Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee Schedule, 22214-22221 [2019-10116]
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Notices
likely that the Exchange will lose
membership and market share as a
result. As a result, the Exchange
carefully considers any increases to its
fees, balancing the utility in remaining
competitive with other exchanges and
with alternative trading systems
exempted from compliance with the
statutory standards applicable to
exchanges, and in covering costs
associated with maintaining its equities
market and its regulatory programs to
ensure that the Exchange remains an
efficient and well-regulated
marketplace. The Exchange notes that
competitors are free to modify their own
fees in response to its proposal, and
because Members are not compelled to
be Members of the Exchange and may
trade on numerous other exchanges and
other alternative venues, the Exchange
believes that the proposed fee change
will not impose a burden on intermarket
competition.
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
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 8 and paragraph (f) of Rule
19b–4 9 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGA–2019–011 on the subject
line.
Paper Comments
• 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–CboeEDGA–2019–011. 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 (https://www.sec.gov/
rules/sro.shtml). 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
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGA–2019–011 and
should be submitted on or before June
6, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–10121 Filed 5–15–19; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85837; File No. SR–
PEARL–2019–17]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX
PEARL Fee Schedule
May 10, 2019.
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 April 30,
2019, MIAX PEARL, LLC (‘‘MIAX
PEARL’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX PEARL Fee Schedule
(the ‘‘Fee Schedule’’) to modify certain
of the Exchange’s system connectivity
fees.
The Exchange initially filed the
proposal on March 1, 2019 (SR–PEARL–
2019–08). That filing has been
withdrawn and replaced with the
current filing (SR–PEARL–2019–17).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX PEARL’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
BILLING CODE 8011–01–P
8 15
U.S.C. 78s(b)(3)(A).
9 17 CFR 240.19b–4(f).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule regarding connectivity to
the Exchange. Specifically, the
Exchange proposes to amend Sections
5a) and b) of the Fee Schedule to
increase the network connectivity fees
for the 1 Gigabit (‘‘Gb’’) fiber
connection, the 10Gb fiber connection,
and the 10Gb ultra-low latency (‘‘ULL’’)
fiber connection, which are charged to
both Members 3 and non-Members of the
Exchange for connectivity to the
Exchange’s primary/secondary facility.
The Exchange also proposes to increase
the network connectivity fees for the
1Gb and 10Gb fiber connections for
connectivity to the Exchange’s disaster
recovery facility. Each of these
connections are shared connections, and
thus can be utilized to access both the
Exchange and the Exchange’s affiliate,
Miami International Securities
Exchange, LLC (‘‘MIAX’’). These
proposed fee increases are collectively
referred to herein as the ‘‘Proposed Fee
Increases.’’
The Exchange initially filed the
Proposed Fee Increases on July 31, 2018,
designating the Proposed Fee Increases
effective August 1, 2018.4 The First
Proposed Rule Change was published
for comment in the Federal Register on
August 13, 2018.5 The Commission
received one comment letter on the
proposal.6 The Proposed Fee Increases
remained in effect until they were
temporarily suspended pursuant to a
suspension order (the ‘‘Suspension
Order’’) issued by the Commission on
September 17, 2018.7 The Suspension
Order also instituted proceedings to
determine whether to approve or
disapprove the proposed rule change.8
The Healthy Markets Letter argued
that the Exchange did not provide
sufficient information in its filing to
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3 The
term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of the Exchange’s Rules for
purposes of trading on the Exchange as an
‘‘Electronic Exchange Member’’ or ‘‘Market Maker.’’
Members are deemed ‘‘members’’ under the
Exchange Act. See Exchange Rule 100.
4 See Securities Exchange Act Release No. 83785
(August 7, 2018), 83 FR 40101 (August 13, 2018)
(SR–PEARL–2018–16). (The ‘‘First Proposed Rule
Change’’).
5 Id.
6 See Letter from Tyler Gellasch, Executive
Director, The Healthy Markets Association, to Brent
J. Fields, Secretary, Commission, dated September
4, 2018 (‘‘Healthy Markets Letter’’).
7 See Securities Exchange Act Release No. 34–
84177 (September 17, 2018).
8 Id.
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support a finding that the proposal is
consistent with the Act. Specifically, the
Healthy Markets Letter objected to the
Exchange’s reliance on the fees of other
exchanges to demonstrate that its fee
increases are consistent with the Act. In
addition, the Healthy Markets Letter
argued that the Exchange did not offer
any details to support its basis for
asserting that the Proposed Fee
Increases are consistent with the Act.
On October 5, 2018, the Exchange
withdrew the First Proposed Rule
Change.9 The Exchange refiled the
Proposed Fee Increases on September
18, 2018, designating the Proposed Fee
Increases immediately effective.10 The
Second Proposed Rule Change was
published for comment in the Federal
Register on October 10, 2018.11 The
Commission received one comment
letter on the proposal.12 The Proposed
Fee Increases remained in effect until
they were temporarily suspended
pursuant to a suspension order (the
‘‘Second Suspension Order’’) issued by
the Commission on October 3, 2018.13
The Second Suspension Order also
instituted proceedings to determine
whether to approve or disapprove the
Second Proposed Rule Change.14
The SIFMA Letter argued that the
Exchange did not provide sufficient
information in its filing to support a
finding that the proposal should be
approved by the Commission after
further review of the proposed fee
increases. Specifically, the SIFMA
Letter objected to the Exchange’s
reliance on the fees of other exchanges
to justify its own fee increases. In
addition, the SIFMA Letter argued that
the Exchange did not offer any details
to support its basis for asserting that the
Proposed Fee Increases are reasonable.
On November 23, 2018, the Exchange
withdrew the Second Proposed Rule
Change.15
The Exchange refiled the Proposed
Fee Increases on March 1, 2019,
designating the Proposed Fee Increases
9 See Securities Exchange Act Release No. 84397
(October 10, 2018), 83 FR 52272 (October 16, 2018)
(SR–PEARL–2018–16).
10 See Securities Exchange Act Release No. 84358
(October 3, 2018), 83 FR 51022 (October 10, 2018)
(SR–PEARL–2018–19). (The ‘‘Second Proposed
Rule Change’’).
11 Id.
12 See Letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, and Ellen
Greene, Managing Director Financial Services
Operations, The Securities Industry and Financial
Markets Association (‘‘SIFMA’’), to Brent J. Fields,
Secretary, Commission, dated October 15, 2018
(‘‘SIFMA Letter’’).
13 See supra note 10.
14 Id.
15 See Securities Exchange Act Release No. 84651
(November 26, 2018), 83 FR 61687 (November 30,
2018) (SR–PEARL–2018–19).
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immediately effective.16 The Third
Proposed Rule Change was published
for comment in the Federal Register on
March 20, 2019.17 The Third Proposed
Rule Change provided new information,
including additional detail about the
market participants impacted by the
Proposed Fee Increases, as well as the
additional costs incurred by the
Exchange associated with providing the
connectivity alternatives, in order to
provide more transparency and support
relating to the Exchange’s belief that the
Proposed Fee Increases are reasonable,
equitable, and non-discriminatory, and
to provide sufficient information for the
Commission to determine that the
Proposed Fee Increases are consistent
with the Act.
On March 29, 2019, the Commission
issued its Order Disapproving Proposed
Rule Changes to Amend the Fee
Schedule on the BOX Market LLC
Options Facility to Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network (the ‘‘BOX Order’’).18 In
the BOX Order, the Commission
highlighted a number of deficiencies it
found in three separate rule filings by
BOX Exchange LLC (‘‘BOX’’) to increase
BOX’s connectivity fees that prevented
the Commission from finding that
BOX’s proposed connectivity fees were
consistent with the Act. These
deficiencies relate to topics that the
Commission believes should be
discussed in a connectivity fee filing.
After the BOX Order was issued, the
Commission received four comment
letters on the Third Proposed Rule
Change.19
The Second SIFMA Letter argued that
the Exchange did not provide sufficient
information in its Third Proposed Rule
Change to support a finding that the
16 See Securities Exchange Act Release No. 85318
(March 14, 2019), 84 FR 10363 (March 20, 2019)
(SR–MIAX–2019–10) (the ‘‘Third Proposed Rule
Change’’) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule).
17 Id.
18 See Securities Exchange Act Release No. 85459
(March 29, 2019), 84 FR 13363 (April 4, 2019) (SR–
BOX–2018–24, SR–BOX–2018–37, and SR–BOX–
2019–04).
19 See Letter from Joseph W. Ferraro III, SVP &
Deputy General Counsel, MIAX, to Vanessa
Countryman, Acting Secretary, Commission, dated
April 5, 2019 (‘‘MIAX Letter’’); Letter from
Theodore R. Lazo, Managing Director and Associate
General Counsel, SIFMA, to Vanessa Countryman,
Acting Secretary, Commission, dated April 10, 2019
(‘‘Second SIFMA Letter’’); Letter from John Ramsay,
Chief Market Policy Officer, Investors Exchange
LLC, to Vanessa Countryman, Acting Secretary,
Commission, dated April 10, 2019 (‘‘IEX Letter’’);
and Letter from Tyler Gellasch, Executive Director,
Healthy Markets, to Brent J. Fields, Secretary,
Commission, dated April 18, 2019 (‘‘Second
Healthy Markets Letter’’).
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Notices
proposal should be approved by the
Commission after further review of the
proposed fee increases. Specifically, the
Second SIFMA Letter argued that the
Exchange’s market data fees and
connectivity fees were not constrained
by competitive forces, the Exchange’s
filing lacked sufficient information
regarding cost and competition, and that
the Commission should establish a
framework for determining whether fees
for exchange products and services are
reasonable when those products and
services are not constrained by
significant competitive forces.
The IEX Letter argued that the
Exchange did not provide sufficient
information in its Third Proposed Rule
Change to support a finding that the
proposal should be approved by the
Commission and that the Commission
should extend the time for public
comment on the Third Proposed Rule
Change. Despite the objection to the
Proposed Fee Increases, the IEX Letter
did find that ‘‘MIAX has provided more
transparency and analysis in these
filings than other exchanges have sought
to do for their own fee increases.’’ 20 The
IEX Letter specifically argued that the
Proposed Fee Increases were not
constrained by competition, the
Exchange should provide data on the
Exchange’s actual costs and how those
costs relate to the product or service in
question, and whether and how MIAX
considered changes to transaction fees
as an alternative to offsetting exchange
costs.
The Second Healthy Markets Letter
did not object to the Third Proposed
Rule Change and the information
provided by the Exchange in support of
the Proposed Fee Increases. Specifically,
the Second Healthy Markets Letter
stated that the Third Proposed Rule
Change was ‘‘remarkably different,’’ and
went on to further state as follows:
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The instant MIAX filings—along with their
April 5th supplement—provide much greater
detail regarding users of connectivity, the
market for connectivity, and costs than the
Initial MIAX Filings. They also appear to
address many of the issues raised by the
Commission staff’s BOX disapproval order.
This third round of MIAX filings suggests
that MIAX is operating in good faith to
provide what the Commission and staff
seek.21 On April 29, 2019, the Exchange
withdrew the Third Proposed Rule Change.22
The Exchange is now re-filing the
Proposed Fee Increases to squarely and
comprehensively address each and
every topic raised for discussion in the
BOX Order, the IEX Letter and the
20 See
IEX Letter, pg. 1.
Second Healthy Markets Letter, pg. 2.
22 See SR–PEARL–2019–08).
21 See
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Second SIFMA Letter to ensure that the
Proposed Fee Increases are reasonable,
equitable, and non-discriminatory, and
that the Commission should find that
the Proposed Fee Increases are
consistent with the Act. The proposed
rule change is immediately effective
upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the
Act.
The Exchange currently offers various
bandwidth alternatives for connectivity
to the Exchange to its primary and
secondary facilities, consisting of a 1Gb
fiber connection, a 10Gb fiber
connection, and a 10Gb ULL fiber
connection. The 10Gb ULL offering uses
an ultra-low latency switch, which
provides faster processing of messages
sent to it in comparison to the switch
used for the other types of connectivity.
The Exchange currently assesses the
following monthly network connectivity
fees to both Members and non-Members
for connectivity to the Exchange’s
primary/secondary facility: (a) $1,100
for the 1Gb connection; (b) $5,500 for
the 10Gb connection; and (c) $8,500 for
the 10Gb ULL connection. The
Exchange also assesses to both Members
and non-Members a monthly per
connection network connectivity fee of
$500 for each 1Gb connection to the
disaster recovery facility and a monthly
per connection network connectivity fee
of $2,500 for each 10Gb connection to
the disaster recovery facility.
The Exchange’s MIAX Express
Network Interconnect (‘‘MENI’’) can be
configured to provide Members and
non-Members of the Exchange network
connectivity to the trading platforms,
market data systems, test systems, and
disaster recovery facilities of both the
Exchange and its affiliate, MIAX, via a
single, shared connection. Members and
non-Members utilizing the MENI to
connect to the trading platforms, market
data systems, test systems and disaster
recovery facilities of the Exchange and
MIAX via a single, shared connection
are assessed only one monthly network
connectivity fee per connection,
regardless of the trading platforms,
market data systems, test systems, and
disaster recovery facilities accessed via
such connection.
The Exchange proposes to increase
the monthly network connectivity fees
for such connections for both Members
and non-Members. The network
connectivity fees for connectivity to the
Exchange’s primary/secondary facility
will be increased as follows: (a) From
$1,100 to $1,400 for the 1Gb connection;
(b) from $5,500 to $6,100 for the 10Gb
connection; and (c) from $8,500 to
$9,300 for the 10Gb ULL connection.
The network connectivity fees for
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connectivity to the Exchange’s disaster
recovery facility will be increased as
follows: (a) From $500 to $550 for the
1Gb connection; and (b) from $2,500 to
$2,750 for the 10Gb connection.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 23
in general, and furthers the objectives of
Section 6(b)(4) of the Act 24 in
particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among Exchange
Members and issuers and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposal
furthers the objectives of Section 6(b)(5)
of the Act 25 in that it 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 and is
not designed to permit unfair
discrimination between customer,
issuers, brokers and dealers.
First, the Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act, in that the Proposed
Fee Changes are fair, equitable and not
unreasonably discriminatory, because
the fees for the connectivity alternatives
available on the Exchange, as proposed
to be increased, are competitive and
market-driven. The U.S. options markets
are highly competitive (there are
currently 16 options markets) and a
reliance on competitive markets is an
appropriate means to ensure equitable
and reasonable prices.
The Exchange acknowledges that
there is no regulatory requirement that
any market participant connect to the
Exchange, or that any participant
connect at any specific connection
speed. The rule structure for options
exchanges are, in fact, fundamentally
different from those of equities
exchanges. In particular, options market
participants are not forced to connect to
(and purchase market data from) all
options exchanges, as shown by the
number of Members of MIAX PEARL as
compared to the much greater number
of members at other options exchanges
(as further detailed below). Not only
does MIAX PEARL have less than half
the number of members as certain other
options exchanges, but there are also a
number of the Exchange’s Members that
do not connect directly to MIAX
23 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
25 15 U.S.C. 78f(b)(5).
24 15
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PEARL. Further, of the number of
Members that connect directly to MIAX
PEARL, many such Members do not
purchase market data from MIAX
PEARL. There are a number of large
market makers and broker-dealers that
are members of other options exchange
but not Members of MIAX PEARL. For
example, the following are not Members
of MIAX PEARL: The D.E. Shaw Group,
CTC, XR Trading LLC, Hardcastle
Trading AG, Ronin Capital LLC,
Belvedere Trading, LLC, Bluefin
Trading, and HAP Capital LLC. In
addition, of the market makers that are
connected to MIAX PEARL, it is the
individual needs of the market maker
that require whether they need one
connection or multiple connections to
the Exchange. The Exchange has market
maker Members that only purchase one
connection (10Gb or 10Gb ULL) and the
Exchange has market maker Members
that purchase multiple connections. It is
all driven by the business needs of the
market maker. Market makers that are
consolidators that target resting order
flow tend to purchase more connectivity
that market makers that simply quote all
symbols on the Exchange. Even though
non-Members purchase and resell 10Gb
and 10Gb ULL connections to both
Members and non-Members, no market
makers currently connect to the
Exchange indirectly through such
resellers.
SIFMA’s argument that all brokerdealers are required to connect to all
exchanges is not true in the options
markets. The options markets have
evolved differently than the equities
markets both in terms of market
structure and functionality. For
example, there are many order types
that are available in the equities markets
that are not utilized in the options
markets, which relate to mid-point
pricing and pegged pricing which
require connection to the SIPs and each
of the equities exchanges in order to
properly execute those orders in
compliance with best execution
obligations. In addition, in the options
markets there is a single SIP (OPRA)
versus two SIPs in the equities markets,
resulting in few hops and thus
alleviating the need to connect directly
to all the options exchanges.
Additionally, in the options markets,
the linkage routing and trade through
protection are handled by the
exchanges, not by the individual
members. Thus not connecting to an
options exchange or disconnecting from
an options exchange does not
potentially subject a broker-dealer to
violate order protection requirements as
suggested by SIFMA. Gone are the days
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when the retail brokerage firms (the
Fidelity’s, the Schwab’s, the eTrade’s)
were members of the options
exchanges—they are not members of
MIAX PEARL or its affiliates, MIAX and
MIAX Emerald, they do not purchase
connectivity to MIAX PEARL, and they
do not purchase market data from MIAX
PEARL. The Exchange further
recognizes that the decision of whether
to connect to the Exchange is separate
and distinct from the decision of
whether and how to trade on the
Exchange. The Exchange acknowledges
that many firms may choose to connect
to the Exchange, but ultimately not
trade on it, based on their particular
business needs.
To assist prospective Members or
firms considering connecting to MIAX
PEARL, the Exchange provides
information about the Exchange’s
available connectivity alternatives.26
The decision of which type of
connectivity to purchase, or whether to
purchase connectivity at all for a
particular exchange, is based on the
business needs of the firm. For example,
if the firm wants to receive the top-ofmarket data feed product or depth data
feed product, due to the amount/size of
data contained in those feeds, such firm
would need to purchase either the 10Gb
or 10Gb ULL connection. The 1Gb
connection is too small to support those
data feed products. MIAX PEARL notes
that there are twelve (12) Members that
only purchase the 1Gb connectivity
alternative. Thus, while there is a
meaningful percentage of purchasers of
only 1Gb connections (12 of 33), by
definition, those twelve (12) members
purchase connectivity that cannot
support the top-of-market data feed
product or depth data feed product and
thus they do not purchase such data
feed products. Accordingly, purchasing
market data is a business decision/
choice, and thus the pricing for it is
constrained by competition.
Contrary to SIFMA’s argument, there
is competition for connectivity to MIAX
PEARL and its affiliates. MIAX PEARL
competes with nine (9) non-Members
who resell MIAX PEARL connectivity.
Those non-Members resell that
connectivity to multiple market
participants over that same connection,
including both Members and nonMembers of MIAX PEARL (typically
extranets and service bureaus). When
connectivity is re-sold by a third-party,
MIAX PEARL does not receive any
connectivity revenue from that sale. It is
26 See the MIAX Connectivity Guide at https://
www.miaxoptions.com/sites/default/files/pagefiles/MIAX_Connectivity_Guide_v3.6_
01142019.pdf.
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entirely between the third-party and the
purchaser, thus constraining the ability
of MIAX PEARL to set its connectivity
pricing as indirect connectivity is a
substitute for direct connectivity. There
are currently nine (9) non-Members that
purchase connectivity to MIAX PEARL
and/or MIAX. Those non-Members
resell that connectivity to eleven (11)
customers, some of whom are agency
broker-dealers that have tens of
customers of their own. Some of those
eleven (11) customers also purchase
connectivity directly from MIAX PEARL
and/or MIAX. Accordingly, indirect
connectivity is a viable alternative that
is already being used by non-Members
of MIAX PEARL, constraining the price
that MIAX PEARL is able to charge for
connectivity to its Exchange.
The Exchange 27 and MIAX 28 are
comprised of 41 distinct Members
between the two exchanges, excluding
any additional affiliates of such
Members that are also Members of
MIAX PEARL, MIAX, or both. Of those
41 distinct Members, 33 Members have
purchased the 1Gb, 10Gb, 10Gb ULL
connections or some combination of
multiple various connections.
Furthermore, every Member who has
purchased at least one connection also
trades on the Exchange, MIAX, or both,
with the exception of one new Member
who is currently in the on-boarding
process. The 8 remaining Members who
have not purchased any connectivity to
the Exchange are still able to trade on
the Exchange indirectly through other
Members or non-Member service
bureaus that are connected. These 8
Members who have not purchased
connectivity are not forced or compelled
to purchase connectivity, and they
retain all of the other benefits of
Membership with the Exchange.
Accordingly, Members have the choice
to purchase connectivity and are not
compelled to do so in any way.
The Exchange believes that the
Proposed Fee Changes are fair, equitable
and not unreasonably discriminatory
because the connectivity pricing is
associated with relative usage of the
various market participants and does
not impose a barrier to entry to smaller
participants. Accordingly, the Exchange
offers three direct connectivity
alternatives and various indirect
connectivity (via third-party)
alternatives, as described above. MIAX
27 MIAX PEARL has 36 distinct Members,
excluding affiliated entities. See MIAX PEARL
Exchange Member Directory, available at https://
www.miaxoptions.com/exchange-members/pearl.
28 MIAX has 38 distinct Members, excluding
affiliated entities. See MIAXExchange [sic] Member
Directory, available at https://
www.miaxoptions.com/exchange-members.
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PEARL recognizes that there are various
business models and varying sizes of
market participants conducting business
on the Exchange. The 1Gb direct
connectivity alternative is 1/10th the
size of the 10Gb direct connectivity
alternative. Approximately just less than
half of MIAX PEARL and MIAX
Members that connect (14 out of 33)
purchase 1Gb connections. The 1Gb
direct connection can support the
sending of orders and the consumption
of all market data feed products, other
than the top-of-market data feed product
or depth data feed product (which
require a 10Gb connection). The 1Gb
direct connection is generally purchased
by market participants that utilize less
bandwidth. The market participants that
purchase 10Gb ULL direct connections
utilize the most bandwidth, and those
are the participants that consume the
most resources from the network.
Accordingly, the Exchange believes the
allocation of the Proposed Fee Increases
($9,300 for a 10Gb ULL connection
versus $1,400 for a 1Gb connection) are
reasonable based on the network
resources consumed by the market
participants—lowest bandwidth
consuming members pay the least, and
highest bandwidth consuming members
pays the most, particularly since higher
bandwidth consumption translates to
higher costs to the Exchange. The 10Gb
ULL connection offers optimized
connectivity for latency sensitive
participants and is approximately single
digit microseconds faster in round trip
time for connection oriented traffic to
the Exchange than the 10Gb connection.
This lower latency is achieved through
more advanced network equipment,
such as advanced hardware and
switching components, which translates
to increased costs to the Exchange.
Market participants that are less latency
sensitive can purchase 10Gb direct
connections and quote in all products
on the Exchange and consume all
market data feeds, and such 10Gb direct
connections are priced lower than the
10Gb ULL direct connections, offering
smaller sized market makers a lower
cost alternative.
With respect to options trading, the
Exchange had only 4.82% market share
of the U.S. options industry in Equity/
ETF classes according to the OCC in
2018.29 For all of 2018, the Exchange’s
affiliate, MIAX had only 4.39% market
share of the U.S. options industry in
Equity/ETF classes according to the
29 See Exchange Market Share of Equity
Products—2018, The Options Clearing Corporation,
available at https://www.theocc.com/webapps/
exchange-volume.
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OCC.30 The Exchange is aware of no
evidence that a combined market share
of less than 10% provides the Exchange
with anti-competitive pricing power.
This, in addition to the fact that not all
broker-dealers are required to connect to
all options exchanges, supports the
Exchange’s conclusion that its pricing is
constrained by competition.
Separately, the Exchange is not aware
of any reason why market participants
could not simply drop their connections
and cease being Members of the
Exchange if the Exchange were to
establish unreasonable and
uncompetitive price increases for its
connectivity alternatives. Market
participants choose to connect to a
particular exchange and because it is a
choice, MIAX PEARL must set
reasonable connectivity pricing,
otherwise prospective members would
not connect and existing members
would disconnect or connect through a
third-party reseller of connectivity. No
options market participant is required
by rule, regulation, or competitive forces
to be a Member of the Exchange. Several
market participants choose not to be
Members of the Exchange and choose
not to access the Exchange, and several
market participants also access the
Exchange indirectly through another
market participant. To illustrate, the
Exchange has only 41 Members
(including all such Members’ affiliate
Members). However, Cboe Exchange,
Inc. (‘‘Cboe’’) has over 200 members,31
Nasdaq ISE, LLC has approximately 100
members,32 and NYSE American LLC
has over 80 members.33 If all market
participants were required to be
Members of the Exchange and connect
directly to the Exchange, the Exchange
would have over 200 Members, in line
with Cboe’s total membership. But it
does not. The Exchange only has 41
Members (inclusive of Members’
affiliates).
The Exchange finds it compelling that
all of the Exchange’s existing Members
continued to purchase the Exchange’s
connectivity services during the period
for which the Proposed Fee Increases
30 Id.
31 See Form 1/A, filed August 30, 2018 (https://
www.sec.gov/Archives/edgar/vprr/1800/
18002831.pdf); Form 1/A, filed August 30, 2018
(https://www.sec.gov/Archives/edgar/vprr/1800/
18002833.pdf); Form 1/A, filed July 24, 2018
(https://www.sec.gov/Archives/edgar/vprr/1800/
18002781.pdf); Form 1/A, filed August 30, 2018
(https://www.sec.gov/Archives/edgar/data/
1473845/999999999718007832/9999999997-18007832-index.htm).
32 See Form 1/A, filed July 1, 2016 (https://
www.sec.gov/Archives/edgar/vprr/1601/
16019243.pdf).
33 See https://www.nyse.com/markets/americanoptions/membership#directory.
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took effect in August 2018. In particular,
the Exchange believes that the Proposed
Fee Increases are reasonable because the
Exchange did not lose any Members (or
the number of connections each
Member purchased) or non-Member
connections due to the Exchange
increasing its connectivity fees through
the First Proposed Rule Change, which
fee increase became effective August 1,
2018. For example, in July 2018,
fourteen (14) Members purchased 1Gb
connections, ten (10) Members
purchased 10Gb connections, and
fifteen (15) Members purchased 10Gb
ULL connections. (The Exchange notes
that 1Gb connections are purchased
primarily by EEM Members; 10Gb ULL
connections are purchased primarily by
higher volume Market Makers quoting
all products across both MIAX PEARL
and MIAX; and 10Gb connections are
purchased by higher volume EEMs and
lower volume Market Makers.) The vast
majority of those Members purchased
multiple such connections with the
actual number of connections
depending on the Member’s throughput
requirements based on the volume of
their quote/order traffic and market data
needs associated with their business
model. After the fee increase, beginning
August 1, 2018, the same number of
Members purchased the same number of
connections.34 Furthermore, the total
number of connections did not decrease
from July to August 2018, and in fact
one Member even purchased two (2)
additional 10Gb ULL connections in
August 2018, after the fee increase.
Also, in July 2018, four (4) nonMembers purchased 1Gb connections,
two (2) non-Members purchased 10Gb
connections, and one (1) non-Member
purchased 10Gb ULL connections. After
the fee increase, beginning August 1,
2018, the same non-Members purchased
the same number of connections across
all available alternatives and two (2)
additional non-Members purchased
three (3) more connections after the fee
increase. These non-Members freely
purchased their connectivity with the
Exchange in order to offer trading
services to other firms and customers, as
well as access to the market data
services that their connections to the
Exchange provide them, but they are not
required or compelled to purchase any
of the Exchange’s connectivity options.
MIAX PEARL did not experience any
noticeable change (increase or decrease)
34 The Exchange notes that one Member
downgraded one connection in July of 2018,
however such downgrade was done well ahead of
notice of the Proposed Fee Increase and was the
result of a change to the Member’s business
operation that was completely independent of, and
unrelated to, the Proposed Fee Increases.
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in order flow sent by its market
participants as a result of the fee
increase.
Of those Members and non-Members
that bought multiple connections, no
firm dropped any connections
beginning August 1, 2018, when the
Exchange increased its fees. Nor did the
Exchange lose any Members.
Furthermore, the Exchange did not
receive any comment letters or official
complaints from any Member or nonMember purchaser of connectivity
regarding the increased fees regarding
how the fee increase was unreasonable,
unduly burdensome, or would
negatively impact their competitiveness
amongst other market participants.
These facts, coupled with the discussion
above, showing that it is not necessary
to join and/or connect to all options
exchanges, demonstrate that the
Exchange’s fees are constrained by
competition and are reasonable and not
contrary to the Law of Demand as
SIFMA suggests. Therefore, the
Exchange believes that the Proposed Fee
Increases are fair, equitable, and nondiscriminatory, as the fees are
competitive.
The Exchange believes that the
Proposed Fee Increases are equitably
allocated among Members and nonMembers, as evidenced by the fact that
the fee increases are allocated across all
connectivity alternatives, and there is
not a disproportionate number of
Members purchasing any alternative—
fourteen (14) Members purchased 1Gb
connections, ten (10) Members
purchased 10Gb connections, fifteen
(15) Members purchased 10Gb ULL
connections, four (4) non-Members
purchased 1Gb connections, two (2)
non-Members purchased 10Gb
connections, and one (1) non-Member
purchased 10Gb ULL connections. The
Exchange recognizes that the relative fee
increases are 27% for the 1Gb
connection, 10.9% for the 10Gb
connection, and 9.4% for the 10Gb ULL
connection, but the Exchange believes
that percentage increase differentiation
is appropriate, given the different levels
of service provided and the largest
percentage increase being associated
with the lowest cost connection.
Further, the Exchange believes that the
fees are reasonably allocated as the
users of the higher bandwidth
connections consume the most
resources of the Exchange’s network. It
is these firms that account that also
account for the vast majority of the
Exchange’s trading volume. The
purchasers of the 10Gb ULL
connectivity account for approximately
80% of the volume on the Exchange. For
example, in April of 2019, to date,
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approximately 12 million contracts of
the approximately 14.5 million
contracts executed were done by the top
market making firms of the Exchange’s
total volume. The Exchange considered
whether to increase transaction fees and
other fees in order to offset its costs as
an alternative to increasing connectivity
fees, however, the Exchange determined
that increasing its connectivity fees was
the only viable alternative. This is
because the increased costs are more
closely associated with connectivity, as
well as the intense level of competition
among the options exchanges for order
flow through transaction fees.
Second, the Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act because the Proposed
Fee Increases allow the Exchange to
recover a portion (less than all) of the
increased costs incurred by the
Exchange associated with providing and
maintaining the necessary hardware and
other network infrastructure to support
this technology since Exchange
launched operations in February 2017.
Put simply, the costs of the Exchange to
provide these services have increased
considerably over this time, as more
fully-detailed and quantified below. The
Exchange believes that it is reasonable
and appropriate to increase its fees
charged for use of its connectivity to
partially offset the increased costs the
Exchange incurred during this time
associated with maintaining and
enhancing a state-of-the-art exchange
network infrastructure in the U.S.
options industry.
In particular, the Exchange’s
increased costs associated with
supporting its network are due to
several factors, including increased
costs associated with maintaining and
expanding a team of highly-skilled
network engineers (the Exchange also
hired additional network engineering
staff in 2017 and 2018), increasing fees
charged by the Exchange’s third-party
data center operator, and costs
associated with projects and initiatives
designed to improve overall network
performance and stability, through the
Exchange’s research and development
(‘‘R&D’’) efforts.
In order to provide more detail and to
quantify the Exchange’s increased costs,
the Exchange notes that increased costs
are associated with the infrastructure
and increased headcount to fullysupport the advances in infrastructure
and expansion of network level services,
including customer monitoring, alerting
and reporting. Additional technology
expenses were incurred related to the
expanding its Information Security
services, network monitoring and
customer reporting, as well as
PO 00000
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Sfmt 4703
22219
Regulation SCI mandated processes
associated with network technology. All
of these additional expenses have been
incurred by the Exchange since became
operational in February 2017.
Additionally, while some of the expense
is fixed, much of the expense is not
fixed, and thus increases as the number
of connections increase. For example,
new 1Gb, 10Gb, and 10Gb ULL
connections require the purchase of
additional hardware to support those
connections as well as enhanced
monitoring and reporting of customer
performance that MIAX PEARL and its
affiliates provide. And 10Gb ULL
connections require the purchase of
specialized, more costly hardware.
Further, as the total number of all
connections increase, MIAX PEARL and
its affiliates need to increase their data
center footprint and consume more
power, resulting in increased costs
charged by their third-party data center
provider. Accordingly, cost to MIAX
PEARL and its affiliates is not entirely
fixed. Just the initial fixed cost buildout
of the network infrastructure of MIAX
PEARL and its affiliates, including both
primary/secondary sites and disaster
recovery, was over $30 million. The
current annual operational expense
(which relates 100% to the network
infrastructure, associated data center
processing equipment required to
support various connections, network
monitoring systems and associated
software required to support the various
forms of connectivity) is approximately
$8.5 million. This does not include
additional indirect expenses that the
Exchange incurs that are allocated to the
support of network infrastructure of the
Exchange. These costs have increased
over 10% since the Exchange became
operational in February 2017. As these
operational expenses increase, MIAX
PEARL and its affiliates look to offset
those costs through increased
connectivity fees.
A more detailed breakdown of the
operational expense increases include
an approximate 70% increase in
technology-related personnel costs in
infrastructure, due to expansion of
services/support (increase of
approximately $800,000); an
approximate 10% increase in datacenter
costs due to price increases and
footprint expansion (increase of
approximately $500,000); an
approximate 5% increase in vendorsupplied dark fiber due to price
increases and expanded capabilities
(increase of approximately $25,000);
and a 30% increase in market data
connectivity fees (increase of
approximately $200,000). Of note,
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regarding market data connectivity fee
increased cost, this is the cost associated
with MIAX PEARL consuming
connectivity/content from the equities
markets in order to operate the
Exchange, causing MIAX PEARL to
effectively pay its competitors for this
connectivity. The Exchange also
incurred significant capital
expenditures over this same period to
upgrade and enhance the underlying
technology components, as more fullydetailed below.
Further, because the costs of operating
a data center are significant and not
economically feasible for the Exchange,
the Exchange does not operate its own
data centers, and instead contracts with
a third-party data center provider. The
Exchange notes that larger, dominant
exchange operators own/operate their
data centers, which offers them greater
control over their data center costs.
Because those exchanges own and
operate their data centers as profit
centers, the Exchange is subject to
additional costs. As a result, the
Exchange is subject to fee increases from
its data center provider, which the
Exchange experienced in 2017 and 2018
of approximately 10%, as cited above.
Connectivity fees, which are charged for
accessing the Exchange’s data center
network infrastructure, are directly
related to the network and offset such
costs.
Further, the Exchange invests
significant resources in network R&D,
which are not included in direct
operational expenses to improve the
overall performance and stability of its
network. For example, the Exchange has
a number of network monitoring tools
(some of which were developed inhouse, and some of which are licensed
from third-parties), that continually
monitor, detect, and report network
performance, many of which serve as
significant value-adds to the Exchange’s
Members and enable the Exchange to
provide a high level of customer service.
These tools detect and report
performance issues, and thus enable the
Exchange to proactively notify a
Member (and the SIPs) when the
Exchange detects a problem with a
Member’s connectivity. The costs
associated with the maintenance and
improvement of existing tools and the
development of new tools resulted in
significant increased cost to the
Exchange since February 2017.
Certain recently developed network
aggregation and monitoring tools
provide the Exchange with the ability to
measure network traffic with a much
more granular level of variability. This
is important as Exchange Members
demand a higher level of network
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determinism and the ability to measure
variability in terms of single digit
nanoseconds. Also, the Exchange
routinely conducts R&D projects to
improve the performance of the
network’s hardware infrastructure. As
an example, in the last year, the
Exchange’s R&D efforts resulted in a
performance improvement, requiring
the purchase of new equipment to
support that improvement, and thus
resulting in increased costs in the
hundreds of thousands of dollars range.
In sum, the costs associated with
maintaining and enhancing a state-ofthe-art exchange network infrastructure
in the U.S. options industry is a
significant expense for the Exchange
that continues to increase, and thus the
Exchange believes that it is reasonable
to offset a portion of those increased
costs by increasing its network
connectivity fees, as proposed herein.
The Exchange invests in and offers a
superior network infrastructure as part
of its overall options exchange services
offering, resulting in significant costs
associated with maintaining this
network infrastructure, which are
directly tied to the amount of the
connectivity fees that must be charged
to access it, in order to recover those
costs.
The Exchange notes that other
exchanges have similar connectivity
alternatives for their participants,
including similar low-latency
connectivity. For example, Nasdaq
PHLX LLC (‘‘Phlx’’), NYSE Arca, Inc.
(‘‘Arca’’), NYSE American LLC (‘‘NYSE
American’’) and Nasdaq ISE, LLC
(‘‘ISE’’) all offer a 1Gb, 10Gb and 10Gb
low latency ethernet connectivity
alternatives to each of their
participants.35 The Exchange further
notes that Phlx, ISE, Arca and NYSE
American each charge higher rates for
such similar connectivity to primary
and secondary facilities.36 While MIAX
PEARL’s proposed connectivity fees are
substantially lower than the fees
charged by Phlx, ISE, Arca and NYSE
American, MIAX PEARL believes that it
offers significant value to Members over
other exchanges in terms of network
monitoring and reporting, which MIAX
35 See
Phlx and ISE Rules, General Equity and
Options Rules, General 8, Section 1(b). Phlx and ISE
each charge a monthly fee of $2,500 for each 1Gb
connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection, which the
equivalent of the Exchange’s 10Gb ULL connection.
See also NYSE American Fee Schedule, Section
V.B, and Arca Fees and Charges, Co-Location Fees.
NYSE American and Arca each charge a monthly
fee of $5,000 for each 1Gb circuit, $14,000 for each
10Gb circuit and $22,000 for each 10Gb LX circuit,
which the equivalent of the Exchange’s 10Gb ULL
connection.
36 Id.
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PEARL believes is a competitive
advantage, and differentiates its
connectivity versus connectivity to
other exchanges. Additionally, the
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.37
B. Self-Regulatory Organization’s
Statement on Burden on Competition
MIAX PEARL does not believe that
the proposed rule changes will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. In particular,
the Exchange has received no official
complaints from Members or others who
connect to it that its fees or the
Proposed Fee Increases are negatively
impacting or would negatively impact
their abilities to compete with other
market participants. Further, the
Exchange is unaware of any assertion
that its existing fee levels or the
Proposed Fee Increases would somehow
unduly impair its competition with
other options exchanges. To the
contrary, if the fees charged are deemed
too high by market participants, they
can simply disconnect.
While the Exchange recognizes the
distinction between connecting to an
exchange and trading at the exchange,
the Exchange notes that it operates in a
highly competitive options market in
which market participants can readily
connect and trade with venues they
desire. In such an environment, the
Exchange must continually adjust its
fees to remain competitive with other
exchanges. The Exchange believes that
the proposed changes reflect this
competitive environment.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,38 and Rule
37 See Nasdaq ISE, Options Rules, Options 7,
Pricing Schedule, Section 11.D. (charging $3,000 for
disaster recovery testing & relocation services); see
also Cboe Exchange, Inc. (‘‘Cboe’’) Fees Schedule,
p. 14, Cboe Command Connectivity Charges
(charging a monthly fee of $2,000 for a 1Gb disaster
recovery network access port and a monthly fee of
$6,000 for a 10Gb disaster recovery network access
port).
38 15 U.S.C. 78s(b)(3)(A)(ii).
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19b–4(f)(2) 39 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
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:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2019–17 on the subject line.
Paper Comments
• 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–PEARL–2019–17. 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 (https://www.sec.gov/
rules/sro.shtml). 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
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
39 17
CFR 240.19b–4(f)(2).
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17:22 May 15, 2019
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received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2019–17 and
should be submitted on or before June
6, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–10116 Filed 5–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85829; File No. SR–
NYSEArca–2019–14]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on a Proposed Rule Change Relating
to Certain Changes Regarding
Investments of the PGIM Ultra Short
Bond ETF Under NYSE Arca Rule
8.600–E
On March 13, 2019, NYSE Arca, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
make certain changes regarding
investments of the PGIM Ultra Short
Bond ETF under NYSE Arca Rule
8.600–E. The proposed rule change was
published for comment in the Federal
Register on April 2, 2019.3 The
Commission has received no comment
letters on the proposed rule change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
40 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85430
(Mar. 27, 2019), 84 FR 12646.
4 15 U.S.C. 78s(b)(2).
1 15
Frm 00117
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is May 17, 2019.
The Commission is extending this 45day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,5
designates July 1, 2019 as the date by
which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–NYSEArca–2019–14).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–10114 Filed 5–15–19; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Reporting and Recordkeeping
Requirements Under OMB Review
Small Business Administration.
30-Day notice.
AGENCY:
May 10, 2019.
PO 00000
22221
Fmt 4703
Sfmt 4703
ACTION:
The Small Business
Administration (SBA) is publishing this
notice to comply with requirements of
the Paperwork Reduction Act (PRA),
which requires agencies to submit
proposed reporting and recordkeeping
requirements to OMB for review and
approval, and to publish a notice in the
Federal Register notifying the public
that the agency has made such a
submission. This notice also allows an
additional 30 days for public comments.
DATES: Submit comments on or before
June 17, 2019.
ADDRESSES: Comments should refer to
the information collection by name and/
or OMB Control Number and should be
sent to: Agency Clearance Officer, Curtis
Rich, Small Business Administration,
409 3rd Street SW, 5th Floor,
Washington, DC 20416; and SBA Desk
Officer, Office of Information and
Regulatory Affairs, Office of
Management and Budget, New
Executive Office Building, Washington,
DC 20503.
FOR FURTHER INFORMATION CONTACT:
Curtis Rich, Agency Clearance Officer,
(202) 205–7030 curtis.rich@sba.gov.
SUMMARY:
5 Id.
6 17
CFR 200.30–3(a)(31).
E:\FR\FM\16MYN1.SGM
16MYN1
]]>Agencies
[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Notices]
[Pages 22214-22221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10116]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85837; File No. SR-PEARL-2019-17]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
PEARL Fee Schedule
May 10, 2019.
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 April 30, 2019, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX PEARL Fee
Schedule (the ``Fee Schedule'') to modify certain of the Exchange's
system connectivity fees.
The Exchange initially filed the proposal on March 1, 2019 (SR-
PEARL-2019-08). That filing has been withdrawn and replaced with the
current filing (SR-PEARL-2019-17).
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 22215]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule regarding
connectivity to the Exchange. Specifically, the Exchange proposes to
amend Sections 5a) and b) of the Fee Schedule to increase the network
connectivity fees for the 1 Gigabit (``Gb'') fiber connection, the 10Gb
fiber connection, and the 10Gb ultra-low latency (``ULL'') fiber
connection, which are charged to both Members \3\ and non-Members of
the Exchange for connectivity to the Exchange's primary/secondary
facility. The Exchange also proposes to increase the network
connectivity fees for the 1Gb and 10Gb fiber connections for
connectivity to the Exchange's disaster recovery facility. Each of
these connections are shared connections, and thus can be utilized to
access both the Exchange and the Exchange's affiliate, Miami
International Securities Exchange, LLC (``MIAX''). These proposed fee
increases are collectively referred to herein as the ``Proposed Fee
Increases.''
---------------------------------------------------------------------------
\3\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of the
Exchange's Rules for purposes of trading on the Exchange as an
``Electronic Exchange Member'' or ``Market Maker.'' Members are
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
---------------------------------------------------------------------------
The Exchange initially filed the Proposed Fee Increases on July 31,
2018, designating the Proposed Fee Increases effective August 1,
2018.\4\ The First Proposed Rule Change was published for comment in
the Federal Register on August 13, 2018.\5\ The Commission received one
comment letter on the proposal.\6\ The Proposed Fee Increases remained
in effect until they were temporarily suspended pursuant to a
suspension order (the ``Suspension Order'') issued by the Commission on
September 17, 2018.\7\ The Suspension Order also instituted proceedings
to determine whether to approve or disapprove the proposed rule
change.\8\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 83785 (August 7,
2018), 83 FR 40101 (August 13, 2018) (SR-PEARL-2018-16). (The
``First Proposed Rule Change'').
\5\ Id.
\6\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated September 4, 2018 (``Healthy Markets Letter'').
\7\ See Securities Exchange Act Release No. 34-84177 (September
17, 2018).
\8\ Id.
---------------------------------------------------------------------------
The Healthy Markets Letter argued that the Exchange did not provide
sufficient information in its filing to support a finding that the
proposal is consistent with the Act. Specifically, the Healthy Markets
Letter objected to the Exchange's reliance on the fees of other
exchanges to demonstrate that its fee increases are consistent with the
Act. In addition, the Healthy Markets Letter argued that the Exchange
did not offer any details to support its basis for asserting that the
Proposed Fee Increases are consistent with the Act.
On October 5, 2018, the Exchange withdrew the First Proposed Rule
Change.\9\ The Exchange refiled the Proposed Fee Increases on September
18, 2018, designating the Proposed Fee Increases immediately
effective.\10\ The Second Proposed Rule Change was published for
comment in the Federal Register on October 10, 2018.\11\ The Commission
received one comment letter on the proposal.\12\ The Proposed Fee
Increases remained in effect until they were temporarily suspended
pursuant to a suspension order (the ``Second Suspension Order'') issued
by the Commission on October 3, 2018.\13\ The Second Suspension Order
also instituted proceedings to determine whether to approve or
disapprove the Second Proposed Rule Change.\14\
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\9\ See Securities Exchange Act Release No. 84397 (October 10,
2018), 83 FR 52272 (October 16, 2018) (SR-PEARL-2018-16).
\10\ See Securities Exchange Act Release No. 84358 (October 3,
2018), 83 FR 51022 (October 10, 2018) (SR-PEARL-2018-19). (The
``Second Proposed Rule Change'').
\11\ Id.
\12\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director
Financial Services Operations, The Securities Industry and Financial
Markets Association (``SIFMA''), to Brent J. Fields, Secretary,
Commission, dated October 15, 2018 (``SIFMA Letter'').
\13\ See supra note 10.
\14\ Id.
---------------------------------------------------------------------------
The SIFMA Letter argued that the Exchange did not provide
sufficient information in its filing to support a finding that the
proposal should be approved by the Commission after further review of
the proposed fee increases. Specifically, the SIFMA Letter objected to
the Exchange's reliance on the fees of other exchanges to justify its
own fee increases. In addition, the SIFMA Letter argued that the
Exchange did not offer any details to support its basis for asserting
that the Proposed Fee Increases are reasonable. On November 23, 2018,
the Exchange withdrew the Second Proposed Rule Change.\15\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 84651 (November 26,
2018), 83 FR 61687 (November 30, 2018) (SR-PEARL-2018-19).
---------------------------------------------------------------------------
The Exchange refiled the Proposed Fee Increases on March 1, 2019,
designating the Proposed Fee Increases immediately effective.\16\ The
Third Proposed Rule Change was published for comment in the Federal
Register on March 20, 2019.\17\ The Third Proposed Rule Change provided
new information, including additional detail about the market
participants impacted by the Proposed Fee Increases, as well as the
additional costs incurred by the Exchange associated with providing the
connectivity alternatives, in order to provide more transparency and
support relating to the Exchange's belief that the Proposed Fee
Increases are reasonable, equitable, and non-discriminatory, and to
provide sufficient information for the Commission to determine that the
Proposed Fee Increases are consistent with the Act.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 85318 (March 14,
2019), 84 FR 10363 (March 20, 2019) (SR-MIAX-2019-10) (the ``Third
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule).
\17\ Id.
---------------------------------------------------------------------------
On March 29, 2019, the Commission issued its Order Disapproving
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC
Options Facility to Establish BOX Connectivity Fees for Participants
and Non-Participants Who Connect to the BOX Network (the ``BOX
Order'').\18\ In the BOX Order, the Commission highlighted a number of
deficiencies it found in three separate rule filings by BOX Exchange
LLC (``BOX'') to increase BOX's connectivity fees that prevented the
Commission from finding that BOX's proposed connectivity fees were
consistent with the Act. These deficiencies relate to topics that the
Commission believes should be discussed in a connectivity fee filing.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04).
---------------------------------------------------------------------------
After the BOX Order was issued, the Commission received four
comment letters on the Third Proposed Rule Change.\19\
---------------------------------------------------------------------------
\19\ See Letter from Joseph W. Ferraro III, SVP & Deputy General
Counsel, MIAX, to Vanessa Countryman, Acting Secretary, Commission,
dated April 5, 2019 (``MIAX Letter''); Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA, to Vanessa
Countryman, Acting Secretary, Commission, dated April 10, 2019
(``Second SIFMA Letter''); Letter from John Ramsay, Chief Market
Policy Officer, Investors Exchange LLC, to Vanessa Countryman,
Acting Secretary, Commission, dated April 10, 2019 (``IEX Letter'');
and Letter from Tyler Gellasch, Executive Director, Healthy Markets,
to Brent J. Fields, Secretary, Commission, dated April 18, 2019
(``Second Healthy Markets Letter'').
---------------------------------------------------------------------------
The Second SIFMA Letter argued that the Exchange did not provide
sufficient information in its Third Proposed Rule Change to support a
finding that the
[[Page 22216]]
proposal should be approved by the Commission after further review of
the proposed fee increases. Specifically, the Second SIFMA Letter
argued that the Exchange's market data fees and connectivity fees were
not constrained by competitive forces, the Exchange's filing lacked
sufficient information regarding cost and competition, and that the
Commission should establish a framework for determining whether fees
for exchange products and services are reasonable when those products
and services are not constrained by significant competitive forces.
The IEX Letter argued that the Exchange did not provide sufficient
information in its Third Proposed Rule Change to support a finding that
the proposal should be approved by the Commission and that the
Commission should extend the time for public comment on the Third
Proposed Rule Change. Despite the objection to the Proposed Fee
Increases, the IEX Letter did find that ``MIAX has provided more
transparency and analysis in these filings than other exchanges have
sought to do for their own fee increases.'' \20\ The IEX Letter
specifically argued that the Proposed Fee Increases were not
constrained by competition, the Exchange should provide data on the
Exchange's actual costs and how those costs relate to the product or
service in question, and whether and how MIAX considered changes to
transaction fees as an alternative to offsetting exchange costs.
---------------------------------------------------------------------------
\20\ See IEX Letter, pg. 1.
---------------------------------------------------------------------------
The Second Healthy Markets Letter did not object to the Third
Proposed Rule Change and the information provided by the Exchange in
support of the Proposed Fee Increases. Specifically, the Second Healthy
Markets Letter stated that the Third Proposed Rule Change was
``remarkably different,'' and went on to further state as follows:
The instant MIAX filings--along with their April 5th
supplement--provide much greater detail regarding users of
connectivity, the market for connectivity, and costs than the
Initial MIAX Filings. They also appear to address many of the issues
raised by the Commission staff's BOX disapproval order. This third
round of MIAX filings suggests that MIAX is operating in good faith
to provide what the Commission and staff seek.\21\ On April 29,
2019, the Exchange withdrew the Third Proposed Rule Change.\22\
---------------------------------------------------------------------------
\21\ See Second Healthy Markets Letter, pg. 2.
\22\ See SR-PEARL-2019-08).
The Exchange is now re-filing the Proposed Fee Increases to
squarely and comprehensively address each and every topic raised for
discussion in the BOX Order, the IEX Letter and the Second SIFMA Letter
to ensure that the Proposed Fee Increases are reasonable, equitable,
and non-discriminatory, and that the Commission should find that the
Proposed Fee Increases are consistent with the Act. The proposed rule
change is immediately effective upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the Act.
The Exchange currently offers various bandwidth alternatives for
connectivity to the Exchange to its primary and secondary facilities,
consisting of a 1Gb fiber connection, a 10Gb fiber connection, and a
10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-low
latency switch, which provides faster processing of messages sent to it
in comparison to the switch used for the other types of connectivity.
The Exchange currently assesses the following monthly network
connectivity fees to both Members and non-Members for connectivity to
the Exchange's primary/secondary facility: (a) $1,100 for the 1Gb
connection; (b) $5,500 for the 10Gb connection; and (c) $8,500 for the
10Gb ULL connection. The Exchange also assesses to both Members and
non-Members a monthly per connection network connectivity fee of $500
for each 1Gb connection to the disaster recovery facility and a monthly
per connection network connectivity fee of $2,500 for each 10Gb
connection to the disaster recovery facility.
The Exchange's MIAX Express Network Interconnect (``MENI'') can be
configured to provide Members and non-Members of the Exchange network
connectivity to the trading platforms, market data systems, test
systems, and disaster recovery facilities of both the Exchange and its
affiliate, MIAX, via a single, shared connection. Members and non-
Members utilizing the MENI to connect to the trading platforms, market
data systems, test systems and disaster recovery facilities of the
Exchange and MIAX via a single, shared connection are assessed only one
monthly network connectivity fee per connection, regardless of the
trading platforms, market data systems, test systems, and disaster
recovery facilities accessed via such connection.
The Exchange proposes to increase the monthly network connectivity
fees for such connections for both Members and non-Members. The network
connectivity fees for connectivity to the Exchange's primary/secondary
facility will be increased as follows: (a) From $1,100 to $1,400 for
the 1Gb connection; (b) from $5,500 to $6,100 for the 10Gb connection;
and (c) from $8,500 to $9,300 for the 10Gb ULL connection. The network
connectivity fees for connectivity to the Exchange's disaster recovery
facility will be increased as follows: (a) From $500 to $550 for the
1Gb connection; and (b) from $2,500 to $2,750 for the 10Gb connection.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \23\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \24\ in
particular, in that it provides for the equitable allocation of
reasonable dues, fees and other charges among Exchange Members and
issuers and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposal
furthers the objectives of Section 6(b)(5) of the Act \25\ in that it
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 and is not designed to permit unfair
discrimination between customer, issuers, brokers and dealers.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(4).
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
First, the Exchange believes that its proposal is consistent with
Section 6(b)(4) of the Act, in that the Proposed Fee Changes are fair,
equitable and not unreasonably discriminatory, because the fees for the
connectivity alternatives available on the Exchange, as proposed to be
increased, are competitive and market-driven. The U.S. options markets
are highly competitive (there are currently 16 options markets) and a
reliance on competitive markets is an appropriate means to ensure
equitable and reasonable prices.
The Exchange acknowledges that there is no regulatory requirement
that any market participant connect to the Exchange, or that any
participant connect at any specific connection speed. The rule
structure for options exchanges are, in fact, fundamentally different
from those of equities exchanges. In particular, options market
participants are not forced to connect to (and purchase market data
from) all options exchanges, as shown by the number of Members of MIAX
PEARL as compared to the much greater number of members at other
options exchanges (as further detailed below). Not only does MIAX PEARL
have less than half the number of members as certain other options
exchanges, but there are also a number of the Exchange's Members that
do not connect directly to MIAX
[[Page 22217]]
PEARL. Further, of the number of Members that connect directly to MIAX
PEARL, many such Members do not purchase market data from MIAX PEARL.
There are a number of large market makers and broker-dealers that are
members of other options exchange but not Members of MIAX PEARL. For
example, the following are not Members of MIAX PEARL: The D.E. Shaw
Group, CTC, XR Trading LLC, Hardcastle Trading AG, Ronin Capital LLC,
Belvedere Trading, LLC, Bluefin Trading, and HAP Capital LLC. In
addition, of the market makers that are connected to MIAX PEARL, it is
the individual needs of the market maker that require whether they need
one connection or multiple connections to the Exchange. The Exchange
has market maker Members that only purchase one connection (10Gb or
10Gb ULL) and the Exchange has market maker Members that purchase
multiple connections. It is all driven by the business needs of the
market maker. Market makers that are consolidators that target resting
order flow tend to purchase more connectivity that market makers that
simply quote all symbols on the Exchange. Even though non-Members
purchase and resell 10Gb and 10Gb ULL connections to both Members and
non-Members, no market makers currently connect to the Exchange
indirectly through such resellers.
SIFMA's argument that all broker-dealers are required to connect to
all exchanges is not true in the options markets. The options markets
have evolved differently than the equities markets both in terms of
market structure and functionality. For example, there are many order
types that are available in the equities markets that are not utilized
in the options markets, which relate to mid-point pricing and pegged
pricing which require connection to the SIPs and each of the equities
exchanges in order to properly execute those orders in compliance with
best execution obligations. In addition, in the options markets there
is a single SIP (OPRA) versus two SIPs in the equities markets,
resulting in few hops and thus alleviating the need to connect directly
to all the options exchanges. Additionally, in the options markets, the
linkage routing and trade through protection are handled by the
exchanges, not by the individual members. Thus not connecting to an
options exchange or disconnecting from an options exchange does not
potentially subject a broker-dealer to violate order protection
requirements as suggested by SIFMA. Gone are the days when the retail
brokerage firms (the Fidelity's, the Schwab's, the eTrade's) were
members of the options exchanges--they are not members of MIAX PEARL or
its affiliates, MIAX and MIAX Emerald, they do not purchase
connectivity to MIAX PEARL, and they do not purchase market data from
MIAX PEARL. The Exchange further recognizes that the decision of
whether to connect to the Exchange is separate and distinct from the
decision of whether and how to trade on the Exchange. The Exchange
acknowledges that many firms may choose to connect to the Exchange, but
ultimately not trade on it, based on their particular business needs.
To assist prospective Members or firms considering connecting to
MIAX PEARL, the Exchange provides information about the Exchange's
available connectivity alternatives.\26\ The decision of which type of
connectivity to purchase, or whether to purchase connectivity at all
for a particular exchange, is based on the business needs of the firm.
For example, if the firm wants to receive the top-of-market data feed
product or depth data feed product, due to the amount/size of data
contained in those feeds, such firm would need to purchase either the
10Gb or 10Gb ULL connection. The 1Gb connection is too small to support
those data feed products. MIAX PEARL notes that there are twelve (12)
Members that only purchase the 1Gb connectivity alternative. Thus,
while there is a meaningful percentage of purchasers of only 1Gb
connections (12 of 33), by definition, those twelve (12) members
purchase connectivity that cannot support the top-of-market data feed
product or depth data feed product and thus they do not purchase such
data feed products. Accordingly, purchasing market data is a business
decision/choice, and thus the pricing for it is constrained by
competition.
---------------------------------------------------------------------------
\26\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
---------------------------------------------------------------------------
Contrary to SIFMA's argument, there is competition for connectivity
to MIAX PEARL and its affiliates. MIAX PEARL competes with nine (9)
non-Members who resell MIAX PEARL connectivity. Those non-Members
resell that connectivity to multiple market participants over that same
connection, including both Members and non-Members of MIAX PEARL
(typically extranets and service bureaus). When connectivity is re-sold
by a third-party, MIAX PEARL does not receive any connectivity revenue
from that sale. It is entirely between the third-party and the
purchaser, thus constraining the ability of MIAX PEARL to set its
connectivity pricing as indirect connectivity is a substitute for
direct connectivity. There are currently nine (9) non-Members that
purchase connectivity to MIAX PEARL and/or MIAX. Those non-Members
resell that connectivity to eleven (11) customers, some of whom are
agency broker-dealers that have tens of customers of their own. Some of
those eleven (11) customers also purchase connectivity directly from
MIAX PEARL and/or MIAX. Accordingly, indirect connectivity is a viable
alternative that is already being used by non-Members of MIAX PEARL,
constraining the price that MIAX PEARL is able to charge for
connectivity to its Exchange.
The Exchange \27\ and MIAX \28\ are comprised of 41 distinct
Members between the two exchanges, excluding any additional affiliates
of such Members that are also Members of MIAX PEARL, MIAX, or both. Of
those 41 distinct Members, 33 Members have purchased the 1Gb, 10Gb,
10Gb ULL connections or some combination of multiple various
connections. Furthermore, every Member who has purchased at least one
connection also trades on the Exchange, MIAX, or both, with the
exception of one new Member who is currently in the on-boarding
process. The 8 remaining Members who have not purchased any
connectivity to the Exchange are still able to trade on the Exchange
indirectly through other Members or non-Member service bureaus that are
connected. These 8 Members who have not purchased connectivity are not
forced or compelled to purchase connectivity, and they retain all of
the other benefits of Membership with the Exchange. Accordingly,
Members have the choice to purchase connectivity and are not compelled
to do so in any way.
---------------------------------------------------------------------------
\27\ MIAX PEARL has 36 distinct Members, excluding affiliated
entities. See MIAX PEARL Exchange Member Directory, available at
https://www.miaxoptions.com/exchange-members/pearl.
\28\ MIAX has 38 distinct Members, excluding affiliated
entities. See MIAXExchange [sic] Member Directory, available at
https://www.miaxoptions.com/exchange-members.
---------------------------------------------------------------------------
The Exchange believes that the Proposed Fee Changes are fair,
equitable and not unreasonably discriminatory because the connectivity
pricing is associated with relative usage of the various market
participants and does not impose a barrier to entry to smaller
participants. Accordingly, the Exchange offers three direct
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above. MIAX
[[Page 22218]]
PEARL recognizes that there are various business models and varying
sizes of market participants conducting business on the Exchange. The
1Gb direct connectivity alternative is 1/10th the size of the 10Gb
direct connectivity alternative. Approximately just less than half of
MIAX PEARL and MIAX Members that connect (14 out of 33) purchase 1Gb
connections. The 1Gb direct connection can support the sending of
orders and the consumption of all market data feed products, other than
the top-of-market data feed product or depth data feed product (which
require a 10Gb connection). The 1Gb direct connection is generally
purchased by market participants that utilize less bandwidth. The
market participants that purchase 10Gb ULL direct connections utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the Exchange believes the
allocation of the Proposed Fee Increases ($9,300 for a 10Gb ULL
connection versus $1,400 for a 1Gb connection) are reasonable based on
the network resources consumed by the market participants--lowest
bandwidth consuming members pay the least, and highest bandwidth
consuming members pays the most, particularly since higher bandwidth
consumption translates to higher costs to the Exchange. The 10Gb ULL
connection offers optimized connectivity for latency sensitive
participants and is approximately single digit microseconds faster in
round trip time for connection oriented traffic to the Exchange than
the 10Gb connection. This lower latency is achieved through more
advanced network equipment, such as advanced hardware and switching
components, which translates to increased costs to the Exchange. Market
participants that are less latency sensitive can purchase 10Gb direct
connections and quote in all products on the Exchange and consume all
market data feeds, and such 10Gb direct connections are priced lower
than the 10Gb ULL direct connections, offering smaller sized market
makers a lower cost alternative.
With respect to options trading, the Exchange had only 4.82% market
share of the U.S. options industry in Equity/ETF classes according to
the OCC in 2018.\29\ For all of 2018, the Exchange's affiliate, MIAX
had only 4.39% market share of the U.S. options industry in Equity/ETF
classes according to the OCC.\30\ The Exchange is aware of no evidence
that a combined market share of less than 10% provides the Exchange
with anti-competitive pricing power. This, in addition to the fact that
not all broker-dealers are required to connect to all options
exchanges, supports the Exchange's conclusion that its pricing is
constrained by competition.
---------------------------------------------------------------------------
\29\ See Exchange Market Share of Equity Products--2018, The
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
\30\ Id.
---------------------------------------------------------------------------
Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Members of the Exchange if the Exchange were to establish unreasonable
and uncompetitive price increases for its connectivity alternatives.
Market participants choose to connect to a particular exchange and
because it is a choice, MIAX PEARL must set reasonable connectivity
pricing, otherwise prospective members would not connect and existing
members would disconnect or connect through a third-party reseller of
connectivity. No options market participant is required by rule,
regulation, or competitive forces to be a Member of the Exchange.
Several market participants choose not to be Members of the Exchange
and choose not to access the Exchange, and several market participants
also access the Exchange indirectly through another market participant.
To illustrate, the Exchange has only 41 Members (including all such
Members' affiliate Members). However, Cboe Exchange, Inc. (``Cboe'')
has over 200 members,\31\ Nasdaq ISE, LLC has approximately 100
members,\32\ and NYSE American LLC has over 80 members.\33\ If all
market participants were required to be Members of the Exchange and
connect directly to the Exchange, the Exchange would have over 200
Members, in line with Cboe's total membership. But it does not. The
Exchange only has 41 Members (inclusive of Members' affiliates).
---------------------------------------------------------------------------
\31\ See Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002831.pdf); Form 1/A, filed August 30,
2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002833.pdf);
Form 1/A, filed July 24, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002781.pdf); Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/data/1473845/999999999718007832/9999999997-18-007832-index.htm).
\32\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
\33\ See https://www.nyse.com/markets/american-options/membership#directory.
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The Exchange finds it compelling that all of the Exchange's
existing Members continued to purchase the Exchange's connectivity
services during the period for which the Proposed Fee Increases took
effect in August 2018. In particular, the Exchange believes that the
Proposed Fee Increases are reasonable because the Exchange did not lose
any Members (or the number of connections each Member purchased) or
non-Member connections due to the Exchange increasing its connectivity
fees through the First Proposed Rule Change, which fee increase became
effective August 1, 2018. For example, in July 2018, fourteen (14)
Members purchased 1Gb connections, ten (10) Members purchased 10Gb
connections, and fifteen (15) Members purchased 10Gb ULL connections.
(The Exchange notes that 1Gb connections are purchased primarily by EEM
Members; 10Gb ULL connections are purchased primarily by higher volume
Market Makers quoting all products across both MIAX PEARL and MIAX; and
10Gb connections are purchased by higher volume EEMs and lower volume
Market Makers.) The vast majority of those Members purchased multiple
such connections with the actual number of connections depending on the
Member's throughput requirements based on the volume of their quote/
order traffic and market data needs associated with their business
model. After the fee increase, beginning August 1, 2018, the same
number of Members purchased the same number of connections.\34\
Furthermore, the total number of connections did not decrease from July
to August 2018, and in fact one Member even purchased two (2)
additional 10Gb ULL connections in August 2018, after the fee increase.
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\34\ The Exchange notes that one Member downgraded one
connection in July of 2018, however such downgrade was done well
ahead of notice of the Proposed Fee Increase and was the result of a
change to the Member's business operation that was completely
independent of, and unrelated to, the Proposed Fee Increases.
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Also, in July 2018, four (4) non-Members purchased 1Gb connections,
two (2) non-Members purchased 10Gb connections, and one (1) non-Member
purchased 10Gb ULL connections. After the fee increase, beginning
August 1, 2018, the same non-Members purchased the same number of
connections across all available alternatives and two (2) additional
non-Members purchased three (3) more connections after the fee
increase. These non-Members freely purchased their connectivity with
the Exchange in order to offer trading services to other firms and
customers, as well as access to the market data services that their
connections to the Exchange provide them, but they are not required or
compelled to purchase any of the Exchange's connectivity options. MIAX
PEARL did not experience any noticeable change (increase or decrease)
[[Page 22219]]
in order flow sent by its market participants as a result of the fee
increase.
Of those Members and non-Members that bought multiple connections,
no firm dropped any connections beginning August 1, 2018, when the
Exchange increased its fees. Nor did the Exchange lose any Members.
Furthermore, the Exchange did not receive any comment letters or
official complaints from any Member or non-Member purchaser of
connectivity regarding the increased fees regarding how the fee
increase was unreasonable, unduly burdensome, or would negatively
impact their competitiveness amongst other market participants. These
facts, coupled with the discussion above, showing that it is not
necessary to join and/or connect to all options exchanges, demonstrate
that the Exchange's fees are constrained by competition and are
reasonable and not contrary to the Law of Demand as SIFMA suggests.
Therefore, the Exchange believes that the Proposed Fee Increases are
fair, equitable, and non-discriminatory, as the fees are competitive.
The Exchange believes that the Proposed Fee Increases are equitably
allocated among Members and non-Members, as evidenced by the fact that
the fee increases are allocated across all connectivity alternatives,
and there is not a disproportionate number of Members purchasing any
alternative--fourteen (14) Members purchased 1Gb connections, ten (10)
Members purchased 10Gb connections, fifteen (15) Members purchased 10Gb
ULL connections, four (4) non-Members purchased 1Gb connections, two
(2) non-Members purchased 10Gb connections, and one (1) non-Member
purchased 10Gb ULL connections. The Exchange recognizes that the
relative fee increases are 27% for the 1Gb connection, 10.9% for the
10Gb connection, and 9.4% for the 10Gb ULL connection, but the Exchange
believes that percentage increase differentiation is appropriate, given
the different levels of service provided and the largest percentage
increase being associated with the lowest cost connection. Further, the
Exchange believes that the fees are reasonably allocated as the users
of the higher bandwidth connections consume the most resources of the
Exchange's network. It is these firms that account that also account
for the vast majority of the Exchange's trading volume. The purchasers
of the 10Gb ULL connectivity account for approximately 80% of the
volume on the Exchange. For example, in April of 2019, to date,
approximately 12 million contracts of the approximately 14.5 million
contracts executed were done by the top market making firms of the
Exchange's total volume. The Exchange considered whether to increase
transaction fees and other fees in order to offset its costs as an
alternative to increasing connectivity fees, however, the Exchange
determined that increasing its connectivity fees was the only viable
alternative. This is because the increased costs are more closely
associated with connectivity, as well as the intense level of
competition among the options exchanges for order flow through
transaction fees.
Second, the Exchange believes that its proposal is consistent with
Section 6(b)(4) of the Act because the Proposed Fee Increases allow the
Exchange to recover a portion (less than all) of the increased costs
incurred by the Exchange associated with providing and maintaining the
necessary hardware and other network infrastructure to support this
technology since Exchange launched operations in February 2017. Put
simply, the costs of the Exchange to provide these services have
increased considerably over this time, as more fully-detailed and
quantified below. The Exchange believes that it is reasonable and
appropriate to increase its fees charged for use of its connectivity to
partially offset the increased costs the Exchange incurred during this
time associated with maintaining and enhancing a state-of-the-art
exchange network infrastructure in the U.S. options industry.
In particular, the Exchange's increased costs associated with
supporting its network are due to several factors, including increased
costs associated with maintaining and expanding a team of highly-
skilled network engineers (the Exchange also hired additional network
engineering staff in 2017 and 2018), increasing fees charged by the
Exchange's third-party data center operator, and costs associated with
projects and initiatives designed to improve overall network
performance and stability, through the Exchange's research and
development (``R&D'') efforts.
In order to provide more detail and to quantify the Exchange's
increased costs, the Exchange notes that increased costs are associated
with the infrastructure and increased headcount to fully-support the
advances in infrastructure and expansion of network level services,
including customer monitoring, alerting and reporting. Additional
technology expenses were incurred related to the expanding its
Information Security services, network monitoring and customer
reporting, as well as Regulation SCI mandated processes associated with
network technology. All of these additional expenses have been incurred
by the Exchange since became operational in February 2017.
Additionally, while some of the expense is fixed, much of the expense
is not fixed, and thus increases as the number of connections increase.
For example, new 1Gb, 10Gb, and 10Gb ULL connections require the
purchase of additional hardware to support those connections as well as
enhanced monitoring and reporting of customer performance that MIAX
PEARL and its affiliates provide. And 10Gb ULL connections require the
purchase of specialized, more costly hardware. Further, as the total
number of all connections increase, MIAX PEARL and its affiliates need
to increase their data center footprint and consume more power,
resulting in increased costs charged by their third-party data center
provider. Accordingly, cost to MIAX PEARL and its affiliates is not
entirely fixed. Just the initial fixed cost buildout of the network
infrastructure of MIAX PEARL and its affiliates, including both
primary/secondary sites and disaster recovery, was over $30 million.
The current annual operational expense (which relates 100% to the
network infrastructure, associated data center processing equipment
required to support various connections, network monitoring systems and
associated software required to support the various forms of
connectivity) is approximately $8.5 million. This does not include
additional indirect expenses that the Exchange incurs that are
allocated to the support of network infrastructure of the Exchange.
These costs have increased over 10% since the Exchange became
operational in February 2017. As these operational expenses increase,
MIAX PEARL and its affiliates look to offset those costs through
increased connectivity fees.
A more detailed breakdown of the operational expense increases
include an approximate 70% increase in technology-related personnel
costs in infrastructure, due to expansion of services/support (increase
of approximately $800,000); an approximate 10% increase in datacenter
costs due to price increases and footprint expansion (increase of
approximately $500,000); an approximate 5% increase in vendor-supplied
dark fiber due to price increases and expanded capabilities (increase
of approximately $25,000); and a 30% increase in market data
connectivity fees (increase of approximately $200,000). Of note,
[[Page 22220]]
regarding market data connectivity fee increased cost, this is the cost
associated with MIAX PEARL consuming connectivity/content from the
equities markets in order to operate the Exchange, causing MIAX PEARL
to effectively pay its competitors for this connectivity. The Exchange
also incurred significant capital expenditures over this same period to
upgrade and enhance the underlying technology components, as more
fully-detailed below.
Further, because the costs of operating a data center are
significant and not economically feasible for the Exchange, the
Exchange does not operate its own data centers, and instead contracts
with a third-party data center provider. The Exchange notes that
larger, dominant exchange operators own/operate their data centers,
which offers them greater control over their data center costs. Because
those exchanges own and operate their data centers as profit centers,
the Exchange is subject to additional costs. As a result, the Exchange
is subject to fee increases from its data center provider, which the
Exchange experienced in 2017 and 2018 of approximately 10%, as cited
above. Connectivity fees, which are charged for accessing the
Exchange's data center network infrastructure, are directly related to
the network and offset such costs.
Further, the Exchange invests significant resources in network R&D,
which are not included in direct operational expenses to improve the
overall performance and stability of its network. For example, the
Exchange has a number of network monitoring tools (some of which were
developed in-house, and some of which are licensed from third-parties),
that continually monitor, detect, and report network performance, many
of which serve as significant value-adds to the Exchange's Members and
enable the Exchange to provide a high level of customer service. These
tools detect and report performance issues, and thus enable the
Exchange to proactively notify a Member (and the SIPs) when the
Exchange detects a problem with a Member's connectivity. The costs
associated with the maintenance and improvement of existing tools and
the development of new tools resulted in significant increased cost to
the Exchange since February 2017.
Certain recently developed network aggregation and monitoring tools
provide the Exchange with the ability to measure network traffic with a
much more granular level of variability. This is important as Exchange
Members demand a higher level of network determinism and the ability to
measure variability in terms of single digit nanoseconds. Also, the
Exchange routinely conducts R&D projects to improve the performance of
the network's hardware infrastructure. As an example, in the last year,
the Exchange's R&D efforts resulted in a performance improvement,
requiring the purchase of new equipment to support that improvement,
and thus resulting in increased costs in the hundreds of thousands of
dollars range. In sum, the costs associated with maintaining and
enhancing a state-of-the-art exchange network infrastructure in the
U.S. options industry is a significant expense for the Exchange that
continues to increase, and thus the Exchange believes that it is
reasonable to offset a portion of those increased costs by increasing
its network connectivity fees, as proposed herein. The Exchange invests
in and offers a superior network infrastructure as part of its overall
options exchange services offering, resulting in significant costs
associated with maintaining this network infrastructure, which are
directly tied to the amount of the connectivity fees that must be
charged to access it, in order to recover those costs.
The Exchange notes that other exchanges have similar connectivity
alternatives for their participants, including similar low-latency
connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE Arca, Inc.
(``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq ISE, LLC
(``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet
connectivity alternatives to each of their participants.\35\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\36\ While MIAX PEARL's proposed connectivity fees
are substantially lower than the fees charged by Phlx, ISE, Arca and
NYSE American, MIAX PEARL believes that it offers significant value to
Members over other exchanges in terms of network monitoring and
reporting, which MIAX PEARL believes is a competitive advantage, and
differentiates its connectivity versus connectivity to other exchanges.
Additionally, the 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.\37\
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\35\ See Phlx and ISE Rules, General Equity and Options Rules,
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection, which the equivalent of the
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule,
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE
American and Arca each charge a monthly fee of $5,000 for each 1Gb
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
\36\ Id.
\37\ See Nasdaq ISE, Options Rules, Options 7, Pricing Schedule,
Section 11.D. (charging $3,000 for disaster recovery testing &
relocation services); see also Cboe Exchange, Inc. (``Cboe'') Fees
Schedule, p. 14, Cboe Command Connectivity Charges (charging a
monthly fee of $2,000 for a 1Gb disaster recovery network access
port and a monthly fee of $6,000 for a 10Gb disaster recovery
network access port).
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B. Self-Regulatory Organization's Statement on Burden on Competition
MIAX PEARL does not believe that the proposed rule changes will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In particular, the Exchange has
received no official complaints from Members or others who connect to
it that its fees or the Proposed Fee Increases are negatively impacting
or would negatively impact their abilities to compete with other market
participants. Further, the Exchange is unaware of any assertion that
its existing fee levels or the Proposed Fee Increases would somehow
unduly impair its competition with other options exchanges. To the
contrary, if the fees charged are deemed too high by market
participants, they can simply disconnect.
While the Exchange recognizes the distinction between connecting to
an exchange and trading at the exchange, the Exchange notes that it
operates in a highly competitive options market in which market
participants can readily connect and trade with venues they desire. In
such an environment, the Exchange must continually adjust its fees to
remain competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\38\ and Rule
[[Page 22221]]
19b-4(f)(2) \39\ thereunder. At any time within 60 days of the filing
of the proposed rule change, the Commission summarily may temporarily
suspend such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
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\38\ 15 U.S.C. 78s(b)(3)(A)(ii).
\39\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-PEARL-2019-17 on the subject line.
Paper Comments
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-PEARL-2019-17. 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 (https://www.sec.gov/rules/sro.shtml).
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 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2019-17 and should be submitted on
or before June 6, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10116 Filed 5-15-19; 8:45 am]
BILLING CODE 8011-01-P
