Notice2024-10588
Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Pursuant to IEX Rule 15.110 To Amend IEX's Fee Schedule To Adopt a Physical Connectivity Fee and Increase Certain Port Fees
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 15, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 95 (Wednesday, May 15, 2024)</title>
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[Federal Register Volume 89, Number 95 (Wednesday, May 15, 2024)]
[Notices]
[Pages 42528-42543]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-10588]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100085); File No. SR-IEX-2024-08]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Pursuant to
IEX Rule 15.110 To Amend IEX's Fee Schedule To Adopt a Physical
Connectivity Fee and Increase Certain Port Fees
May 9, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\
notice is hereby given that, on May 2, 2024, the Investors Exchange LLC
(``IEX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. 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\ 15 U.S.C. 78a.
\3\ 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
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the
Commission a proposed rule change to modify its Fee Schedule, pursuant
to IEX Rules 15.110(a) and (c), to amend certain connectivity fees. IEX
will implement the proposed fees beginning on June 1, 2024.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website at <a href="http://www.iextrading.com">www.iextrading.com</a>, at the principal office of the Exchange,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
IEX is proposing to modify its Fee Schedule, pursuant to IEX Rules
15.110(a) and (c), to add a new fee for physical connections to its
Primary Data Center,\6\ Disaster Recovery Data Center \7\ and the IEX
Testing Facility (``ITF'') (``physical connectivity fees''),\8\ and
increase fees for logical order entry ports (also referred to as
``Order Entry Ports'') \9\ in excess of five per subscriber (``port
fees''). IEX has not previously imposed any physical connectivity fees
but has charged port fees since October 1, 2019.\10\ The Exchange has
not changed the port fees since they were implemented, but since that
time, the Exchange has experienced increases in related operational
expenses including significant upgrades to its trading platform
infrastructure. As discussed more fully below, the Exchange recently
calculated its aggregate annual costs of $12,904,100 for providing
physical
[[Page 42529]]
connectivity and $5,924,000 for providing Order Entry Ports.
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\6\ All connections to the IEX Primary Data Center (including
for order entry and market data receipt) are made through IEX's
point-of-presence (``IEX POP'') in Secaucus, NJ. From the IEX POP,
messages travel to IEX's Primary Data Center.
\7\ The Disaster Recovery Data Center, also known as the
``Secondary Data Center'', is the physical location of IEX's backup
trading platform. It is located in Chicago, Illinois.
\8\ The only connections offered to the Primary Data Center are
10 gigabit (``10G'') physical port connections. The Exchange offers
both 10G and 1 gigabit (``1G'') physical port connections to the
ITF, for which it incurs physical connectivity-related costs;
however, as discussed below, the Exchange is not proposing to charge
for the connections to the ITF itself.
\9\ Order Entry Ports are used for sending and receiving order
messages. Other uses for logical ports, which are not subject to the
fees proposed herein, include drop copy ports and market data ports.
\10\ See Securities Exchange Act Release No. 86626 (August 9,
2019), 84 FR 41793 (August 15, 2019) (SR-IEX-2019-07) (``Port Fee
Filing'').
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Increased operational costs include costs related to monitoring and
analysis of data and performance of the network connections with
nanosecond granularity and continuous improvements in network
performance. The costs associated with maintaining and enhancing a
state-of-the-art network impacts the overall operational costs of the
Exchange. The Exchange believes that it is appropriate to offset a
portion of those increased costs by adding fees for physical
connectivity and increasing fees for Order Entry Ports. Maintaining and
enhancing the performance of the Exchange's systems is necessary to
compete with other market venues and meet Users' \11\ expectations when
trading on the Exchange, as well as to assist the Exchange in complying
with its Regulation SCI compliance obligations to have levels of
capacity, integrity, resiliency, availability and security adequate to
maintain IEX's operational capability and promote the maintenance of
fair and orderly markets,\12\ and to support a robust trading
environment for Users.\13\ In addition, the Exchange is in the process
of implementing significant upgrades to its trading system to enhance
scalability, network performance and connectivity, thereby enhancing
the User experience. The associated costs are substantial, including
costs to purchase new connectivity infrastructure equipment as well as
other ongoing expenses. The Exchange believes it is necessary and
appropriate to offset a portion of these costs with fees for physical
connectivity and increased fees for Order Entry Ports.
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\11\ See IEX Rule 1.160(qq).
\12\ 17 CFR 242.1001(a)(1)).
\13\ Reg SCI Rule 1001(a) requires that IEX establish, maintain,
and enforce written policies and procedures reasonably designed to
ensure (among other things) that its Reg SCI systems have levels of
capacity adequate to maintain IEX's operational capability and
promote the maintenance of fair and orderly markets.
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Accordingly, the Exchange now proposes to amend the Fee Schedule to
begin charging fees for physical connectivity and increase existing
fees for Order Entry Ports in excess of five per subscriber, in order
to offset a portion of these increased related costs and expenses, with
a limited potential return in excess of such costs if actuals differ
from projections, as set forth below in the Exchange's cost analysis.
As described below, IEX proposes to charge $4,000 for each physical
port connection to its Primary Data Center, which fee would also
include one (1) 10G connection to its Disaster Recovery Center and one
(1) 10G or 1G connection to its ITF; and to increase the fees it
charges for Order Entry Ports in excess of five per subscriber from
$100 to $250 per month. IEX is proposing to continue to provide Order
Entry Ports at the Disaster Recovery Data Center and ITF, as well as
drop copy ports and market data ports, free of charge. In each case, as
detailed below, the proposed fees are less than comparable connectivity
services offered by other equities exchanges, and significantly less
than comparable fees charged by legacy exchanges.\14\ The Exchange
proposes to implement the changes to the Fee Schedule pursuant to this
proposal on June 1, 2024.
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\14\ See infra note 53 for a discussion of legacy and non-legacy
exchanges.
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As described in previous filings,\15\ in setting its prices for
market data and connectivity products, IEX has established a general
framework (``Framework'') that is based on a high level of transparency
with regard to its costs of providing these services and which is
designed to set prices at levels that are reasonably related to those
costs.\16\ As relevant to this filing, the Framework includes the
following elements:
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\15\ See Securities Exchange Act Release No. 94630 (April 7,
2022), 87 FR 21945 (April 13, 2022) (SR-IEX-2022-22) (``IEX Market
Data Fee Filing''); see also Port Fee Filing, supra note 10.
\16\ Since the IEX Market Data Fee Filing, which applied this
Framework to provide a high level of transparency of relevant costs,
other exchanges have adopted similar fees based on their own
detailed cost analyses. IEX believes that the information provided
in this filing meets or exceeds the level of detail and analysis
contained in those filings. See Securities Exchange Act Release No.
98584 (September 28, 2023), 88 FR 68736 (October 4, 2023) (SR-PEARL-
2023-51) (``MIAX Connectivity Fee Filing'') (increasing physical and
logical connectivity fees for MIAX Pearl equities members and non-
members from $1,000/month to $2,500/month for 1G connections; from
$3,500/month to $8,000/month for 10G connections; and from $0 for
ports in excess of five but less than 25 per User, and from $300-
$450/month for ports in excess of 25 per User to $450/month); see
also Securities Exchange Act Release No. No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26) (``MEMX
Connectivity Fees Filing'').
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<bullet> Prices are determined based on a comprehensive and
transparently applied methodology for allocating costs to different
exchange products.
<bullet> Based on this methodology, specific exchange costs are
reasonably allocated to the products and services for which the
exchange seeks to charge, including technology and staff directly
related to the products and services being charged for. In this way,
IEX prevents ``double-counting'' of costs across more than one set of
product classes (e.g., market data, physical connectivity, and logical
connectivity).
<bullet> Cost allocation takes account of recent or planned
enhancements to exchange operations.
<bullet> IEX strives to maintain a relatively flat, simple fee
structure that avoids disproportionate or discriminatory impacts on any
group of members or market participants.
The physical connectivity and port fees proposed in this filing
have been developed consistent with this Framework. In particular, as
described more fully below, in this rule filing IEX provides a cost
analysis that includes, among other things, descriptions of how the
Exchange allocated costs between the Exchange's various cost drivers to
ensure no cost was double counted, as well as additional detail
supporting its cost allocation processes.
IEX is in the process of implementing significant upgrades to its
technological infrastructure. These upgrades, which include substantial
enhancements to the speed and efficiency with which the Exchange can
handle message traffic, as well as enhancements to the various matching
engines, are thereby projected to provide noticeable performance
improvements to Users. Additionally, these enhancements are designed to
allow for greater scalability of the Exchange's System \17\ as overall
message traffic in the securities markets increases, and IEX seeks to
capture a greater percentage of equity trading volume.
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\17\ See IEX Rule 1.160(nn).
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Consistent with the Framework, in proposing to charge physical
connectivity and port fees, IEX assessed those fees in relation to its
own aggregate costs of providing the services, as well as the impact on
Members \18\ (as well as other Users and subscribers)--both generally
and in relation to other Members, i.e., so that the fees will not
create a financial burden on any participant or an undue impact in
particular on smaller Members and competition among Members in general.
IEX believes that its approach is consistent with the requirements of
Section 19(b)(1) under the Act,\19\ and Rule 19b-4 thereunder,\20\ and
Section 6(b) of the Act,\21\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\22\ not designed
to permit unfair discrimination,\23\ and that they not impose a burden
on competition not necessary or appropriate in furtherance
[[Page 42530]]
of the purposes of the Act.\24\ 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.\25\
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\18\ See IEX Rule 1.160(s).
\19\ 15 U.S.C. 78s(b)(1).
\20\ 17 CFR 240.19b-4.
\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(4).
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78f(b)(8).
\25\ In 2019, the Commission staff published guidance suggesting
the types of information that self-regulatory organizations
(``SROs'') may use to demonstrate that their fee filings comply with
the standards of the Exchange Act (``Staff Guidance''). While IEX
understands that the Staff Guidance does not create new legal
obligations on SROs, IEX has consistently applied the Staff Guidance
to provide the type and level of transparency in demonstrating
compliance when seeking to modify fees. 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>.
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In determining the appropriate fees to charge, IEX considered its
costs of providing physical and logical connectivity, using a
methodology that is designed to allocate those costs that are related
to the establishment, maintenance, support, and enhancements to its
connectivity products. Based on this allocation, IEX has set the
proposed fees at levels that are designed to offset a portion of its
costs, with a limited potential return in excess of such costs if
actuals differ from projections. Because of the uncertainty of
forecasting subscribers' decision-making with respect to their IEX
physical connections and Order Entry Ports it is not possible to make a
definitive projection of the revenues that will be received.
* * * * *
Connectivity Fee Changes
IEX offers the ability to physically connect to the Exchange via
the IEX POP \26\ to its Members, Data Recipients \27\, Service Bureaus
\28\, and Extranet Providers \29\ (collectively, ``Connectivity
Subscribers'').\30\ In order to cover a portion of the aggregate costs
of providing physical connectivity to its Connectivity Subscribers, the
Exchange proposes to modify its Fee Schedule as described above and
detailed below. IEX notes that it currently does not charge any fees
for physical connectivity, and therefore the full cost of providing
such connectivity is borne by IEX.
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\26\ Physical connectivity is provided via network switch and
cabling infrastructure that allows a subscriber to access a logical
port for send and receive order messages, as well receive market
data messages.
\27\ See IEX Rule 11.130(c).
\28\ See IEX Rule 11.130(d).
\29\ See IEX Rule 11.130(e).
\30\ Service Bureaus offer technology-based services to Members
for a fee, including physical connectivity and Order Entry Ports.
Extranet Providers offer physical connectivity services to Members
and Data Recipients.
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The number of physical connections to IEX's Primary Data Center
(via the IEX POP) assigned to each Connectivity Subscriber as of
February 29, 2024, ranged from one (1) to 14, as determined by the
Connectivity Subscriber based on the scope and scale of its trading
activity on the Exchange (or other IEX activity, in the case Data
Recipients, Service Bureaus, and Extranet Providers), including its
determination of the need for redundant connectivity.\31\ Approximately
67% of IEX's Members do not maintain a direct physical connection to
the Exchange's Primary Data Center (though many such Members have
physical connectivity through a Service Bureau or Extranet Provider)
and another 22% have either one (1) or two (2) physical connections to
the Exchange in the Primary Data Center. Presently, only 10% of
Members, maintain three or more physical connections to the Exchange to
the Primary Data Center.
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\31\ 21 Connectivity Subscribers maintain one (1) or two (2)
physical connections at IEX's Disaster Recovery Center, and 20
Connectivity Subscribers maintain one (1) or two (2) physical
connections to the ITF.
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The Exchange currently does not charge any fees to connect to its
Primary Data Center, its Disaster Recovery Data Center, or the ITF. In
order to offset a portion of the costs of providing this physical
connectivity, plus a limited potential return in excess of such costs
if actuals differ from projections, the Exchange proposes to charge
$4,000 per month for each physical connection to its Primary Data
Center (all of which are 10G connections), which fee would also include
an option for one (1) 10G connection to its Disaster Recovery Center
and one (1) 10G or 1G connection to its ITF. This integrated approach
is designed to simplify the fee structure and encourage physical
connectivity to the Disaster Recovery Data Center and testing at the
ITF. As proposed, and discussed more fully below, IEX fees are
significantly lower than comparable physical connectivity fees of other
equity exchanges.
Order Entry Ports Fee Changes
Similar to other exchanges, IEX offers Order Entry Ports, also
known as ``sessions'', for order entry and receipt of trade execution
reports and order messages.\32\ Members can also choose to connect to
IEX indirectly through a session maintained by a third-party Service
Bureau. Service Bureau sessions may provide access to one or multiple
Members on a single session.\33\ The number of sessions assigned to
each Port Subscriber as of February 29, 2024 ranges from one to 279,
depending on the scope and scale of the User's trading activity on IEX
(either through a direct connection or through a Service Bureau) as
determined by the User. For example, by using multiple sessions,
Members can segregate order flow from different internal desks,
business lines, or customers. IEX does not impose any minimum or
maximum requirements for how many Order Entry Ports a Port Subscriber
can maintain, and it is not proposing to impose any minimum or maximum
requirements.
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\32\ Logical connectivity for order entry is provided via
network switch and cabling infrastructure that delivers order and
execution messages, as well as server infrastructure that runs
software processes responsible for validating and formatting such
messages for either internal or external consumption.
\33\ Members and Service Bureaus are collectively referred to
herein as ``Port Subscribers.''
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IEX currently charges Port Subscribers $100 per port on a monthly
basis for each Order Entry Port at the Primary Data Center in excess of
five per Port Subscriber. In order to offset a portion of its costs
with a limited potential return in excess of such costs if actuals
differ from projections, the Exchange proposes to increase the fees it
charges for each such port in excess of five per Port Subscriber from
$100 per month to $250 per month.\34\ These proposed fees would
continue not to apply to logical ports used for other purposes, such as
receiving market data or drop copies,\35\ nor would such ports count
toward the five free Order Entry Ports calculation. Furthermore, IEX
would continue not to charge any fee for logical ports used to connect
to IEX's Disaster Recovery Data Center or ITF, nor would such ports
count toward the five free Order Entry Ports calculation.\36\
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\34\ As described in the Statutory Basis section, infra, these
fees are significantly lower than fees charged by IEX's competitors
for their sessions.
\35\ Confirmations of orders and execution reports are
transmitted by the Exchange over the Order Entry Port that was used
to enter the order. A ``drop copy'' contains redundant information
that a Member chooses to have ``dropped'' to another destination
(e.g., to allow the Member's back office and/or compliance
department, or another Member--typically the Member's clearing
broker--to have immediate access to the information for risk
management and other purposes). Drop copies can only be sent via a
drop copy port. Drop copy ports cannot be used to enter orders.
\36\ IEX expects to incur costs of $5,924,000 in 2024 to offer
Order Entry Ports. At the current fee level, IEX would expect to
generate fee revenue of $1,389,500 resulting in negative income of
$4,534,500.
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Conforming Changes to Fee Schedule
<bullet> To reflect the fee changes described above, IEX proposes
to update the Connectivity Fees section of the IEX Fee Schedule as
follows: In the first row of
[[Page 42531]]
the Connectivity Fees table, after the words ``10G Physical Port'', add
the words ``Connection to Primary Data Center'' to reflect that the
$4,000 per port monthly 10G fee applies to those connections.
Additionally, IEX proposes to remove from this row the current footnote
1, which currently reads: ``10G physical ports are available to connect
to IEX's production systems (i.e., the IEX POP and Disaster Recovery
Data Centers) and the IEX Test Facility (``ITF'').'' IEX is proposing
to remove this footnote as the information contained therein is being
added to other sections of the Connectivity Fees table.
<bullet> Add a new footnote 1 to the first row of the table, after
the words ``$4,000 per month'', which states: ``Physical connectivity
fees are billed to and payable by the Member, Service Bureau, Data
Recipient, or Extranet Provider maintaining the physical port
connection at the Primary Data Center based on the number of physical
connections to the Primary Data Center as of the first of each month.''
<bullet> Add a new second row to the Connectivity Fees table
specifying that a ``10G Physical Port Connection to Disaster Recovery
Data Center'' is ``Included with 10G Physical Port Connection at
Primary Data Center.''
<bullet> Update the (now) third row of the Connectivity Fees table
so it reads ``1G or 10G Physical Port Connection to IEX Test Facility
(``ITF'')'' are ``Included with 10G Physical Port Connection at Primary
Data Center.'' Update footnote 2 to add the words ``and Service
Bureaus'' after the word ``Members'', in order to reflect that both
Members and Service Bureaus may have physical connections to the ITF.
<bullet> Update the (now) fourth row of the Connectivity Fees table
so it reads ``Logical Port (except for Primary Data Center Order Entry
Port)'' are free, to reflect that some Order Entry Ports, in particular
at the ITF and the Disaster Recovery Data Center, will continue to be
offered free of charge, and that all other logical ports (e.g., drop
copy ports) will continue to be offered free of charge.
<bullet> Update the (now) fifth row of the Connectivity Fees table
so it reads ``Primary Data Center Order Entry Port'' to specify that
IEX will only be charging for Order Entry Ports (above 5 per Port
Subscriber) at the Primary Data Center. No changes are proposed for
footnote 3.
<bullet> Update footnote 4 to add the words ``Primary Data Center''
before the words ``Logical Order Entry Ports,'' and delete the second
sentence of the footnote, because the effective date of these proposed
fee changes will be the same date as the effective date of the fee
schedule.
Implementation
Although fee filings are immediately effective upon filing, IEX
plans to implement these fee changes on June 1, 2024, in order to
provide ample advance notice and allow impacted market participants
time to prepare for the change. As proposed, monthly physical
connectivity fees will be assessed based on the number of 10G physical
port connections maintained by a Member, Service Bureau, Data
Recipient, or Extranet Provider as of the first of each month.
Similarly, monthly logical connectivity fees will be assessed based on
the number of Primary Data Center Order Entry Ports assigned to each
Member or Service Bureau as of the first of each month.
2. Statutory Basis
IEX believes that the proposed fees are consistent with the
provisions of Section 6(b) \37\ of the Act in general and further the
objectives of Section 6(b)(4) \38\ of the Act, in particular, in that
they are designed to provide for the equitable allocation of reasonable
dues, fees and other charges among its Members and other persons using
its facilities. The Exchange also believes that the proposed fee
changes promote just and equitable principles of trade and will not be
unfairly discriminatory, consistent with the objectives of Section
6(b)(5) \39\ of the Act.
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\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(4).
\39\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided herein to
justify the proposed fees meets or exceeds the amount of detail
required in respect of proposed fee changes under the Act, as well as
the amount of detail required by the Commission in its review of
similar fee filings by other exchanges \40\ and is also consistent with
Staff Guidance \41\ on such filings. Accordingly, the Exchange believes
that the proposed fees are consistent with the Act because they: (i)
are reasonable, equitably allocated, not unfairly discriminatory, do
not create an undue burden on competition; (ii) are consistent with
prior Commission action on other exchanges' fee filings and the Staff
Guidance; and (iii) are supported by evidence (including the revenue
and cost data and analysis detailed below) that they are fair and
reasonable and will not result in excessive pricing or supra-
competitive profit.
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\40\ Specifically, the Commission allowed fee filings by MIAX
Pearl and MEMX to remain effective by not suspending them within 60
days of filing, see supra note 16.
\41\ See Staff Guidance, supra note 25.
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As discussed in the Purpose section and in IEX's Port and Market
Data Fee Filings,\42\ IEX 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.
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\42\ See Port Fee Filing, supra 10; IEX Market Data Fee Filing,
supra note 15.
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In the Staff Guidance, the Commission Staff stated that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\43\ IEX believes that as a general matter, physical and logical
connectivity fees cannot be sufficiently justified based on unproven
assumptions about competition, notwithstanding that a newer and/or
smaller securities exchange, such as IEX, may be less able to set
prices for its physical and logical connectivity free of constraint by
significant competitive forces than may be the case for more
established securities exchanges.
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\43\ See Staff Guidance, supra note 25.
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The Staff Guidance further stated 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.'' \44\ Thus, similar to fee proposals submitted by other
exchanges,\45\ IEX has not determined its proposed physical and logical
connectivity fees based on assumptions about market competition,
instead relying upon a cost-based model to determine a reasonable fee
structure that is informed by the extent to which demand for each
product drives IEX's overall costs. In this context, IEX believes the
proposed fees overall are fair and reasonable as a form of cost
recovery because they are designed to offset a portion of IEX's costs
with a limited possibility of a reasonable return in excess of IEX's
aggregate costs of offering physical and logical
[[Page 42532]]
connectivity, if actuals differ from projections.\46\
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\44\ See Staff Guidance, supra note 25.
\45\ See supra note 16.
\46\ IEX has not sought to justify the proposed fees solely on
the basis that fees of the same type are constrained by competition.
To the extent that the Commission later determines that exchange
fees for market data, technology, or other technology products in
general may be justified on the basis that they are effectively
constrained by market competition, IEX reserves the right in future
filings to use competition analysis as an independent basis to show
why particular fees meet the requirements of the Exchange Act.
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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 the
proposed fees meet the standards of the Exchange Act based on the
relationship of the fees to related costs and to IEX's business
objectives, without needing to rely on a market competition analysis.
In proposing to charge fees for physical connectivity and increase
fees for Order Entry Ports, the Exchange assessed those fees in a
transparent way against its own aggregate costs of providing each
service, as well as the impact on Members and other Connectivity
Subscribers--both generally and in relation to other Members and
Connectivity Subscribers, i.e., to reasonably assure the fee will not
create an undue financial burden or impact on particular participants,
smaller Members or Connectivity Subscribers, or competition among
Members and other Connectivity Subscribers in general. The Exchange
believes that this level of transparency is appropriate as a way of
demonstrating that the fees meet the requirements of Section 19(b)(1)
under the Act,\47\ and Rule 19b-4 thereunder,\48\ with respect to the
types of information exchanges should provide when filing fee changes,
and Section 6(b) of the Act,\49\ which requires, among other things,
that exchange fees be reasonable and equitably allocated,\50\ not
designed to permit unfair discrimination,\51\ and that they not impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\52\ 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.\53\
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\47\ 15 U.S.C. 78s(b)(1).
\48\ 17 CFR 240.19b-4.
\49\ 15 U.S.C. 78f(b).
\50\ 15 U.S.C. 78f(b)(4).
\51\ 15 U.S.C. 78f(b)(5).
\52\ 15 U.S.C. 78f(b)(8).
\53\ See Staff Guidance, supra note 25. The Exchange notes that
other newer entrants to the equities exchange marketplace (``non-
legacy exchanges'') have asserted that the Commission has
historically applied different standards of transparency and
accountability in evaluating whether their fee filings, as compared
to fee filings by larger incumbent exchanges (``legacy exchanges''),
satisfied the Act's requirements. See e.g., MIAX Connectivity Fee
Filing, supra note 16.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical connectivity at $12,904,100 (or
approximately $1,075,342 per month for physical 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 Order Entry Ports at $5,924,000 (or approximately
$493,667 per month for Order Entry 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 physical and
logical connectivity to its Connectivity Subscribers and Port
Subscribers, respectively, the Exchange proposes to modify its Fee
Schedule as described above.
In connection with this fee filing, the Exchange recently conducted
a cost analysis to determine the Exchange's costs associated with
providing physical and logical connectivity to the Exchange (``2024
Cost Analysis''). This 2024 Cost Analysis, similar to analyses
performed by MIAX Pearl and MEMX in their connectivity fee filings
\54\, included a comprehensive, wholistic, detailed analysis of the
Exchange's aggregate baseline costs, including a determination and
allocation of costs for core services provided by the Exchange--trading
and routing, market data, physical connectivity, and logical ports
(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, and certain
general and administrative expenses (``cost drivers'').\55\
---------------------------------------------------------------------------
\54\ See supra note 16.
\55\ IEX previously conducted cost analyses in 2019 in
connection with charging for Order Entry Ports and in 2021 in
connection with charging for market data. The 2024 Cost Analysis is
a more comprehensive analysis that incorporates all expenses related
to providing core Exchange services and is also consistent with the
cost analyses described by MIAX Pearl and MEMX in their filings.
---------------------------------------------------------------------------
The 2024 Cost Analysis specifies how hardware, software, vendor,
and human resources costs were allocated for trading and routing,
market data, physical connectivity, and logical ports, and identified
an annual dollar cost for each line item in each category.\56\ The
Exchange adopted an allocation methodology with transparent and
consistently applied principles to guide how much of a particular cost
amount should be allocated to each core service. As set forth below,
the cost allocation process is then applied to each of the cost
drivers. For instance, fixed infrastructure 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
(54% of fixed infrastructure costs were allocated to physical
connectivity, with smaller allocations to Order Entry Ports (6%), and
the remainder to the provision of other connectivity, other ports,
transaction execution, and market data services (40%). 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.
---------------------------------------------------------------------------
\56\ All allocation percentages discussed herein, were rounded
up or down to the nearest whole number.
---------------------------------------------------------------------------
By allocating segmented costs to each core service, the Exchange
estimates by core service the potential positive or negative margins it
might earn based on different fee models. As a non-listing venue, the
Exchange has only several potential sources of revenue that it can use
to fund its operations: transaction fees, fees for physical
connectivity and port services, membership fees, regulatory fees, and
market data fees. The Exchange does not charge membership or regulatory
fees. Moreover, as a general matter, each of these sources of revenue
is based on services that are interrelated. For instance, trading and
routing obviously necessitates that Users have physical and logical
connectivity to send orders to IEX. Given this interrelationship, the
allocation of costs to each service and the relative weighting of such
costs depends on the exercise of reasonable judgment by the Exchange.
While there is no standardized and generally accepted methodology for
the allocation of an exchange's costs across different products and
services, the Exchange's methodology is the result of an extensive
review and analysis, transparently applied, and IEX believes this
methodology provides a more than
[[Page 42533]]
ample basis to justify the proposed fees, particularly in light of the
adoption of similar or much larger fees by other exchanges \57\ with
minimal or no cost analysis. Through the Exchange's extensive 2024 Cost
Analysis, the Exchange analyzed each expense category in the Exchange's
general expense ledger to determine whether and how to allocate such
expense to the provision of physical and/or logical connectivity as
appropriate.
---------------------------------------------------------------------------
\57\ See infra notes 71 and 72.
---------------------------------------------------------------------------
Costs Related To Offering Physical Connectivity to the Primary Data
Center, the Disaster Recovery Data Center and the ITF
The following charts detail the costs considered by the Exchange to
be related to offering physical connectivity to the Primary Data
Center, Disaster Recovery Data Center, and ITF, each 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 14% of its overall Human Resources cost to
offering physical connectivity to the Primary Data Center, Disaster
Recovery Data Center, and ITF).
Primary Data Center, Disaster Recovery Data Center, and ITF
----------------------------------------------------------------------------------------------------------------
Allocated
Cost drivers Allocated annual monthly cost % of cost
cost \a\ \b\ driver
----------------------------------------------------------------------------------------------------------------
Human Resources.............................................. $7,475,449 $622,954 14
Connectivity (external fees, cabling, switches, etc.)........ 0 0 0
External Market Data......................................... 0 0 0
Data Center.................................................. 2,721,667 226,806 71
Hardware and Software Maintenance and Licenses and Internet 1,244,888 103,741 37
Services....................................................
Depreciation................................................. 88,132 7,344 7
Allocated Shared Expenses.................................... 1,373,962 114,497 8
--------------------------------------------------
Total.................................................... 12,904,100 1,075,342 15
----------------------------------------------------------------------------------------------------------------
\a\ The Annual Cost includes figures rounded to the nearest dollar.
\b\ 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.
The following are additional details regarding each of the cost
drivers considered by the Exchange to be related to offering physical
connectivity to the Primary Data Center, Disaster Recovery Data Center
and the ITF.
Human Resources
The Exchange notes that IEX Group, Inc. (``IEXG'') (the parent
company of the Exchange) had 68 employees who were fully dedicated to
Exchange functions and 59 employees who performed some functions on
behalf of the Exchange as of February 29, 2024. Each department leader
has direct knowledge of the time spent by each employee with respect to
the various tasks necessary to operate the Exchange. The estimates of
Human Resources cost were therefore determined by consulting with such
department leaders, determining which employees are involved in tasks
related to providing physical connectivity, and confirming that the
proposed allocations were reasonable based on an understanding of the
percentage of their time such employees devote to such tasks, as well
as to other exchange services. This process ensures that every employee
is 100% allocated, with no double counting of employee time across
different categories of exchange services. For shared services employee
costs, the Exchange first allocated a percentage of the shared services
employees from IEXG to the Exchange. This allocation was based on an
assessment during the company's annual budget process by IEXG's
management and Finance teams on how the shared services functions
support the IEXG's different businesses. This assessment resulted in
75% of the shared services employees' costs being allocated to the
Exchange. For the 2024 Cost Analysis, the Exchange calculated an
average of the direct and ancillary employees time devoted to physical
connectivity (approximately 14%) and applied the 14% average to each
shared services department's employee costs. This rate was deemed
appropriate for shared services employees as these functions operate to
support the direct and ancillary functions. Overall, employee costs, as
allocated, were calculated using a blended rate of compensation
reflecting salary, equity and bonus compensation, benefits, payroll
taxes, and 401(k) matching contributions and totaled 14% of Exchange
Human Resources expenses.\58\
---------------------------------------------------------------------------
\58\ The 14% average allocation applied to shared services
employees represents an average of the time that the direct and
ancillary employees spend on physical connectivity. The 14% overall
Human Resource allocation represents the total of the direct,
ancillary and shared services employees cost allocations to physical
connectivity. While the number is coincidentally the same for this
allocation, the overall total represents a different calculation in
that the components attributable to direct and ancillary employees
reflect variations in individual employee compensation and time
spent on physical connectivity.
---------------------------------------------------------------------------
Specifically, the Exchange calculated an allocation of employee
time for employees whose functions include providing and maintaining
physical connectivity and performance thereof, specifically Data
Engineering, Network Engineering, Software Development Engineer and
Test/Quality Assurance, Software Engineering, System Reliability
Engineering, and Technology Project Management. The Exchange also
allocated Human Resources costs to the provision of physical
connectivity to a limited subset of employees with ancillary functions
related to establishing and maintaining such physical connectivity,
specifically Business Analytics, Business Development, Business
Operations, Market Operations, Market Policy, Product, Quantitative
Research and Regulation. In addition, the Exchange allocated Human
Resources costs to employees in groups providing shared services that
thereby support physical connectivity, specifically Marketing, Office
Management, Human Resources, Finance & Accounting, Information
Security, Legal, Risk, Government Relations, senior level executives,
and Compliance employees.
For employees that have direct or ancillary functions related to
physical connectivity, the estimates of Human Resources cost were
determined by consulting with applicable department leaders, who
determined which employees are involved in tasks related
[[Page 42534]]
to providing physical connectivity, and provided reasonable allocations
based on an estimate of the percentage of time such employees devote to
those tasks. Employees from these departments perform numerous
functions to support physical connectivity, such as the installation,
re-location, configuration, and maintenance of 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. Further, these employees engage in
research and development analysis for equipment and software supporting
physical connectivity and design, provide regulatory oversight, 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 physical
connectivity, but it illustrates the breath of functions those
employees perform in support of the above cost and time allocations.
Last, the Exchange notes that its Human Resources costs associated
with physical connectivity have increased in recent years as the
Exchange engaged in a several-years-long initiative to upgrade its
system infrastructure and trading system, as discussed in the Purpose
section. Thus, employees are allocated to work on various business
initiatives and enhancements to support the Exchange's business, 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 physical connectivity by
requiring additional coding, testing, and other updates necessary to
accommodate the above initiatives.
Connectivity (External Fees, Cabling, Switches,)
The Exchange did not allocate costs for physical connectivity to
external markets to receive market data to the provision of physical
connectivity. As discussed below, a portion of such costs (as well as
market data fees paid to external markets) were allocated to logical
access as such market data is necessary for IEX 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, aggregate and net
notional risk checks, LULD bands).
External Market Data
The Exchange did not allocate external market data fees to the
provision of physical connectivity. As discussed below, a portion of
such fees were allocated to logical access, as such market data is
necessary for IEX 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, aggregate and net notional risk checks,
LULD bands).
Data Center
Data Center costs include 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 does not own the Primary Data Center
or the Disaster Recovery Data Center, but instead, leases space in data
centers operated by third parties. The Exchange has allocated a high
percentage of the Data Center costs (71%) to physical 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 trading platform, costs to operate in the data centers are
tangible costs that are directly related to its ability to offer
physical connectivity to market participants.
Hardware and Software Maintenance and Licenses and Internet Services
Hardware and Software Licenses and internet Services includes
hardware and software licenses used to operate and monitor physical
assets necessary to offer physical connectivity to the Exchange, such
as integrated development environments, data visualization applications
for building monitoring and real time analytic dashboards, knowledge
management services and release management software. IEX allocated 37%
of Exchange Hardware and Software Maintenance and Licenses and internet
Services expenses to the provision of physical connectivity.
Depreciation
All physical assets, software, and hardware used to provide
physical connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated over three years. In general, the Depreciation costs
overall relate to hardware necessary to operate the Exchange, some of
which are owned by the Exchange and some of which are leased by the
Exchange 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 physical connectivity in the near-term. As with the
other allocated costs in the Exchange's 2024 Cost Analysis, the
Depreciation cost was narrowly tailored to depreciation related to
physical connectivity. As noted above, the Exchange allocated 7% of its
allocated depreciation costs to providing physical connectivity.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to overall physical connectivity
costs (8% of Exchange Allocated Shared Expenses). 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. These general shared expenses are incurred by the
Exchange's parent company, IEXG, as a direct result of operating the
Exchange. The Exchange allocated shared services costs in line with the
average allocation rate for employees in the direct and ancillary
categories (14%), consistent with the methodology used to allocate the
cost of shared services employees as described above.\59\ The Exchange
believes it is reasonable to assign an allocation of shared expenses to
physical connectivity, consistent with allocations for shared services
employees, while continuing to ensure that such allocated expenses are
not double counted when allocated to other products and services for
which the
[[Page 42535]]
Exchange charges fees. Separately, for other shared expenses related to
the Exchange's regulatory obligations, such as fees paid to FINRA
pursuant to a regulatory services agreement between the Exchange and
FINRA, fees paid to the Depository Trust and Clearing Corporation,
audit fees, and fees paid to Securities Information Processors, were
allocated differently, less than 1% was allocated to the provision of
physical connectivity. Thus, the Allocated Shared Expenses applied to
offering physical connectivity totaled 8%.
---------------------------------------------------------------------------
\59\ The 14% average allocation applied to applicable allocated
shared expenses is based on the average of the time that the direct
and ancillary employees spend on physical connectivity.
---------------------------------------------------------------------------
Approximate Monthly Cost
After determining the approximate allocated monthly cost related to
physical connectivity, the total monthly cost for physical connectivity
to the Primary Data Center, Disaster Recovery Data Center, and ITF of
$1,075,342 was divided by the number of Primary Data Center physical
connections the Exchange maintained (because Disaster Recovery Center
and ITF connectivity is included with each connection to the Primary
Data Center) as of February 29, 2024 (180 connections), to arrive at a
cost of approximately $5,974 per month, per physical 10G connection.
* * * * *
Costs Related To Offering Order Entry Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Order Entry 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 8% of its overall Human Resources cost to offering Order
Entry Ports).\60\
---------------------------------------------------------------------------
\60\ As described above, IEX is proposing to continue to not
charge fees for the first five Order Entry Ports at the Primary Data
Center assigned to any Port Subscriber, and to not charge fees for
logical connectivity to the Disaster Recovery Data Center or ITF.
Order Entry Ports
----------------------------------------------------------------------------------------------------------------
Allocated
Cost drivers Allocated annual monthly cost Percent of
cost \c\ \d\ cost driver
----------------------------------------------------------------------------------------------------------------
Human Resources.............................................. $4,227,561 $352,297 8
Connectivity (external fees, cabling, switches, etc.)........ 161,051 13,421 5
External Market Data......................................... 141,035 11,753 8
Data Center.................................................. 122,923 10,244 3
Hardware and Software Maintenance and Licenses and Internet 345,906 28,826 10
Services....................................................
Depreciation................................................. 225,727 18,811 18
Allocated Shared Expenses.................................... 699,796 58,316 4
--------------------------------------------------
Total.................................................... 5,924,000 493,667 7
----------------------------------------------------------------------------------------------------------------
\c\ The Annual Cost includes figures rounded to the nearest dollar.
\d\ 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.
The following provides additional detail regarding each of the cost
drivers considered by the Exchange to be related to offering Order
Entry Ports.
Human Resources
As noted above, IEXG (the parent company of the Exchange) had 68
employees who are fully dedicated to Exchange functions and 59
additional employees who perform some functions on behalf of the
Exchange as of February 29, 2024. As discussed in the section on
physical connectivity, each department leader has direct knowledge of
the time spent by each employee with respect to the various tasks
necessary to operate the Exchange. The estimates of Human Resources
cost were therefore determined by consulting with applicable department
leaders, who determined which employees are involved in tasks related
to providing Order Entry Ports, and provided reasonable allocations
based on an understanding of the percentage of their time such
employees devote to such tasks. This process ensures that every
employee is 100% allocated, with no double counting of employee time
across different categories of exchange services. For shared services
employee costs, the Exchange first allocated a percentage of the shared
services employees from IEXG to the Exchange. This allocation was based
on an assessment during the company's annual budget process by IEXG's
management and Finance teams on how the shared services functions
support IEXG's different businesses. This assessment resulted in 75% of
the shared services employee's costs being allocated to the Exchange.
The Exchange then allocated these costs to its core services, including
logical ports in line with the average allocation rate for employees in
the direct and ancillary categories. For the 2024 Cost Analysis, the
Exchange calculated an average of the direct and ancillary employees
time devoted to logical connectivity (7%) and applied the 7% average to
each shared services department's employee costs. This rate was deemed
appropriate for shared services employees as these functions operate to
support the direct and ancillary functions. Overall, employee costs for
employees in the direct, ancillary and shared services categories, as
allocated, were calculated using a blended rate of compensation
reflecting salary, equity and bonus compensation, benefits, payroll
taxes, and 401(k) matching contributions and totaled 8% of Exchange
Human Resources expenses.\61\
---------------------------------------------------------------------------
\61\ The 7% average allocation applied to shared services
employees represents an average of the time that the direct and
ancillary employees spend on logical Order Entry Ports. The 8%
overall Human Resource allocation represents the total of the
direct, ancillary and shared services employees cost allocations to
logical connectivity. The overall total represents a different
calculation than the average allocation in that the components
attributable to direct and ancillary employees reflect variations in
individual employee compensation and time spent on logical
connectivity.
---------------------------------------------------------------------------
Specifically, the Exchange calculated an allocation of employee
time for employees whose functions include providing and maintaining
Order Entry Ports and performance thereof, specifically Data
Engineering, Network Engineering, Software Development Engineer and
Test/Quality Assurance, Software Engineering, System Reliability
Engineering, and Technology Project Management. The Exchange also
allocated Human Resources costs to the provision of Order Entry Ports
to a limited subset of employees with
[[Page 42536]]
ancillary functions related to establishing and maintaining such
connectivity, specifically Business Analytics, Business Development,
Business Operations, Market Operations, Market Policy, Product,
Quantitative Research and Regulation. In addition, the Exchange
allocated Human Resources costs to employees in groups providing shared
services that thereby support Order Entry Ports, specifically
Marketing, Office Management, Human Resources, Finance & Accounting,
Information Security, Legal, Risk, Government Relations, senior level
executives, and Compliance employees.
For employees that have direct or ancillary functions related to
Order Entry Ports, the estimates of Human Resources cost were
determined by consulting with applicable department leaders, who
determined which employees are involved in tasks related to providing
logical connectivity, and provided reasonable allocations based on an
estimate of the percentage of time such employees devote to those
tasks. Employees from these departments perform numerous functions to
support logical connectivity, such as the installation, re-location,
configuration, and maintenance of 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, and performance and capacity management.
Further, these employees engage in research and development analysis
for equipment and software supporting logical connectivity and design,
provide regulatory oversight, 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 logical connectivity, but it illustrates the breath of
functions those employees perform in support of the above cost and time
allocations.
Last, the Exchange notes that its Human Resources costs associated
with logical connectivity have increased in recent years as the
Exchange engaged in a several-years-long initiative to upgrade its
system infrastructure and trading platform, as discussed in the Purpose
section. Thus, employees are allocated to work on various business
initiatives and enhancements to support the Exchange's business, 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 logical connectivity by
requiring additional coding, testing, and other updates necessary to
accommodate the above initiatives.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges, cabling, and switches. The Connectivity cost driver
includes external fees paid to connect to other exchanges and third
parties, along with other cable and switch infrastructure required to
operate the Exchange. The Connectivity cost driver is narrowly focused
on technology used to complete connections on the Exchange and to
connect to external markets. The Exchange requires connectivity to
external markets to enable it to receive market data to run the
Exchange's matching engine (and make routing decisions for its
affiliated routing broker, IEX Services, LLC, pursuant to IEX Rule
2.220) and basic operations compliant with existing regulations,
primarily Regulation NMS. The Exchange allocated 5% of such costs (as
well as market data fees paid to external markets) to logical access as
such market data is necessary for IEX 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, and aggregate and net notional
risk checks, LULD bands).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange includes a portion of External Market Data fees to the
provision of Order Entry Ports as such market data is also necessary to
offer certain services related to such connectivity, such as certain
risk checks that are performed before an order enters the matching
engine (e.g., validating orders against the national best bid and
national best offer, trading collars, whether a symbol is halted or
subject to a short sale circuit breaker). Thus, as market data from
other exchanges is consumed at the port level to validate orders before
additional processing occurs with respect to such orders, the Exchange
believes it is reasonable to allocate a limited proportion of such
costs to Order Entry Ports (8% of Exchange External Market Data
expenses).
Data Center
Data Center costs include the costs the Exchange incurs to provide
logical connectivity in the third-party data centers where it maintains
its equipment (such as rent for dedicated space, security services,
cooling and power). The Exchange does not own the Primary Data Center
or the Disaster Recovery Data Center, but instead, leases space in data
centers operated by third parties. The Exchange has allocated a portion
of the Data Center cost to logical access ports based on its reasonable
assessment (3% of Data Center expenses).
Hardware and Software Maintenance and Licenses and Internet Services
Hardware and Software Licenses include hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above. The Exchange uses a
third-party vendor to provide the initial logical order entry port
configurations, which have been extensively customized by Exchange
employees. Internet Services relate to the internet Service Provider
vendor that is used to monitor and administer the order entry port
sessions. The Exchange allocated 10% of Hardware and Software
Maintenance and Licenses and internet Services expenses to the
provision of Order Entry Ports based upon its reasonable assessment.
Depreciation
As noted above, the software the Exchange uses to provide Order
Entry Ports is licensed from a third-party service provider, although
it has been significantly customized by in-house employees. Related
costs include both development work, as well as quality assurance and
testing to ensure the software works as intended. These costs are
depreciated over time once the software is activated in the production
environment. Hardware used to provide Order Entry 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 and depreciated or leased over a three-year period. 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
[[Page 42537]]
efficient periodic technology refreshes. The Exchange allocated 18% of
Exchange Depreciation expenses to the provision of Order Entry Ports
based upon its reasonable assessment.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to overall logical connectivity
costs (4% of Exchange Allocated Shared Expenses). These general shared
costs are integral to exchange operations, including its ability to
provide logical 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. These general shared expenses are incurred by the
Exchange's parent company, IEXG, as a direct result of operating the
Exchange. The Exchange allocated shared services costs in line with the
average allocation rate for employees in the direct and ancillary
categories (7%), consistent with the methodology used to allocate the
cost of shared services employees as described above.\62\ The Exchange
believes it is reasonable to assign an allocation of shared expenses to
logical Order Entry Ports, consistent with allocations for shared
services employees, while continuing to ensure that such allocated
expenses are not double counted when allocated to other products and
services for which the Exchange charges fees. Separately, for other
shared expenses related to the Exchange's regulatory obligations, such
as fees paid to FINRA pursuant to a regulatory services agreement
between the Exchange and FINRA, fees paid to the Depository Trust and
Clearing Corporation, audit fees, and fees paid to Securities
Information Processors, were allocated differently, less than 1% was
allocated to the provision of logical connectivity. Thus, the Allocated
Shared Expenses applied to offering physical connectivity totaled 4%.
---------------------------------------------------------------------------
\62\ The 7% average allocation applied to applicable allocated
shared expenses is based on the average of the time that the direct
and ancillary employees spent on logical connectivity.
---------------------------------------------------------------------------
* * * * *
Approximate Monthly Cost
The total monthly cost allocated to logical ports of $493,667 was
divided by the number of chargeable Order Entry Ports the Exchange
maintained at the time that proposed pricing was determined \63\
(1,161), to arrive at a cost of approximately $425 per month, per
chargeable Order Entry Port (rounded to the nearest dollar when
dividing the approximate monthly cost by the number of Order Entry
Ports).
---------------------------------------------------------------------------
\63\ The Exchanges' costs for providing logical connectivity
include the costs of providing logical connectivity for which the
Exchange charges no fees (i.e., free logical connectivity to its
Disaster Recovery Data Center or its ITF, as well as up to five free
Order Entry Ports to its Primary Data Center to Port Subscribers).
See supra note 60. Thus the total number of assigned Order Entry
Ports figure includes more ports than the total number of ports for
which the Exchange charges any fees.
---------------------------------------------------------------------------
* * * * *
Cost Analysis--Additional Discussion
In conducting its 2024 Cost Analysis, the Exchange did not
generally allocate any overall expense category in full to any core
services (including physical connectivity or logical Order Entry Ports)
and did not double-count any expenses. Instead, as described above, the
Exchange allocated applicable cost drivers across its core services.
For instance, in calculating the Human Resources expenses to be
allocated to physical connections based upon the methodology described
above, the Exchange allocated network infrastructure employees with a
high percentage of the cost of such employees (75%) to physical
connectivity given their focus on functions necessary to provide
physical connections. The compensation of those same employees was
allocated 20% to Order Entry Ports, and the remaining 5% was allocated
to trading and routing, market data, and other Exchange functions. For
ancillary employees, who work closely with and support network
infrastructure employees, the Exchange allocated a smaller percentage
of 8% for physical connectivity and 4% for Order Entry Ports, with the
remaining 88% allocated to trading and routing, market data, and other
core services provided by the Exchange. For shared services employees,
the Exchange allocated costs across a wider range of employee groups
pursuant to the allocation methodology described above resulting in an
allocation of 14% to physical connectivity, 8% to Order Entry Ports,
and 78% to trading and routing, market data, and other core services
provided by the Exchange.
In total, the Exchange allocated 14% of its Human Resources costs
to providing physical connectivity and 8% of its Human Resources costs
to providing Order Entry Ports, for a total allocation of 22% of its
Human Resources expense to provide these specific connectivity
services. In turn, the Exchange allocated the remaining 78% of its
Human Resources expense toward the cost of providing trading and
routing, market data and other core services provided by the Exchange.
The Exchange allocated depreciation expense to all core services,
including physical connections and Order Entry 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, IEX would not be able to operate the
Exchange and provide connectivity services to its Members and Sponsored
Participants. The Exchange allocated 25% of overall depreciation and
amortization expense to connectivity services (7% attributed to
physical connectivity and 18% to Order Entry Ports). The Exchange
allocated the remaining depreciation and amortization expense (75%)
toward the cost of providing trading and routing, market data, and
other Exchange functions.
The Exchange's revenue estimates described herein are based on
projections for physical connectivity and Order Entry Ports 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 Order Entry Ports or in obtaining new clients that
will purchase such services.
The 2024 Cost Analysis is based on the Exchange's 2024 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 current costs and 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 offset applicable costs as projected and described herein.
In the event revenues fail to cover future costs and a reasonable mark-
up of such costs (potential future markup of such costs), the Exchange
may later propose to
[[Page 42538]]
increase related fees. Similarly, the Exchange may propose to decrease
fees in the event that revenue materially exceeds our current projected
costs. 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 projected costs so that it would
constitute excessive pricing or a supra-competitive profit. In the
event that the Exchange determines to propose a fee change, the results
of a timely review, including an updated cost estimate, will be
included in the rule filing proposing the fee change. More generally,
the Exchange believes that it is appropriate for an exchange to refresh
and update information about its relevant costs and revenues in seeking
any future changes to fees, and the Exchange commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services. Without such hardware, infrastructure,
monitoring and support, the Exchange would be unable to provide the
physical connectivity and Order Entry Port services required by
Connectivity Subscribers and Port Subscribers.
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 offset a portion of those costs, with a
limited potential return in excess of such costs if actuals differ from
projections, by adopting and increasing fees for connectivity services.
Costs in this category enable the Exchange, for example, to measure
network performance with nanosecond granularity and allow the Exchange
to continuously improve network performance, based on Connectivity
Subscribers' needs and expectations.
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 (which
the Exchange does not charge), and market data fees. Accordingly, the
Exchange must cover its expenses from these five primary sources of
revenue.
The Exchange's 2024 Cost Analysis estimates the 2024 annual cost to
provide physical connectivity will be $12,904,100. These costs include
costs to provide physical connectivity at IEX's Primary Data Denter,
Disaster Recovery Data Center, and ITF. Based on current usage (i.e.,
that all current Connectivity Subscribers pay fees as proposed to
maintain existing physical connectivity), the Exchange estimates that
it would generate annual revenue of approximately $8,640,000, that
would cover 67% of such costs. The cost recovery would vary from this
estimate if actual usage were more or less than current usage.
The Exchange's 2024 Cost Analysis estimates the 2024 annual cost to
provide Order Entry Ports services will be $5,924,000. Based on current
usage, the Exchange estimates that would generate annual revenue of
approximately $3,483,000, that would cover 59% of such costs.\64\ The
cost recovery would vary from this estimate if actual usage were more
or less than current usage.
---------------------------------------------------------------------------
\64\ For comparison, see MEMX Connectivity Fees Filing,
Securities Exchange Act Release No. No. 95936 (September 27, 2022),
87 FR 59845, 59851 (October 3, 2022) (SR-MEMX-2022-26) (proposing to
adopt fees for connectivity and stating that MEMX would earn
approximately 8% markup).
---------------------------------------------------------------------------
Based on the above discussion, IEX believes that the proposed fees
are fair and reasonable because they are reasonably related to the
associated costs of providing products and services and will not result
in excessive pricing, or supra-competitive profit. To the contrary, the
proposed fees are expected to only provide a partial recovery of its
costs to provide physical and logical connectivity. Further, the
proposed fees are comparable to, or lower than, similar fees for
similar products charged by competing exchanges. For example, for
physical connectivity to the Primary Data Center which would include
physical connectivity at the Disaster Recovery Data Center and the ITF,
the Exchange proposes a lower monthly fee ($4,000) than the monthly
fees charged by MIAX Pearl ($8,000), MEMX ($6,000), and Cboe EDGA
($8,500) for just their 10G connections to their primary data
centers.\65\ Moreover, IEX is not proposing to charge additional fees
for physical connectivity to its Disaster Recovery Data Center, while
competing exchanges charge separately for such connectivity.
Specifically, MIAX Pearl charges a monthly fee of $3,000, MEMX charges
a monthly fee of $3,000, and Cboe EDGA charges a monthly fee of $6,000
for their comparable 10G connections to their secondary data
centers.\66\ Similarly, the proposed increases to the logical port fees
would continue to result in lower fees than those of IEX's competitors.
Accordingly, the Exchange believes that this comparative analysis
provides an additional layer of support for how its proposed fees meet
the requirements of the Act in that they are lower than the fees
charged by competing exchanges.\67\
---------------------------------------------------------------------------
\65\ See MIAX Pearl Equities Exchange Fee Schedule as of May 1,
2024, available at <a href="https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf">https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf</a>;
MEMX Connectivity Fee Schedule, available at <a href="https://info.memxtrading.com/connectivity-fees/">https://info.memxtrading.com/connectivity-fees/</a>; Cboe U.S. Equities Fee
Schedule, EDGA Equities, available at <a href="https://www.cboe.com/us/equities/membership/fee_schedule/edga/">https://www.cboe.com/us/equities/membership/fee_schedule/edga/</a>.
\66\ See supra note 65.
\67\ However, even if the Exchange earns incrementally more
revenue, the proposed fees are fair and reasonable because they
would not result in excessive pricing or supra-competitive profit
compared to other equities exchanges, based on the total expenses of
the Exchange associated with providing physical connectivity and
Order Entry Ports versus the total projected revenue of the Exchange
associated with those services.
---------------------------------------------------------------------------
The Exchange believes it is appropriate and consistent with the Act
to raise its fees, as proposed, to facilitate enhancements and upgrades
to its technology, which are essential for it to continue to compete
with other equities exchanges. The Exchange believes the proposed fees
are reasonable because they are based on the extent to which each
product drives the Exchange's overall costs, which recognizes that
certain market participants ascribe certain market value to each such
product, and the Exchange's objective to make access to its trading
system broadly available to market participants.
The Exchange notes that its revenue estimates are based on
projections and will only be realized to the extent customer activity
produces the revenue estimated. The Exchange does not yet know whether
such projections will be realized. For instance, in order to generate
the revenue expected from physical connectivity as well as Order Entry
Ports, the Exchange will need to be successful in retaining existing
clients that wish to utilize its physical connectivity and Order Entry
Ports and/or obtaining new clients that will purchase such access. To
the extent the Exchange experiences a net loss in Connectivity or Port
Subscribers, the Exchange could experience a net reduction in revenue.
In assessing an
[[Page 42539]]
exchange's rule filing to adopt non-transaction fees based on a cost
analysis, IEX believes that it is also relevant for the Commission to
consider the extent to which the proposed fees are comparable to and
competitive with similar fees charged by other exchanges in order to
ensure that the regulatory oversight of comparable fees across
exchanges is applied in a way that promotes fair and non-discriminatory
intermarket competition.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
Physical Connectivity Fees
IEX believes that its proposed physical connectivity fee of $4,000
to connect to the Primary Data Center, which includes physical
connectivity to the Disaster Recovery Data Center and ITF for no
additional charge, is reasonable, fair and equitable, and not unfairly
discriminatory because it is designed to align fees with the costs of
services provided and will apply equally to all Members and other
Connectivity Subscribers \68\ with direct physical connectivity to the
Exchange, and will minimize barriers to entry by providing high speed
10G connectivity at prices well below those offered by any other
exchange. IEX believes that the cost-based fee of $4,000 per month is
low enough that it will not operate to restrain any subscriber's
ability to maintain physical connectivity to the Exchange. These lower
fees for 10G physical connectivity mean that even those firms which
might maintain two or more physical connections to the Exchange will
still pay considerably less than competing exchanges charge for
equivalent physical connectivity. Further, the number of physical
connections to the Exchange will continue to be based on decisions by
each firm, including the ability to reduce fees by reducing the number
of physical connections to the Exchange.
---------------------------------------------------------------------------
\68\ As discussed above, the types of firms that might pay for
physical connectivity to the Exchange are: Members, Service Bureaus,
Data Recipients, and Extranet Providers.
---------------------------------------------------------------------------
The Exchange believes that charging $4,000 for physical
connectivity to the Exchange is fair and equitable, and not unfairly
discriminatory because it will enable all Members (and other firms with
physical connectivity) to obtain a 10G connection to IEX at prices
well-below those of any other equity exchange, thereby encouraging
order flow and liquidity from a diverse set of market participants,
facilitating price discovery and the interaction of orders. IEX also
notes that Connectivity Providers that determine they need two or more
physical connections to the Exchange (generally because they generate
relatively higher inbound message volume or need faster message
throughput) thereby account for a disproportionate share of IEX's
aggregate costs for providing physical connectivity. Therefore, IEX
believes it is not unfairly discriminatory for such Members to pay a
higher proportionate share of the physical connectivity fees by paying
for each additional connection.
Accordingly, the Exchange believes that the fee will be applied
consistently with its specific purpose--to offset a portion of its
costs with a limited potential return in excess of such costs if
actuals differ from projections.
The Exchange further believes that the proposed fees are
reasonable, fair and equitable, and non-discriminatory because they
will apply to all Connectivity Subscribers in the same manner and are
not targeted at a specific type or category of market participant
engaged in any particular trading strategy. All Members, Service
Bureaus, Data Recipients, and Extranet Providers will pay the same
``per unit'' rate for physical connectivity to the Exchange. Further,
the physical connectivity fee is not connected to volume-based tiers or
dependent on executing a minimum volume of orders on IEX. All
Connectivity Subscribers will be subject to the same fee schedule,
regardless of the volume sent to or executed on IEX. The fee also does
not depend on any distinctions between Members, Service Bureaus, Data
Recipients, and Extranet Providers. The fee will be assessed solely
based on the number of physical connections a firm selects and not on
any other distinction applied by IEX. While firms that send relatively
more inbound messages to IEX may select two or more physical
connections to the Exchange, thereby resulting in higher fees, that
distinction is based on decisions made by each firm and the extent and
nature of the firm's business on IEX rather than application of the fee
by IEX. Members, Service Bureaus, Data Recipients, and Extranet
Providers can determine how many physical connections they need to
implement their trading or business strategies effectively.
IEX also believes that it is reasonable, equitable, and not
unfairly discriminatory to base its billing for physical connectivity
on the number of physical connections assigned to Members, Service
Bureaus, Data Recipients, and Extranet Providers as of the first day of
each month. IEX believes that this approach is fair because Members,
Service Bureaus, Data Recipients, and Extranet Providers will have a
reasonable understanding and expectation of the cutoff date for
determining whether the firm requires one or more physical connections
to the Exchange.
Furthermore, the Exchange believes that the proposed fee is
consistent with Section 11A of the Exchange Act in that it is designed
to facilitate the economically efficient execution of securities
transactions, fair competition among brokers and dealers, exchange
markets and markets other than exchange markets, and the practicability
of brokers executing investors' orders in the best market.
Specifically, the proposed low, cost-based fee will enable a broad
range of Members, Service Bureaus, Data Recipients, and Extranet
Providers to continue to physically connect to IEX, thereby
facilitating the economically efficient execution of securities
transactions on IEX, fair competition between and among such Members,
Service Bureaus, Data Recipients, and Extranet Providers, and the
practicability of Members that are brokers executing investors' orders
on IEX when it is the best market.
As discussed above, IEX believes the proposed fees are reasonable
because they are equitable and not unfairly discriminatory, based on a
thorough and transparent cost-based analysis as well as a comparison to
similar fees charged by other exchanges, as detailed below. Moreover,
the proposed fees would support IEX's ability to cover its costs (in
whole or in part) to provide physical connectivity, with a limited
potential return in excess of such costs if actuals differ from
projections, and thereby invest in infrastructure, new products and
other innovations, and competitively price transaction fees. These
investments in the IEX's future growth are designed to enable IEX to
attract additional business and build market share, with the benefit,
inter alia, of attracting more displayed liquidity to the Exchange to
the benefit of all market participants.
Finally, IEX does not believe that physical connectivity fees are
properly constrained by competitive market pressures. Nevertheless, the
Exchange believes that a competitive analysis of its proposed fees, as
discussed below, also demonstrates that they are equitable and not
unfairly discriminatory.
Logical Connectivity Fees
With respect to Order Entry Ports, IEX believes that its proposed
fee is reasonable, fair and equitable, and not
[[Page 42540]]
unfairly discriminatory because it is designed to align fees with the
costs of services provided, will apply equally to all Members that are
assigned Order Entry Ports (either directly or through a Service
Bureau), and will minimize barriers to entry by continuing to provide
all Port Subscribers with five free Order Entry Ports. Because the
first five Order Entry Ports are free, a significant majority of Port
Subscribers will not be subject to any fee. Even for Port Subscribers
that choose to maintain more than five Order Entry Ports, IEX believes
that the cost-based fee of $250 is low enough that it will not operate
to restrain any Port Subscriber's ability to maintain the number of
Order Entry Ports that it determines are consistent with its business
objectives. The small number of Members projected to be subject to the
highest fees will still pay considerably less than competing exchanges
charge. For example, the monthly cost per order entry port on Nasdaq,
NYSE, and Cboe EDGA is $575, $550, and $550, respectively.\69\ IEX
further notes that NYSE and Nasdaq both charge for other logical ports
that IEX will continue to offer for free, such as those used for
testing and disaster recovery purposes.\70\ Further, the number of
assigned Order Entry Ports will continue to be based on decisions by
each Port Subscriber, including the ability to reduce fees by
discontinuing unused Order Entry Ports.
---------------------------------------------------------------------------
\69\ See Nasdaq Price List--Trading Connectivity, Logical
Connectivity, <a href="https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity">https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity</a>; NYSE Price
List as of February 12, 20204, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a>; and Cboe U.S.
Equities Fee Schedule, EDGA Equities, available at <a href="https://www.cboe.com/us/equities/membership/fee_schedule/edga/">https://www.cboe.com/us/equities/membership/fee_schedule/edga/</a>.
\70\ See Nasdaq Price List--Trading Connectivity, Logical
Connectivity, <a href="https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity">https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity</a>; NYSE Price
List as of February 12, 20204, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a>;
---------------------------------------------------------------------------
The Exchange believes that providing five free Order Entry Ports is
fair and equitable, and not unfairly discriminatory because it will
enable all Members and Service Bureaus to access IEX on those ports
free of charge, thereby encouraging order flow and liquidity from a
diverse set of market participants, facilitating price discovery and
the interaction of orders. IEX continues to believe that five Order
Entry Ports is an appropriate number to provide for free because it
aligns with the number of such ports currently maintained by a
meaningful majority of Port Subscribers. Port Subscribers with
relatively higher inbound message volume also request (and are
assigned) more Order Entry Ports than other Port Subscribers, which in
turn means they account for a disproportionate share of IEX's aggregate
costs for providing Order Entry Ports. Therefore, IEX believes it is
not unfairly discriminatory for the Port Subscribers with higher
inbound message volume to pay a higher proportionate share of the Order
Entry Port fees.
Accordingly, the Exchange believes that the fee will be applied
consistently with its specific purpose--to offset a portion its costs,
with a limited potential return in excess of such costs if actuals
differ from projections, encourage the efficient use of Order Entry
Ports, and align fees with Port Subscribers' Order Entry Port and
system usage.
The Exchange further believes that the proposed fees are
reasonable, fair and equitable, and non-discriminatory because they
will apply to all Members in the same manner and are not targeted at a
specific type or category of market participant engaged in any
particular trading strategy. All Members (or Service Bureaus) will
receive five free Order Entry Ports and pay the same $250 per Order
Entry Port for each additional Order Entry Port. Each Order Entry Port
is identical, providing logical connectivity to IEX on identical terms.
While the proposed fee will result in a different effective ``per
unit'' rate for different Members (or Service Bureaus) after factoring
in the five free Order Entry Ports, the Exchange does not believe that
this difference is material given the overall low fee of $250 per Order
Entry Port. Because the first five Order Entry Ports are free of
charge, each entity will have a ``per unit'' rate of less than $250.
Further, the fee is not connected to volume-based tiers. All Members
will be subject to the same fee schedule, regardless of the volume sent
to or executed on IEX. The fee also does not depend on any distinctions
between Members, customers, broker-dealers, or any other entity. The
fee will be assessed solely based on the number of Order Entry Ports an
entity selects and not on any other distinction applied by IEX. While
entities that send relatively more inbound messages to IEX may select
more Order Entry Ports, thereby resulting in higher fees, that
distinction is based on decisions made by each Port Subscriber and the
extent and nature of the Port Subscribers' business on IEX rather than
application of the fee by IEX. Members (and their Service Bureaus) can
determine how many Order Entry Ports they need to implement their
trading strategies effectively. As proposed, IEX will continue to offer
multiple Order Entry Ports at a low fee to enable all Port Subscribers
to purchase as many Order Entry Ports as their business needs dictate
in order to optimize throughput and manage latency across the Exchange.
Notwithstanding that Port Subscribers with the highest number of
Order Entry Ports will pay a greater percentage of the total projected
fees than is represented by their Order Entry Port usage, IEX does not
believe that the proposed fee is unfairly discriminatory. It is not
possible to fully synchronize IEX's objective to provide five free
Order Entry Ports to all Port Subscribers, thereby minimizing barriers
to entry and incentivizing liquidity on the Exchange, with an approach
that exactly aligns the projected per Port Subscriber fee with each
Port Subscriber's number of requested Order Entry Ports. As proposed,
IEX is providing a reasonable number of Order Entry Ports to each
Member (or Service Bureau) without charge. Any variance between
projected fees and Order Entry Port usage is attributable to objective
differences among Members in terms of the number of Order Entry Ports
they determine are appropriate based on their trading on IEX. Any
difference in impact would be allocated to Port Subscribers with
substantially higher trading volume.
IEX also believes that it is reasonable, equitable, and not
unfairly discriminatory to base its billing for Order Entry Ports on
the number of Order Entry Ports assigned to each User as of the first
day of each month. IEX believes that this approach is fair because
Members (and Service Bureaus) will have a reasonable understanding and
expectation of the cutoff date for determining whether a User has more
than five assigned Order Entry Ports.
Finally, the Exchange believes that the proposed fee is consistent
with Section 11A of the Exchange Act in that it is designed to
facilitate the economically efficient execution of securities
transactions, fair competition among brokers and dealers, exchange
markets and markets other than exchange markets, and the practicability
of brokers executing investors' orders in the best market.
Specifically, the proposed low, cost-based fee will enable a broad
range of IEX Members to continue to connect to IEX, thereby
facilitating the economically efficient execution of securities
transactions on IEX, fair competition between and among such Members,
and the practicability of Members that are brokers executing investors'
orders on IEX when it is the best market.
As discussed above, IEX believes the proposed fees are reasonable
because they are equitable and not unfairly
[[Page 42541]]
discriminatory, based on a thorough and transparent cost-based
analysis, as well as a comparison to similar fees charged by other
exchanges, as detailed below. Moreover, the proposed fees would support
IEX's ability to offset its costs (in whole or in part) to provide
logical connectivity, with a limited potential return in excess of such
costs if actuals differ from projections, and thereby invest in
infrastructure, new products and other innovations, and competitively
price transaction fees. These investments in the IEX's future growth
are designed to enable IEX to attract additional business and build
market share, with the benefit, inter alia, of attracting more
displayed liquidity to the Exchange to the benefit of all market
participants.
As discussed above, IEX does not believe that logical connectivity
fees are properly constrained by competitive market pressures.
Nevertheless, the Exchange believes that an analysis of similar fees
charged by competitor exchanges, as discussed below, also demonstrates
that the proposed fees are equitable and not unfairly discriminatory.
The Proposed Fees Promote Competition by Offering a Lower Cost Solution
The Exchange believes the competing exchanges' physical
connectivity and port fees are useful examples of alternative
approaches to providing and charging for physical and logical
connectivity. To that end, the Exchange believes the proposed fees are
reasonable, in addition to being cost-based, because the proposed fees
are less than fees charged for similar physical connectivity and
logical order entry port access provided by other exchanges with
comparable market shares. These fees are designed to recoup a portion
of its costs for providing physical and logical connectivity, with a
limited potential return in excess of such costs if actuals differ from
projections, thereby enabling it to invest in competitive
infrastructure and other offerings and compete with other equities
exchanges. The following table demonstrates that the Exchange's
proposed fees would be significantly less than fees charged for similar
physical and logical connectivity provided by other exchanges with
similar market share. Each of the physical or logical connectivity fees
in place at competing exchanges listed below were filed with the
Commission for immediate effectiveness and remain in place today.
------------------------------------------------------------------------
Type of connection
Exchange or port Monthly fee
------------------------------------------------------------------------
IEX (market share of 1.94% 10G connection to $4,000 per
for the month of March Primary Data Center. connection (as
2024) \e\. proposed).
10G connection to Included with 10G
Disaster Recovery connection to
Data Center. Primary Data Center
(as proposed).
Primary Data Center 1-5 ports: FREE 6
Logical Order Entry ports or more: $250
Ports. per port (as
proposed).
All other logical FREE.
ports (including
Drop Copy ports).
MIAX Pearl Equities (market 1G connection to $2,500 per
share of 1.87% for the primary/secondary connection.\f\ \g\
month of March 2024) \e\. data center. $8,000 per
10G connection to connection.\f\
primary/secondary $1,000 per
data center. connection.\f\ \h\
1G connection to $3,000 per
disaster recovery connection.\f\
data center. 1-5 ports: FREE 6
1G [sic] connection ports or more: $450
to disaster per port.\f\
recovery data FREE.\f\
center.
FIX and MEO Ports...
FXD Ports (i.e.,
Drop Copy Ports).
MEMX (market share of 2.53% 1G connection to Not available.\i\
for the month of March primary data center. $6,000 per
2024) \e\. 10G connection to connection.\i\
primary data center. $3,000 per
10G connection to connection.\i\
disaster recovery $450 per port.\i\
data center. $450 per port.\i\
Order Entry Ports...
Drop Copy Ports.....
Cboe EDGA (market share of 1G connection to $2,500 per
1.78% for the month of primary data center. connection.\g\ \j\
March 2024) \e\. 10G connection to $8,500 per
primary data center. connection.\j\
1G connection to $2,000 per
disaster recovery connection.\j\
data center. $6,000 per
10G connection to connection.\j\
disaster recovery $550 per port.\j\
data center. $650 per port.\j\
Order Entry Ports...
Purge Ports.........
------------------------------------------------------------------------
\e\ See ``U.S. Equities Market Volume Summary'', available at <a href="https://www.cboe.com/us/equities/market_share/">https://www.cboe.com/us/equities/market_share/</a>.
\f\ See MIAX Pearl Equities Exchange Fee Schedule as of May 1, 2024,
available at <a href="https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf">https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf</a>.
\g\ IEX notes that some equities exchanges also offer a 1G connection to
their primary data center, but understands that only a small minority
of market participants find a 1G connection to be adequate for trading
and market data purposes.
\h\ MIAX Pearl waives the fee for a single 1G connection to the disaster
recovery center for members required by MIAX Pearl to conduct disaster
recovery data center testing. See <a href="https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf">https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_05012024.pdf</a>.
\i\ See MEMX Connectivity Fee Schedule, available at <a href="https://info.memxtrading.com/connectivity-fees/">https://info.memxtrading.com/connectivity-fees/</a>.
\j\ See Cboe U.S. Equities Fee Schedule, EDGA Equities, available at
<a href="https://www.cboe.com/us/equities/membership/fee_schedule/edga/">https://www.cboe.com/us/equities/membership/fee_schedule/edga/</a>.
Moreover, IEX's proposed fees are substantially lower than the fees
other exchanges that operate listing markets charge for the equivalent
physical and logical connectivity. For example, NYSE charges $22,000
per month for a 10G physical connection, plus an initial charge of
$15,000; and charges $550 per order entry and drop copy ports.\71\
Nasdaq charges $10,550 per month for a 10G physical connection, plus an
initial charge of $1,055 (and $15,825 per month for a 10G ``Ultra''
connection, plus an initial charge of $1,583); and charges $575 per
order entry port, $550 per drop copy port, $100 per test ports, and $25
per disaster recovery ports.\72\ By contrast, IEX, as proposed, will
charge $4,000 for a 10G physical connection, offers up to five Order
Entry Ports for free, and charges $250 per port for 6 or more ports.
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\71\ See NYSE Connectivity Fee Schedule as of April 3, 2024,
available at <a href="https://www.nyse.com/publicdocs/Wireless_Connectivity_Fees_and_Charges.pdf">https://www.nyse.com/publicdocs/Wireless_Connectivity_Fees_and_Charges.pdf</a>. and NYSE Price List as
of February 12, 20204, available at <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a>.
\72\ See Nasdaq Price List--Trading Connectivity, Logical
Connectivity, <a href="https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity">https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#logicalconnectivity</a>.
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There is no regulatory requirement 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 (or no)
equities exchanges based on the market participant's assessment of the
business opportunity relative to the costs of the Exchange. In lieu of
becoming a member at each exchange, a market participant may join one
[[Page 42542]]
exchange and elect to have its orders routed in the event that a better
price is available on an away market. Nothing in the Order Protection
Rule \73\ requires a broker-dealer to become a Member of--or establish
connectivity to--the Exchange. All equities exchanges have rules in
place to avoid trading through a better priced quotation on another
exchange in violation of Order Protection Rule.\74\
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\73\ See 17 CFR 242.611.
\74\ See e.g., IEX Rule 11.230.
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As noted earlier, IEX believes that as a general matter, physical
and logical connectivity fees cannot be sufficiently justified based
solely on unproven assumptions about competition, notwithstanding that
a newer and/or smaller securities exchange, such as IEX, may be less
able to set prices for its physical and logical connectivity free of
constraint by significant competitive forces than may be the case for
more established securities exchanges.\75\
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\75\ And as noted earlier, IEX's proposed fees are significantly
less than fees charged by its competitors.
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In summary, for all of the foregoing reasons, the Exchange believes
that the proposed fees are reasonable, equitably allocated, and not
unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on intramarket or intermarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act.
Physical Connectivity Fees
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
fees are cost-based fees, which are designed to enable the Exchange to
recoup applicable costs, with a limited potential return on its
investment in excess of such costs if actuals differ from projections,
as described in the Purpose and Statutory Basis sections. Competing
equities exchanges are free to propose comparable fee structures
subject to the SEC rule filing process. And as discussed above, market
participants are not required to connect to all exchanges. There is no
reason to believe that IEX's proposed price increase will adversely
impact any other exchange's ability to compete. Further, as detailed
above, the proposed fees are lower than similar fees charged by other
exchanges. IEX believes that a comparison to comparable fees charged by
competitor markets helps to ensure that regulatory oversight of
comparable fees across exchanges is applied in a way that promotes fair
and non-discriminatory intermarket competition. 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.
The Exchange also does not believe that the proposed fees will
impose any burden on intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. All Connectivity
Subscribers will be charged the same amount for each physical
connection to the Primary Data Center, with free physical connectivity
to the Disaster Recovery Data Center and ITF. The proposed fees do not
favor certain categories of Connectivity Subscribers in a manner that
would impose an undue burden on competition. The Exchange does not
believe that the proposed rule change would place certain Connectivity
Subscribers at the Exchange at a relative advantage or disadvantage
compared to other Connectivity Subscribers or affect the ability of
such firms to compete. Connectivity Subscribers that utilize more
physical connectivity services typically utilize the most bandwidth,
and those are the firms that consume the most resources from the
Exchange. Accordingly, the proposed fees for physical connectivity
services do not favor certain categories of Connectivity Subscribers in
a manner that would impose a burden on competition; rather, the
allocation of the proposed physical connectivity fees reflects the
Exchange resources consumed by the various Connectivity Subscribers and
the costs to the Exchange of providing such physical connectivity
services.
Finally, as described in the Purpose section, the proposed fee
change is designed to assist the Exchange in complying with its
Regulation SCI compliance obligations to have levels of capacity
adequate to maintain IEX's operational capability and promote the
maintenance of fair and orderly markets, thereby promoting both
intermarket and intramarket competition by enabling IEX to support a
robust trading environment for its Members and compete with other
equities venues.
Logical Connectivity Fees
The Exchange does not believe that the proposed rule change with
respect to Order Entry Port Fees will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The proposed fees are cost-based fees, which are
designed to enable the Exchange to recoup applicable costs, with a
limited potential return on its investment in excess of such costs if
actuals differ from projections, as described in the Purpose and
Statutory Basis sections. Competing equities exchanges are free to
propose comparable fee structures subject to the SEC rule filing
process. And as discussed above, market participants are not
regulatorily required to connect to all exchanges. There is no reason
to believe that IEX's proposed price increase will adversely impact any
other exchange's ability to compete. Further, as detailed above, the
proposed fees are lower than similar fees charged by other exchanges.
IEX believes that a comparison to comparable fees charged by competitor
markets helps to ensure that regulatory oversight of comparable fees
across exchanges is applied in a way that promotes fair and non-
discriminatory intermarket competition. 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.
The Exchange also does not believe that the proposed fees will
impose any burden on intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. IEX does not
believe that the proposed increased Port Fees will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purpose of the Act because all Members (and/or their
Service Bureaus) will continue to be entitled to five free ports and
subject to the same low, cost-based fee for additional ports. While
different total fees would be assessed depending on the number of Order
Entry Ports a Member (or Service Bureau) requests, these different fees
are not based on the type of Member requesting the Order Entry Port(s)
but on the number of such ports it requests, and each Port Subscriber
can determine the number of such ports to request. Further, providing
five free Order Entry Ports is designed to avoid creating barriers to
entry for smaller Members, thereby promoting intramarket competition.
In addition, IEX believes that even Members subject to relatively
higher fees for more Order Entry Ports will still be subject to a
relatively low aggregate fee (and significantly less than competing
exchanges, as described above) and thus the proposed fee will not
operate as a barrier to entry for such Members or impose a significant
business cost
[[Page 42543]]
burden on such Members relative to their levels of business activity.
The proposed fees do not favor certain categories of Connectivity
Subscribers in a manner that would impose an undue burden on
competition. The Exchange does not believe that the proposed rule
change would place certain Connectivity Subscribers at the Exchange at
a relative advantage or disadvantage compared to other Connectivity
Subscribers or affect the ability of such firms to compete.
Finally, as described in the Purpose section, the proposed fee
change is designed to assist the Exchange in complying with its
Regulation SCI compliance obligations to have levels of capacity
adequate to maintain IEX's operational capability and promote the
maintenance of fair and orderly markets, thereby promoting both
intermarket and intramarket competition by enabling IEX to support a
robust trading environment for its Members and compete with other
equities venues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) \76\ of the Act.
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\76\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 under
Section 19(b)(2)(B) \77\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\77\ 15 U.S.C. 78s(b)(2)(B).
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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#384a4d545d155b5755555d564c4b784b5d5b165f574e"><span class="__cf_email__" data-cfemail="5e2c2b323b733d3133333b302a2d1e2d3b3d70393128">[email protected]</span></a>. Please include
file number SR-IEX-2024-08 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-IEX-2024-08. 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-IEX-2024-08 and should be
submitted on or before June 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\78\
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\78\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10588 Filed 5-14-24; 8:45 am]
BILLING CODE 8011-01-P
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