Notice2024-29336
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
December 13, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 240 (Friday, December 13, 2024)</title>
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[Federal Register Volume 89, Number 240 (Friday, December 13, 2024)]
[Notices]
[Pages 101057-101064]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29336]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101851; File No. SR-LTSE-2024-09]
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
December 9, 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 November 27, 2024, Long-Term Stock Exchange, Inc. (``LTSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 101058]]
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 Fees) in the Long-Term Stock Exchange Fee Schedule. Prior
to the launch of the new trading system on September 23, 2024, the
Exchange offered connectivity (both physical and logical) at no cost to
all market participants. With the launch of the new trading system and
the significant costs detailed below, the Exchange determined it was
reasonable and appropriate to begin to charge market participants for
their connectivity to the Exchange. The Exchange notes that the
transition between trading systems required all market participants to
set up new connectivity to the new trading system, and after the
successful launch the Exchange decommissioned all the historical
connections within the old trading system. The Exchange also notes that
market participants were not charged simultaneously for both their old
connections and new connections during the transition as the Exchange
never charged for connectivity to the old trading system.
Cross-Connect Fees
The Exchange proposes to offer to both Members \3\ and non-Members
the option to utilize 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 ULL fiber cross-connection to the Test
Environment. 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 either the Disaster Recovery facility or the
Test Environment.
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\3\ The term ``Member'' shall mean any registered broker or
dealer that has been admitted to membership in the Exchange. See
LTSE Rule 1.160.
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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 the Primary facility, Disaster Recovery facility or Test
Environment.\4\
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\4\ 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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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 market participants--both generally and in relation to other
market participants, 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 market participants and competition among
market participants in general. The Exchange believes that this level
of diligence and transparency is called for by the requirements of
Section 19(b)(1) under the Act,\5\ and Rule 19b-4 thereunder,\6\ with
respect to the types of information self-regulatory organizations
(``SROs'') should provide when filing fee changes, and Section 6(b) of
the Act,\7\ which requires, among other things, that exchange fees be
reasonable and equitably allocated,\8\ not designed to permit unfair
discrimination,\9\ and that they not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.\10\
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.\11\
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\5\ 15 U.S.C. 78s(b)(1).
\6\ 17 CFR 240.19b-4.
\7\ 15 U.S.C.78f(b).
\8\ 15 U.S.C. 78f(b)(4).
\9\ 15 U.S.C. 78(f)(b)(5).
\10\ 15 U.S.C. 78f(b)(8).
\11\ 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 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). Available at
<a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.gov">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.gov</a>.
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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.\12\ As such, a large portion 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.\13\ Because of this arrangement, the Exchange does not
possess the same level of specificity for cost drivers related to
connectivity as
[[Page 101059]]
other exchanges have detailed within their own similar filings.
However, the Exchange recognizes that the fees it pays MEMX
Technologies are for the services MEMX Technologies provides to the
Exchange and their costs, these services and costs include maintaining
a team of highly-skilled network engineers, fees charged to MEMX
Technologies by the third-party data center operator for the servers
and equipment LTSE utilizes, 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. While these cost drivers are known,
because of the unique structure laid out above the Exchange is unable
to separate out most of the specific expenses for connectivity
services, as these are intricately combined in its DSLA with MEMX
Technologies.
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\12\ 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, supra note 3 [sic].
\13\ The DSLA with MEMX Technologies entails both fixed and
variable costs. To Exchange used both types of costs when
determining aggregated monthly costs detailed below.
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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) does not
reflect LTSE's actual current costs associated with the development and
operation of connectivity on LTSE. Accordingly, the Exchange believes
it is more appropriate to justify its fees 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 services to the Exchange at approximately $485,000
beginning October 1, 2024.\14\ 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) \15\ the Exchange is
proposing to modify its Fee Schedule and charge the fees for
connectivity detailed herein.
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\14\ The aggregate monthly costs were determined by taking the
individual cost drivers detailed below and their yearly costs and
dividing by twelve months.
\15\ 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 connectivity, 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, 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 connectivity. 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 only cover a portion of the total annual
expense that the Exchange projects to incur 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. Based on current connectivity services usage,
the Exchange would generate monthly revenues for the rest of 2024 of
approximately $192,000, which will result in a loss for the Exchange.
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 for a total of $538,400 per year of costs related
to providing connectivity).
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Allocated monthly Allocated yearly
Cost drivers costs costs % of all
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Third-Party Expenses................................... $427,279 $4,594,998 32
Human Resources........................................ 44,866 538,400 10
Data Center............................................ 13,170 158,040 30
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Total.............................................. 485,315 5,291,438 .................
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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 trading system and related technology to a third-party
technology provider MEMX Technologies. With this arrangement LTSE
receives (1) access to technology used to complete connections to the
Exchange and to connect to external markets, (2) physical connectivity
in the data centers where MEMX Technologies maintains equipment for
LTSE use--such as dedicated space, security services, cooling and
power, (3) use of physical ports and logical ports, and (3) use of
physical assets and software, which also includes assets used for
testing and monitoring of infrastructure. Also included in this section
are the costs from a second third-party vendor which assists LTSE with
services related to member gateways.
The Exchange took the annual costs for each of these third-party
providers to determine what portion (or percentage) of these costs
related to connectivity services and thus bears a relationship that is,
``in nature and closeness,'' directly related to connectivity services.
There are four major core services
[[Page 101060]]
associated with the Exchange (member gateways, the matching engine, the
SIP and then downstream services). The services provided by these third
party vendors touches each of these major core services, therefore the
Exchange believed a conservative allocation of 32% of costs for
connectivity services was appropriate.
Human Resources
For personnel costs not related to its outsourced third-party
providers, LTSE then 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 notes that network support services to Members and Non-Members
provided by the Exchange and its staff, including network monitoring,
reporting and support services, are all handled directly by LTSE and
not MEMX Technologies.
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
In addition to the data center costs incurred by MEMX Technologies
which are allocated in the Third-Party Expenses above, the Exchange
also maintains its own footprint in a third-party data center.\16\ Data
Center costs include an allocation of the costs the Exchange incurs to
monitor its trading platform (both the Primary facility and Disaster
Recovery facility) as well as the costs to maintain its equipment in
the data center. The Exchange does not own the data center facilities,
but instead, leases space in a data center operated by a third party).
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\16\ LTSE has a data center presence in Secaucus NY4.
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The Exchange took the annual data center costs to determine what
portion (or percentage) of these costs related to connectivity services
and thus bears a relationship that is, ``in nature and closeness,''
directly related to connectivity services. As stated above, there are
four major core services associated with the Exchange (member gateways,
the matching engine, the SIP and then downstream services). The
services related to these costs include network packet capture for
performance monitoring, security information and event management,
network connectivity and security monitoring. The Exchange therefore
believes a conservative allocation of 30% of costs for connectivity
services was appropriate.
Physical Connectivity Fees
With the launch of the new trading platform, LTSE required Members
and Non-Members to establish all new connections (both physical and
logical) to the Exchange in order to transmit orders to and receive
information through the new trading platform. Members and Non-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 and Non-
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 market
participant. The number of physical connections assigned to each firm
as of September 30, 2024, ranges from one to three, depending on the
scope and scale of the firm's trading activity on the Exchange as
determined by the firm, including the firm'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 42% have either one or two physical
connections to the Exchange in the Primary Data Center.
As described above, to cover a portion the aggregate costs of
providing physical connectivity to Members and Non-Members, as
described below, the Exchange is proposing to charge a fee of $5,500
per month for each physical connection in the Primary facility and a
fee of $2,750 per month for each physical connection in the Disaster
Recovery and Test Environment facilities. There is no requirement that
any Member or Non-Member maintain a specific number of physical
connections and a Member or Non-Member may choose to maintain as many
or as few of such connections as each Member or Non-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 facility). 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 facility,
in that these Members do not need one full 10Gb connection, and that
four of the designated Members use a third-party provider instead of
connecting directly to the Disaster Recovery facility through
connectivity provided by the Exchange. Nonetheless, because some
Members are required to connect to the Disaster Recovery facility
pursuant to Rule 2.250 and to encourage Members and Non-Members to
connect to the Disaster Recovery facility generally, the Exchange has
proposed to charge one-half of the fee for a physical connection in the
Primary facility. The Exchange believes that charging a higher fee for
physical connections at the Disaster Recovery facility would be
inconsistent with its objective of encouraging Members to connect at
such a facility.
[[Page 101061]]
Further, other exchanges also provide discounted connectivity fees for
connections to their respective disaster recovery facilities.\17\
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\17\ See, e.g., the CBOE BZX equities fee schedule, available
at: <a href="https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/">https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/</a>.
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The Exchange notes that while Members are required to connect to
the Test Environment in some way for initial protocol certification,
they do not have to connect directly and can use an extranet provider
to connect or access the LTSE Test Environment directly.
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 Member of Non-Member requests, based upon
factors deemed relevant by each firm (either a Member, service bureau
or extranet). The Exchange believes these factors include the costs to
maintain connectivity, business model and choices Members and Non-
Members make in how to participate on the Exchange, as further
described below. The proposed connectivity fees are designed to permit
the Exchange to cover a portion of costs allocated to providing
connectivity services. 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 facility and Test Environment. The Exchange
has proposed this discounted rate for Disaster Recovery and Test
Environment connectivity in order to encourage Members and Non-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 facility given this
requirement. The Exchange notes that this rate is well below the cost
of providing such services and the Exchange will offer connectivity to
the Disaster Recovery facility and Test Environment 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. Upon receipt of the completed instructions, LTSE assigns
the Member or Non-Member the number of sessions requested. The number
of sessions assigned to each Member 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 Members and Non-Members, 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 initiate order entry in all three
environments (Production, Disaster Recovery and Test Environments).
Further, 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.
The proposed fee is also designed to encourage Members and Non-
Members 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 each
logical connectivity session 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.
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 Member of Non-Member requests, based upon
factors deemed relevant by each firm (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.\18\
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\18\ The Exchange understands that some Members (or service
bureaus) may also request more sessions to enable the ability to
send a greater number of simultaneous order messages to the Exchange
by spreading orders over more Order Entry Ports, thereby increasing
throughput (i.e., the potential for more orders to be processed in
the same amount of time). The degree to which this usage of sessions
provides any throughput advantage is based on how a particular
Member sends order messages to LTSE, however the Exchange notes that
the architecture reduces the impact or necessity of such a strategy.
All sessions on LTSE provide the same throughput, and as noted
above, the throughput is likely adequate even for a Member sending a
significant amount of volume at a fast pace, and is not artificially
throttled or limited in any way by the Exchange.
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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
or Non-Members. As discussed in more detail in the Statutory Basis
section, the Exchange believes that the likelihood of higher fees for
certain Members or Non-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 and Non-Members. The Exchange's costs for connectivity services
are directly proportional to the impact Members and Non-Members with
higher message traffic and/or Members and Non-Members with more
complicated connections established with the Exchange, as such Members
and Non-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
[[Page 101062]]
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 and Non-
Members with higher message traffic and/or Members and Non-Members with
more complicated connections to pay a higher share of the total
connectivity services fees. While Members and Non-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 Non-Members and not on the business model or type of firm. The
Exchange notes that the correlation between message traffic and usage
of connectivity services is not completely aligned because Members and
Non-Members individually determine how many physical connections and
application sessions to request, and Members and Non-Members may make
different decisions on the appropriate ways based on facts unique to
their individual businesses. 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'').\19\ 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.\20\
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 Member or Non-Member
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 and Test Environment
facilities 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.\21\
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\19\ 17 CFR 242.1000-1007.
\20\ 17 CFR 242.1001(a).
\21\ 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 rule change is consistent
with the provisions of Section 6(b) \22\ of the Act in general and
furthers the objectives of Section 6(b)(4) \23\ 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) \24\ 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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\22\ 15 U.S.C. 78f.
\23\ 15 U.S.C. 78f(b)(4).
\24\ 15 U.S.C. 78f(b)(5).
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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 does not believe the proposed pricing for connectivity
services imposes a barrier to entry to smaller market participants. As
detailed above, the Exchange recognizes that there are various business
models and varying sizes of market participants conducting business on
the Exchange. The Exchange's costs for its connectivity services are
directly proportional to the impact that Members and Non-Members with
higher message traffic and/or Members and Non-Members with more
complicated connections established with the Exchange, as such Members
and Non-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 and Non-Members will pay the
least, and highest resource consuming Members and Non-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
[[Page 101063]]
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
$192,000 \25\ providing partial 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 also believes
the proposed fee is a reasonable means of encouraging firms 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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\25\ 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) 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.\26\ 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. As
stated above, the proposed fee structure is merely designed to permit
the Exchange to cover some of the costs allocated to providing
connectivity services. Thus, the Exchange believes that its proposed
pricing for Connectivity Fees is fair, reasonable, and equitable.
Accordingly, the Exchange believes that its proposal is consistent with
Section 6(b)(4) 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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\26\ See Fee Guidance, supra note 13 [sic].
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The proposed fees for connectivity services will allow the Exchange
to cover a portion of costs incurred by the Exchange for offering
connectivity to Members and Non-Members. As detailed above, the
Exchange has numerous internal and third-party expenses associated with
providing connectivity. Including 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.
Further, the Exchange routinely works with its MEMX Technologies 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 $485,000. Based
on current connectivity services usage, the Exchange would generate
monthly revenues for the rest of 2024 of approximately $192,000, which
will result in a loss for the Exchange. 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 proposed
connectivity fees are lower.\27\ The Exchange further notes that
several of these exchanges charge for all logical connectivity
sessions, and do not offer the three free sessions per month the
Exchange is proposing to offer.\28\
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\27\ See, e.g., the MEMX Connectivity fee schedule, available
at: <a href="https://info.memxtrading.com/connectivity-fees/">https://info.memxtrading.com/connectivity-fees/</a>.
\28\ See id.
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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
\29\ 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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\29\ 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,\30\ 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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\30\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
The Exchange does not believe that the proposed rule change to
establish connectivity fees 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
[[Page 101064]]
firms. As described above, the connectivity services purchased by
market participants typically increase based on their additional
message traffic and/or the complexity of their operations. The market
participants that utilize more connectivity services typically utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the proposed fees for
connectivity services do not favor certain categories of market
participants in a manner that would impose a burden on competition;
rather, the allocation of the proposed fees for connectivity reflects
the network resources consumed by the various size of market
participants and the costs to the Exchange of providing such
connectivity services.
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, another exchange has similar
connectivity alternatives for their participants, but with higher rates
to connect.\31\ The Exchange is also unaware of any assertion that the
proposed fees for connectivity services would somehow unduly impair its
competition with other exchanges. In sum, LTSE's proposed fees for
connectivity for Members and Non-Members are comparable to and
generally lower than fees charged by another exchange for the same or
similar services.
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\31\ See supra notes 28-29 [sic].
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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 \32\ and
paragraph (f)(2) of Rule 19b-4 thereunder.\33\ Accordingly, the
proposed rule change would take effect upon filing with the Commission.
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\32\ 15 U.S.C. 78s(b)(3)(A)(ii).
\33\ 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#780a0d141d551b1715151d160c0b380b1d1b561f170e"><span class="__cf_email__" data-cfemail="f381869f96de909c9e9e969d8780b3809690dd949c85">[email protected]</span></a>. Please include
file number SR-LTSE-2024-09 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-2024-09. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or
withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to file number SR-LTSE-2024-09 and should be submitted on or
before January 3, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29336 Filed 12-12-24; 8:45 am]
BILLING CODE 8011-01-P
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