Notice2024-23981
Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule To Adopt Certain Connectivity Fees
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 17, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 201 (Thursday, October 17, 2024)</title>
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[Federal Register Volume 89, Number 201 (Thursday, October 17, 2024)]
[Notices]
[Pages 83731-83738]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-23981]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101320; File No. SR-LTSE-2024-07]
Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Fee Schedule To Adopt Certain Connectivity Fees
October 11, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 1, 2024, Long-Term Stock Exchange, Inc. (``LTSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``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\ 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 with the Securities and Exchange Commission
(``Commission'') a proposed rule change to amend the LTSE Fee Schedule
(the ``Fee Schedule'') to adopt certain connectivity fees effective
October 1, 2024. The text of the proposed rule change is available at
the Exchange's website at <a href="https://longtermstockexchange.com/">https://longtermstockexchange.com/</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement on 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 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to establish a new section (C.
Connectivity) in the Long-Term Stock Exchange Fee Schedule and adopt
fees for Cross-Connect (Primary), Cross-Connect (Disaster Recovery),
Cross-Connect (Test Environment) and Logical Connectivity (all
Environments) that will apply to all market participants connecting to
the Exchange.\3\
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\3\ As proposed, fees for connectivity services would be
assessed based on each active connectivity service product at the
close of business on the first day of each month. If a product is
canceled prior to such fee being assessed, then the Member will not
be obligated to pay the applicable product fee.
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Cross-Connect Fees
The Exchange proposes to offer to both Members and non-Members the
choice of a 10 Gigabit (``Gb'') ultra-low latency (``ULL'') fiber
cross-connection to the Exchange's Primary and Disaster Recovery
facilities, as well as a 10Gb cross-connection to the Test Environment
facility. The Exchange proposes to establish a Cross-Connect fee of
$5,500 per 10Gb physical interface per month that will be assessed to
Members and non-Members for connecting to the Primary facility. The
Exchange proposes to establish a Cross-Connect fee of $2,750 per 10Gb
physical interface per month that will be assessed to Members and non-
Members for connecting to both the Disaster Recovery facility or the
Test Environment.
Monthly network connectivity fees for Members and non-Members for
connectivity will be assessed in any month the Member or non-Member is
credentialed to use any of the LTSE Application Programming Interfaces
(``APIs'') in either the Primary, Disaster Recovery or test
environments.
Port Fees
The Exchange proposes to establish a $450 fee for all Logical
Connectivity sessions. These application sessions, commonly known as
ports, are utilized to perform a particular function on the Exchange,
such as order entry or order cancellation, receipt of drop copies,
proprietary market data dissemination, or requesting data to be
backfilled (i.e., ``gap ports''). All market participants (members and
non-members) will be charged per session per month. The Exchange will
waive the fees for three sessions per month per market participant.
In proposing to charge fees for connectivity to LTSE, the Exchange
has sought to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related services, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level diligence and transparency is called for by the
requirements of Section 19(b)(1)
[[Page 83732]]
under the Act,\4\ and Rule 19b-4 thereunder,\5\ with respect to the
types of information self-regulatory organizations (``SROs'') should
provide when filing fee changes, and Section 6(b) of the Act,\6\ which
requires, among other things, that exchange fees be reasonable and
equitably allocated,\7\ not designed to permit unfair
discrimination,\8\ and that they not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.\9\
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.\10\
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ 15 U.S.C.78f(b).
\7\ 15 U.S.C. 78f(b)(4).
\8\ 15 U.S.C. 78(b)(5).
\9\ 15 U.S.C. 78f(b)(8).
\10\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While LTSE understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with LTSE's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. See Staff Guidance on
SRO Rule Filings Relating to Fees (May 21, 2019).
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Cost Analysis
The Exchange notes it operates a unique model where the LTSE
trading system and services are provided on an outsourced basis by MEMX
Technologies LLC.\11\ As such, most of the Exchange's technology costs,
including those related to Connectivity, are incorporated into the
overall fees that the Exchange pays MEMX Technologies as part of its
multi-year arrangement to provide a trading system and associated
services. Because of this arrangement, the Exchange does not possess
the same level of specificity for cost drivers related to Connectivity
as other exchanges have detailed within their own similar filings.
However, the Exchange recognizes that the costs associated with
building out and maintaining a state-of-the-art network infrastructure
for LTSE were extensive and in line with the costs that MEMX LLC, an
exchange that also uses the trading system and associated services of
MEMX Technologies, outlined in its own filing establishing connectivity
fees for Members and Non-Members.\12\ These include costs associated
with maintaining and expanding a team of highly-skilled network
engineers, fees charged by the third-party data center operator, costs
associated with projects and initiatives designed to improve overall
network performance and stability, and costs associated with fully-
supporting advances in infrastructure and expansion of network level
services, including customer monitoring, alerting and reporting. There
are also significant technology expenses related to establishing and
maintaining Information Security services, enhanced network monitoring
and customer reporting, as well as Regulation SCI mandated processes,
associated with the MEMX Technologies network technology. Because of
this structure, the Exchange is unable to separate out its expense by
connectivity alternative, as all connectivity alternatives are
intricately combined in its DSLA with MEMX Technologies.
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\11\ The Exchange and MEMX Technologies executed a Development,
License and Services Agreement on January 23, 2024, with
accompanying Schedules (collectively, the ``DLSA''). MEMX
Technologies, an affiliate of the MEMX Exchange, is in the business
of developing technology systems for use in the financial industry.
See SR-LTSE-2024-03.
\12\ See SR-MEMX-2022-26.
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Further, while the Exchange has been operating since September
2020, it only entered the DLSA with MEMX Technologies LLC in January of
this year and launched the new trading system in September 2024.
Therefore, the Exchange's most recent publicly available financial
statement (2023 Audited Unconsolidated Financial Statement) is not an
accurate reflection of the total annual costs associated with the
development and operation of Connectivity on LTSE. Accordingly, the
Exchange believes it is more appropriate to justify its fees using cost
figures that are isolated specifically for LTSE on an annualized basis,
and utilizing a recent monthly billing cycle and extrapolated
annualized costs on a going-forward basis.
LTSE recently calculated its aggregate monthly costs for providing
Connectivity to the Exchange at $193,637 beginning October 1, 2024.
Because LTSE offered all connectivity free of charge from its launch in
September 2020 until October of this year, LTSE has borne 100% of all
connectivity costs. Now, in order to cover some of the aggregate costs
of providing connectivity to market participants (both Members and non-
Members) \13\ the Exchange is proposing to modify its Fee Schedule and
charge the Connectivity fees detailed above.
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\13\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services to Members, and thus, may access application sessions on
behalf of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
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In order to determine the Exchange's costs for providing the
services associated with the Connectivity Fees, the Exchange conducted
an extensive review in which the Exchange analyzed every expense item
in the Exchange's general expense ledger to determine whether each such
expense relates to the services associated with the Connectivity Fees,
and, if such expense did so relate, what portion (or percentage) of
such expense actually supports those services. The sum of all such
portions of expenses represents the total cost of the Exchange to
provide the services associated with the Connectivity Fees. For the
avoidance of doubt, no expense amount was allocated twice. The Exchange
is also providing detailed information regarding the Exchange's cost
allocation methodology--namely, information that explains the
Exchange's rationale for determining that it was reasonable to allocate
certain expenses described in this filing towards the total cost to the
Exchange to provide Connectivity.
The Exchange believes that the Connectivity Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the
Exchange projects to incur in connection with providing the services
associated with the proposed Connectivity Fees versus the total annual
revenue of the Exchange projects to collect in connection with
providing those services. For 2024, the total annual expense for
providing the services associated with the Connectivity Fees is
projected to be approximately $4.5 million. The $4.5 million in expense
includes expenses associated with providing all ports and all
connectivity alternatives.
Costs Related to Offering Connectivity
The following chart details the individual line-item costs
considered by LTSE to be related to offering connectivity as well as
the percentage of the Exchange's overall costs per year such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 10% of its overall Human Resources cost to
offering connectivity).
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Yearly % of
Cost drivers costs all
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Third-Party Expenses................................ $3,228,630 32
Human Resources..................................... 1,120,500 10
[[Page 83733]]
Data Center......................................... 158,040 30
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Total........................................... 4,507,170 .....
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Below are additional details regarding each of the line-item costs
considered by LTSE to be related to offering connectivity.
Third-Party Expenses
As discussed above, LTSE has undertaken a unique model where it has
outsourced its technology to a third-party technology provider. As such
the costs associated with connectivity for this provider include (1)
costs for the technology used to complete connections to the Exchange
and to connect to external markets, (2) costs the third-party provider
incurs to provide physical connectivity in the data centers where it
maintains its equipment--such as dedicated space, security services,
cooling and power, (3) charges from the third-party provider for use of
physical ports and logical ports, and (3) depreciation of physical
assets and software, which also includes assets used for testing and
monitoring of infrastructure.
Human Resources
For personnel costs (Human Resources), LTSE calculated an
allocation of LTSE employee time for employees whose functions include
providing and maintaining connectivity and performance thereof
(technical operations personnel, market operations personnel, and
software engineering personnel). The Exchange also allocated Human
Resources costs to provide connectivity to a limited subset of
personnel with ancillary functions related to establishing and
maintaining such connectivity (such as information security and finance
personnel), for which the Exchange allocated cost on an employee-by-
employee basis (i.e., only including those personnel who do support
functions related to providing connectivity) and then applied a smaller
allocation to such employees. The Exchange notes that it has fewer than
fifty (50) employees 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. 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 connectivity, and confirming that the proposed allocations
were reasonable based on an understanding of the percentage of their
time such employees devote to tasks related to providing connectivity.
The Exchange notes that senior level executives were only allocated
Human Resources costs to the extent the Exchange believed they are
involved in overseeing tasks related to providing connectivity. The
Human Resources cost was calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Data Center
Data Center costs include an allocation of the costs the Exchange
incurs to monitor its trading platform in third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
Physical Connectivity Fees
LTSE offers its Members the ability to connect to the Exchange in
order to transmit orders to and receive information from the Exchange.
Members can also choose to connect to LTSE indirectly through physical
connectivity maintained by a third-party extranet. Extranet physical
connections may provide access to one or multiple Members on a single
connection. Users of LTSE physical connectivity services (both Members
and non-Members) seeking to establish one or more connections with the
Exchange submit a request directly to Exchange personnel. Upon receipt
of the completed instructions, LTSE establishes the physical
connections requested by the User. The number of physical connections
assigned to each User as of September 30, 2024, ranges from one to
three, depending on the scope and scale of the Member's trading
activity on the Exchange as determined by the Member, including the
Member's determination of the need for redundant connectivity. The
Exchange notes that 58% of its Members do not maintain a physical
connection directly with the Exchange in the Primary Data Center
(though many such Members have connectivity through a third-party
provider) and another 41% have either one or two physical connections
to the Exchange in the Primary Data Center.
As described above, to cover the aggregate costs of providing
physical connectivity to Users and make a modest profit, as described
below, the Exchange is proposing to charge a fee of $5,500 per month
for each physical connection in the Primary Data Center and a fee of
$2,750 per month for each physical connection in the Disaster Recovery
Data Center and Test Environment. There is no requirement that any
Member maintain a specific number of physical connections and a Member
may choose to maintain as many or as few of such connections as each
Member deems appropriate. The Exchange notes, however, that pursuant to
Rule 2.250 (Mandatory Participation in Testing of Backup Systems), the
Exchange does require a small number of Members to connect and
participate in functional and performance testing as announced by the
Exchange, which occurs at least once every 12 months. Specifically,
Members that have been determined by the Exchange to contribute a
meaningful percentage of the Exchange's overall volume must participate
in mandatory testing of the Exchange's backup systems (i.e., such
Members must connect to the Disaster Recovery Data Center). The
Exchange notes that Members that have been designated are still able to
use third-party providers of connectivity to access the Exchange at its
Disaster Recovery Data Center, and that four of the designated Members
use a third-party provider instead of connecting directly to the
Disaster Recovery Data Center through connectivity provided by the
Exchange. Nonetheless, because some Members are required to connect to
the Disaster Recovery Data Center pursuant to Rule 2.250 and to
encourage Exchange Members to connect to the Disaster Recovery Data
Center generally, the Exchange has proposed to charge one-half of the
fee for a physical connection in the Primary Data Center. The Exchange
believes that charging a higher fee for physical connections at the
Disaster Recovery Data Center would be inconsistent with its objective
of encouraging Members to connect at such data center and is
inconsistent with the fees charged by other exchanges, which also
provide connectivity for disaster recovery purposes at a discounted
rate.
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
physical connections a User requests, based upon factors deemed
relevant by each User (either a Member, service bureau or extranet).
The Exchange believes these factors include the costs to maintain
connectivity, business model and choices. The proposed fee of $5,500
per month for physical connections at the Primary Data Center is
designed to permit the Exchange to cover a portion
[[Page 83734]]
of costs allocated to providing connectivity services, which would also
help fund future expenditures (increased costs, improvements, etc.).
The Exchange believes it is appropriate to charge fees that represent a
reasonable markup over cost given the other factors discussed above and
the need for the Exchange to maintain a highly performant and stable
platform to allow Members to transact with determinism. The Exchange
also reiterates that the Exchange did not charge any fees for
connectivity services prior to October 2024, and its allocation of
costs to physical connections was part of a holistic allocation that
also allocated costs to other core services without double-counting any
expenses. As noted above, the Exchange proposes a discounted rate of
$2,750 per month for physical connections at its Disaster Recovery
Center and Test Environment. The Exchange has proposed this discounted
rate for Disaster Recovery Center and Test Environment connectivity in
order to encourage Members to establish and maintain such connections.
Also, as noted above, a small number of Members are required pursuant
to Rule 2.4 to connect and participate in testing of the Exchange's
backup systems, and the Exchange believes it is appropriate to provide
a discounted rate for physical connections at the Disaster Recovery
Center given this requirement. The Exchange notes that this rate is
well below the cost of providing such services and the Exchange will
operate its network and systems at the Disaster Recovery Center without
recouping the full amount of such cost through connectivity services.
Logical Connectivity Fees
Similar to other exchanges, LTSE offers its Members application
sessions, also known as logical ports, for order entry and receipt of
trade execution reports and order messages. Members can also choose to
connect to LTSE 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. Users of LTSE connectivity
services (both Members and non-Members) seeking to establish one or
more application sessions with the Exchange shall submit a request to
the Exchange via the LTSE User Portal or directly to Exchange
personnel. Upon receipt of the completed instructions, LTSE assigns the
User the number of sessions requested by the User. The number of
sessions assigned to each User as of September 30, 2024, ranges from
one (1) to more than 58 depending on the scope and scale of the
Member's trading activity on the Exchange (either through a direct
connection or through a service bureau) as determined by the Member.
For example, by using multiple sessions, Members can segregate order
flow from different internal desks, business lines, or customers. The
Exchange does not impose any minimum or maximum requirements for how
many application sessions a Member or service bureau can maintain, and
it is not proposing to impose any minimum or maximum session
requirements for its Members or their service bureaus.
As described above, to cover the aggregate costs of providing
application sessions to Users and to make a modest profit, as described
below, the Exchange is proposing to charge a fee of $450 per session
per month. The Exchange notes that it is proposing to waive the fees
for Members and Non-Members their first three sessions, so that market
participants can have no cost to connect to the Disaster Recovery
Center or a Test Environment port. The Exchange believes that providing
three free sessions will encourage Members to connect to the Exchange's
backup trading systems and to conduct appropriate testing of their use
of the Exchange.
The proposed fee of $450 per month for each Logical Connectivity
session is designed to permit the Exchange to cover some of the costs
allocated to providing application sessions, which would also help fund
future expenditures (increased costs, improvements, etc.).
The proposed fee is also designed to encourage Users to be
efficient with their application session usage, thereby resulting in a
corresponding increase in the efficiency that the Exchange would be
able to realize in managing its aggregate costs for providing
connectivity services. There is no requirement that any Member maintain
a specific number of application sessions and a Member may choose to
maintain as many or as few of such ports as each Member deems
appropriate. The platform has been designed such that Order Entry Ports
can handle a significant amount of message traffic (i.e., over 50,000
orders per second), and has no application flow control or order
throttling. In contrast, other exchanges maintain certain thresholds
that limit the amount of message traffic that a single logical port can
handle.\14\ As such, while several Members maintain a relatively high
number of ports because that is consistent with their usage on other
exchanges and is preferable for their own reasons, the Exchange
believes that it has designed a system capable of allowing such Members
to significantly reduce the number of application sessions maintained.
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\14\ See, e.g., Cboe US Options BOE Specification, available at:
<a href="https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf">https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf</a> (describing a 5,000 message per
second Port Order Rate Threshold on Cboe BOE ports).
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The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
application sessions a User requests, based upon factors deemed
relevant by each User (either a Member or service bureau on behalf of a
Member). The Exchange believes these factors include the costs to
maintain connectivity and choices Members make in how to segment or
allocate their order flow.
Proposed Fees--Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (1) consume the most bandwidth and resources
of the network; (2) transact the vast majority of the volume on the
Exchange; and (3) require the high-touch network support services
provided by the Exchange and its technology service provider, including
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services. For
these reasons, LTSE believes it is not unfairly discriminatory for the
Members with higher message traffic and/or Members with more
complicated connections to pay a higher share of the total connectivity
services fees. While Members with a business model that results in
higher relative inbound message activity or more complicated
connections are projected to pay higher fees, the level of such fees is
based solely on the number of physical connections and/or application
sessions deemed necessary by the Member and not on the Member's
business model or type of Member. The Exchange notes
[[Page 83735]]
that the correlation between message traffic and usage of connectivity
services is not completely aligned because Members individually
determine how many physical connections and application sessions to
request, and Members may make different decisions on the appropriate
ways based on facts unique to their individual businesses. Based on the
Exchange's architecture, as described above, the Exchange believes that
a Member even with high message traffic would be able to conduct
business on the Exchange with a relatively small connectivity services
footprint.
Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\15\ Reg SCI Rule 1001(a) requires that the Exchange 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 the Exchange's operational
capability and promote the maintenance of fair and orderly markets.\16\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. Additionally,
because the Exchange will charge a lower rate for a physical connection
to the Disaster Recovery Center and Test Environment and will waive the
first three logical connectivity sessions each month, the proposed fee
structure will further support the Exchange's Reg SCI compliance by
reducing the potential impact of a disruption should the Exchange be
required to switch to its Disaster Recovery Facility and encouraging
Members to engage in any necessary system testing with low or no cost
imposed by the Exchange.\17\
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\15\ 17 CFR 242.1000-1007.
\16\ 17 CFR 242.1001(a).
\17\ While some Members might directly connect to the Disaster
Recovery Center and incur the proposed $2,750 per month fee, there
are other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is waiving fees for the
first three logical connectivity sessions, a Member connecting
through another method would not incur any fees charged directly by
the Exchange. However, the Exchange notes that a third-party service
provider providing connectivity to the Exchange likely would charge
a fee for providing such connectivity; such fees are not set by or
shared in by the Exchange.
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2. Statutory Basis
The Exchange believes that the proposed fees for connectivity
services to LTSE are reasonable, equitable and not unfairly
discriminatory because, as described above, the proposed pricing for
connectivity services is directly related to the relative costs to the
Exchange to provide those respective services and does not impose a
barrier to entry to smaller participants.
The Exchange recognizes that there are various business models and
varying sizes of market participants conducting business on the
Exchange. The Exchange's incremental aggregate costs for all
connectivity services are disproportionately related to Members with
higher message traffic and/or Members with more complicated connections
established with the Exchange, as such Members: (1) consume the most
bandwidth and resources of the network; (2) transact the vast majority
of the volume on the Exchange; and (3) require the high-touch network
support services provided by the Exchange and its staff, including
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services.
Accordingly, the Exchange believes the allocation of the proposed fees
that increase based on the number of physical connections or
application sessions is reasonable based on the resources consumed by
the respective type of market participant (i.e., lowest resource
consuming Members will pay the least, and highest resource consuming
Members will pay the most), particularly since higher resource
consumption translates directly to higher costs to the Exchange.
With regard to reasonableness, the Exchange understands that when
appropriate given the context of a proposal the Commission has taken a
market-based approach to examine whether the SRO making the proposal
was subject to significant competitive forces in setting the terms of
the proposal. In looking at this question, the Commission considers
whether the SRO has demonstrated in its filing that: (i) there are
reasonable substitutes for the product or service; (ii) ``platform''
competition constrains the ability to set the fee; and/or (iii) revenue
and cost analysis shows the fee would not result in the SRO taking
supra-competitive profits. If the SRO demonstrates that the fee is
subject to significant competitive forces, the Commission 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. If the filing fails to demonstrate that the fee is
constrained by competitive forces, the SRO must provide a substantial
basis, other than competition, to show that it is consistent with the
Exchange Act, which may include production of relevant revenue and cost
data pertaining to the product or service.
LTSE believes the proposed fees for connectivity services are fair
and reasonable as a form of cost recovery for the Exchange's aggregate
costs of offering connectivity services to Members and non-Members. The
proposed fees are expected to generate monthly revenue of approximately
$120,000 \18\ providing cost recovery to the Exchange for the aggregate
costs of offering connectivity services, based on a methodology that
narrowly limits the cost drivers that are allocated to those closely
and directly related to the particular service. In addition, this
revenue will allow the Exchange to continue to offer, to enhance, and
to continually refresh its infrastructure as necessary to offer a
state-of-the-art trading platform. The Exchange believes that,
consistent with the Act, it is appropriate to charge fees that
represent a reasonable markup over cost given the other factors
discussed above. The Exchange also believes the proposed fee is a
reasonable means of encouraging Users to be efficient in the
connectivity services they reserve for use, with the benefits to
overall system efficiency to the extent Members and non-Members
consolidate their usage of connectivity services or discontinue
subscriptions to unused physical connectivity.
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\18\ As stated above, the Exchange launched its new trading
platform on September 23, 2024. This expected revenue is based on a
model for Q4 2024.
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The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (1)
[[Page 83736]]
consume the most bandwidth and resources of the network; (2) transact
the vast majority of the volume on the Exchange; and (3) require the
high-touch network support services provided by the Exchange and its
staff, including network monitoring, reporting and support services,
resulting in a much higher cost to the Exchange to provide such
connectivity services.
Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering
whether an exchange's proposed fees are consistent with the Act.\19\ As
described in the Fee Guidance, the term ``supra-competitive profits''
refers to profits that exceed the profits that can be obtained in a
competitive market. The proposed fee structure would not result in
excessive pricing or supra-competitive profits for the Exchange. The
proposed fee structure is merely designed to permit the Exchange to
cover some of the costs allocated to providing connectivity services,
which would also help fund future expenditures (increased costs,
improvements, etc.). While the Fee Guidance did not establish a
guideline as to what constitutes supra-competitive pricing through
analyzing margin (nor does the Exchange believe it should have), the
Exchange does not believe that it would be reasonable to consider the
aforementioned margins to constitute supra-competitive pricing. Of
course, should the Exchange find opportunities to dramatically reduce
costs or increase revenues such that it believes the cost it is
charging for physical connections or applications sessions is
inconsistent with the cost of providing such connectivity or resulting
in unreasonable margin, the Exchange will seek to lower its fees in
order to pass savings on to its constituents. Thus, the Exchange
believes that its proposed pricing for Connectivity Fees is fair,
reasonable, and equitable. Further, the Exchange notes that certain of
its competitors have connectivity fees that were approved without the
presentation of a cost-based analysis, but it is reasonable to assume
that certain of those competitors with significantly higher fees also
operate with significantly higher profit margins. Accordingly, the
Exchange believes that its proposal is consistent with Section
6(b)(4)40 of the Act because the proposed fees will permit recovery of
the Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
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\19\ See Fee Guidance, supra note 13.
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The proposed fees for connectivity services will allow the Exchange
to cover certain costs incurred by the Exchange's technology provider
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 offer the connectivity services. The
Exchange routinely works with its technology provider 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 portion of the overall expense of the
technology provider's services, and thus the Exchange believes that it
is reasonable and appropriate to help offset those costs by adopting
fees for connectivity services. The Exchange's Cost Analysis estimates
the monthly costs to provide connectivity services at $375,597. Based
on current connectivity services usage, the Exchange would generate
monthly revenues for the rest of 2024 of approximately $120,000. Even
if the Exchange earns that amount or incrementally more, the Exchange
believes the proposed fees for connectivity services are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total expense of LTSE associated
with providing connectivity services versus the total projected revenue
of the Exchange associated with network connectivity services.
The Exchange notes that other exchanges offer similar connectivity
options to market participants and that the Exchange's fees are a
discount as compared to the majority of such fees.\20\ With respect to
physical connections, MIAX Options (``MIAX''), MIAX Pearl, LLC (``MIAX
Pearl''), MIAX Emerald, LLC (``MIAX Emerald''), each of the Nasdaq
Stock Market LLC (``Nasdaq'') options exchanges,\21\ NYSE American
Options (``NYSE American''), NYSE Arca Options (``NYSE Arca''), Cboe
Exchange, Inc. (``Cboe Options''), Cboe BZX Options (``BZX Options''),
and Cboe EDGX Options (``EDGX Options'') charge between $7,000-$22,750
per month for physical connectivity at their primary data centers that
is comparable to that offered by the Exchange.\22\ Nasdaq, NYSE
American and NYSE Arca also charge installation fees, which are not
proposed to be charged by the Exchange. With respect to application
sessions, BX,PHLX, GEMX, MRX, BOX Options (``BOX''), Cboe Options, BZX
Options and EDGX charge between $500-$800 per month for order entry and
drop ports.\23\ The Exchange further notes that several of these
exchanges each charge for other logical ports that the Exchange will
continue to provide for free, such as application sessions for testing
and disaster recovery purposes.\24\ While the Exchange's proposed
Options Connectivity Fees are lower than certain of the fees charged by
the Nasdaq options exchanges, MIAX Options, MIAX Pearl, MIAX Emerald,
NYSE American, NYSE Arca, BOX, Cboe, BZX and EDGX, MEMX believes that
it offers significant value to Members over these other exchanges in
terms of bandwidth available over such connectivity services, which the
Exchange believes is a competitive advantage, and differentiates its
connectivity versus connectivity to other exchanges.\25\ Additionally,
the
[[Page 83737]]
Exchange's proposed Connectivity Fees to its disaster recovery facility
are within the range of the fees charged by other exchanges for similar
connectivity alternatives.\26\
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\20\ One significant differentiation between the Exchanges is
that while it offers different types of physical connections,
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does
not propose to charge different prices for such connections. In
contrast, most of the Exchange's competitors provide scaled pricing
that increases depending on the size of the physical connection. The
Exchange does not believe that its costs increase incrementally
based on the size of a physical connection but instead, that
individual connections and the number of such separate and disparate
connections are the primary drivers of cost for the Exchange.
\21\ Including Nasdaq PHLX (``PHLX''), Nasdaq Options Market
(``NOM''), Nasdaq BX Options (``BX''), Nasdaq ISE (``ISE''), Nasdaq
GEMX (``GEMX''), and Nasdaq MRX (``MRX'').
\22\ See the MIAX fee schedule, available at:<a href="http://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_09122023.pdf">http://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_09122023.pdf</a>; the MIAX
Emerald fee schedule, available at: <a href="https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_10122023_3.pdf">https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_10122023_3.pdf</a>; the Nasdaq
Options markets fee schedule, at <a href="http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2">http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2</a>; the NYSE Connectivity fee
schedule, 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>; the Cboe fee schedule,
available at: <a href="https://cboe.com/us/options/membership/fee_schedule/bzx/">https://cboe.com/us/options/membership/fee_schedule/bzx/</a>; the EDGX Options fee schedule, at: <a href="https://cboe.com/us/options/membership/fee_schedule/edgx/">https://cboe.com/us/options/membership/fee_schedule/edgx/</a>, and the BOX Options fee
schedule, available at: <a href="https://boxoptions.com/fee-schedule/">https://boxoptions.com/fee-schedule/</a>. This
range is based on a review of the fees charged for 10-40Gb
connections at each of these exchanges and relates solely to the
physical port fee or connection charge, excluding co-location fees
and other fees assessed by these exchanges. The Exchange notes that
it does not offer physical connections with lower bandwidth than
10Gb and that Members and non-members with lower bandwidth than 10Gb
and that Members and non-members with lower bandwidth requirements
typically access the Exchange through third-party extranets or
service bureaus.
\23\ See id.
\24\ See id.
\25\ As noted above, all physical connections offered by LTSE
are at least 10Gb capable and physical connections provided with
larger bandwidth capabilities will be provided at the same rate as
such connections. The Exchange also reiterates that LTSE application
sessions are capable of handling significant amount of message
traffic (i.e., over 50,000 orders per second), and have no
application flow control or order throttling, in contrast to
competitors that have imposed message rate thresholds.
\26\ See supra note 22.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\27\ for the reasons discussed above in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
its Members and other persons using its facilities, does not permit
unfair discrimination between customers, issuers, brokers, or dealers,
and is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and in general to protect investors
and the public interest, particularly as the proposal neither targets
nor will it have a disparate impact on any particular category of
market participant.
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\27\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\28\ 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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\28\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
The Exchange does not believe that the proposed rule change to
apply Connectivity Fees to Users would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants because the proposed connectivity pricing is
associated with relative usage of the Exchange by each market
participant and does not impose a barrier to entry to smaller
participants. The Exchange believes its proposed pricing is reasonable
and lower than what other exchanges charge and, when coupled with the
availability of third-party providers that also offer connectivity
solutions, that participation on the Exchange is affordable for all
market participants, including smaller trading firms. Therefore, the
fees may stimulate intramarket competition by attracting additional
firms to become Members of LTSE. As described above, the connectivity
services purchased by market participants typically increase based on
their additional message traffic and/or the complexity of their
operations. The market participants that utilize more connectivity
services typically utilize the most bandwidth, and those are the
participants that consume the most resources from the network.
Accordingly, the proposed fees for connectivity services do not favor
certain categories of market participants in a manner that would impose
a burden on competition; rather, the allocation of the proposed
Connectivity Fees reflects the network resources consumed by the
various size of market participants and the costs to the Exchange of
providing such connectivity services.
As it relates to the reorganization of the fee schedule, as
discussed above, the Exchange does not believe that the proposed change
would impose any burden on competition because such change serves to
create an easier to read fee schedule to avoid any Member confusion.
Intermarket Competition
The Exchange does not believe the proposed fees for Connectivity to
LTSE places an undue burden on competition on other SROs that is not
necessary or appropriate. Additionally, other exchanges have similar
connectivity alternatives for their participants, but with higher rates
to connect.\29\ The Exchange is also unaware of any assertion that the
proposed fees for connectivity services would somehow unduly impair its
competition with other exchanges. As a participant in an already highly
competitive environment for equity trading, LTSE does not have the
market power necessary to set prices for services that are unreasonable
or unfairly discriminatory in violation of the Exchange Act. In sum,
LTSE's proposed Connectivity Fees for Members are comparable to and
generally lower than fees charged by other exchanges for the same or
similar services.
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\29\ See supra notes 21-24 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
This proposed rule change establishes dues, fees or other charges
among its members and, as such, may take effect upon filing with the
Commission pursuant to Section 19(b)(3)(A)(ii) of the Act \30\ and
paragraph (f)(2) of Rule 19b-4 thereunder.\31\ Accordingly, the
proposed rule change would take effect upon filing with the Commission.
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\30\ 15 U.S.C. 78s(b)(3)(A)(ii).
\31\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend the rule
change if it appears to the Commission that the action is necessary or
appropriate in the public interest, for the protection of investors, or
would otherwise further 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.
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#8dfff8e1e8a0eee2e0e0e8e3f9fecdfee8eea3eae2fb"><span class="__cf_email__" data-cfemail="d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0">[email protected]</span></a>. Please include
file number SR-LTSE-2024-07 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-LTSE-2024-07. 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 83738]]
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-LTSE-2024-07 and should be submitted on or before November 7, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-23981 Filed 10-16-24; 8:45 am]
BILLING CODE 8011-01-P
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