated to work on various
business initiatives and enhancements to help the market grow, add new
functionality, and expand its product offerings. These technology
changes directly impact the Exchange's interface specifications and
matching engine which, in turn, impacts connectivity by requiring
additional coding, testing, and other updates necessary to accommodate
the above initiatives.
---------------------------------------------------------------------------
\98\ 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).
---------------------------------------------------------------------------
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. equities 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 1Gb and 10Gb ULL connectivity. Specifically, the Exchange
utilizes connectivity providers to connect to other national securities
exchanges, the NASDAQ UTP and CTA/CQ Plans. 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 the NASDAQ UTP
and CTA/CQ Plans 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 provider expense and recoups that
expense, in part, by charging for 1Gb and 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 and consume market data from other markets.
The Exchange included external market data fees to the provision of
physical connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., limit order price protection, trading collars).\99\
Thus, as market data from other exchanges is consumed at the matching
engine level, (to which physical connectivity provides access to) in
order to validate orders before additional entering the matching engine
or being executed, the Exchange believes it is reasonable to allocate
an amount of such costs to 1Gb ULL and 10Gb ULL connectivity.
---------------------------------------------------------------------------
\99\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds purchased by
MIAX Pearl Equities compared to MIAX Pearl Options. For options
market data, MIAX Pearl Options primarily relies on data purchased
from OPRA. For equities market data, MIAX Pearl Equities does not
solely rely on data purchased from the consolidated tape plans
(e.g., Nasdaq UTP, CTA, and CQ plans), but rather purchases multiple
proprietary market data feeds from other equities exchanges. See,
e.g., Exchange Rule 2613 (setting forth the data feeds MIAX Pearl
Equities subscribes to for each equities exchange and trading
center).
---------------------------------------------------------------------------
The Exchange relies on content service providers for data feeds for
the entire U.S. equities 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 Nasdaq UTP, CTA and CQ Plans, as
well as from other exchanges and market data providers. The Exchange
understands that these service providers provide services to most, if
not all, of the other U.S. exchanges and other market participants.
Market data provided these service providers and competing exchanges is
critical to the Exchange's daily operations and performance of its
System Networks to which market participants connect to via 1Gb ULL and
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 1Gb ULL and 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 markets, the
overall dollar amount allocated to the Exchange under the initial step
of the 2023 budget process is lower than its affiliated markets.
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
[[Page 68749]]
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 (62%) to physical 1Gb and 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.
Lastly, MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl
Equities allocated 61.9%, 60.60%, 60.60% and 60%, respectively, to the
Data Center cost driver. However, MIAX Pearl Equities was allocated a
larger dollar amount under the first step of the 2023 budget process.
This resulted in MIAX Pearl Equities allocating a larger dollar amount
to its Data Center cost driver than its affiliated options markets,
despite nearly identical percentage allocations. The dollar amount of
MIAX Pearl Equities' Data Center cost driver is higher than its
affiliated options 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). As described herein, MIAX Pearl Equities connects
directly to multiple individual equities exchanges for trading and
market data. This, in turn, requires additional hardware and software
requiring an increased data center footprint. MIAX Pearl Equities also
maintains an additional gateway to support market participant's access
demands and maintains 24 matching engines, double the number of
matching engines on MIAX Emerald and MIAX Pearl Options.\100\ The
additional gateway coupled with the higher number of matching engines
results in higher data center costs.
---------------------------------------------------------------------------
\100\ See supra note 97. MIAX Pearl Options also provides an
additional gateway but only maintains 12 matching engines. MIAX and
MIAX Emerald do not provide an additional gateway and maintain 24
and 12 matching engines, respectively.
---------------------------------------------------------------------------
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.\101\ The Exchange notes that
this allocation is greater than MIAX and MIAX Emerald options exchanges
as MIAX Pearl Equities allocated 58% 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 difference in allocation is because MIAX
Pearl Equities maintains software licenses that are unique to its
trading platform and used only for the trading of equity securities.
The cost for these licenses cannot be shared with MIAX Pearl Equities'
affiliated options markets because each of those platforms trade only
options, not equities. MIAX Pearl Equities' affiliates are able to
share the cost of many of their software licenses among the multiple
options platforms (thus lowering the cost to each individual options
platform), whereas MIAX Pearl Equities cannot share such cost and,
therefore, bears the entire cost. Also, MIAX Pearl Options allocated a
higher percentage of the same category of expense (58.6%) towards its
Hardware and Software Maintenance and License expense for 10Gb ULL
connectivity, which MIAX Pearl Options explains in its own proposal to
amend its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------
\101\ This allocation may be greater than the Exchange's
affiliated markets, specifically MIAX and MIAX Emerald, because,
unlike MIAX and MIAX Emerald, MIAX Pearl Equities and MIAX Pearl
Options both maintain an additional gateway to accommodate their
Members' and Equity Members' access and connectivity needs. This
added gateway contributes to the difference in allocation
percentages between MIAX Pearl Equities and MIAX Pearl Options and
MIAX and MIAX Emerald.
---------------------------------------------------------------------------
Depreciation
All physical assets, software, and hardware used to provide 1Gb ULL
and 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 73.6% of its allocated depreciation
costs to providing physical 10Gb ULL connectivity and 2.5% of all
depreciation costs to providing 1Gb 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.
Lastly, the Exchange notes that this allocation is greater than its
affiliate options exchanges as MIAX Pearl Equities allocated 73.6% of
its Depreciation expense towards 10Gb ULL connectivity, while MIAX,
MIAX Pearl Options and MIAX Emerald allocated 61.6%, 58.2% and 63.8%,
respectively, to the same category of expense. This is due to MIAX
Pearl Equities being a newer market and having newer physical assets
and software subject to depreciation than its affiliate options
exchanges. The Exchange's affiliate options exchanges are older markets
that have more software and equipment that have been fully depreciated
when compared to the newer software and hardware currently being
depreciated by MIAX Pearl Equities at higher rates.
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.\102\
These
[[Page 68750]]
general shared expenses are incurred by the Exchange's parent company,
MIH, as a direct result of operating the Exchange and its affiliated
markets.
---------------------------------------------------------------------------
\102\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. See Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26). 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.
Again, a portion of all shared expenses were allocated to the
Exchange (and its affiliated markets) which, in turn, allocated a
portion of that overall allocation to all physical connectivity on the
Exchange. The Exchange then allocated 50% of the portion allocated to
physical connectivity to 10Gb ULL connectivity. The Exchange believes
this allocation percentage is reasonable because, while the overall
dollar amount may be higher than other cost drivers, the 50% is based
on and in line with the percentage allocations of each of the
Exchange's other cost drivers. The percentage allocated to 10Gb ULL
connectivity also reflects its importance to the Exchange's strategy
and necessity towards the nature of the Exchange's overall operations,
which is to provide a resilient, highly deterministic trading system
that relies on faster 10Gb ULL connectivity than the Exchange's
competitors to maintain premium performance. This allocation reflects
the Exchange's focus on providing and maintaining high performance
network connectivity, of which 10Gb ULL connectivity is a main
contributor. The Exchange differentiates itself by offering a
``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which system networks can support access for multiple
competing market-makers having affirmative obligations to continuously
quote over 11,000 symbols, and the capacity to handle approximately
8,000,000,000 orders in a month. The ``premium-product'' network
experience enables users of 10Gb ULL connections to receive the network
monitoring and reporting services for those approximately 11,000
symbols available for trading. These value add services are part of the
Exchange's strategy for offering a high performance trading system,
which utilizes 10Gb ULL connectivity.
The Exchange notes that the 50% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for MEO and FIX 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), FIX and MEO Ports do
not require as many broad or indirect resources as other core services.
* * * * *
Approximate Cost Per 1Gb ULL and 10Gb ULL Connection Per Month
After determining the approximate allocated monthly cost related to
10Gb connectivity, the, total monthly cost for 10Gb ULL connectivity of
$1,477,233 was divided by the number of physical 10Gb ULL connections
the Exchange maintained at the time that proposed pricing was
determined (90), to arrive at a cost of approximately $16,414 per
month, per physical 10Gb ULL connection. The total monthly cost for 1Gb
connectivity of $50,404 was divided by the number of physical 1Gb
connections the Exchange maintained at the time that proposed pricing
was determined (8), to arrive at a cost of approximately $6,301 per
month, per physical 1Gb 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 1Gb ULL and 10Gb ULL connections.
* * * * *
Costs Related to Offering FIX and MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering FIX and 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 22.4% of its overall Human Resources cost to
offering FIX and MEO Ports).
FIX Ports
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost Percent of all
\l\ \m\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $665,726 $55,476 5.2
Connectivity (external fees, cabling, switches, etc.)........... 535 45 0.5
Internet Services and External Market Data...................... 11,574 965 0.5
Data Center..................................................... 20,262 1,689 1.2
Hardware and Software Maintenance and Licenses.................. 5,108 426 0.5
Depreciation.................................................... 92,114 7,676 2.0
Allocated Shared Expenses....................................... 116,679 9,723 1.2
-----------------------------------------------
Total....................................................... 911,998 76,000 2.8
----------------------------------------------------------------------------------------------------------------
\l\ See supra note h (describing rounding of Annual Costs).
[[Page 68751]]
\m\ See supra note i (describing rounding of Monthly Costs based on annual costs).
MEO Ports
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost Percent of all
\n\ \o\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $2,219,088 $184,924 17.2
Connectivity (external fees, cabling, switches, etc.)........... 1,782 149 1.5
Internet Services and External Market Data...................... 38,582 3,215 1.5
Data Center..................................................... 67,538 5,628 3.8
Hardware and Software Maintenance and Licenses.................. 17,026 1,419 1.5
Depreciation.................................................... 307,048 25,587 6.6
Allocated Shared Expenses....................................... 388,931 32,411 4.0
Total....................................................... 3,039,995 253,333 9.3
----------------------------------------------------------------------------------------------------------------
\n\ See supra note h (describing rounding of Annual Costs). The Exchange notes that costs to provide MEO Ports
are higher than the Exchange's costs to provide FIX Ports because it is more expensive to maintain and support
the MEO network due to its high performance capabilities and supporting infrastructure (including employee
support). The MEO interface is a customizable binary interface that the Exchange developed in-house and
maintains on its own. The FIX interface is the industry standard for simple order entry, which requires less
development, maintenance, and support than the MEO interface. The MEO interface provides best-in-class system
throughput and capacity. Users of MEO Ports, which are primarily Equity Market Makers, consume the most
bandwidth and resources of the network via MEO Ports. 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, resulting in greater cost to provide and maintain MEO ports.
\o\ See supra note i (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 FIX and 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 FIX and MEO Ports, the Exchange calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing FIX and 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 FIX and 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 FIX and MEO Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing FIX
and MEO Ports: Business Systems Development, Trading Systems
Development, Systems Operations and Network Monitoring, Network and
Data Center Operations, Listings, Trading Operations, and Project
Management. The Exchange notes that senior level executives were
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 related to providing FIX and 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.
Lastly, the Exchange notes that the Human Resource allocation for
MEO Ports is greater than its Human Resource allocation for FIX Ports
as MIAX Pearl Equities allocated 5.2% of its Human Resource expense
towards FIX Ports and 17.2% of its Human Resource expense towards MEO
Ports. This is because the MEO interface is a customized binary
interface that the Exchange developed in-house and maintains on its
own. The FIX interface is the industry standard for simple order entry
which requires less development, maintenance, and support than the MEO
interface. The MEO interface is performance oriented and designed to
meet the needs of more latency sensitive Equity Members. Due to the in-
house development of the MEO interface, the Exchange was required to
expend more internal personnel to support the MEO interface than the
FIX interface. Because of the materially higher cost associated with
maintaining and supporting MEO Ports versus FIX Ports, the Exchange
allocates a materially higher percentage of Human Resource expense to
MEO Ports versus FIX Ports.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges, 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 FIX and 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,
[[Page 68752]]
including other exchanges, to receive and consume market data from
other markets. The Exchange includes external market data fees to the
provision of FIX and MEO Ports as such market data is also necessary
here (in addition to physical connectivity) to offer certain services
related to such ports, such as validating orders on entry against the
national best bid and national best offer and checking for other
conditions (e.g., whether a symbol is halted or subject to a short sale
circuit breaker).\103\ Thus, as market data from other exchanges is
consumed at the 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
FIX and MEO Ports.
---------------------------------------------------------------------------
\103\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds the Exchange
purchases for its options and equities trading platforms. MIAX Pearl
Options primarily relies on data purchased from OPRA. MIAX Pearl
Equities does not solely rely on data purchased from the
consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ plans), but
rather purchases multiple proprietary market data feeds from other
equities exchanges. See, e.g., Exchange Rule 2613 (setting forth the
data feeds the Exchange subscribes to for each equities exchange and
trading center). The Exchange separately notes that MEMX separately
allocated 7.5% of its external market data costs to providing
physical connectivity. See Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26).
---------------------------------------------------------------------------
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
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.
Depreciation
The vast majority of the software the Exchange uses to provide FIX
and 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 FIX and 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 8.6% of
all depreciation costs to providing FIX and 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 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.
Lastly, the Exchange notes that the Depreciation allocation for MEO
Ports is greater than the Depreciation allocation for FIX Ports as MIAX
Pearl Equities allocated 2.00% of its Depreciation expense towards FIX
Ports and 6.60% of its Depreciation expense towards MEO Ports. As
discussed above, this is because the MEO interface is a customized
binary interface that the Exchange developed in-house and maintains on
its own. The FIX interface is the industry standard for simple order
entry which requires less development, maintenance, and support than
the MEO interface. The Exchange maintains more dedicated hardware per
port for the MEO interface compared to the FIX interface; MEO Ports sit
on their own core server, whereas for the FIX interface, three (3) to
five (5) connections may go onto a single server. As a result, the MEO
interface is supported by more dedicated in-house hardware and software
than the FIX interface that is subject to depreciation. Thus, there is
a greater amount of equipment supporting the MEO interface than the FIX
interface, resulting in higher depreciation costs than the FIX
interface.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall FIX and 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 20% of the overall cost for directors was allocated to
providing FIX and MEO Ports. The Exchange notes that the 5.2%
allocation of general shared expenses for FIX and 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 FIX and MEO Ports have several areas where certain tangible
costs are heavily weighted towards providing such service (e.g., Data
Centers, as described above), 1Gb and 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 the Allocated Shared Expense
allocation for MEO Ports is greater than the same allocation for FIX
Ports as MIAX Pearl Equities allocated 1.20% of its Allocated Shared
Expense towards FIX Ports and 4.00% of its Allocated Shared Expense
towards MEO Ports. As discussed above, this is because the MEO
interface is a customized binary interface that the Exchange developed
in-house and maintains on its own. The FIX interface is the industry
standard for simple order entry which requires less development,
maintenance, and support than the MEO interface. The MEO interface is
performance oriented and designed to meet the needs of more latency
sensitive Equity Members. This required more internal personnel and
resources to support than the FIX interface. Because of the materially
higher cost associated with maintaining and supporting MEO Ports versus
FIX Ports, the Exchange allocates a materially higher percentage of
Allocated Shared expense to MEO Ports versus FIX Ports, which is a less
complex, standardized solution.
* * * * *
[[Page 68753]]
Approximate Cost Per FIX and MEO Port per Month
The total monthly cost allocated to FIX Ports of $76,000 was
divided by the number of chargeable FIX Ports the Exchange maintained
at the time that proposed pricing was determined (142), to arrive at a
cost of approximately $535 per month, per FIX Port (rounded to the
nearest dollar when dividing the approximate monthly cost by the number
of FIX Ports). The total monthly cost allocated to MEO Ports of
$253,333 was divided by the number of chargeable MEO Ports the Exchange
maintained at the time that proposed pricing was determined (336), to
arrive at a cost of approximately $754 per month, per MEO Port (rounded
to the nearest dollar when dividing the approximate monthly cost by the
number of MEO Ports).
* * * * *
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 FIX and 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 (60%) to 1Gb and 10Gb ULL connectivity given
their focus on functions necessary to provide physical connections. The
salaries of those same personnel were allocated only 25% to FIX and MEO
Ports and the remaining 15% was allocated to transactions and market
data. The Exchange did not allocate any other Human Resources expense
for providing physical connections to any other employee group, outside
of a smaller allocation of 37% for 1Gb and 10Gb ULL connectivity 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 (less than 21%) across a
wider range of personnel groups in order to allocate Human Resources
costs to providing FIX and MEO Ports. This is because a much wider
range of personnel are involved in functions necessary to offer,
monitor and maintain FIX and MEO Ports but the tasks necessary to do so
are not a primary or full-time function.
In total, the Exchange allocated 47.6% of its personnel costs to
providing physical connections and 22.4% of its personnel costs to
providing FIX and MEO Ports, for a total allocation of 70% Human
Resources expense to provide these specific connectivity services. In
turn, the Exchange allocated the remaining 30% of its Human Resources
expense to membership (less than 1%) and transactions and market data
(9.5%). Thus, again, the Exchange's allocations of cost across core
services were based on real costs of operating the Exchange and were
not double-counted across the core services or their associated revenue
streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and FIX and MEO
Ports, but in different amounts. The Exchange believes it is reasonable
to allocate the identified portion of such expense because such expense
includes the actual cost of the computer equipment, such as dedicated
servers, computers, laptops, monitors, information security appliances
and storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network. Without this equipment, the Exchange would not be able to
operate the network and provide connectivity services to its Equity
Members and non-Equity 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 85% of the Exchange's overall depreciation and
amortization expense to connectivity services (76.185% attributed to
1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports).
The Exchange allocated the remaining depreciation and amortization
expense (approximately 15%) toward the cost of providing transaction
services, membership 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 FIX and 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, or decrease fees in the event that revenue or
the mark-up materially exceeds our current projections. In the event
that the Exchange determines to propose a fee change, the results of a
timely review, including an updated cost estimate, will be included in
the rule filing proposing the fee change. More generally, the Exchange
believes that it is appropriate for an exchange to refresh and update
information about its relevant costs and revenues in seeking any future
changes to fees, and the Exchange commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services;
[[Page 68754]]
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.
<bullet> The Exchange's Cost Analysis estimates the annual cost to
provide 10Gb ULL connectivity services will equal $17,726,799. Based on
current 10Gb ULL connectivity services usage, the Exchange would
generate annual revenue of approximately $9,144,000. This represents a
negative margin when compared to the cost of providing 10Gb ULL
connectivity services, which will decrease over time.\104\
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\104\ 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).
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<bullet> The Exchange's Cost Analysis estimates the annual cost to
provide 1Gb connectivity services will equal $604,851. Based on current
1Gb connectivity services usage, the Exchange would generate annual
revenue of approximately $312,000. This represents a negative margin
when compared to the cost of providing 1Gb connectivity services, which
will decrease over time.\105\
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\105\ Id.
---------------------------------------------------------------------------
<bullet> The Exchange's Cost Analysis estimates the annual cost to
provide FIX Port services will equal $911,998. Based on current FIX
Port services usage, the Exchange would generate annual revenue of
approximately $388,800. This represents a negative margin when compared
to the cost of providing FIX Port services, which will decrease over
time.\106\
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\106\ Id.
---------------------------------------------------------------------------
<bullet> The Exchange's Cost Analysis estimates the annual cost to
provide MEO Port services will equal $3,039,995. Based on current MEO
Port services usage, the Exchange would generate annual revenue of
approximately $1,296,000. This represents a negative margin when
compared to the cost of providing MEO Port services, which will
decrease over time.\107\
---------------------------------------------------------------------------
\107\ Id.
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Importantly, the Exchange's affiliated markets submitted similar
filings to also amend their fees for 10Gb ULL connectivity and, when
considering the profit margins attributed to 10Gb ULL connectivity for
the affiliated markets and the Exchange collectively, the overall
profit margin based on projected revenue and costs for the Exchange and
its affiliated markets for 10Gb ULL connectivity is only 9.5%. This
margin is in line with the profit margin MEMX anticipated making in a
recent similar proposal to adopt connectivity fees, including fees for
10Gb connectivity, that the Commission Staff did not suspend and
remains in effect today.\108\
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\108\ See Securities Exchange Act Release No. 95936 (September
27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26)
(proposing to adopt fees for connectivity and stating that MEMX
would earn approximately 8.5% to 15% margin). MEMX's projected
profit margin being for a single exchange and the Exchange and its
affiliated markets aggregated profit margin being for four separate
markets is not a material difference as both profit margins reflect
the profit of the overall corporate entities that operate the
exchange(s).
---------------------------------------------------------------------------
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 supra-competitive profit, when
comparing the total expense of the Exchange associated with providing
1Gb and 10Gb ULL connectivity and FIX and MEO Port services versus the
total projected revenue of the Exchange associated with those services.
In fact, the Exchange will generate negative margins on those
connectivity and port services even with the proposed fees.
The Exchange also notes that this the resultant margin differs 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.,
MIAX Pearl Equities maintains 24 matching engines while MIAX Pearl
Options maintains 12 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 BX for its
comparable 10Gb Ultra fiber connection ($8,000 per month for the
Exchange vs. $15,000 per month for BX).\109\ PSX charges comparable
rate for its 10Gb connection of $7,500.\110\ 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).
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\109\ See BX Pricing Schedule, available at <a href="https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing">https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing</a>; and BX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\110\ See PSX Pricing Schedule, available at <a href="https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing">https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing</a>; and PSX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
---------------------------------------------------------------------------
MIAX Pearl Equities is one of the newer equities exchange and only
commenced operations in September 2020. New entrants like MIAX Pearl
Equities propose fees that may help these new entrants recoup their
substantial investment in building out
[[Page 68755]]
costly infrastructure. However, it is not uncommon for start-ups, like
MIAX Pearl Equities, to incur losses while they seek to build their
businesses.\111\ In some cases, as is the case here, these start-ups
set their fees purposefully low or offer products at no cost \112\ to
attract business and build market share so that they can compete with
the larger, well established incumbents that already charge higher
fees. This is done while incurring losses by investing in future
growth. Therefore, it is not uncommon for MIAX Pearl Equities to incur
a negative profit margin even with the proposed fees while it continues
to build its business and gain traction as a new exchange entrant that
competing to attract market share from the larger, established
incumbent equities exchanges.
---------------------------------------------------------------------------
\111\ See Exchange Fee Schedule (offering market data for no
cost).
\112\ See, e.g., 5 Successful Companies that Didn't Make a
Dollar for 5 Years, by Drew Hendricks, July 7, 2014, available at
<a href="https://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html">https://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html</a>.
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* * * * *
MIAX Pearl Equities has operated at a cumulative net annual loss
since it launched operations in 2020.\113\ 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
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 1Gb and 10Gb
ULL connectivity as well as FIX and 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 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports.
---------------------------------------------------------------------------
\113\ The Exchange has incurred a cumulative loss of $83 million
since its inception in 2020. 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/2300/23007741.pdf">https://www.sec.gov/Archives/edgar/vprr/2300/23007741.pdf</a>.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
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 1Gb and 10Gb ULL connectivity as well as FIX and MEO
Ports, the Exchange will have to be successful in retaining existing
clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as
FIX and MEO Ports and/or obtaining new clients that will purchase such
access. 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 part of a holding company that operates four
exchange markets and, therefore, the Exchange and its affiliated
markets must allocate shared costs across all of those markets
accordingly, pursuant to the above-described allocation methodology. In
contrast, the Investors Exchange LLC (``IEX'') and MEMX, which are
currently each operating only one exchange, in their recent non-
transaction fee filings can allocate the entire amount of that same
cost to a single exchange. This can result in lower profit margins for
the non-transaction fees proposed by IEX and MEMX because the single
allocated cost does not experience the efficiencies and synergies 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
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.
1Gb and 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
[[Page 68756]]
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 equities 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.\114\ 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.
---------------------------------------------------------------------------
\114\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
FIX and MEO Ports
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.\115\ Thus, as the number of connections an Equity Member
has increases, the related pull on Exchange resources also increases.
The Exchange sought to design the proposed pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases, while continuing to provide the first five (5) ports for
free. The more connections purchased by an Equity Member likely results
in greater expenditure of Exchange resources and increased cost to the
Exchange. The Exchange further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee, the Exchange provides each Equity Member
their first five (5) ports for free, unlike other equity exchanges
referenced above.
---------------------------------------------------------------------------
\115\ Id.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 1Gb
and 10Gb ULL connectivity as well as FIX and MEO Ports at below market
rates to market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2020 \116\ due to providing a low-
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very lower fee, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low-cost exchange alternative to the
industry, which resulted in lower initial revenues. Examples of this
are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for
which the Exchange only now seeks to adopt fees at a level similar to
or lower than those of other equity exchanges.
---------------------------------------------------------------------------
\116\ See supra note 113.
---------------------------------------------------------------------------
Further, the Exchange does not believe that the proposed fee
increase for the 1Gb or 10Gb ULL connection change would place certain
market participants at the Exchange at a relative disadvantage compared
to other market participants or affect the ability of such market
participants to compete. The proposed fees would apply uniformly to all
market participants regardless of the number of connections they choose
to purchase. The proposed fees do not favor certain categories of
market participants in a manner that would impose an undue burden on
competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Equity Members, non-Equity Members (extranets or service
bureaus), third-parties that purchase the Exchange's connectivity and
resell it, and customers of those resellers to compete with other
market participants or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Options Market Maker
terminated their MIAX Pearl Options membership on January 1, 2023 as a
direct result of the proposed fee changes for that market.\117\ The
[[Page 68757]]
Exchange does not believe that the proposed fees for connectivity
services place certain market participants at a relative disadvantage
to other market participants because the proposed connectivity pricing
is associated with relative usage of the Exchange by each market
participant and does not impose a barrier to entry to smaller
participants. The Exchange believes its proposed pricing is reasonable
and, when coupled with the availability of third-party providers that
also offer connectivity solutions, that participation on the Exchange
is affordable for all market participants, including smaller trading
firms. As described above, the connectivity services purchased by
market participants typically increase based on their additional
message traffic and/or the complexity of their operations. The market
participants that utilize more connectivity services typically utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the proposed fees for
connectivity services do not favor certain categories of market
participants in a manner that would impose a burden on competition;
rather, the allocation of the proposed connectivity fees reflects the
network resources consumed by the various size of market participants
and the costs to the Exchange of providing such connectivity services.
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\117\ The Exchange acknowledges that IEX included in its
proposal to adopt market data fees after offering market data for
free an analysis of what its projected revenue would be if all of
its existing customers continued to subscribe versus what its
projected revenue would be if a limited number of customers
subscribed due to the new fees. See Securities Exchange Act Release
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its
recent non-transaction fee proposals. See, e.g., supra note 67. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost. In addition,
despite the potential for existing subscribers to terminate
connections due to the proposal, the Exchange anticipates its number
of subscribers to remain generally static, resulting in an
immaterial difference between a best case and worst case scenario.
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Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, market participants are not forced to connect to all
exchanges. There is no reason to believe that our proposed price
increase will harm another exchange's ability to compete. There are
other markets of which market participants may connect to trade
equities at higher rates than the Exchange's. There is also a range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. Market participants are free to choose which exchange or
reseller to use to satisfy their business needs. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial Proposal,
one comment letter on the Second Proposal, one comment letter on the
Fourth Proposal and one comment letter on the Fifth Proposal, all from
the same commenter.\118\ In their letters, the sole commenter seeks to
incorporate comments submitted on previous Exchange proposals to which
the Exchange has previously responded. To the extent the sole commenter
has attempted to raise new issues in its letters, the Exchange believes
those issues are not germane to this proposal in particular, but rather
raise larger issues with the current environment surrounding exchange
non-transaction fee proposals that should be addressed by the
Commission through rule making, or Congress, more holistically and not
through an individual exchange fee filings. Among other things, the
commenter is requesting additional data and information that is both
opaque and a moving target and would constitute a level of disclosure
materially over and above that provided by any competitor exchanges.
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\118\ See letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP (``SIG''), to Vanessa
Countryman, Secretary, Commission, dated February 7, 2023 and
letters from Gerald D. O'Connell, SIG, to Vanessa Countryman,
Secretary, Commission, dated March 21, 2023, July 24, 2023 and
September 18, 2023.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\119\ and Rule 19b-4(f)(2) \120\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\119\ 15 U.S.C. 78s(b)(3)(A)(ii).
\120\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#cbb9bea7aee6a8a4a6a6aea5bfb88bb8aea8e5aca4bd"><span class="__cf_email__" data-cfemail="0a787f666f27696567676f647e794a796f69246d657c">[email protected]</span></a>. Please include
file number SR-PEARL-2023-51 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 68758]]
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-PEARL-2023-51. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-PEARL-2023-51 and should be
submitted on or before October 25, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\121\
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\121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21933 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P
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