Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule, 34012-34020 [2019-15024]
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Federal Register / Vol. 84, No. 136 / Tuesday, July 16, 2019 / Notices
should be submitted on or before
August 6, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15025 Filed 7–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86342; File No. SR–MIAX–
2019–31]
Self-Regulatory Organizations; Miami
International Securities Exchange LLC;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule
July 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 June 26,
2019, Miami International Securities
Exchange LLC (‘‘MIAX Options’’ 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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Options Fee Schedule
(the ‘‘Fee Schedule’’) to modify certain
of the Exchange’s system connectivity
fees.
The Exchange previously filed the
proposal on April 30, 2019 (SR–MIAX–
2019–23). That filing has been
withdrawn and replaced with the
current filing (SR–MIAX–2019–31).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX’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
47 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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,
MIAX PEARL, LLC (‘‘MIAX PEARL’’).
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
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 See Securities Exchange Act Release No. 83786
(August 7, 2018), 83 FR 40106 (August 13,
2018)(SR–MIAX–2018–19) (the ‘‘First Proposed
Rule Change’’).
5 Id.
6 See Letter from Tyler Gellasch, Executive
Director, The Healthy Markets Association
(‘‘Healthy Markets’’), to Brent J. Fields, Secretary,
Commission, dated September 4, 2018 (‘‘Healthy
Markets Letter’’).
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September 17, 2018.7 The Suspension
Order also instituted proceedings to
determine whether to approve or
disapprove the First Proposed Rule
Change.8
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
7 See Securities Exchange Act Release No. 34–
84175 (September 17, 2018), 83 FR 47955
(September 21, 2018) (SR–MIAX–2018–19)
(Suspension of and Order Instituting Proceedings
To Determine Whether To Approve or Disapprove
a Proposed Rule Change To Amend the Fee
Schedule Regarding Connectivity Fees for Members
and Non-Members).
8 Id.
9 See Securities Exchange Act Release No. 84398
(October 10, 2018), 83 FR 52264 (October 16, 2018)
(SR–MIAX–2018–19 (Notice of Withdrawal of a
Proposed Rule Change To Amend the Fee Schedule
Regarding Connectivity Fees for Members and NonMembers).
10 See Securities Exchange Act Release No. 84357
(October 3, 2018), 83 FR 50976 (October 10, 2018)
(SR–MIAX–2018–25) (the ‘‘Second Proposed Rule
Change’’) (Notice of Filing of a Proposed Rule
Change To Amend the Fee Schedule Regarding
Connectivity Fees for Members and Non-Members;
Suspension of and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove the
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.
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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
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
15 See Securities Exchange Act Release No. 84650
(November 26, 2018), 83 FR 61705 (November 30,
2018) (SR–MIAX–2018–25) (Notice of Withdrawal
of a Proposed Rule Change To Amend the Fee
Schedule Regarding Connectivity Fees for Members
and Non-Members.).
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).
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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
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
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’’).
20 See IEX Letter, pg. 1.
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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
The Exchange refiled the Proposed
Fee Increases on April 30, 2019,
designating the Proposed Fee Increases
immediately effective.23 The Fourth
Proposed Rule Change was published
for comment in the Federal Register on
May 16, 2019.24 The Fourth Proposed
Rule Change provided further cost
analysis information 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.
On May 21, 2019, the Commission
issued the Staff Guidance on SRO Rule
Filings Relating to Fees (the
‘‘Guidance’’).25
The Commission received two
comment letters on the Fourth Proposed
Rule Change, after the Guidance was
released.26 The Second IEX Letter and
the Third SIFMA Letter argued that the
Exchange did not provide sufficient
information in its Fourth Proposed Rule
Change to justify the Proposed Fee
Increases based on the Guidance and the
BOX Order. Of note, however, is that
21 See
Second Healthy Markets Letter, pg. 2.
SR–MIAX–2019–10.
23 See Securities Exchange Act Release No. 85836
(May 10, 2019), 84 FR 22205 (May 16, 2019) (SR–
MIAX–2019–23) (the ‘‘Fourth Proposed Rule
Change’’) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule).
24 Id.
25 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.
26 See Letter from John Ramsay, Chief Market
Policy Officer, Investors Exchange LLC, to Vanessa
Countryman, Acting Secretary, Commission, dated
June 5, 2019 (the ‘‘Second IEX Letter’’) and Letter
from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene,
Managing Director, SIFMA, to Vanessa
Countryman, Acting Secretary, Commission, dated
June 6, 2019 (the ‘‘Third SIFMA Letter’’).
22 See
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unlike their previous comment letter,
the Third SIFMA Letter did not call for
the Commission to suspend the Fourth
Proposed Rule Change. Also, Healthy
Markets did not comment on the Fourth
Proposed Rule Change.
The Exchange is now re-filing the
Proposed Fee Increases (the ‘‘Fifth
Proposed Rule Change’’) to bolster its
cost-based discussion to support its
claim that the Proposed Fee Increases
are fair and reasonable because they will
permit recovery of the Exchange’s costs
and will not result in excessive pricing
or supracompetitive profit, in light of
the Guidance issued by Commission
staff subsequent to the Fourth Proposed
Rule Change. The Exchange believes
that the Proposed Fee Increases are
consistent with the Act because they (i)
are reasonable, equitably allocated, not
unfairly discriminatory, and not an
undue burden on competition; (ii)
comply with the BOX Order and the
Guidance; (iii) are, as demonstrated in
the Fifth Proposed Rule Change and
supported by evidence (including data
and analysis), constrained by significant
competitive forces; and (iv) are, as
demonstrated in the Fifth Proposed Rule
Change and supported by specific
information (including quantitative
information), fair and reasonable
because they will permit recovery of the
Exchange’s costs and will not result in
excessive pricing or supracompetitive
profit. Accordingly, the Exchange
believes 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
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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
PEARL, 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 PEARL 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 27
in general, and furthers the objectives of
Section 6(b)(4) of the Act 28 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 29 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.
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
29 15 U.S.C. 78f(b)(5).
The Commission has repeatedly
expressed its preference for competition
over regulatory intervention in
determining prices, products, and
services in the securities markets. In
Regulation NMS, the Commission
highlighted the importance of market
forces in determining prices and SRO
revenues and, also, recognized that
current regulation of the market system
‘‘has been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 30
First, the Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act, in that the Proposed
Fee Increases are fair, equitable and not
unreasonably discriminatory, because
the fees for the connectivity alternatives
available on the Exchange, as proposed
to be increased, are constrained by
significant competitive forces. 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 as
compared to the much greater number
of members at other options exchanges
(as further detailed below). Not only
does MIAX 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.
Further, of the number of Members that
connect directly to MIAX, many such
Members do not purchase market data
from MIAX. There are a number of large
market makers and broker-dealers that
are members of other options exchange
but not Members of MIAX. For example,
the following are not Members of MIAX:
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, it is the
individual needs of the market maker
that require whether they need one
connection or multiple connections to
27 15
28 15
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30 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
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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 fewer 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 or its affiliates, MIAX PEARL and
MIAX Emerald, they do not purchase
connectivity to MIAX, and they do not
purchase market data from MIAX. The
Exchange 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,
the Exchange provides information
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about the Exchange’s available
connectivity alternatives in a
Connectivity Guide, which contains
detailed specifications regarding, among
other things, throughput and latency for
each available connection.31 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 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
and its affiliates. MIAX competes with
nine (9) non-Members who resell MIAX
connectivity. These are resellers of
MIAX connectivity—they are not
arrangements between broker-dealers to
share connectivity costs, as SIFMA
suggests. Those non-Members resell that
connectivity to multiple market
participants over that same connection,
including both Members and nonMembers of MIAX (typically extranets
and service bureaus). When
connectivity is re-sold by a third-party,
MIAX 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 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 and/or
MIAX PEARL. 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 and/or
31 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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MIAX PEARL. Accordingly, indirect
connectivity is a viable alternative that
is already being used by non-Members
of MIAX, constraining the price that
MIAX is able to charge for connectivity
to its Exchange.
The Exchange 32 and MIAX PEARL 33
are comprised of 41 distinct Members
between the two exchanges, excluding
any additional affiliates of such
Members that are also Members of
MIAX, MIAX PEARL, 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 PEARL,
or both, with the exception of one new
Member who is currently in the onboarding 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 Increases 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
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. Because it is 1⁄10th of the
size, it does not offer access to many of
the products and services offered by the
Exchange, such as the ability to quote or
receive certain market data products.
Thus, the value of the 1Gb alternative is
much lower than value of a 10Gb
alternative, when measured based on
32 The Exchange has 38 distinct Members,
excluding affiliated entities. See MIAX Exchange
Member Directory, available at https://
www.miaxoptions.com/exchange-members.
33 MIAX PEARL has 36 distinct Members,
excluding affiliated entities. See MIAX PEARL
Exchange Member Directory, available at https://
www.miaxoptions.com/exchange-members/pearl.
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the type of Exchange access it offers,
which is the basis for difference in price
between a 1Gb connection and a 10Gb
connection. Approximately just less
than half of MIAX and MIAX PEARL
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 3.75% market share
of the U.S. options industry in May
2019 in Equity/ETF classes according to
the OCC.34 For May 2019, the
Exchange’s affiliate, MIAX PEARL, had
only 4.84% market share of the U.S.
options industry in Equity/ETF classes
according to the OCC.35 For May 2019,
the Exchange’s affiliate, MIAX Emerald,
had only 0.77% market share of the U.S.
34 See Exchange Market Share of Equity
Products—2019, The Options Clearing Corporation,
available at https://www.theocc.com/webapps/
exchange-volume.
35 Id.
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options industry in Equity/ETF classes
according to the OCC.36 The Exchange
is not aware of any evidence that a
combined market share of less than 10%
provides the Exchange with anticompetitive pricing power. This, in
addition to the fact that not all brokerdealers 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 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 45 Members
(including all such Members’ affiliate
Members). However, Cboe Exchange,
Inc. (‘‘Cboe’’) has over 200 members,37
Nasdaq ISE, LLC has approximately 100
members,38 and NYSE American LLC
has over 80 members.39 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 45
Members (inclusive of Members’
affiliates).
The Exchange finds it compelling that
all of the Exchange’s existing Members
continued to purchase the Exchange’s
36 Id.
37 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).
38 See Form 1/A, filed July 1, 2016 (https://
www.sec.gov/Archives/edgar/vprr/1601/
16019243.pdf).
39 See https://www.nyse.com/markets/americanoptions/membership#directory.
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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 and
MIAX PEARL and targeting mid-market
resting orders; 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.40 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
40 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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of the Exchange’s connectivity options.
MIAX did not experience any noticeable
change (increase or decrease) 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
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75% of the volume on the Exchange. For
example, in June of 2019, to date,
approximately 7.8 million contracts of
the 10.3 million contracts executed were
done by the top market making firms on
the Exchange in simple (non-complex)
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 will permit recovery of the
Exchange’s costs and will not result in
excessive pricing or supracompetitive
profit. The Proposed Fee Increases will
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 it last filed to increase its
connectivity fees in December 2016,
which became effective on January 1,
2017.41 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-ofthe-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.
41 See Securities Exchange Act Release No. 79666
(December 22, 2016), 81 FR 96133 (December 29,
2016) (SR–MIAX–2016–47) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Modify the
Exchange’s Connectivity Fees).
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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, enhanced 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 it last
increased its connectivity fees on
January 1, 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 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 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
and its affiliates is not entirely fixed.
Just the initial fixed cost buildout of the
network infrastructure of MIAX and its
affiliates, including both primary/
secondary sites and disaster recovery,
was over $30 million. These costs have
increased over 10% since the last time
the Exchange increased its connectivity
fees on January 1, 2017. As these
network connectivity-related expenses
increase, MIAX and its affiliates look to
offset those costs through increased
connectivity fees.
A more detailed breakdown of the
expense increases since January 1, 2017
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 consuming connectivity/
content from the equities markets in
order to operate the Exchange, causing
MIAX to effectively pay its competitors
for this connectivity. While the
Exchange and MIAX PEARL have
incurred a total increase in connectivity
expenses since January 2017 (the last
time connectivity fees were raised) of
approximately $1.5 million per year (as
described above), the total increase in
connectivity revenue amount as a result
of the Proposed Fee Increases is
projected to be approximately $1.2
million per year for MIAX and MIAX
PEARL. Accordingly, the total projected
MIAX and MIAX PEARL connectivity
revenue as a result of the proposed
increase, on an annualized basis, is less
than total annual actual MIAX and
MIAX PEARL connectivity expense.
Accordingly, the Proposed Fee Increases
are fair and reasonable because they will
not result in excessive pricing or
supracompetitive profit, when
comparing the increase in actual costs to
the Exchange (since January 2017)
versus the projected increase in annual
revenue.
The Exchange also incurred
additional 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
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
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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 January 1, 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-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. As detailed in the Exchange’s
2018 audited financial statements which
will be publicly available as part of the
Exchange’s Form 1 Amendment, the
Exchange only has four primary sources
of revenue: Transaction fees, access fees
(of which network connectivity
constitute the majority), regulatory fees,
and market data fees. Accordingly, the
Exchange must cover all of its expenses
from these four primary sources of
revenue.
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The Proposed Fee Increases are fair
and reasonable because they will not
result in excessive pricing or
supracompetitive profit, when
comparing the total annual expense of
the Exchange associated with providing
the network connectivity services versus
the total projected annual revenue of the
Exchange associated with providing the
network connectivity services. For 2018,
the annual expense associated with
providing the network connectivity
services (that is, the shared network
connectivity of MIAX and MIAX
PEARL, but excluding MIAX Emerald)
was approximately $20.8 million. This
amount is comprised of both direct and
indirect expense. The direct 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) was
approximately $8.5 million (constituting
primarily Information Technology
expense in the Exchange’s 2018
financial statements). The indirect
expense (which includes expense from
such areas as trading operations,
software development, business
development, information technology,
marketing, human resources, legal and
regulatory, finance and accounting) that
the Exchange allocates to the
maintenance and support of network
connectivity services was approximately
$12.3 million. This indirect expense
amount of $12.3 million represents
approximately 20% of the total annual
expense of MIAX and MIAX PEARL for
2018 of approximately $70 million, less
direct expense of $8.5 million ($70
million less $8.5 million equals $61.5
million multiplied by 20% equals $12.3
million). Total projected annualized
revenue of the Exchange associated with
selling the network connectivity
services (reflecting the Proposed Fee
Increases on a fully-annualized basis,
using May 2019 data) for MIAX and
MIAX PEARL is projected to be
approximately $14.5 million. This
projected revenue amount of $14.5
million represents approximately 20%
of total net revenue of MIAX and MIAX
PEARL for 2018 of approximately $72
million. The Exchange believes that an
indirect expense allocation of 20% of
total expense (less direct expense) to
network connectivity services is fair and
reasonable, as total projected network
connectivity revenue represents
approximately 20% of total net revenue
for 2018. That is, direct expense of $8.5
million plus indirect expense of $12.3
million fairly reflects the total annual
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expense associated with providing the
network connectivity services, both
from the perspective of similar revenue
and expense percentages (connectivity
to total), as well as matching
connectivity resources to connectivity
expenses. The Exchange believes that
this is a conservative allocation of
indirect expense. Accordingly, the total
projected MIAX and MIAX PEARL
connectivity revenue, reflective of the
proposed increase, on an annualized
basis, of $14.5 million, is less than total
annual actual MIAX and MIAX PEARL
connectivity expense for 2018 of $20.8
million. The Exchange projects
comparable network connectivity
revenue and expense for 2019 for MIAX
and MIAX PEARL. Accordingly, the
Proposed Fee Increases are fair and
reasonable because they do not result in
excessive pricing or supracompetitive
profit, when comparing the actual
network connectivity costs to the
Exchange versus the projected network
connectivity annual revenue, including
the increase amount. Additional
information on overall revenue and
expense of the Exchange can be found
in the Exchange’s 2018 audited financial
results, which will be publicly available
as part of the Exchange’s Form 1 filed
with the Commission by June 30, 2019.
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.42 The Exchange further
notes that Phlx, ISE, Arca and NYSE
American each charge higher rates for
such similar connectivity to primary
and secondary facilities.43 While
MIAX’s proposed connectivity fees are
substantially lower than the fees
charged by Phlx, ISE, Arca and NYSE
American, MIAX believes that it offers
significant value to Members over other
exchanges in terms of network
monitoring and reporting, which MIAX
42 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.
43 Id.
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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.44
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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
MIAX 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.
The Exchange believes the Proposed
Fee Increases do not place an undue
burden on competition on other SROs
that is not necessary or appropriate. 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 as compared to the
much greater number of members at
other options exchanges (as described
above). Not only does MIAX 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. There are a
number of large market makers and
broker-dealers that are members of other
options exchange but not Members of
MIAX. Additionally, the Exchange other
exchanges have similar connectivity
alternatives for their participants,
including similar low-latency
connectivity, but with much higher
rates to connect.45 The Exchange is also
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.
Intra-Market Competition
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
the Exchange has received no official
complaints from Members, nonMembers (extranets and service
bureaus), third-parties that purchase the
Exchange’s connectivity and resell it,
and customers of those resellers, that
the Exchange’s fees or the Proposed Fee
Increases are negatively impacting or
would negatively impact their abilities
to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange believes that the
Proposed Fee Increases do not place
certain market participants at a relative
disadvantage to other market
participants 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. As described
above, the less expensive 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 Proposed Fee Increases
do not favor certain categories of market
participants in a manner that would
impose a burden on competition; rather,
the allocation of the Proposed Fee
Increases reflects the network resources
consumed by the various size of market
44 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).
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
Inter-Market Competition
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.
45 See
E:\FR\FM\16JYN1.SGM
supra note 42.
16JYN1
34020
Federal Register / Vol. 84, No. 136 / Tuesday, July 16, 2019 / Notices
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,46 and Rule
19b–4(f)(2) 47 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:
jspears on DSK30JT082PROD with NOTICES
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–
MIAX–2019–31 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–MIAX–2019–31. 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
46 15
47 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
17:33 Jul 15, 2019
Jkt 247001
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–MIAX–2019–31 and should
be submitted on or before August 6,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15024 Filed 7–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86339; File No. SR–NYSE–
2019–28]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Withdrawal of Proposed Rule Change
Amending Section 303A.08 of the
Listed Company Manual Relating to
Shareholder Approval of Equity
Compensation Plans
July 10, 2019.
On May 13, 2019, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘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
amend Section 303A.08 of the Listed
Company Manual (‘‘Manual’’) to clarify
the circumstances under which certain
sales of a listed company’s securities
will not be deemed to be equity
compensation plans for purposes of the
shareholder approval requirements set
forth in that rule and to make a
clarifying change to Section 312.04 of
the Manual.
The proposed rule change was
published for comment in the Federal
Register on May 31, 2019.3 The
Commission has received no comments
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. 85937
(May 24, 2019), 84 FR 25313 (May 31, 2019).
PO 00000
48 17
1 15
Frm 00117
Fmt 4703
Sfmt 4703
on the proposed rule change. On July 1,
2019, the Exchange withdrew the
proposed rule change (SR–NYSE–2019–
28).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15021 Filed 7–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Submission for OMB Review;
Comment Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Extension:
Rule 607, SEC File No. 270–561, OMB
Control No. 3235–0634, Request for a
New OMB Control No.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
Regulation E (17 CFR 230.601–
230.610a) exempts from registration
under the Securities Act of 1933 (15
U.S.C. 77a et seq.) (‘‘Securities Act’’)
securities issued by a small business
investment company (‘‘SBIC’’) which is
registered under the Investment
Company Act of 1940 (15 U.S.C. 80a–1
et seq.) (‘‘Investment Company Act’’) or
a closed-end investment company that
has elected to be regulated as a business
development company (‘‘BDC’’) under
the Investment Company Act, so long as
the aggregate offering price of all
securities of the issuer that may be sold
within a 12-month period does not
exceed $5,000,000 and certain other
conditions are met. Rule 607 under
Regulation E (17 CFR 230.607) entitled,
‘‘Sales material to be filed,’’ requires
sales material used in connection with
securities offerings under Regulation E
to be filed with the Commission at least
five days (excluding weekends and
holidays) prior to its use.1 Commission
4 17
CFR 200.30–3(a)(12).
material includes advertisements, articles
or other communications to be published in
newspapers, magazines, or other periodicals; radio
and television scripts; and letters, circulars or other
written communications proposed to be sent given
1 Sales
E:\FR\FM\16JYN1.SGM
16JYN1
]]>Agencies
[Federal Register Volume 84, Number 136 (Tuesday, July 16, 2019)]
[Notices]
[Pages 34012-34020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15024]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86342; File No. SR-MIAX-2019-31]
Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Its Fee Schedule
July 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 June 26, 2019, Miami International Securities Exchange LLC (``MIAX
Options'' 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 Options Fee
Schedule (the ``Fee Schedule'') to modify certain of the Exchange's
system connectivity fees.
The Exchange previously filed the proposal on April 30, 2019 (SR-
MIAX-2019-23). That filing has been withdrawn and replaced with the
current filing (SR-MIAX-2019-31).
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings, at MIAX's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
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, MIAX PEARL, LLC
(``MIAX PEARL''). These proposed fee increases are collectively
referred to herein as the ``Proposed Fee Increases.''
---------------------------------------------------------------------------
\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. 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 First Proposed Rule
Change.\8\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 83786 (August 7,
2018), 83 FR 40106 (August 13, 2018)(SR-MIAX-2018-19) (the ``First
Proposed Rule Change'').
\5\ Id.
\6\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association (``Healthy Markets''), to Brent J.
Fields, Secretary, Commission, dated September 4, 2018 (``Healthy
Markets Letter'').
\7\ See Securities Exchange Act Release No. 34-84175 (September
17, 2018), 83 FR 47955 (September 21, 2018) (SR-MIAX-2018-19)
(Suspension of and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change To Amend the
Fee Schedule Regarding Connectivity Fees for Members and Non-
Members).
\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\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 84398 (October 10,
2018), 83 FR 52264 (October 16, 2018) (SR-MIAX-2018-19 (Notice of
Withdrawal of a Proposed Rule Change To Amend the Fee Schedule
Regarding Connectivity Fees for Members and Non-Members).
\10\ See Securities Exchange Act Release No. 84357 (October 3,
2018), 83 FR 50976 (October 10, 2018) (SR-MIAX-2018-25) (the
``Second Proposed Rule Change'') (Notice of Filing of a Proposed
Rule Change To Amend the Fee Schedule Regarding Connectivity Fees
for Members and Non-Members; Suspension of and Order Instituting
Proceedings To Determine Whether To Approve or Disapprove the
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.
---------------------------------------------------------------------------
[[Page 34013]]
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. 84650 (November 26,
2018), 83 FR 61705 (November 30, 2018) (SR-MIAX-2018-25) (Notice of
Withdrawal of a Proposed Rule Change To Amend the Fee Schedule
Regarding Connectivity Fees for Members and Non-Members.).
---------------------------------------------------------------------------
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 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\
---------------------------------------------------------------------------
\21\ See Second Healthy Markets Letter, pg. 2.
On April 29, 2019, the Exchange withdrew the Third Proposed Rule
Change.\22\
---------------------------------------------------------------------------
\22\ See SR-MIAX-2019-10.
---------------------------------------------------------------------------
The Exchange refiled the Proposed Fee Increases on April 30, 2019,
designating the Proposed Fee Increases immediately effective.\23\ The
Fourth Proposed Rule Change was published for comment in the Federal
Register on May 16, 2019.\24\ The Fourth Proposed Rule Change provided
further cost analysis information 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.
---------------------------------------------------------------------------
\23\ See Securities Exchange Act Release No. 85836 (May 10,
2019), 84 FR 22205 (May 16, 2019) (SR-MIAX-2019-23) (the ``Fourth
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule).
\24\ Id.
---------------------------------------------------------------------------
On May 21, 2019, the Commission issued the Staff Guidance on SRO
Rule Filings Relating to Fees (the ``Guidance'').\25\
---------------------------------------------------------------------------
\25\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.
---------------------------------------------------------------------------
The Commission received two comment letters on the Fourth Proposed
Rule Change, after the Guidance was released.\26\ The Second IEX Letter
and the Third SIFMA Letter argued that the Exchange did not provide
sufficient information in its Fourth Proposed Rule Change to justify
the Proposed Fee Increases based on the Guidance and the BOX Order. Of
note, however, is that
[[Page 34014]]
unlike their previous comment letter, the Third SIFMA Letter did not
call for the Commission to suspend the Fourth Proposed Rule Change.
Also, Healthy Markets did not comment on the Fourth Proposed Rule
Change.
---------------------------------------------------------------------------
\26\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC, to Vanessa Countryman, Acting Secretary,
Commission, dated June 5, 2019 (the ``Second IEX Letter'') and
Letter from Theodore R. Lazo, Managing Director and Associate
General Counsel, and Ellen Greene, Managing Director, SIFMA, to
Vanessa Countryman, Acting Secretary, Commission, dated June 6, 2019
(the ``Third SIFMA Letter'').
---------------------------------------------------------------------------
The Exchange is now re-filing the Proposed Fee Increases (the
``Fifth Proposed Rule Change'') to bolster its cost-based discussion to
support its claim that the Proposed Fee Increases are fair and
reasonable because they will permit recovery of the Exchange's costs
and will not result in excessive pricing or supracompetitive profit, in
light of the Guidance issued by Commission staff subsequent to the
Fourth Proposed Rule Change. The Exchange believes that the Proposed
Fee Increases are consistent with the Act because they (i) are
reasonable, equitably allocated, not unfairly discriminatory, and not
an undue burden on competition; (ii) comply with the BOX Order and the
Guidance; (iii) are, as demonstrated in the Fifth Proposed Rule Change
and supported by evidence (including data and analysis), constrained by
significant competitive forces; and (iv) are, as demonstrated in the
Fifth Proposed Rule Change and supported by specific information
(including quantitative information), fair and reasonable because they
will permit recovery of the Exchange's costs and will not result in
excessive pricing or supracompetitive profit. Accordingly, the Exchange
believes 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 PEARL, 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 PEARL 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 \27\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \28\ 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 \29\ 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.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(4).
\29\ 15 U.S.C. 78f(b)(5).
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The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. In Regulation NMS,
the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \30\
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\30\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
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First, the Exchange believes that its proposal is consistent with
Section 6(b)(4) of the Act, in that the Proposed Fee Increases are
fair, equitable and not unreasonably discriminatory, because the fees
for the connectivity alternatives available on the Exchange, as
proposed to be increased, are constrained by significant competitive
forces. 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
as compared to the much greater number of members at other options
exchanges (as further detailed below). Not only does MIAX 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. Further, of the number of Members that connect
directly to MIAX, many such Members do not purchase market data from
MIAX. There are a number of large market makers and broker-dealers that
are members of other options exchange but not Members of MIAX. For
example, the following are not Members of MIAX: 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, it is the
individual needs of the market maker that require whether they need one
connection or multiple connections to
[[Page 34015]]
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 fewer 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 or its
affiliates, MIAX PEARL and MIAX Emerald, they do not purchase
connectivity to MIAX, and they do not purchase market data from MIAX.
The Exchange 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, the Exchange provides information about the Exchange's available
connectivity alternatives in a Connectivity Guide, which contains
detailed specifications regarding, among other things, throughput and
latency for each available connection.\31\ 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 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.
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\31\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
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Contrary to SIFMA's argument, there is competition for connectivity
to MIAX and its affiliates. MIAX competes with nine (9) non-Members who
resell MIAX connectivity. These are resellers of MIAX connectivity--
they are not arrangements between broker-dealers to share connectivity
costs, as SIFMA suggests. Those non-Members resell that connectivity to
multiple market participants over that same connection, including both
Members and non-Members of MIAX (typically extranets and service
bureaus). When connectivity is re-sold by a third-party, MIAX 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 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 and/or MIAX PEARL. 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 and/or MIAX PEARL. Accordingly, indirect
connectivity is a viable alternative that is already being used by non-
Members of MIAX, constraining the price that MIAX is able to charge for
connectivity to its Exchange.
The Exchange \32\ and MIAX PEARL \33\ are comprised of 41 distinct
Members between the two exchanges, excluding any additional affiliates
of such Members that are also Members of MIAX, MIAX PEARL, 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 PEARL, 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.
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\32\ The Exchange has 38 distinct Members, excluding affiliated
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com/exchange-members.
\33\ MIAX PEARL has 36 distinct Members, excluding affiliated
entities. See MIAX PEARL Exchange Member Directory, available at
https://www.miaxoptions.com/exchange-members/pearl.
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The Exchange believes that the Proposed Fee Increases 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 recognizes that there are
various business models and varying sizes of market participants
conducting business on the Exchange. The 1Gb direct connectivity
alternative is \1/10\th the size of the 10Gb direct connectivity
alternative. Because it is \1/10\th of the size, it does not offer
access to many of the products and services offered by the Exchange,
such as the ability to quote or receive certain market data products.
Thus, the value of the 1Gb alternative is much lower than value of a
10Gb alternative, when measured based on
[[Page 34016]]
the type of Exchange access it offers, which is the basis for
difference in price between a 1Gb connection and a 10Gb connection.
Approximately just less than half of MIAX and MIAX PEARL 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 3.75% market
share of the U.S. options industry in May 2019 in Equity/ETF classes
according to the OCC.\34\ For May 2019, the Exchange's affiliate, MIAX
PEARL, had only 4.84% market share of the U.S. options industry in
Equity/ETF classes according to the OCC.\35\ For May 2019, the
Exchange's affiliate, MIAX Emerald, had only 0.77% market share of the
U.S. options industry in Equity/ETF classes according to the OCC.\36\
The Exchange is not aware of any 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.
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\34\ See Exchange Market Share of Equity Products--2019, The
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
\35\ Id.
\36\ Id.
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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 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 45 Members (including all such
Members' affiliate Members). However, Cboe Exchange, Inc. (``Cboe'')
has over 200 members,\37\ Nasdaq ISE, LLC has approximately 100
members,\38\ and NYSE American LLC has over 80 members.\39\ 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 45 Members (inclusive of Members' affiliates).
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\37\ 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).
\38\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
\39\ 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 and MIAX PEARL and
targeting mid-market resting orders; 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.\40\ 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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\40\ 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
[[Page 34017]]
of the Exchange's connectivity options. MIAX did not experience any
noticeable change (increase or decrease) 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 75% of the
volume on the Exchange. For example, in June of 2019, to date,
approximately 7.8 million contracts of the 10.3 million contracts
executed were done by the top market making firms on the Exchange in
simple (non-complex) 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 will
permit recovery of the Exchange's costs and will not result in
excessive pricing or supracompetitive profit. The Proposed Fee
Increases will 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 it last filed to
increase its connectivity fees in December 2016, which became effective
on January 1, 2017.\41\ 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.
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\41\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Modify the Exchange's Connectivity Fees).
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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, enhanced 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 it last increased its connectivity fees on
January 1, 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 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 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 and its affiliates is not entirely fixed.
Just the initial fixed cost buildout of the network infrastructure of
MIAX and its affiliates, including both primary/secondary sites and
disaster recovery, was over $30 million. These costs have increased
over 10% since the last time the Exchange increased its connectivity
fees on January 1, 2017. As these network connectivity-related expenses
increase, MIAX and its affiliates look to offset those costs through
increased connectivity fees.
A more detailed breakdown of the expense increases since January 1,
2017 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 34018]]
regarding market data connectivity fee increased cost, this is the cost
associated with MIAX consuming connectivity/content from the equities
markets in order to operate the Exchange, causing MIAX to effectively
pay its competitors for this connectivity. While the Exchange and MIAX
PEARL have incurred a total increase in connectivity expenses since
January 2017 (the last time connectivity fees were raised) of
approximately $1.5 million per year (as described above), the total
increase in connectivity revenue amount as a result of the Proposed Fee
Increases is projected to be approximately $1.2 million per year for
MIAX and MIAX PEARL. Accordingly, the total projected MIAX and MIAX
PEARL connectivity revenue as a result of the proposed increase, on an
annualized basis, is less than total annual actual MIAX and MIAX PEARL
connectivity expense. Accordingly, the Proposed Fee Increases are fair
and reasonable because they will not result in excessive pricing or
supracompetitive profit, when comparing the increase in actual costs to
the Exchange (since January 2017) versus the projected increase in
annual revenue.
The Exchange also incurred additional 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 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 January 1, 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. As detailed in
the Exchange's 2018 audited financial statements which will be publicly
available as part of the Exchange's Form 1 Amendment, the Exchange only
has four primary sources of revenue: Transaction fees, access fees (of
which network connectivity constitute the majority), regulatory fees,
and market data fees. Accordingly, the Exchange must cover all of its
expenses from these four primary sources of revenue.
The Proposed Fee Increases are fair and reasonable because they
will not result in excessive pricing or supracompetitive profit, when
comparing the total annual expense of the Exchange associated with
providing the network connectivity services versus the total projected
annual revenue of the Exchange associated with providing the network
connectivity services. For 2018, the annual expense associated with
providing the network connectivity services (that is, the shared
network connectivity of MIAX and MIAX PEARL, but excluding MIAX
Emerald) was approximately $20.8 million. This amount is comprised of
both direct and indirect expense. The direct 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) was approximately $8.5 million (constituting primarily
Information Technology expense in the Exchange's 2018 financial
statements). The indirect expense (which includes expense from such
areas as trading operations, software development, business
development, information technology, marketing, human resources, legal
and regulatory, finance and accounting) that the Exchange allocates to
the maintenance and support of network connectivity services was
approximately $12.3 million. This indirect expense amount of $12.3
million represents approximately 20% of the total annual expense of
MIAX and MIAX PEARL for 2018 of approximately $70 million, less direct
expense of $8.5 million ($70 million less $8.5 million equals $61.5
million multiplied by 20% equals $12.3 million). Total projected
annualized revenue of the Exchange associated with selling the network
connectivity services (reflecting the Proposed Fee Increases on a
fully-annualized basis, using May 2019 data) for MIAX and MIAX PEARL is
projected to be approximately $14.5 million. This projected revenue
amount of $14.5 million represents approximately 20% of total net
revenue of MIAX and MIAX PEARL for 2018 of approximately $72 million.
The Exchange believes that an indirect expense allocation of 20% of
total expense (less direct expense) to network connectivity services is
fair and reasonable, as total projected network connectivity revenue
represents approximately 20% of total net revenue for 2018. That is,
direct expense of $8.5 million plus indirect expense of $12.3 million
fairly reflects the total annual
[[Page 34019]]
expense associated with providing the network connectivity services,
both from the perspective of similar revenue and expense percentages
(connectivity to total), as well as matching connectivity resources to
connectivity expenses. The Exchange believes that this is a
conservative allocation of indirect expense. Accordingly, the total
projected MIAX and MIAX PEARL connectivity revenue, reflective of the
proposed increase, on an annualized basis, of $14.5 million, is less
than total annual actual MIAX and MIAX PEARL connectivity expense for
2018 of $20.8 million. The Exchange projects comparable network
connectivity revenue and expense for 2019 for MIAX and MIAX PEARL.
Accordingly, the Proposed Fee Increases are fair and reasonable because
they do not result in excessive pricing or supracompetitive profit,
when comparing the actual network connectivity costs to the Exchange
versus the projected network connectivity annual revenue, including the
increase amount. Additional information on overall revenue and expense
of the Exchange can be found in the Exchange's 2018 audited financial
results, which will be publicly available as part of the Exchange's
Form 1 filed with the Commission by June 30, 2019.
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.\42\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\43\ While MIAX's proposed connectivity fees are
substantially lower than the fees charged by Phlx, ISE, Arca and NYSE
American, MIAX believes that it offers significant value to Members
over other exchanges in terms of network monitoring and reporting,
which MIAX 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.\44\
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\42\ 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.
\43\ Id.
\44\ 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 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.
Intra-Market Competition
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, the
Exchange has received no official complaints from Members, non-Members
(extranets and service bureaus), third-parties that purchase the
Exchange's connectivity and resell it, and customers of those
resellers, that the Exchange's fees or the Proposed Fee Increases are
negatively impacting or would negatively impact their abilities to
compete with other market participants or that they are placed at a
disadvantage.
The Exchange believes that the Proposed Fee Increases do not place
certain market participants at a relative disadvantage to other market
participants 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. As described above, the less
expensive 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 Proposed Fee Increases do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation of the Proposed Fee
Increases reflects the network resources consumed by the various size
of 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.
Inter-Market Competition
The Exchange believes the Proposed Fee Increases do not place an
undue burden on competition on other SROs that is not necessary or
appropriate. 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 as compared to the much greater
number of members at other options exchanges (as described above). Not
only does MIAX 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. There are a number of
large market makers and broker-dealers that are members of other
options exchange but not Members of MIAX. Additionally, the Exchange
other exchanges have similar connectivity alternatives for their
participants, including similar low-latency connectivity, but with much
higher rates to connect.\45\ The Exchange is also 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.
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\45\ See supra note 42.
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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.
[[Page 34020]]
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,\46\ and Rule 19b-4(f)(2) \47\ 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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\46\ 15 U.S.C. 78s(b)(3)(A)(ii).
\47\ 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-MIAX-2019-31 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-MIAX-2019-31. 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-MIAX-2019-31 and should be submitted on
or before August 6, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15024 Filed 7-15-19; 8:45 am]
BILLING CODE 8011-01-P
