Notice2024-19263
Self-Regulatory Organizations; MIAX Sapphire LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Establish a Fee Schedule for the Exchange's Proprietary Market Data Feeds: (i) MIAX Sapphire Top of Market (“ToM”) Data Feed; (ii) MIAX Sapphire Complex Top of Market (“cToM”) Data Feed; and (iii) MIAX Sapphire Liquidity Feed (“SLF”)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 28, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 167 (Wednesday, August 28, 2024)</title>
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[Federal Register Volume 89, Number 167 (Wednesday, August 28, 2024)]
[Notices]
[Pages 68964-68975]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-19263]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100806; File No. SR-SAPPHIRE-2024-18]
Self-Regulatory Organizations; MIAX Sapphire LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Establish a Fee Schedule for the Exchange's Proprietary Market Data
Feeds: (i) MIAX Sapphire Top of Market (``ToM'') Data Feed; (ii) MIAX
Sapphire Complex Top of Market (``cToM'') Data Feed; and (iii) MIAX
Sapphire Liquidity Feed (``SLF'')
August 22, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 8, 2024, MIAX Sapphire, LLC (``MIAX Sapphire'' 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Sapphire
Options Exchange Fee Schedule (the ``Fee Schedule'') to establish fees
for the Exchange's proprietary market data feeds: (i) MIAX Sapphire Top
of Market (``ToM'') data feed; (ii) MIAX Sapphire Complex Top of Market
(``cToM'') data feed; and (iii) MIAX Sapphire Liquidity Feed (``SLF'').
While changes to the Fee Schedule pursuant to this proposal are
effective upon filing, the Exchange has designated these changes to be
operative on August 12, 2024.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://www.miaxglobal.com/markets/us-options/all-options-exchanges/rule-filings">https://www.miaxglobal.com/markets/us-options/all-options-exchanges/rule-filings</a>, at MIAX Sapphire's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
MIAX Sapphire plans to commence electronic operations on August 12,
2024.\3\ On July 19, 2024, the Exchange filed a proposal to establish
the ToM, cToM and SLF data feeds (collectively, the ``market data
feeds'').\4\ The Exchange now proposes to amend the Fee Schedule to
establish fees for each of these market data feeds.\5\ The Exchange
also proposes to waive such fees during an Initial Waiver Period,\6\
which would run for over six full calendar months from the effective
date of the proposed fees to incentivize market participants to
subscribe and make the Exchange's proprietary market data more widely
available.
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\3\ See Securities Exchange Act Release No. 100539 (July 15,
2024) (File No. 10-240) (In the Matter of the Application of MIAX
Sapphire, LLC for Registration as a National Securities Exchange;
Findings, Opinion, and Order of the Commission).
\4\ See Securities Exchange Act Release No. 100588 (July 25,
2024), 89 FR 61554 (July 31, 2024) (SR-SAPPHIRE-2024-01).
\5\ The Exchange established the Definitions section of the Fee
Schedule in a separate rule filing. See SR-SAPPHIRE-2024-13 (not yet
noticed by the Commission at the time of this filing). Certain
capitalized terms used throughout this filing refer are included in
the Definitions section of the Fee Schedule, previously adopted.
\6\ The term ``Initial Waiver Period'' means, for each
applicable fee, the period of time from the initial effective date
of the MIAX Sapphire Fee Schedule plus an additional six (6) full
calendar months after the completion of the partial month of the
Exchange launch. See the Definitions section of the Fee Schedule.
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The ToM data feed contains top of book quotations based on options
[[Page 68965]]
orders \7\ and quotes \8\ resting on the Exchange's Simple Order Book
\9\ as well as administrative messages, such as other real-time
Exchange System \10\ functions.\11\ The cToM data feed includes the
same types of information as ToM, but for Complex Orders \12\ on the
Exchange's Strategy Book.\13\ This information includes the Exchange's
best bid and offer for a complex strategy,\14\ with aggregate size,
based on displayable orders in the complex strategy. The cToM data feed
also provides subscribers with the following information: (i) the
identification of the complex strategies currently trading on the
Exchange; (ii) complex strategy last sale information; and (iii) the
status of securities underlying the complex strategy (e.g., halted,
open, or resumed). ToM subscribers are not required to subscribe to
cToM, and cToM subscribers are not required to subscribe to ToM.
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\7\ The term ``order'' means a firm commitment to buy or sell
option contracts. See Exchange Rule 100.
\8\ The term ``quote'' or ``quotation'' The term ``quote'' or
``quotation'' means a bid or offer entered by a Market Maker as a
firm order that updates the Market Maker's previous bid or offer, if
any. When the term order is used in the Exchange's Rules and a bid
or offer is entered by the Market Maker in the option series to
which such Market Maker is registered, such order shall, as
applicable, constitute a quote or quotation for purposes of the
Exchange's Rules. See Exchange Rule 100.
\9\ The ``Simple Order Book'' is the Exchange's regular
electronic book of orders and quotes. See Exchange Rule 100.
\10\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
\11\ See MIAX Sapphire Options Exchange User Manual, Version
1.0.0, Section 5.06, dated December 11, 2023, available at <a href="https://www.miaxglobal.com/miax_sapphire_user_manual.pdf">https://www.miaxglobal.com/miax_sapphire_user_manual.pdf</a> (last visited July
24, 2024).
\12\ In sum, a ``Complex Order'' is ``any order involving the
concurrent purchase and/or sale of two or more different options in
the same underlying security (the `legs' or `components' of the
complex order), for the same account . . . .'' See Exchange Rule
518(a).
\13\ The ``Strategy Book'' is the Exchange's electronic book of
complex orders. See Exchange Rule 100.
\14\ The term ``complex strategy'' means a particular
combination of components and their ratios to one another. New
complex strategies can be created as the result of the receipt of a
complex order or by the Exchange for a complex strategy that is not
currently in the System. The Exchange may limit the number of new
complex strategies that may be in the System at a particular time
and will communicate this limitation to Members via Regulatory
Circular. See Exchange Rule 518(a).
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The Exchange notes that there is no requirement that any Member
\15\ or market participant subscribe to either the ToM or cToM data
feeds. Instead, a Member may choose to maintain subscriptions to ToM or
cToM based on their trading strategies and individual business
decisions. Moreover, persons (including broker-dealers) who subscribe
to any exchange proprietary data feed must also have equivalent access
to consolidated Options Information \16\ from the Options Price
Reporting Authority (``OPRA'') for the same classes or series of
options that are included in the proprietary data feed (including for
exclusively listed products), and proprietary data feeds cannot be used
to meet that particular requirement. The proposed fees described below
would not apply differently based upon the size or type of firm, but
rather based upon the type of subscription a firm has to ToM or cToM
and their use thereof, which are based upon factors deemed relevant by
each firm.
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\15\ The term ``Member'' means an individual or organization
that is registered with the Exchange pursuant to Chapter II of these
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See Exchange Rule 100.
\16\ The term ``consolidated Options Information'' means
``consolidated Last Sale Reports combined with either consolidated
Quotation Information or the BBO furnished by OPRA . . .'' Access to
consolidated Options Information is deemed ``equivalent'' if both
kinds of information are equally accessible on the same terminal or
work station. See Limited Liability Company Agreement of Options
Price Reporting Authority, LLC (``OPRA Plan''), Section 5.2(c)(iii).
The Exchange notes that this requirement under the OPRA Plan is also
reiterated under the Cboe Global Markets Global Data Agreement and
Cboe Global Markets North American Data Policies, which subscribers
to any exchange proprietary product must sign and are subject to,
respectively. Additionally, the Exchange's Data Order Form (used for
requesting the Exchange's market data products) requires
confirmation that the requesting market participant receives data
from OPRA.
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The SLF data feed provides market participants with a direct data
feed that allows subscribers to receive real-time updates of options
orders, products traded on MIAX Sapphire, MIAX Sapphire System status,
and MIAX Sapphire underlying trading status. When an order is received
or an order state changes, published order information will be
transmitted over SLF, including time stamp, action, product ID, order
ID, order side, order type, order price, original order size, open
order size, time in force, origin, open or close, and route
instruction. For complex orders, complex strategy definition
notification and complex order notice are also included. Subscribers to
the SLF will get a list of all options symbols and strategies that will
be traded and sourced on that feed at the start of every session.
Each of the proposed fees are described below. Again, the Exchange
proposes to not charge the proposed fees during the Initial Waiver
Period. Even though the Exchange proposes to waive these particular
fees during the Initial Waiver Period, the Exchange believes that it is
appropriate to provide market participants with the overall structure
of the fees by outlining the structure and amounts in the Fee Schedule
so that there is general awareness that the Exchange intends to assess
such fees upon expiration of the defined term of the Initial Waiver
Period.
ToM
The Exchange proposes to charge a monthly fee of $1,200 to Internal
Distributors \17\ and $2,000 to External Distributors for the ToM data
feed after the expiration of the Initial Waiver Period. The proposed
fees are intended to cover the Exchange's costs with compiling and
producing the ToM data feed described in the Exchange's cost analysis
detailed below. The Exchange proposes to assess Internal Distributors
fees that are less than the fees assessed for External Distributors
because External Distributors may monetize their receipt of the ToM
data feed by charging their customers fees for receipt of the
Exchange's data. Internal Distributors do not have the same ability.
The Exchange does not propose to charge any additional fees based on a
Distributor's use of the ToM data feed (e.g., displayed versus non-
displayed use), redistribution fees, or individual per user fees.
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\17\ A ``Distributor'' of MIAX Sapphire data is any entity that
receives a feed or file of data either directly from MIAX Sapphire
or indirectly through another entity and then distributes it either
internally (within that entity) or externally (outside that entity).
All Distributors are required to execute an Exchange Data Agreement.
See Fee Schedule, proposed Section 6)a).
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cToM
The Exchange proposes to charge a monthly fee of $1,200 to Internal
Distributors and $2,000 to External Distributors for the cToM data feed
after the expiration of the Initial Waiver Period. The proposed fees
are intended to cover the Exchange's costs with compiling and producing
the cToM data feed described in the Exchange's cost analysis detailed
below. The Exchange proposes to assess Internal Distributors fees that
are less than the fees assessed for External Distributors because
External Distributors may monetize their receipt of the cToM data feed
by charging their customers fees for receipt of the Exchange's data.
Internal Distributors do not have the same ability. The Exchange does
not propose to charge any additional fees based on a Distributor's use
of the cToM data feed (e.g., displayed versus non-displayed use),
redistribution fees, or individual per user fees.
[[Page 68966]]
SLF
The Exchange proposes to charge a monthly fee of $3,000 to Internal
Distributors and $3,500 to External Distributors for the SLF data feed
after the expiration of the Initial Waiver Period. The proposed fees
are intended to cover the Exchange's costs with compiling and producing
the SLF data feed described in the Exchange's Cost Analysis detailed
below. The Exchange proposes to assess Internal Distributors fees that
are less than the fees assessed for External Distributors because
External Distributors may monetize their receipt of the SLF data feed
by charging their customers fees for receipt of the Exchange's data.
Internal Distributors do not have the same ability. The Exchange does
not propose to charge any additional fees based on a Distributor's use
of the SLF data feed (e.g., displayed versus non-displayed use),
redistribution fees, or individual per user fees.
* * * * *
The Exchange proposes that each Distributor would be charged for
each month it is credentialed to receive ToM, cToM, and/or SLF in the
Exchange's production environment. Fees for each of the market data
feeds will be reduced for new Distributors who subscribe to a market
data feed mid-month for the first month they subscribe following the
expiration of the Initial Waiver Period, as described above. New
Distributors who subscribe mid-month for each market data feed would be
assessed a pro-rata percentage of the applicable Distribution fee based
on the percentage of the number of trading days remaining in the
affected calendar month as of the date on which they have been first
credentialed to receive each of the market data feeds in the production
environment, divided by the total number of trading days in the
affected calendar month.
The Exchange believes the proposed fees will allow the Exchange to
offset the expenses the Exchange has and will continue to incur
associated with compiling and disseminating the market data feeds.
Further, the Exchange believes it provided sufficient transparency in
the Cost Analysis provided below, which provides a basis for how the
Exchange determined to charge such fees.
The Exchange issued an alert publicly announcing the proposed fees
on July 23, 2024.\18\
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\18\ See Fee Change Alert, MIAX Sapphire Options Exchange--
Summary of Proposed Non-Transaction Fees (July 23, 2024), available
at <a href="https://www.miaxglobal.com/alert/2024/07/23/miax-sapphire-options-exchange-summary-proposed-non-transaction-fees?nav=all">https://www.miaxglobal.com/alert/2024/07/23/miax-sapphire-options-exchange-summary-proposed-non-transaction-fees?nav=all</a>.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \19\ of the Act in general, and
furthers the objectives of Section 6(b)(4) \20\ of the Act, in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities. Additionally, the Exchange
believes that the proposed fees are consistent with the objectives of
Section 6(b)(5) \21\ of the Act in that they are designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to a free and open market and
national market system, and, in general, to protect investors and the
public interest, and, particularly, are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\19\ 15 U.S.C. 78f.
\20\ 15 U.S.C. 78f(b)(4).
\21\ 15 U.S.C. 78f(b)(5).
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In 2019, 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 (the ``Staff Guidance'').\22\ While the Exchange
understands that the Staff Guidance does not create new legal
obligations on SROs, the Staff Guidance is consistent with the
Exchange's view about the type and level of transparency that exchanges
should meet to demonstrate compliance with their existing obligations
when they seek to charge new fees. The Staff Guidance provides that in
assessing the reasonableness of a fee, the Staff would consider whether
the fee is constrained by significant competitive forces. To determine
whether a proposed fee is constrained by significant competitive
forces, the Staff Guidance further provides that the Staff would
consider whether the evidence provided by an SRO in a fee filing
proposal demonstrates (i) that there are reasonable substitutes for the
product or service that is the subject of a proposed fee; (ii) that
``platform'' competition constrains the fee; and/or (iii) that the
revenue and cost analysis provided by the SRO otherwise demonstrates
that the proposed fee would not result in the SRO taking supra-
competitive profits.\23\ The Exchange provides sufficient evidence
below to support the findings that the proposed fees are reasonable
because the projected revenue and cost analysis contained herein
demonstrates that the proposed fees would not result in the Exchange
taking supra-competitive profits.
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\22\ 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>.
\23\ Id.
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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 requirements of
the Act that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
Members and markets. The Exchange believes this high standard is
especially important when an exchange imposes various fees for market
participants to access an exchange's market data. The Exchange believes
that it is important to demonstrate that these fees are based on its
costs and reasonable business needs. Accordingly, the Exchange included
a cost analysis below in connection with the proposed market data fees
and the costs associated with compiling and providing the ToM, cToM,
and SLF feeds (the ``Cost Analysis'').
Accordingly, in proposing to charge fees for market data, the
Exchange is especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and in carefully and transparently assessing the
impact on Members--both generally and in relation to other Members--to
ensure the fees will not create a financial burden on any participant
and will not have an undue impact in particular on smaller Members and
competition among Members in general. The Exchange does not believe it
needs to otherwise address questions about market competition in the
context of this filing because the proposed fees are consistent with
the Act based on the Exchange's Cost Analysis. The Exchange also
believes that this level of diligence and transparency is called for by
the requirements of Section 19(b)(1) under the Act,\24\ and Rule 19b-4
thereunder,\25\ with respect to the types of information SROs should
provide when filing fee changes, and Section 6(b) of the Act,\26\ which
requires, among other things, that exchange fees be reasonable and
[[Page 68967]]
equitably allocated,\27\ not designed to permit unfair
discrimination,\28\ and that they do not impose a burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.\29\ This proposal addresses those requirements, and the
analysis and data in this section are designed to clearly and
comprehensively show how they are met.
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\24\ 15 U.S.C. 78s(b)(1).
\25\ 17 CFR 240.19b-4.
\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(4).
\28\ 15 U.S.C. 78f(b)(5).
\29\ 15 U.S.C. 78f(b)(8).
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The Exchange's affiliates \30\ previously completed a study of
their aggregate costs to produce market data and provide connectivity
and port services, defined above as its Cost Analysis.\31\ Personnel
began to plan for and develop the Exchange beginning in early 2023, and
costs included in this Cost Analysis are related to the development and
buildout of the Exchange since that time. During the Exchange's
development and buildout that occurred throughout 2023 and continues to
today, the Exchange routinely studied its aggregate costs to produce
and disseminate Exchange market data, which were used to determine the
proposed pricing for the market data feeds as part of the Exchange's
Cost Analysis. The Cost Analysis required a detailed analysis of the
Exchange's aggregate baseline costs, including a determination and
allocation of costs for core services provided by the Exchange--
transaction execution, market data, membership services, physical
connectivity, and port access (which provide order entry, cancellation
and modification functionality, risk functionality, the ability to
receive drop copies, and other functionality). The Exchange separately
divided its costs between those costs necessary to deliver each of
these core services, including infrastructure, software, human
resources (i.e., personnel), and certain general and administrative
expenses (``cost drivers'').
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\30\ The affiliated markets include Miami International
Securities Exchange, LLC (``MIAX''); separately, the options and
equities markets of MIAX PEARL, LLC (``MIAX Pearl''); and MIAX
Emerald, LLC (``MIAX Emerald'').
\31\ See Securities Exchange Act Release Nos. 100041 (April 26,
2024), 89 FR 35868 (May 2, 2024) (SR-MIAX-2024-25); 100319 (June 12,
2024), 89 FR 51562 (June 18, 2024) (SR-PEARL-2024-25); 100042 (April
26, 2024), 89 FR 35879 (May 2, 2024) (SR-EMERALD-2024-15). The
Exchange frequently updates it Cost Analysis as strategic
initiatives change, costs increase or decrease, and market
participant needs and trading activity (once live trading begins)
changes. The Exchange's most recent Cost Analysis was conducted
ahead of this filing.
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As an initial step, the Exchange determined the total cost for the
Exchange and its affiliated markets for each cost driver as part of the
Exchange's 2024 budget review process. The 2024 budget review is a
company-wide process that occurs over the course of many months,
includes meetings among senior management, department heads, and the
Finance Team. Each department head is required to send a ``bottom up''
budget to the Finance Team allocating costs at the profit and loss
account and vendor levels for the Exchange and its affiliated markets
based on a number of factors, including server counts, additional
hardware and software utilization, current or anticipated functional or
non-functional development projects, capacity needs, end-of-life or
end-of-service intervals, number of members, market model (e.g., price
time or pro-rata, simple only or simple and complex markets, auction
functionality, etc.), which may impact message traffic, individual
system architectures that impact platform size,\32\ storage needs,
dedicated infrastructure versus shared infrastructure allocated per
platform based on the resources required to support each platform,
number of available connections, and employees allocated time. All of
these factors result in different allocation percentages among the
Exchange and its affiliated markets, i.e., the different percentages of
the overall cost driver allocated to the Exchange and its affiliated
markets will cause the dollar amount of the overall cost allocated
among the Exchange and its affiliated markets to also differ. Because
the Exchange's parent company currently owns and operates five (upon
launch of MIAX Sapphire) separate and distinct marketplaces, the
Exchange must determine the costs associated with each actual market--
as opposed to the Exchange's parent company simply concluding that all
cost drivers are the same at each individual marketplace and dividing
total cost by five (5) (evenly for each marketplace). Rather, the
Exchange's parent company determines an accurate cost for each
marketplace, which results in different allocations and amounts across
exchanges for the same cost drivers, due to the unique factors of each
marketplace as described above. This allocation methodology also
ensures that no cost would be allocated twice or double-counted between
the Exchange and its affiliated markets. The Finance Team then
consolidates the budget and sends it to senior management, including
the Chief Financial Officer and Chief Executive Officer, for review and
approval. Next, the budget is presented to the Board of Directors and
the Finance and Audit Committees for each exchange for their approval.
The above steps encompass the first step of the cost allocation
process.
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\32\ For example, MIAX Sapphire maintains 8 matching engines,
MIAX maintains 24 matching engines, MIAX Pearl Options maintains 12
matching engines, MIAX Pearl Equities maintains 24 matching engines,
and MIAX Emerald maintains 12 matching engines.
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The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., market data, connectivity, ports,
and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below. For
instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of physical connectivity (for example, 62% of the data
center total expense amount is allocated to all provisions of
connectivity), with smaller allocations to ToM, cToM and SLF (2.0%
combined), and the remainder to the provision of ports, transaction
execution, and membership services (36%). This next level of the
allocation methodology at the individual exchange level also took into
account factors similar to those set forth under the first step of the
allocation methodology process described above, to determine the
appropriate allocation to connectivity or market data versus
allocations for other services. This allocation methodology was
developed through an assessment of costs with senior management
intimately familiar with each area of the Exchange's operations. After
adopting this allocation methodology, the Exchange then applied an
allocation of each cost driver to each core service, resulting in the
cost allocations described below. Each of the below cost allocations is
unique to the Exchange and represents a percentage of overall cost that
was allocated to the Exchange pursuant to the initial allocation
described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that it has five
primary sources of revenue that it can potentially use to fund its
operations: transaction fees, connectivity and port service fees,
[[Page 68968]]
membership fees, regulatory fees, and market data fees. Accordingly,
the Exchange must cover its expenses from these five primary sources of
revenue. The Exchange also notes that as a general matter each of these
sources of revenue is based on services that are interdependent. For
instance, the Exchange's system for executing transactions is dependent
on physical hardware and connectivity; only Members and parties that
they sponsor to participate directly on the Exchange may submit orders
to the Exchange; some Members (but not all) consume market data from
the Exchange in order to trade on the Exchange; and, the Exchange
consumes market data from external sources in order to comply with
regulatory obligations. Accordingly, given this interdependence, the
allocation of costs to each service or revenue source required judgment
of the Exchange and was weighted based on estimates of the Exchange
that the Exchange believes are reasonable, as set forth below. While
there is no standardized and generally accepted methodology for the
allocation of an exchange's costs, the Exchange's methodology is the
result of an extensive review and analysis and will be consistently
applied going forward for any other cost-justified potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive Cost Analysis, the Exchange
analyzed nearly every expense item in the Exchange's general expense
ledger to determine whether each such expense relates to the provision
of the market data feeds, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports the provision
of the market data feeds, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to the market data feeds. In
turn, the Exchange allocated certain costs more to physical
connectivity and others to ports, while certain costs were only
allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the aggregate monthly cost
to provide ToM, cToM, and SLF data feeds is $59,161 (the Exchange
divided the annual cost for each of ToM, cToM, and SLF by 12 months,
then added all three numbers together), as further detailed below.
Costs Related To Offering ToM, cToM, and SLF Data Feeds \33\
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\33\ The Exchange notes that in recent non-transaction fee
filings by the Exchange's affiliated markets, those exchanges
included a comparison and explanation where certain cost driver
allocations and expense amounts materially differed for the same
cost driver among the affiliated markets. See, e.g., Securities
Exchange Act Release No. 100041 (April 26, 2024), 89 FR 35868 (May
2, 2024) (SR-MIAX-2024-25). The Exchange believes a similar
comparison and explanation is not appropriate here because the
Exchange has yet to commence operations and the allocations provided
herein may change over time as the Exchange matures and its
operations adjust based on its trading volumes and number of market
data subscribers. In contrast, MIAX and MIAX Emerald are more mature
markets with a steady market data subscriber base and a clearer
estimation of their costs associated with producing and
disseminating their market data feeds. Further, as a new exchange,
MIAX Sapphire proposes to waive the fees for the market data feeds
for a specified period of time in order to build market share, which
in turn, should attract more market data subscribers. If the
Exchange does not attract as many market data subscribers as
currently projected for the Cost Analysis, the Exchange may need to
reduce its market data fees or waive the fees for a longer period of
time. Accordingly, the Exchange believes it is reasonable to not
provide a similar comparison of cost driver allocations until the
Exchange has time to build its subscriber base for the market data
feeds.
---------------------------------------------------------------------------
The following chart details the individual line-item (annual) costs
considered by the Exchange to be related to offering the ToM, cToM, and
SLF data feeds to its Members and other customers, as well as the
percentage of the Exchange's overall costs that such costs represent
for such area (e.g., as set forth below, the Exchange allocated
approximately 6.2% of its overall Human Resources cost to offering ToM,
cToM, and SLF data feeds).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost monthly cost % of all
\a\ \b\
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $631,203 $52,600 6.2
Connectivity (external fees, cabling, switches, etc.)........... 511 43 2.0
Internet Services and External Market Data...................... 0.00 0.00 0.0
Data Center..................................................... 12,298 1,025 2.0
Hardware and Software Maintenance & Licenses.................... 9,933 828 2.0
Depreciation.................................................... 13,656 1,138 1.1
Allocated Shared Expenses....................................... 42,326 3,527 1.5
-----------------------------------------------
Total....................................................... 709,927 59,161 4.6
----------------------------------------------------------------------------------------------------------------
\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.
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering the market data
feeds.
Human Resources
The Exchange notes that it and its affiliated markets anticipate
that by year-end 2024, there will be 289 employees (excluding employees
at non-options/equities exchange subsidiaries of Miami International
Holdings, Inc. (``MIH''), the holding company of the Exchange and its
affiliated markets), and each department leader has direct knowledge of
the time spent by each employee with respect to the various tasks
necessary to operate the Exchange. Specifically, twice a year, and as
needed with additional new hires and new project initiatives, in
consultation with employees as needed, managers and department heads
assign a percentage of time to every employee and then allocate that
time amongst the Exchange and its affiliated markets to determine each
market's individual Human Resources expense. Then, managers and
department heads assign a percentage of each employee's time allocated
to the Exchange into buckets including network connectivity, ports,
market data, and other exchange services. This process ensures that
every employee is 100% allocated, ensuring there is no double counting
between the Exchange and its affiliated markets.
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
[[Page 68969]]
providing and maintaining the market data feeds and performance thereof
(primarily the Exchange's network infrastructure team, which spends a
portion of their time performing functions necessary to provide market
data). As described more fully above, the Exchange's parent company
allocates costs to the Exchange and its affiliated markets and then a
portion of the Human Resources costs allocated to the Exchange is then
allocated to the market data feeds. From that portion allocated to the
Exchange that applied to the market data feeds, the Exchange then
allocated a weighted average of 7.3% of each employee's time from the
above group to the market data feeds (which excludes an allocation for
the recently hired Head of Data Services for the Exchange and its
affiliates).
The Exchange also allocated Human Resources costs to provide the
market data feeds to a limited subset of personnel with ancillary
functions related to establishing and maintaining such market data
feeds (such as information security, sales, membership, and finance
personnel). The Exchange allocated cost on an employee-by-employee
basis (i.e., only including those personnel who support functions
related to providing market data feeds) and then applied a smaller
allocation to such employees' time to the market data feeds (4.9%,
which includes an allocation for the Head of Data Services). This other
group of personnel with a smaller allocation of Human Resources costs
also have a direct nexus to providing the market data feeds, whether it
is a sales person selling a market data feed, finance personnel billing
for market data feeds or providing budget analysis, or information
security ensuring that such market data feeds are secure and adequately
defended from an outside intrusion.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing market data feeds, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of time such employees devote to those
tasks. This includes personnel from the Exchange departments that are
predominately involved in providing the market data feeds: Business
Systems Development, Trading Systems Development, Systems Operations
and Network Monitoring, Network and Data Center Operations, Listings,
Trading Operations, and Project Management. Again, the Exchange
allocated 7.3% of each of their employee's time assigned to the
Exchange for the market data feeds, as stated above. Employees from
these departments perform numerous functions to support the market data
feeds, such as the configuration and maintenance of the hardware
necessary to support the market data feeds. This hardware includes
servers, routers, switches, firewalls, and monitoring devices. These
employees also perform software upgrades, vulnerability assessments,
remediation and patch installs, equipment configuration and hardening,
as well as performance and capacity management. These employees also
engage in research and development analysis for equipment and software
supporting the market data feeds and design, and support the
development and on-going maintenance of internally-developed
applications as well as data capture and analysis, and Member and
internal Exchange reports related to network and system performance.
The above list of employee functions is not exhaustive of all the
functions performed by Exchange employees to support the market data
feeds, but illustrates the breath of functions those employees perform
in support of the above cost and time allocations.
Lastly, the Exchange notes that senior level executives' time was
only allocated to the market data feeds related Human Resources costs
to the extent that they are involved in overseeing tasks related to
providing market data. The Human Resources cost was calculated using a
blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes cabling and switches required
to generate and disseminate the market data feeds and operate the
Exchange. The Connectivity cost driver is more narrowly focused on
technology used to complete Member subscriptions to the market data
feeds and the servers used at the Exchange's primary and back-up data
centers specifically for the market data feeds. Further, as certain
servers are only partially utilized to generate and disseminate the
market data feeds, only the percentage of such servers devoted to
generating and disseminating the market data feeds was included (i.e.,
the capacity of such servers allocated to the ToM, cToM, and SLF data
feeds).\34\
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\34\ The Exchange understands that the Investors Exchange, Inc.
(``IEX'') and MEMX LLC (``MEMX'') both allocated a percentage of
their servers to the production and dissemination of market data to
support market data fee proposals in 2022 and 2023. See Securities
Exchange Act Release Nos. 94630 (April 7, 2022), 87 FR 21945, at
page 21949 (April 13, 2022) (SR-IEX-2022-02) and 97130 (March 13,
2023), 88 FR 16491 (March 17, 2023) (SR-MEMX-2023-04). The Exchange
does not have insight into either IEX's or MEMX's technology
infrastructure or what their determinations were based on. However,
the Exchange reviewed its own technology infrastructure and believes
based on its design, it is more appropriate for the Exchange to
allocate a portion of its Connectivity cost driver to market data
based on a percentage of overall cost, not on a per server basis.
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Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. External market data includes fees
paid to third parties, including other exchanges, to receive market
data. The Exchange did not allocate any costs associated with internet
services or external market data to the ToM, cToM or SLF data feeds.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide the market data feeds in the third-party data centers
where the Exchange maintains its equipment (such as dedicated space,
security services, cooling and power). The Exchange does not own the
primary data center or the secondary data center, but instead leases
space in data centers operated by third parties. As the Data Center
costs are primarily for space, power, and cooling of servers, the
Exchange allocated 2.0% to the applicable Data Center costs to the
market data feeds. The Exchange believes it is reasonable to apply the
same proportionate percentage of Data Center costs to that of the
Connectivity cost driver.
Hardware and Software Maintenance and Licenses
Hardware and Software Maintenance and Licenses includes hardware
and software licenses used to operate and monitor physical assets
necessary to offer the market data feeds. Because the hardware and
software license fees are correlated to the servers used by the
Exchange, the Exchange again applied an allocation of 2.0% of its costs
for Hardware and Software Maintenance and Licenses to the market data
feeds.
[[Page 68970]]
Depreciation
All physical assets, software, and hardware used to provide the
market data feeds, which also includes assets used for testing and
monitoring of Exchange infrastructure to provide market data, were
valued at cost, and depreciated or leased over periods ranging from
three to five years. Thus, the depreciation cost primarily relates to
servers necessary to operate the Exchange, some of which are owned by
the Exchange and some of which are leased by the Exchange in order to
allow efficient periodic technology refreshes. The vast majority of the
software the Exchange uses for its operations to generate and
disseminate the market data feeds has been developed in-house over an
extended period. This software development also requires quality
assurance and thorough testing to ensure the software works as
intended. The Exchange also included in the Depreciation cost driver
certain budgeted improvements that the Exchange intends to capitalize
and depreciate with respect to the market data feeds in the near-term.
As with the other allocated costs in the Exchange's updated Cost
Analysis, the Depreciation cost was therefore narrowly tailored to
depreciation related to the market data feeds. As noted above, the
Exchange allocated 1.1% of its allocated depreciation costs to
providing the market data feeds.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to the provision of the market
data feeds. These general shared costs are integral to exchange
operations, including its ability to provide the market data feeds.
Costs included in general shared expenses include office space and
office expenses (e.g., occupancy and overhead expenses), utilities,
recruiting and training, marketing and advertising costs, professional
fees for legal, tax and accounting services (including external and
internal audit expenses), and telecommunications. Similarly, the cost
of paying directors to serve on the Exchange's Board of Directors is
also included in the Exchange's general shared expense cost driver.\35\
These general shared expenses are incurred by the Exchange's parent
company, MIH, as a direct result of operating the Exchange and its
affiliated markets.
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\35\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors in a similar non-transaction
fee filing. See Securities Exchange Act Release No. 97130 (March 13,
2023), 88 FR 16491 (March 17, 2023) (SR-MEMX-2023-04). The Exchange
does not calculate is expenses at that granular a level. Instead,
director costs are included as part of the overall general
allocation.
---------------------------------------------------------------------------
The Exchange employed a process to determine a reasonable
percentage to allocate general shared expenses to the market data feeds
pursuant to its multi-layered allocation process. First, general
expenses were allocated among the Exchange and affiliated markets as
described above. Then, the general shared expense assigned to the
Exchange was allocated across core services of the Exchange, including
market data. Then, these costs were further allocated to sub-categories
within the final categories, i.e., ToM, cToM, and SLF, as sub-
categories of market data. In determining the percentage of general
shared expenses allocated to market data that ultimately apply to the
market data feeds, the Exchange looked at the percentage allocations of
each of the cost drivers and determined a reasonable allocation
percentage. The Exchange also held meetings with senior management,
department heads, and the Finance Team to determine the proper amount
of the shared general expense to allocate to the market data feeds. The
Exchange, therefore, believes it is reasonable to assign an allocation,
in the range of allocations for other cost drivers, while continuing to
ensure that this expense is only allocated once. Again, the general
shared expenses are incurred by the Exchange's parent company as a
result of operating the Exchange and its affiliated markets and it is
therefore reasonable to allocate a percentage of those expenses to the
Exchange and ultimately to specific product offerings such as ToM, cToM
and SLF.
Again, a portion of all shared expenses were allocated to the
Exchange (and its affiliated markets) which, in turn, allocated a
portion of that overall allocation to all market data products offered
by the Exchange. The Exchange believes this allocation percentage is
reasonable because, while the overall dollar amount may be higher than
other cost drivers, the 1.5% is based on and in line with the
percentage allocations of each of the Exchange's other cost drivers.
The percentage allocated to the market data feeds also reflects its
importance to the Exchange's strategy and necessity towards the nature
of the Exchange's overall operations, which is to provide a resilient,
highly deterministic trading system that relies on faster market data
feeds than the Exchange's competitors to maintain premium performance.
This allocation reflects the Exchange's focus on providing and
maintaining high performance market data services, of which ToM, cToM,
and SLF are main contributors.
* * * * *
Approximate Cost for ToM, cToM, and SLF per Month
After determining the approximate allocated monthly cost related to
the market data feeds combined, the total monthly cost for the market
data feeds of $59,161 was divided by the total number of projected
subscribers \36\ to ToM, cToM and SLF that the Exchange anticipates
will maintain market data subscriptions following the expiration of the
waiver periods for each respective market data feed (29 Internal
Distributors + 4 External Distributors = 33 total Distributors), to
arrive at a cost of approximately $1,793 per month per subscription
(rounded to the nearest dollar). Due to the nature of this particular
cost, this allocation methodology results in an allocation among the
Exchange and its affiliated markets based on set quantifiable criteria,
i.e., projected number of ToM, cToM, and SLF subscribers.
---------------------------------------------------------------------------
\36\ The methodology used by the Exchange to project the number
of subscribers for each of the market data feeds once the Initial
Waiver Period expires can be found under the section titled
``Projected Revenue'', below.
---------------------------------------------------------------------------
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core service (including market data) and
did not double-count any expenses. Instead, as described above, the
Exchange allocated applicable cost drivers across its core services and
used the same Cost Analysis to form the basis of this proposal. For
instance, in calculating the Human Resources expenses to be allocated
to market data based upon the above described methodology, the Exchange
allocated a higher percentage of dedicated network infrastructure
personnel (7.3%) due to their focus on functions necessary to provide
market data. The remaining 92.7% of the Human Resources expense was
then allocated to connectivity services, port services, transaction
services, and membership services. The Exchange did not allocate any
other Human Resources expense for providing market data to any other
employee group, outside of a smaller allocation of 4.9% for costs
associated with certain specified personnel who work closely with and
support network infrastructure personnel.
In total, the Exchange allocated 6.2% of its personnel costs (Human
Resources) to providing the market data
[[Page 68971]]
feeds. In turn, the Exchange allocated the remaining 93.8% of its Human
Resources expense to membership services, transaction services,
connectivity services, and port services. Thus, again, the Exchange's
allocations of cost across core services were based on real costs of
operating the Exchange and were not double-counted across the core
services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including market data, but in different amounts. The
Exchange believes it is reasonable to allocate the identified portion
of such expense because such expense includes the actual cost of the
computer equipment, such as dedicated servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were purchased to operate and support the network. Without this
equipment, the Exchange would not be able to operate the network and
provide the market data feeds to its Members and their customers.
However, the Exchange did not allocate all of the depreciation and
amortization expense toward the cost of providing the market data
feeds, but instead allocated approximately 1.1% of the Exchange's
overall depreciation and amortization expense to the market data feeds
combined. The Exchange allocated the remaining depreciation and
amortization expense (98.9%) toward the cost of providing transaction
services, membership services, connectivity services, and port
services.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The revenue estimates are based upon the Exchange's
projected number of Internal and External Distributors for each of the
ToM, cToM, and SLF data feeds upon the expiration of the fee waiver
periods for each market data feed and then annualized. The Exchange
does not yet know whether such expectations will be realized. For
instance, in order to generate the revenue expected from the market
data feeds, the Exchange will have to be successful in attracting
customers to a new exchange and then successfully retain those
customers that wish to maintain subscriptions to the market data feeds
or obtain new customers that will purchase such services. Similarly,
the Exchange will have to be successful in retaining a positive net
capture on transaction fees in order to realize the anticipated revenue
from transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2024 fiscal year of operations and projections, which will
only be for part of the year. It is possible, however, that actual
costs may be higher or lower. The proposed fee waivers for the market
data feeds mean that the Exchange will receive no revenue from market
data distribution in 2024. To the extent the Exchange sees growth in
use of market data services in 2025, following the expiration of the
Initial Waiver Period, it will begin to receive revenue to offset
future cost increases. However, if use of market data services is
static or decreases, the Exchange might not realize the revenue that it
anticipates or needs in order to cover applicable costs. Accordingly,
the Exchange is committing to conduct a one-year review after
implementation of these fees and expiration of the fee waivers. The
Exchange expects that it may propose to adjust fees at that time, to
increase fees in the event that revenues fail to cover costs and a
reasonable mark-up of such costs. Similarly, the Exchange may propose
to decrease fees in the event that revenue materially exceeds our
current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, 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 \37\
---------------------------------------------------------------------------
\37\ For purposes of calculating projected annualized revenue
for the market data feeds, the Exchange used projected monthly
revenues for the market data feeds once the Initial Waiver Period
expires.
---------------------------------------------------------------------------
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with creating, generating, and
disseminating the market data feeds and the fact that the Exchange will
need to fund future expenditures (increased costs, improvements, etc.).
The Exchange routinely works to improve the performance of the
network's hardware and software. The costs associated with maintaining
and enhancing a state-of-the-art exchange network is a significant
expense for the Exchange, and thus the Exchange believes that it is
reasonable and appropriate to help offset those costs by establishing
fees for market data subscribers. Subscribers to the ToM, cToM and SLF
data feeds expect the Exchange to provide this level of support so they
continue to receive the performance they expect. This differentiates
the Exchange from its competitors. As detailed above, the Exchange has
five primary sources of revenue that it can potentially use to fund its
operations: transaction fees, connectivity service fees, membership and
regulatory fees, and market data fees. Accordingly, the Exchange must
cover its expenses from these five primary sources of revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
the market data feeds will equal $709,927. Based on projected ToM, cToM
and SLF subscribers once the waiver periods expire for the market data
feeds, the Exchange projects to generate annual revenue of
approximately $726,000 for the market data feeds combined. The Exchange
believes this represents a modest profit of 2.2% when compared to the
cost of providing the market data feeds on an annualized basis once the
waiver periods expire, which the Exchange believes is fair and
reasonable after taking into account the costs related to creating,
generating, and disseminating the market data feeds and the fact that
the Exchange will need to fund future expenditures (increased costs,
improvements, etc.). To determine the projected number of Distributors
for each of the market data feeds, the Exchange reviewed its
anticipated Distributor population from July 2024 based on Distributor
on-boarding documents the Exchange received that showed interest in the
market data products in the month preceding when the Exchange filed its
proposal to implement the proposed fees, and assumed a 5% attrition
rate. The 5% attrition rate was based on surveying the current
Distributor population when socializing the proposed fee structure with
market participants.
Based on the above discussion, the Exchange believes that even if
the Exchange earns the above revenue or incrementally more or less, the
proposed fees are fair and reasonable
[[Page 68972]]
because they will not result in pricing that deviates from that of
other exchanges or a supra-competitive profit, when comparing the total
expense of the Exchange associated with providing the market data feeds
versus the total projected revenue of the Exchange associated with the
market data feeds.
The Exchange's affiliated markets, MIAX and MIAX Emerald, charge
similar or higher rates for their respective ToM, cToM and MOR data
feeds.\38\ The Exchange's proposed fees for its market data feeds are
also comparable to, or lower than, the fees for similar products
charged by competing options exchanges. For example, for Internal
Distributors of ToM and cToM, the Exchange proposes a lower fee than
the fees charged by Nasdaq ISE, LLC (``ISE'') for ISE's Top Quote Feed
\39\ and NYSE Arca, Inc. (``Arca'') for Arca's Top Datafeed \40\ and
Complex Order Book data feed.\41\ Nasdaq PHLX LLC (``PHLX'') assesses
the same fees for the PHLX Orders data feed as proposed by the Exchange
for the SLF data feed.\42\
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\38\ See MIAX Fee Schedule, Sections 6)a) and c); and MIAX
Emerald Fee Schedule, Sections (6)(a) and (c).
\39\ See ISE Options 7: Pricing Schedule, Section 10, Market
Data, Section H. Nasdaq ISE Top Quote Feed, available at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207">https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207</a> (last
visited June 13, 2024) (assessing Professional internal and external
distributors $3,000 per month, plus $20 per month per controlled
device).
\40\ See NYSE Proprietary Market Data Pricing Guide, Section
6.3, NYSE Arca Options (dated May 4, 2022), available at: <a href="https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf">https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf</a> (last
visited June 13, 2024). Fees for the NYSE Arca Options Top Datafeed,
which is the comparable product to ToM, are $3,000 per month for
access (internal use) and an additional $2,000 per month for
redistribution (external distribution), compared to the Exchange's
proposed fees of $1,200 and $2,000 for Internal and External
Distributors, respectively. In addition, for its NYSE Arca Options
Top Datafeed, NYSE Arca charges for three different categories of
non-display usage, and user fees, both of which the Exchange does
not propose to charge, causing the overall cost of NYSE Arca Options
Top Datafeed to far exceed the Exchange's proposed rates.
\41\ See NYSE Proprietary Market Data Pricing Guide, Section
6.4, NYSE Arca Options Complex Order Book (dated May 4, 2022),
available at: <a href="https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf">https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf</a> (last visited June 13, 2024) (assessing
an access fee of $1,500 per month, plus a $1,000 redistribution fee,
$1,000 non-display fee, and $20 fee per professional user).
\42\ See PHLX Options 7: Pricing Schedule, Section 10.
Proprietary Data Feed Fees, PHLX Orders, available at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Options%207">https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Options%207</a>
(last visited June 13, 2024) (assessing internal distributors $3,000
per month and external distributors $3,500 per month for the PHLX
Orders data feed).
---------------------------------------------------------------------------
Accordingly, the Exchange believes that comparable and competitive
pricing are key factors in determining whether a proposed fee meets the
requirements of the Act, regardless of whether that same fee across the
Exchange's affiliated markets leads to slightly different profit
margins due to factors outside of the Exchange's control (i.e., more
subscribers to ToM, cToM, and/or SLF).
The Exchange also reiterates that it proposes to waive the fees for
the market data feeds for a defined period of time. The Exchange is
owned by a holding company that is the parent company of five exchange
markets and, therefore, the Exchange and its affiliated markets must
allocate shared costs across all of those markets accordingly, pursuant
to the above-described allocation methodology. In contrast, IEX, which
currently operates only one exchange, in its recent non-transaction fee
filing allocated the entire amount of that same cost to a single
exchange. This can result in lower profit margins for the non-
transaction fees proposed by IEX because the single allocated cost does
not experience the efficiencies and synergies that result from sharing
costs across multiple platforms.\43\ The Exchange and its affiliated
markets often share a single cost, which results in cost efficiencies
that can cause a broader gap between the allocated cost amount and
projected revenue, even though the fee levels being proposed are lower
or competitive with competing markets (as described above). To the
extent that the application of a cost-based standard results in
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Commission Staff should consider whether
the proposed fee level is comparable to, or competitive with, the same
fee charged by competing exchanges and how different cost allocation
methodologies (such as across multiple markets) may result in different
profit margins for comparable fee levels. If Commission Staff is making
determinations as to appropriate profit margins, the Exchange believes
that the Commission should be clear to all market participants as to
what they have determined is an appropriate profit margin and should
apply such determinations consistently and, in the case of certain
legacy exchanges, retroactively, if such standards are to avoid having
a discriminatory effect.
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\43\ The Exchange acknowledges that IEX included in its proposal
to adopt market data fees after offering market data for free an
analysis of what its projected revenue would be if all of its
existing customers continued to subscribe versus what its projected
revenue would be if a limited number of customers subscribed due to
the new fees. See Securities Exchange Act Release No. 94630 (April
7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-2022-02). MEMX did
not include a similar analysis in either of its recent non-
transaction fee proposals. See, e.g., supra notes 34 and 35. The
Exchange does not believe a similar analysis would be useful here
because it is part of a holding company that operates five different
markets.
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Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone are used to justify fees
increases.
Accordingly, while the Exchange is supportive of transparency
around costs and potential margins (applied across all exchanges), as
well as periodic review of revenues and applicable costs (as discussed
below), the Exchange does not believe that these estimates should form
the sole basis of whether or not a proposed fee is reasonable or can be
adopted. Instead, the Exchange believes that the information should be
used solely to confirm that an Exchange is not earning--or seeking to
earn--supra-competitive profits, the standard set forth in the Staff
Guidance. The Exchange believes the Cost Analysis and related
projections in this filing demonstrate this fact.
Reasonableness
Overall. With regard to reasonableness, the Exchange understands
that the Commission has traditionally taken a market-based approach to
examine whether the exchange making the fee proposal was subject to
significant competitive forces in setting the terms of the proposal.
The Exchange understands that in general the analysis considers whether
the exchange has demonstrated in its filing that (i) there are
reasonable substitutes for the product or service; (ii) ``platform''
competition constrains the ability to set the fee; and/or (iii) revenue
and cost analysis shows the fee would not result in the exchange taking
supra-competitive profits. If the exchange demonstrates that the fee is
subject to significant competitive forces, the Exchange understands
that in general the analysis will next consider whether there is any
substantial countervailing basis to suggest the fee's terms fail to
meet one or more standards under the Exchange Act. The Exchange further
[[Page 68973]]
understands that if the filing fails to demonstrate that the fee is
constrained by competitive forces, the exchange must provide a
substantial basis, other than competition, to show that it is
consistent with the Exchange Act, which may include production of
relevant revenue and cost data pertaining to the product or service.
The Exchange has not determined its proposed overall market data
fees based on assumptions about market competition, instead relying
upon a cost-plus model to determine a reasonable fee structure that is
informed by the Exchange's understanding of different uses of the
products by different types of participants. In this context, the
Exchange believes the proposed fees overall are fair and reasonable as
a form of cost recovery plus the possibility of a reasonable return for
the Exchange's aggregate costs of offering the market data feeds. The
Exchange believes the proposed fees are reasonable because they are
designed to generate annual revenue to recoup some or all of Exchange's
annual costs of providing the market data feeds with a reasonable mark-
up. As discussed above, the Exchange estimates this fee filing will
result in annual revenue of approximately $726,000 once the fee waivers
expire for the market data feeds, representing a potential mark-up of
just 2.2% over the cost of providing the market data feeds.
Accordingly, the Exchange believes that this fee methodology is
reasonable because it allows the Exchange to recoup all of its expenses
for providing the market data feeds (with any additional revenue
representing no more than what the Exchange believes to be a reasonable
rate of return). The Exchange also believes that the proposed fees are
reasonable because they are generally less than the fees charged by
competing options exchanges for comparable market data products,
notwithstanding that the competing exchanges may have different system
architectures that may result in different cost structures for the
provision of market data.
The Exchange believes the proposed fees for the market data
products are reasonable when compared to fees for comparable products,
compared to which the Exchange's proposed fees are generally lower, as
well as other comparable data feeds priced significantly higher than
the Exchange's proposed fees for the market data feeds.
Internal Distribution Fees. The Exchange believes it is reasonable
to charge Internal Distribution fees because such data assists Internal
Distributors in their profit-generating activities. The Exchange also
believes that the proposed monthly Internal Distribution fees for ToM,
cToM, and SLF are reasonable as they are similar to the amounts charged
by at least one other exchange of comparable size for comparable data
products, and lower than the fees charged by other exchanges for
comparable data products.\44\
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\44\ See supra notes 41 and 42.
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External Distribution Fees. The Exchange believes that it is
reasonable to charge External Distribution fees for the market data
feeds because vendors receive enumeration from redistributing the data
in their business products provided to their customers. The Exchange
believes that charging External Distribution fees is reasonable because
the vendors that would be charged such fees profit by re-transmitting
the Exchange's market data to their customers. These fees would be
charged only once per month to each vendor account that redistributes
any ToM, cToM, or SLF data feeds, regardless of the number of customers
to which that vendor redistributes the data.
For all of the foregoing reasons, the Exchange believes that the
proposed fees for the market data feeds are reasonable.
Equitable Allocation and Not Unfairly Discriminatory
Overall. The Exchange believes that its proposed fees are
reasonable, equitable, and not unfairly discriminatory because they are
designed to align the proposed fees with services provided. The
Exchange believes the proposed fees for the market data feeds are
allocated fairly and equitably among the various categories of users of
the feeds, and any differences among categories of users are justified
and appropriate.
The Exchange believes that the proposed fees are equitably
allocated because they will apply uniformly to all data recipients that
choose to subscribe to the market data feeds. Any subscriber or vendor
that chooses to subscribe to the market data feeds is subject to the
same Fee Schedule, regardless of what type of business they operate,
and the decision to subscribe to one or more of the ToM, cToM or SLF
data feeds is based on objective differences in usage of each market
data feed among different Members, which are still ultimately in the
control of any particular Member. The Exchange believes the proposed
pricing of the market data feeds is equitably allocated because it is
based, in part, upon the amount of information contained in each data
feed, which may have additional value to market participants.
Internal Distribution Fees. The Exchange believes the proposed
monthly fees for Internal Distribution of the market data feeds are
equitably allocated and not unfairly discriminatory because they would
be charged on an equal basis to all data recipients that receive the
market data feeds for internal distribution, regardless of what type of
business they operate.
External Distribution Fees. The Exchange believes the proposed
monthly fees for External Distribution of the market data feeds are
equitably allocated and not unfairly discriminatory because they would
be charged on an equal basis to all data recipients that receive the
market data feeds that choose to redistribute the feeds externally,
regardless of what business they operate. The Exchange also believes
that the proposed monthly fees for External Distribution are equitably
allocated when compared to lower proposed fees for Internal
Distribution because data recipients that are externally distributing
ToM, cToM, and/or SLF data feeds are able to monetize such distribution
and spread such costs amongst multiple third party data recipients,
whereas the Internal Distribution fee is applicable to use by a single
data recipient (and its affiliates).
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to assess Internal Distributors fees that are
less than the fees assessed for External Distributors for subscriptions
to the ToM, cToM and SLF data feeds because Internal Distributors have
limited, restricted usage rights to the market data, as compared to
External Distributors, which have more expansive usage rights. All
Members and non-Members that decide to receive any market data feed of
the Exchange (or its affiliates, MIAX, MIAX Pearl and MIAX Emerald),
must first execute, among other things, the MIAX Exchange Group Data
Agreement (the ``Exchange Data Agreement'').\45\ Pursuant to the
Exchange Data Agreement, Internal Distributors are restricted to the
``internal use'' of any market data they receive. This means that
Internal Distributors may only distribute the Exchange's market data to
the recipient's officers and employees and its affiliates.\46\ External
Distributors may distribute the Exchange's market data to
[[Page 68974]]
persons who are not officers, employees or affiliates of the External
Distributor,\47\ and may charge their own fees for the redistribution
of such market data. External Distributors may monetize their receipt
of the ToM, cToM and SLF data feeds by charging their customers fees
for receipt of the Exchange's market data. Internal Distributors do not
have the same ability to monetize the Exchange's market data feeds.
Accordingly, the Exchange believes it is fair, reasonable and not
unfairly discriminatory to assess External Distributors a higher fee
for the Exchange's market data feeds as External Distributors have
greater usage rights to commercialize such market data and can adjust
their own fee structures if necessary.
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\45\ See Exchange Data Agreement, available at <a href="https://www.miaxglobal.com/markets/us-options/all-options/market-data-vendor-agreements">https://www.miaxglobal.com/markets/us-options/all-options/market-data-vendor-agreements</a>.
\46\ See id.
\47\ See id.
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The Exchange also utilizes more resources to support External
Distributors versus Internal Distributors, as External Distributors
have reporting and monitoring obligations that Internal Distributors do
not have, thus requiring additional time and effort of Exchange staff.
For example, External Distributors have monthly reporting requirements
under the Exchange's Market Data Policies.\48\ Exchange staff must
then, in turn, process and review information reported by External
Distributors to ensure the External Distributors are redistributing
market data in compliance with the Exchange Data Agreement and Market
Data Policies.
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\48\ See Section 6 of the Exchange's Market Data Policies,
available at <a href="https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Exchange_Group_Market_Data_Policies_07202021.pdf">https://www.miaxglobal.com/sites/default/files/page-files/MIAX_Exchange_Group_Market_Data_Policies_07202021.pdf</a>.
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The Exchange believes the proposed market data fees are equitable
and not unfairly discriminatory because the fee level results in a
reasonable and equitable allocation of fees amongst subscribers for
similar services, depending on whether the subscriber is an Internal or
External Distributor. Moreover, the decision as to whether or not to
purchase market data is entirely optional to all market participants.
Potential purchasers are not required to purchase the market data, and
the Exchange is not required to make the market data available.
Purchasers may request the data at any time or may decline to purchase
such data. The allocation of fees among users is fair and reasonable
because, if market participants decide not to subscribe to the data
feed, firms can discontinue their use of any of the market data feeds.
For all of the foregoing reasons, the Exchange believes that the
proposed fees are equitably allocated and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\49\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\49\ 15 U.S.C. 78f(b)(8).
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Intra-Market Competition
The Exchange does not believe that the proposed fees place certain
market participants at a relative disadvantage to other market
participants because, as noted above, the proposed fees are associated
with usage of the data feed by each market participant based on whether
the market participant internally or externally distributes the
Exchange data, which are still ultimately in the control of any
particular Member, and such fees do not impose a barrier to entry to
smaller participants. Accordingly, the proposed fees do not favor
certain categories of market participants in a manner that would impose
a burden on competition; rather, the allocation of the proposed fees
reflects the types of data consumed by various market participants and
their usage thereof.
Inter-Market Competition
The Exchange does not believe the proposed fees place an undue
burden on competition on other exchanges that is not necessary or
appropriate. In particular, market participants are not forced to
subscribe to any of the market data feeds. Additionally, other
exchanges have similar market data fees with comparable rates in place
for their participants.\50\ The proposed fees are based on actual costs
and are designed to enable the Exchange to recoup its applicable costs
with the possibility of a reasonable profit on its investment as
described in the Purpose and Statutory Basis sections. Competing
exchanges are free to adopt comparable fee structures subject to the
Commission's rule filing process. Allowing the Exchange, or any new
market entrant, to waive fees (as the Exchange proposes here for all
three of its market data feeds) for a period of time to allow it to
become established encourages market entry and thereby ultimately
promotes competition.
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\50\ See supra notes 41 and 42.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\51\ and Rule 19b-4(f)(2) \52\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\51\ 15 U.S.C. 78s(b)(3)(A)(ii).
\52\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments:
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7200071e175f111d1f1f171c0601320117115c151d04"><span class="__cf_email__" data-cfemail="156760797038767a7878707b6166556670763b727a63">[email protected]</span></a>. Please include
file number SR-SAPPHIRE-2024-18 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-SAPPHIRE-2024-18. 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
[[Page 68975]]
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-SAPPHIRE-2024-18 and should be submitted on or before September 18,
2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-19263 Filed 8-27-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 28, 2024.
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