Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt System Connectivity Fees, 34030-34039 [2019-15026]
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securities to Canadian retirement
accounts without registering as
investment companies under the
Investment Company Act.
Rule 7d–2 contains a ‘‘collection of
information’’ requirement within the
meaning of the Paperwork Reduction
Act of 1995.4 Rule 7d–2 requires written
offering materials for securities offered
or sold in reliance on that rule to
disclose prominently that those
securities and the fund issuing those
securities are not registered with the
Commission, and that those securities
and the fund issuing those securities are
exempt from registration under U.S.
securities laws. Rule 7d–2 does not
require any documents to be filed with
the Commission.
Rule 7d–2 requires written offering
documents for securities offered or sold
in reliance on the rule to disclose
prominently that the securities are not
registered with the Commission and
may not be offered or sold in the United
States unless registered or exempt from
registration under the U.S. securities
laws, and also to disclose prominently
that the fund that issued the securities
is not registered with the Commission.
The burden under the rule associated
with adding this disclosure to written
offering documents is minimal and is
non-recurring. The foreign issuer,
underwriter, or broker-dealer can redraft
an existing prospectus or other written
offering material to add this disclosure
statement, or may draft a sticker or
supplement containing this disclosure
to be added to existing offering
materials. In either case, based on
discussions with representatives of the
Canadian fund industry, the staff
estimates that it would take an average
of 10 minutes per document to draft the
requisite disclosure statement.
The staff estimates that there are 4,086
publicly offered Canadian funds that
potentially would rely on the rule to
offer securities to participants and sell
securities to their Canadian retirement
accounts without registering under the
Investment Company Act.5 The staff
estimates that all of these funds have
previously relied upon the rule and
have already made the one-time change
to their offering documents required to
rely on the rule. The staff estimates that
204 (5 percent) additional Canadian
funds would newly rely on the rule each
year to offer securities to Canadian-U.S.
Participants and sell securities to their
Canadian retirement accounts, thus
incurring the paperwork burden
required under the rule. The staff
4 44
U.S.C. 3501–3502.
Company Institute, 2019 Investment
Company Fact Book (2019) at 258, tbl. 66.
5 Investment
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estimates that each of those funds, on
average, distributes 3 different written
offering documents concerning those
securities, for a total of 612 offering
documents. The staff therefore estimates
that 204 respondents would make 612
responses by adding the new disclosure
statement to 612 written offering
documents. The staff therefore estimates
that the annual burden associated with
the rule 7d–2 disclosure requirement
would be 102 hours (612 offering
documents x 10 minutes per document).
The total annual cost of these burden
hours is estimated to be $42,330 (102
hours × $415 per hour of attorney
time).6
These burden hour estimates are
based upon the Commission staff’s
experience and discussions with the
fund industry. The estimates of average
burden hours are made solely for the
purposes of the Paperwork Reduction
Act. These estimates are not derived
from a comprehensive or even a
representative survey or study of the
costs of Commission rules.
Compliance with the collection of
information requirements of the rule is
mandatory and is necessary to comply
with the requirements of the rule in
general. An agency may not conduct or
sponsor, and a person is not required to
respond to a collection of information
unless it displays a currently valid
control number.
Written comments are invited on: (a)
Whether the collection of information is
necessary for the proper performance of
the functions of the Commission,
including whether the information has
practical utility; (b) the accuracy of the
Commission’s estimate of the burdens of
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information collected; and (d)
ways to minimize the burdens of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted in
writing within 60 days of this
publication.
Please direct your written comments
to Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, C/O Candace
6 The Commission’s estimate concerning the wage
rate for attorney time is based on salary information
for the securities industry compiled by the
Securities Industry and Financial Markets
Association (‘‘SIFMA’’). The $380 per hour figure
for an attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2013, modified by Commission staff to account for
an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
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Kenner, 100 F Street NE, Washington,
DC 20549; or send an email to: PRA_
Mailbox@sec.gov.
Dated: July 9, 2019.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15034 Filed 7–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86344; File No. SR–
EMERALD–2019–24]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt System
Connectivity Fees
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, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Emerald Fee Schedule
(the ‘‘Fee Schedule’’) to adopt the
Exchange’s system connectivity fees.
The Exchange previously filed the
proposal on April 30, 2019 (SR–
EMERALD–2019–20). That filing has
been withdrawn and replaced with the
current filing (SR–EMERALD–2019–24).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/emerald, 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
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
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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 adopt
the network connectivity fees for the 1
Gigabit (‘‘Gb’’) 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 adopt
network connectivity fees for the 1Gb
and 10Gb fiber connections for
connectivity to the Exchange’s disaster
recovery facility. Each of these
connections (with the exception of the
10Gb ULL) are shared connections
(collectively, the ‘‘Shared
Connections’’), and thus can be utilized
to access the Exchange and both of the
Exchange’s affiliates, Miami
International Securities Exchange, LLC
(‘‘MIAX’’) and MIAX PEARL, LLC
(‘‘MIAX PEARL’’). The 10Gb ULL
connection is a dedicated connection
(‘‘Dedicated Connection’’), which
provides network connectivity solely to
the trading platforms, market data
systems, and test system facilities of
MIAX Emerald. These proposed fees are
collectively referred to herein as the
‘‘Proposed Fees.’’ The amounts of the
Proposed Fees for the Shared
Connections are the same amounts that
are currently in place at MIAX and
MIAX PEARL.4 While the Exchange is
new and only launched trading on
March 1, 2019, since: (i) All of the
Proposed Fees (except for the fee
relating to the 10Gb ULL connection)
relate to Shared Connections, and thus
are the same amounts as are currently in
place at MIAX and MIAX PEARL; (ii) all
of the Members of MIAX Emerald are
also members of either MIAX and/or
MIAX PEARL, and most of those
Members already have connectivity to
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 SR–MIAX–2019–31 and SR–PEARL–2019–
21 (the ‘‘MIAX and PEARL Fee Filings’’).
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the Exchange via existing Shared
Connections (without paying any new
incremental connectivity fees), the
Exchange is providing similar
information to that which was provided
in the MIAX and PEARL Fee Filings,
including providing detail about the
market participants impacted by the
Proposed Fees, as well as the costs
incurred by the Exchange associated
with providing the connectivity
alternatives, in order to provide
transparency and support relating to the
Exchange’s belief that the Proposed Fees
are reasonable, equitable, and nondiscriminatory, and to provide sufficient
information for the Commission to
determine that the Proposed Fees are
consistent with the Act.
The Exchange initially filed the
Proposed Fees on March 1, 2019,
designating the Proposed Fees
immediately effective.5 The First
Proposed Rule Change was published
for comment in the Federal Register on
March 20, 2019.6 The First Proposed
Rule Change provided information
about the market participants impacted
by the Proposed Fees, as well as the
additional costs incurred by the
Exchange associated with providing the
connectivity alternatives, in order to
provide transparency and support
relating to the Exchange’s belief that the
Proposed Fees are reasonable, equitable,
and non-discriminatory, and to provide
sufficient information for the
Commission to determine that the
Proposed Fees 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’’).7 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.
5 See Securities Exchange Act Release No. 85316
(March 14, 2019), 84 FR 10350 (March 20, 2019)
(SR–EMERALD–2019–11) (the ‘‘First Proposed Rule
Change’’).
6 Id.
7 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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After the BOX Order was issued, the
Commission received four comment
letters on the First Proposed Rule
Change.8
The Second SIFMA Letter argued that
the Exchange did not provide sufficient
information in its First Proposed Rule
Change to support a finding that the
proposal should be approved by the
Commission after further review of the
Proposed Fees. 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 First 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 First Proposed Rule
Change. Despite the objection to the
Proposed Fees, 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.’’ 9 The
IEX Letter specifically argued that the
Proposed Fees 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 Emerald and its
affiliates considered changes to
transaction fees as an alternative to
offsetting exchange costs.
The Second Healthy Markets Letter
did not object to the First Proposed Rule
Change and the information provided by
the Exchange in support of the Proposed
Fees. Specifically, the Second Healthy
Markets Letter stated that the First
Proposed Rule Change was ‘‘remarkably
8 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’’).
9 See IEX Letter, pg. 1.
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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.10
On April 29, 2019, the Exchange
withdrew the First Proposed Rule
Change.11
The Exchange refiled the Proposed
Fees on April 30, 2019, designating the
Proposed Fees immediately effective.12
The Second Proposed Rule Change was
published for comment in the Federal
Register on May 16, 2019.13 The Second
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 Fees are reasonable, equitable,
and non-discriminatory, and that the
Commission should find that the
Proposed Fees are consistent with the
Act.
On May 21, 2019, the Commission
issued the Staff Guidance on SRO Rule
Filings Relating to Fees (the
‘‘Guidance’’).14
The Commission received two
comment letters on the Second
Proposed Rule Change, after the
Guidance was released.15 The Second
IEX Letter and the Third SIFMA Letter
argued that the Exchange did not
provide sufficient information in its
Second Proposed Rule Change to justify
the Proposed Fees based on the
Guidance and the BOX Order. Of note,
however, is that unlike their previous
comment letter, the Third SIFMA Letter
10 See
Second Healthy Markets Letter, pg. 2.
SR–EMERALD–2019–11.
12 See Securities Exchange Act Release No. 85839
(May 10, 2019), 84 FR 22192 (May 16, 2019) (SR–
EMERALD–2019–20) (the ‘‘Second Proposed Rule
Change’’) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Adopt
System Connectivity Fees).
13 Id.
14 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.
15 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’’).
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11 See
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did not call for the Commission to
suspend the Second Proposed Rule
Change. Also, Healthy Markets did not
comment on the Second Proposed Rule
Change.
The Exchange is now re-filing the
Proposed Fees (the ‘‘Third Proposed
Rule Change’’) to bolster its cost-based
discussion to support its claim that the
Proposed Fees 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
Second Proposed Rule Change. The
Exchange believes that the Proposed
Fees 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 Third Proposed
Rule Change and supported by evidence
(including data and analysis),
constrained by significant competitive
forces; and (iv) are, as demonstrated in
the Third 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 Fees 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 offers to both Members
and non-Members various bandwidth
alternatives for connectivity to the
Exchange, to its primary and secondary
facilities, consisting of a 1Gb 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 also offers to both
Members and non-Members various
bandwidth alternatives for connectivity
to the Exchange, to its disaster recovery
facility, consisting of a 1Gb fiber
connection and a 10Gb connection.
For the Shared Connections, 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 the
Exchange and its affiliates, MIAX and
MIAX PEARL, via a single, shared
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connection. Any Member or nonMember can purchase a Shared
Connection.
For the Dedicated Connection, the
Exchange’s MENI is 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 the Exchange. Any
Member or non-Member can purchase a
Dedicated Connection. The Exchange
determined to design its network
architecture in a manner that offered
10Gb ULL connections as dedicated
connections (as opposed to shared
connections) in order to provide cost
saving opportunities for itself and for its
Members, by reducing the amount of
equipment that the Exchange would
have to purchase and to which the
Members would have to connect.
Accordingly, the Exchange is able to
offer to its Members 10Gb ULL
connectivity at a lower price point than
is offered on MIAX and MIAX PEARL,
the price difference being reflective of
the lower cost to the Exchange.
For the Shared Connections, 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,
MIAX, 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. Thus,
since all of the Members of MIAX
Emerald are also members of either
MIAX and/or MIAX PEARL, and most of
those Members already have
connectivity to the Exchange via
existing Shared Connections, most
Members of MIAX Emerald have instant
connectivity to the Exchange without
paying any new incremental
connectivity fees, as more fully-detailed
below.
The Exchange proposes to establish
the monthly network connectivity fees
for such connections for both Members
and non-Members. As discussed above,
the amounts of the Proposed Fees for
the Shared Connections are the same
amounts that are currently in place at
MIAX and MIAX PEARL. The amount of
the Proposed Fee for the Dedicated
Connection is offered at a substantial
discount to the amount currently in
place at MIAX and MIAX PEARL. The
reasons for the substantial discount are
that the Dedicated Connection offers
access to only a single market (the
Exchange), whereas the 10Gb ULL
connection offered by MIAX and MIAX
PEARL offers access to two markets
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(MIAX and MIAX PEARL), as well as
cost savings the Exchange was able to
achieve (and thus pass through to its
Members) as a result of a dedicated
architecture. The network connectivity
fees for connectivity to the Exchange’s
primary/secondary facility will be as
follows: (a) 1,400 for the 1Gb
connection; and (b) $6,000 for the 10Gb
ULL connection. The network
connectivity fees for connectivity to the
Exchange’s disaster recovery facility
will be as follows: (a) $550 for the 1Gb
connection; and (b) $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 16
in general, and furthers the objectives of
Section 6(b)(4) of the Act 17 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 18 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.
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.’’ 19
First, the Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act, in that the Proposed
Fees are fair, equitable and not
unreasonably discriminatory, because
the fees for the connectivity alternatives
available on the Exchange, as proposed,
are constrained by significant
competitive forces. The U.S. options
16 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
18 15 U.S.C. 78f(b)(5).
19 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
17 15
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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 Emerald
as compared to the much greater
number of members at other options
exchanges (as further detailed below).
MIAX Emerald is a brand new
exchange, having only commenced
operations in March 2019. Not only
does MIAX Emerald 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
Emerald. Further, of the number of
Members that connect directly to MIAX
Emerald, many such Members do not
purchase market data from MIAX
Emerald. There are a number of large
market makers and broker-dealers that
are members of other options exchanges
but not Members of MIAX Emerald. For
example, the following are not Members
of MIAX Emerald: 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 Emerald, it is the
individual needs of the market maker
that require whether they need one
connection or multiple connections to
the Exchange. The Exchange has market
maker Members that only purchase one
connection 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 than market
makers that simply quote all symbols on
the Exchange. Even though nonMembers purchase and resell 10Gb ULL
connections to both Members and nonMembers, 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
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34033
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 Emerald or its affiliates, MIAX
and MIAX PEARL, they do not purchase
connectivity to MIAX Emerald, and they
do not purchase market data from MIAX
Emerald. The Exchange further
recognizes that the decision of whether
to connect to the Exchange is separate
and distinct from the decision of
whether and how to trade on the
Exchange. The Exchange acknowledges
that many firms may choose to connect
to the Exchange, but ultimately not
trade on it, based on their particular
business needs.
To assist prospective Members or
firms considering connecting to MIAX
Emerald, 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.20 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 a 10Gb ULL
20 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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connection. The 1Gb connection is too
small to support those data feed
products. MIAX Emerald 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
Emerald and its affiliates. MIAX
Emerald competes with eight (8) nonMembers, who resell MIAX Emerald
connectivity. These are resellers of
MIAX Emerald connectivity—they are
not arrangements between brokerdealers 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 Emerald
(typically extranets and service
bureaus). When connectivity is re-sold
by a third-party, MIAX Emerald 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
Emerald to set its connectivity pricing
as indirect connectivity is a substitute
for direct connectivity. In fact, there are
currently seven (7) non-Members that
purchase 1Gb direct connectivity that
are able to access MIAX Emerald, MIAX
and MIAX PEARL. Those non-Members
resell that connectivity to eight (8)
customers, some of whom are agency
broker-dealers that have tens of
customers of their own. Some of those
eight (8) customers also purchase
connectivity directly from MIAX
Emerald and/or its affiliates, MIAX and
MIAX PEARL. Accordingly, indirect
connectivity is a viable alternative used
by non-Members of MIAX Emerald,
constraining the price that MIAX
Emerald is able to charge for
connectivity to its Exchange.
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The Exchange,21 MIAX,22 and MIAX
PEARL 23 are comprised of 41 distinct
members amongst all three exchanges,
excluding any additional affiliates of
such members that are also members of
the Exchange, MIAX, MIAX PEARL, or
any combination thereof. Of those 41
distinct members, 28 of those distinct
members are Members of MIAX
Emerald. (Currently, there are no
Members of MIAX Emerald that are not
also members of MIAX or MIAX PEARL,
or both.) Of those 28 distinct Members
of MIAX Emerald, there are 6 Members
that have no connectivity to the
Exchange. Members are not forced to
purchase connectivity to the Exchange,
and these Members have elected not to
purchase such connectivity. Of note,
these same 6 Members also do not have
connectivity to either MIAX or MIAX
PEARL. These Members either trade
indirectly through other Members or
non-Members that have connectivity to
the Exchange, or do not trade and
conduct another type of business on the
Exchange. Of the remaining 22 distinct
Members of MIAX Emerald, all 22 of
those distinct Members already had
connectivity to the Exchange via
existing Shared Connections, thus
providing all such 22 MIAX Emerald
Members with instant connectivity to
the Exchange without paying any new
incremental connectivity fees.
Further, of those 22 Members, 14 of
such Members elected to purchase
additional connectivity to the Exchange,
including additional Shared
Connections and additional Dedicated
Connections. The Exchange made
available in advance to all of its
prospective Members its proposed
connectivity pricing (subject to
regulatory clearance), in order for those
prospective Members to make an
informed decision about whether to
become a Member of the Exchange and
whether to purchase connectivity to the
Exchange. Accordingly, each such
Member made the decision to become a
Member of the Exchange and to
purchase connectivity to the Exchange,
knowing in advance the connectivity
pricing. And the vast majority of the
additional connectivity purchased by
those Members were for Dedicated
21 The Exchange has 28 distinct Members,
excluding affiliated entities. See MIAX Emerald
Exchange Member Directory, available at https://
www.miaxoptions.com.
22 MIAX has 38 distinct Members, excluding
affiliated entities. See MIAX Exchange Member
Directory, available at https://
www.miaxoptions.com.
23 MIAX PEARL has 36 distinct Members,
excluding affiliated entities. See MIAX PEARL
Exchange Member Directory, available at https://
www.miaxoptions.com.
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Connections, the most expensive
connectivity option.
As a result, of those 22 Members,
through existing Shared Connections,
newly purchased Shared Connections,
and newly purchased Dedicated
Connections: 14 Members have 1Gb
(primary/secondary) connections; 13
Members have 10Gb ULL (primary/
secondary) connections; 3 Members
have 10Gb (disaster recovery)
connections; and 10 Members have 1Gb
(disaster recovery) connections, or some
combination of multiple various
connections. All such Members with
those Shared Connections and
Dedicated Connections trade on MIAX
Emerald.
The 6 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 6
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.
In addition, there are 5 non-Member
service bureaus that already have
connectivity to the Exchange via
existing Shared Connections, thus
providing all 5 of those non-Member
service bureaus with instant
connectivity to the Exchange without
paying any new incremental
connectivity fees. These non-Members
freely purchased their connectivity from
one of the Exchange’s affiliates, either
MIAX or MIAX PEARL, in order to offer
trading services to other firms and
customers, as well as access to the
market data services that their
connections to the Exchange provide
them, but they are not required or
compelled to purchase any of the
Exchange’s connectivity options.
The Exchange believes that the
Proposed Fees 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 two
direct connectivity alternatives and
various indirect connectivity (via thirdparty) alternatives, as described above.
MIAX Emerald 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 ULL direct
connectivity alternative. Because it is 1/
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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 ULL alternative, when
measured based on the type of Exchange
access it offers, which is the basis for
difference in price between a 1Gb
connection and a 10Gb ULL connection.
Approximately just less than half of
MIAX Emerald, MIAX and MIAX
PEARL Members that connect (15 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 Fees ($6,000
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. 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.
The Exchange launched trading on
March 1, 2019. Thus, at the time that the
14 Members who elected to purchase
connectivity to the Exchange, the
Exchange was untested and unproven,
and had 0% market share of the U.S.
options industry. For May 2019, the
Exchange had only a 0.77% market
share of the U.S. options industry in
Equity/ETF classes according to the
OCC.24 For May 2019, the Exchange’s
affiliate, MIAX, had only 3.75% market
share of the U.S. options industry in
May 2019 in Equity/ETF classes
according to the OCC.25 For May 2019,
24 See Exchange Market Share of Equity
Products—2019, The Options Clearing Corporation,
available at https://www.theocc.com/webapps/
exchange-volume.
25 Id.
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Jkt 247001
the Exchange’s affiliate, MIAX PEARL,
had only 4.8% market share of the U.S.
options industry in Equity/ETF classes
according to the OCC.26 The Exchange
is not aware of any evidence that a
combined market share 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. Certainly,
an untested and unproven exchange,
with less than 1% market share in any
month, and no rule or requirement that
a market participant must join or
connect to it, does not have anticompetitive pricing power, with respect
to setting the pricing for the Dedicated
Connections or the Shared Connections.
If the Exchange were to attempt to
establish unreasonable connectivity
pricing, then no market participant
would join or connect. Therefore, since
28 distinct Members joined MIAX
Emerald and 14 of those distinct
Members purchased additional
connectivity to the Exchange, all
knowing, in advance, the connectivity
fees, the Exchange believes the
Proposed Fees are reasonable, equitable,
and not unfairly discriminatory.
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 Emerald 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 are proposing to
access the Exchange indirectly through
another market participant. To
illustrate, the Exchange has only 34 total
Members (including all such Members’
affiliate Members).
However, Cboe Exchange, Inc.
(‘‘Cboe’’) has over 200 members,27
26 Id.
27 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/
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34035
Nasdaq ISE, LLC has approximately 100
members,28 and NYSE American LLC
has over 80 members.29 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 34
Members.
Further, since there are 41 distinct
members amongst all three exchanges,
and only 28 of those distinct members
decided to become Members of MIAX
Emerald, there were 13 distinct
members that decided not to become
Members of MIAX Emerald. This further
reinforces the fact that all market
participants are not required to be
Members of the Exchange and are not
required to connect to the Exchange. It
is a choice whether to join and it is a
choice to connect. Therefore, the
Exchange believes that the Proposed
Fees are fair, equitable, and nondiscriminatory, as the fees are
competitive.
With respect to the now MIAX
Emerald Members that had Shared
Connections in place as of August 1,
2018 (via a previously purchased
Shared Connection from MIAX or MIAX
PEARL), the Exchange finds it
compelling that all of those Members
continued to purchase those Shared
Connections after August 1, 2018, when
MIAX and MIAX PEARL increased the
connectivity fees for the Shared
Connections to the current amounts
proposed by the Exchange herein. In
particular, the Exchange believes that
the Proposed Fees for the Shared
Connections are reasonable because
MIAX and MIAX PEARL, which charge
the same amount for the Shared
Connections, did not lose any Members
(or the number of Shared Connections
each Member purchased) or nonMember Shared Connections when
MIAX and MIAX PEARL proposed to
increase the connectivity fees for the
Shared Connections on August 1, 2018.
For example, with respect to the Shared
Connections maintained by now
Members of MIAX Emerald who had
Shared Connections in place as of July
2018, 12 Members purchased 1Gb
connections. The vast majority of those
Members purchased multiple such
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).
28 See Form 1/A, filed July 1, 2016 (https://
www.sec.gov/Archives/edgar/vprr/1601/
16019243.pdf).
29 See https://www.nyse.com/markets/americanoptions/membership#directory.
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connections, the number of connections
depending on their 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 12 Members
purchased 1Gb connections.
Furthermore, the total number of
connections did not decrease from July
to August.
Further, with respect to the Shared
Connections maintained by now
Members of MIAX Emerald who had
Shared Connections in place as of July
2018, of those Members and nonMembers that bought multiple
connections, no firm dropped any
connections beginning August 1, 2018,
when MIAX and MIAX PEARL
increased its fees. Furthermore, the
Exchange understands that MIAX and
MIAX PEARL did not receive any
official comment letters or complaints
from any now Members of MIAX
Emerald who had Shared Connections
in place as of July 2018 regarding the
increased fees regarding how the change
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
Fees are fair, equitable, and nondiscriminatory, as the fees are
competitive.
The Exchange believes that the
Proposed Fees are equitably allocated
among Members and non-Members, as
evidenced by the fact that the fees are
allocated across all connectivity
alternatives, and there is not a
disproportionate number of Members
purchasing any alternative –14 Members
have 1Gb (primary/secondary)
connections; 14 Members have 10Gb
ULL (primary/secondary) connections; 3
Members have 10Gb (disaster recovery)
connections; and 11 Members have 1Gb
(disaster recovery) connections, or some
combination of multiple various
connections. Further, the Exchange
believes that the fees are reasonably
allocated as the users of the higher
bandwidth connections consume the
most resources of the Exchange’s
network. It is these firms that account
that also account for the vast majority of
the Exchange’s trading volume. The
purchasers of the 10Gb ULL
connectivity account for approximately
80% of the volume on the Exchange. For
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example, in June of 2019, to date, 3.1
million contracts of the 3.8 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 establishing connectivity
fees, however, the Exchange determined
that establishing its connectivity fees
was the only viable alternative. This is
because the 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
Fees will permit recovery of the
Exchange’s costs and will not result in
excessive or supracompetitive profit.
The Proposed Fees will allow the
Exchange to recover a portion (less than
all) of the costs incurred by the
Exchange associated with providing and
maintaining the necessary hardware and
other infrastructure to support this
technology. The Exchange believes that
it is reasonable and appropriate to
establish its fees charged for use of its
connectivity at a level that will partially
offset the costs to the Exchange
associated with maintaining and
enhancing a state-of-the-art exchange
network infrastructure in the U.S.
options industry.
The costs associated with making the
network accessible to Exchange
Members and non-Members, through
the expansion associated with new
Shared Connections and Dedicated
Connections, as well as the general
expansion of a state-of-the-art
infrastructure, are extensive, have
increased year-over-year in the past two
years, and are projected to increase yearover-year in the future. This is due to
several factors, including costs
associated with maintaining and
expanding a team of highly-skilled
network engineers, 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 costs, the
Exchange notes that costs are associated
with the infrastructure and headcount to
fully-support the advances in
infrastructure and expansion of network
level services, including customer
monitoring, alerting and reporting. The
Exchange incurs technology expenses
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related to establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
mandated processes, associated with its
network technology. Additionally, the
Exchange incurred costs in the
expansion/buildout of the network
leading up to the launch of operations,
and the network maintenance costs
continue to increase year-over-year.
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 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
Emerald 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
Emerald and its affiliates need to
increase their data center footprint and
consume more power, resulting in
increased costs charged by their thirdparty data center provider. Accordingly,
cost to MIAX Emerald and its affiliates
is not entirely fixed. Just the initial fixed
cost buildout of the network
infrastructure of MIAX Emerald and its
affiliates, including both primary/
secondary sites and disaster recovery,
was over $30 million.
A more detailed breakdown of the
expense increases since the initial
phases of the buildout of the Exchange
over two years ago include the
following: With respect to the network,
there has been 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,
regarding market data connectivity fee
cost, this is the cost associated with
MIAX Emerald consuming connectivity/
content from the equities markets in
order to operate the Exchange, causing
MIAX Emerald to effectively pay its
competitors for this connectivity.
There was also significant capital
expenditures over this same period to
upgrade and enhance the underlying
technology components. The Exchange
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believes that it is reasonable and
appropriate to establish its fees charged
for use of its connectivity at a level that
will partially offset the costs to the
Exchange associated with the buildout,
maintenance, and enhancement of its
network infrastructure.
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. Connectivity fees,
which are charged for accessing the
Exchange’s data center network
infrastructure, are directly related to the
network and offset costs such costs.
Further, the Exchange invests
significant resources in network R&D 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 Exchange
also incurs costs associated with the
maintenance and improvement of
existing tools and the development of
new tools.
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, routine R&D
projects to improve the performance of
the network’s hardware infrastructure
result in additional cost. As an example,
in the last year, 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-
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the-art exchange network infrastructure
in the U.S. options industry is a
significant expense for the Exchange
that also increases year-over-year, and
thus the Exchange believes that it is
reasonable to offset a portion of those
costs through establishing network
connectivity fees, as proposed herein.
Overall, the Proposed Fees are projected
to offset only a portion of the
Exchange’s network connectivity costs.
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 Fees 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 annual revenue
of the Exchange associated with
providing the network connectivity
services. For 2018, the annual expense
associated with the provision of the
network connectivity services for MIAX
Emerald was approximately $3.7
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 $1.2 million (constituting
primarily the 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
development, maintenance and support
of network connectivity services was
approximately $2.5 million. This
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34037
indirect expense of $2.5 million
represents approximately 20% of total
annual expense of MIAX Emerald for
2018 of approximately $13.5 million,
less direct expense of $1.2 million
($13.5 million less $1.2 million equals
$12.3 million multiplied by 20% equals
$2.5 million). The Exchange projects
that its expenses for 2019 will be
slightly higher than they were in 2018,
as the Exchange went into operation in
2019 and thus required additional
resources and services. For 2019, the
annual expense associated with the
provision of the network connectivity
services for MIAX Emerald is projected
to be approximately $5.5 million,
consisting of $2.5 million in direct
expense and $3 million in indirect
expense.
Total revenue of the Exchange
associated with selling the network
connectivity services for MIAX Emerald
in 2018 was $0, as the Exchange did not
commence operations until March 2019.
Total projected revenue of the Exchange
associated with selling the network
connectivity services for MIAX Emerald
is projected to be approximately $2.5
million for 2019 (reflecting 10 full
months of operation). This $2.5 million
in revenue represents approximately
25% of total projected net revenue of
MIAX Emerald for 2019, of
approximately $9.7 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 for 2019
represents approximately 25% of total
projected net revenue for 2019, and the
Exchange’s affiliates, MIAX and MIAX
PEARL, utilize a 20% expense
allocation for their network connectivity
fees. That is, for 2018, direct expense of
$1.2 million plus indirect expense of
$2.5 million fairly reflects the total
annual expense associated with
providing the network connectivity
services in 2018. For 2019, direct
expense of $2.5 million plus indirect
expense of $3 million fairly reflects the
total projected annual expense
associated with providing the network
connectivity services in 2019. The
Exchange believes that this is a
conservative allocation of indirect
expense. Accordingly, the total
projected MIAX Emerald connectivity
revenue for 2018 of $0 is less than total
annual actual MIAX Emerald
connectivity expense for 2018 of $3.7
million. Further, the total projected
MIAX Emerald connectivity revenue for
2019 of $2.5 million is less than total
projected MIAX Emerald connectivity
E:\FR\FM\16JYN1.SGM
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expense for 2019 of $5.5 million.
Accordingly, the Proposed Fees are fair
and reasonable because they do not
result in excessive pricing or
supracompetitive profit, when
comparing the network connectivity
costs to the Exchange versus the
network connectivity annual revenue.
Additional information on Exchange
revenue and expense 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 also believes its
proposal to offer 10Gb ULL connections
as dedicated connections furthers the
objectives of Section 6(b)(5) of the Act 30
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.
In particular, for the Dedicated
Connection, the Exchange’s MENI is
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 the
Exchange. Any Member or non-Member
can purchase a Dedicated Connection.
The Exchange determined to design its
network architecture in a manner that
offered 10Gb ULL connections as
dedicated connections (as opposed to
shared connections) in order to provide
cost saving opportunities for itself and
for its Members, by reducing the amount
of equipment that the Exchange would
have to purchase and to which the
Members would have to connect. A
dedicated 10Gb ULL connection does
not offer any unfair advantage over a
shared 10GB ULL connection, as is
being offered solely as a cost-saving
measure to the Exchange and its
Members.
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.31 The Exchange further
30 15
U.S.C. 78f(b)(5).
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
31 See
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17:33 Jul 15, 2019
Jkt 247001
notes that Phlx, ISE, Arca and NYSE
American each charge higher rates for
such similar connectivity to primary
and secondary facilities,32 however the
Exchange also notes that the Exchange’s
10Gb ULL connection is dedicated
solely to one market (the Exchange)
whereas the Exchange believes that
other exchanges offer a shared 10Gb
ULL connection to multiple markets.
While MIAX Emerald’s proposed
connectivity fees are substantially lower
than the fees charged by Phlx, ISE, Arca
and NYSE American, MIAX Emerald
believes that it offers significant value to
Members over other exchanges in terms
of network monitoring and reporting,
which MIAX Emerald 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.33
B. Self-Regulatory Organization’s
Statement on Burden on 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
Fees 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 Fees do not place certain
market participants at a relative
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.
32 Id.
33 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 00135
Fmt 4703
Sfmt 4703
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 Fees do not
favor certain categories of market
participants in a manner that would
impose a burden on competition; rather,
the allocation of the Proposed Fees
reflects the 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
Fees 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
the Exchange as compared to the much
greater number of members at other
options exchanges (as described above).
Not only does MIAX Emerald 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 Emerald.
There are a number of large market
makers and broker-dealers that are
members of other options exchange but
not Members of MIAX Emerald.
Additionally, the Exchange other
exchanges have similar connectivity
alternatives for their participants,
including similar low-latency
connectivity, but with much higher
rates to connect.34 The Exchange is also
unaware of any assertion that its
existing fee levels or the Proposed Fees
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,
34 See
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Federal Register / Vol. 84, No. 136 / Tuesday, July 16, 2019 / Notices
the Exchange notes that it operates in a
highly competitive options market in
which market participants can readily
connect and trade with venues they
desire. In such an environment, the
Exchange must continually adjust its
fees to remain competitive with other
exchanges. The Exchange believes that
the proposed changes reflect this
competitive environment.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,35 and Rule
19b–4(f)(2) 36 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–
EMERALD–2019–24 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–EMERALD–2019–24. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
35 15
36 17
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–EMERALD–2019–24 and
should be submitted on or before
August 6, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–15026 Filed 7–15–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
2:00 p.m. on Thursday,
July 18, 2019.
PLACE: The meeting will be held at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will be closed to
the public.
MATTERS TO BE CONSIDERED:
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters also may be present.
In the event that the time, date, or
location of this meeting changes, an
TIME AND DATE:
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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37 17
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CFR 200.30–3(a)(12).
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34039
announcement of the change, along with
the new time, date, and/or place of the
meeting will be posted on the
Commission’s website at https://
www.sec.gov.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B)
and (10) and 17 CFR 200.402(a)(3),
(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and
(a)(10), permit consideration of the
scheduled matters at the closed meeting.
The subject matters of the closed
meeting will consist of the following
topics:
Institution and settlement of injunctive
actions;
Institution and settlement of
administrative proceedings;
Resolution of litigation claims; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting agenda items that
may consist of adjudicatory,
examination, litigation, or regulatory
matters
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Dated: July 11, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019–15158 Filed 7–12–19; 11:15 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 17a–8, SEC File No. 270–225, OMB
Control No. 3235–0235
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520), the Securities
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for extension of the
previously approved collection of
information discussed below.
Rule 17a–8 (17 CFR 270.17a–8) under
the Investment Company Act of 1940
(the ‘‘Act’’) (15 U.S.C. 80a–1 et seq.) is
entitled ‘‘Mergers of affiliated
E:\FR\FM\16JYN1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 136 (Tuesday, July 16, 2019)]
[Notices]
[Pages 34030-34039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15026]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86344; File No. SR-EMERALD-2019-24]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt
System Connectivity Fees
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, MIAX Emerald, LLC (``MIAX Emerald'' 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 Emerald Fee
Schedule (the ``Fee Schedule'') to adopt the Exchange's system
connectivity fees.
The Exchange previously filed the proposal on April 30, 2019 (SR-
EMERALD-2019-20). That filing has been withdrawn and replaced with the
current filing (SR-EMERALD-2019-24).
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/emerald, 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
[[Page 34031]]
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 adopt the network
connectivity fees for the 1 Gigabit (``Gb'') 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 adopt network connectivity fees for the 1Gb and 10Gb fiber
connections for connectivity to the Exchange's disaster recovery
facility. Each of these connections (with the exception of the 10Gb
ULL) are shared connections (collectively, the ``Shared Connections''),
and thus can be utilized to access the Exchange and both of the
Exchange's affiliates, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX PEARL, LLC (``MIAX PEARL''). The 10Gb ULL
connection is a dedicated connection (``Dedicated Connection''), which
provides network connectivity solely to the trading platforms, market
data systems, and test system facilities of MIAX Emerald. These
proposed fees are collectively referred to herein as the ``Proposed
Fees.'' The amounts of the Proposed Fees for the Shared Connections are
the same amounts that are currently in place at MIAX and MIAX PEARL.\4\
While the Exchange is new and only launched trading on March 1, 2019,
since: (i) All of the Proposed Fees (except for the fee relating to the
10Gb ULL connection) relate to Shared Connections, and thus are the
same amounts as are currently in place at MIAX and MIAX PEARL; (ii) all
of the Members of MIAX Emerald are also members of either MIAX and/or
MIAX PEARL, and most of those Members already have connectivity to the
Exchange via existing Shared Connections (without paying any new
incremental connectivity fees), the Exchange is providing similar
information to that which was provided in the MIAX and PEARL Fee
Filings, including providing detail about the market participants
impacted by the Proposed Fees, as well as the costs incurred by the
Exchange associated with providing the connectivity alternatives, in
order to provide transparency and support relating to the Exchange's
belief that the Proposed Fees are reasonable, equitable, and non-
discriminatory, and to provide sufficient information for the
Commission to determine that the Proposed Fees are consistent with the
Act.
---------------------------------------------------------------------------
\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 SR-MIAX-2019-31 and SR-PEARL-2019-21 (the ``MIAX and
PEARL Fee Filings'').
---------------------------------------------------------------------------
The Exchange initially filed the Proposed Fees on March 1, 2019,
designating the Proposed Fees immediately effective.\5\ The First
Proposed Rule Change was published for comment in the Federal Register
on March 20, 2019.\6\ The First Proposed Rule Change provided
information about the market participants impacted by the Proposed
Fees, as well as the additional costs incurred by the Exchange
associated with providing the connectivity alternatives, in order to
provide transparency and support relating to the Exchange's belief that
the Proposed Fees are reasonable, equitable, and non-discriminatory,
and to provide sufficient information for the Commission to determine
that the Proposed Fees are consistent with the Act.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 85316 (March 14,
2019), 84 FR 10350 (March 20, 2019) (SR-EMERALD-2019-11) (the
``First Proposed Rule Change'').
\6\ 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'').\7\ 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.
---------------------------------------------------------------------------
\7\ 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 First Proposed Rule Change.\8\
---------------------------------------------------------------------------
\8\ 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 First Proposed Rule Change to support a
finding that the proposal should be approved by the Commission after
further review of the Proposed Fees. 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 First 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 First
Proposed Rule Change. Despite the objection to the Proposed Fees, 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.'' \9\ The IEX Letter specifically argued that
the Proposed Fees 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
Emerald and its affiliates considered changes to transaction fees as an
alternative to offsetting exchange costs.
---------------------------------------------------------------------------
\9\ See IEX Letter, pg. 1.
---------------------------------------------------------------------------
The Second Healthy Markets Letter did not object to the First
Proposed Rule Change and the information provided by the Exchange in
support of the Proposed Fees. Specifically, the Second Healthy Markets
Letter stated that the First Proposed Rule Change was ``remarkably
[[Page 34032]]
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.\10\
---------------------------------------------------------------------------
\10\ See Second Healthy Markets Letter, pg. 2.
---------------------------------------------------------------------------
On April 29, 2019, the Exchange withdrew the First Proposed Rule
Change.\11\
---------------------------------------------------------------------------
\11\ See SR-EMERALD-2019-11.
---------------------------------------------------------------------------
The Exchange refiled the Proposed Fees on April 30, 2019,
designating the Proposed Fees immediately effective.\12\ The Second
Proposed Rule Change was published for comment in the Federal Register
on May 16, 2019.\13\ The Second 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 Fees are
reasonable, equitable, and non-discriminatory, and that the Commission
should find that the Proposed Fees are consistent with the Act.
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 85839 (May 10,
2019), 84 FR 22192 (May 16, 2019) (SR-EMERALD-2019-20) (the ``Second
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Adopt System Connectivity
Fees).
\13\ Id.
---------------------------------------------------------------------------
On May 21, 2019, the Commission issued the Staff Guidance on SRO
Rule Filings Relating to Fees (the ``Guidance'').\14\
---------------------------------------------------------------------------
\14\ 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 Second Proposed
Rule Change, after the Guidance was released.\15\ The Second IEX Letter
and the Third SIFMA Letter argued that the Exchange did not provide
sufficient information in its Second Proposed Rule Change to justify
the Proposed Fees based on the Guidance and the BOX Order. Of note,
however, is that unlike their previous comment letter, the Third SIFMA
Letter did not call for the Commission to suspend the Second Proposed
Rule Change. Also, Healthy Markets did not comment on the Second
Proposed Rule Change.
---------------------------------------------------------------------------
\15\ 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 Fees (the ``Third
Proposed Rule Change'') to bolster its cost-based discussion to support
its claim that the Proposed Fees 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 Second Proposed Rule
Change. The Exchange believes that the Proposed Fees 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 Third Proposed Rule Change and supported by evidence (including
data and analysis), constrained by significant competitive forces; and
(iv) are, as demonstrated in the Third 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 Fees 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 offers to both Members and non-Members various
bandwidth alternatives for connectivity to the Exchange, to its primary
and secondary facilities, consisting of a 1Gb 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 also offers to both Members and non-Members various
bandwidth alternatives for connectivity to the Exchange, to its
disaster recovery facility, consisting of a 1Gb fiber connection and a
10Gb connection.
For the Shared Connections, 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
the Exchange and its affiliates, MIAX and MIAX PEARL, via a single,
shared connection. Any Member or non-Member can purchase a Shared
Connection.
For the Dedicated Connection, the Exchange's MENI is 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 the Exchange. Any Member or non-Member can
purchase a Dedicated Connection. The Exchange determined to design its
network architecture in a manner that offered 10Gb ULL connections as
dedicated connections (as opposed to shared connections) in order to
provide cost saving opportunities for itself and for its Members, by
reducing the amount of equipment that the Exchange would have to
purchase and to which the Members would have to connect. Accordingly,
the Exchange is able to offer to its Members 10Gb ULL connectivity at a
lower price point than is offered on MIAX and MIAX PEARL, the price
difference being reflective of the lower cost to the Exchange.
For the Shared Connections, 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, MIAX, 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. Thus, since all of
the Members of MIAX Emerald are also members of either MIAX and/or MIAX
PEARL, and most of those Members already have connectivity to the
Exchange via existing Shared Connections, most Members of MIAX Emerald
have instant connectivity to the Exchange without paying any new
incremental connectivity fees, as more fully-detailed below.
The Exchange proposes to establish the monthly network connectivity
fees for such connections for both Members and non-Members. As
discussed above, the amounts of the Proposed Fees for the Shared
Connections are the same amounts that are currently in place at MIAX
and MIAX PEARL. The amount of the Proposed Fee for the Dedicated
Connection is offered at a substantial discount to the amount currently
in place at MIAX and MIAX PEARL. The reasons for the substantial
discount are that the Dedicated Connection offers access to only a
single market (the Exchange), whereas the 10Gb ULL connection offered
by MIAX and MIAX PEARL offers access to two markets
[[Page 34033]]
(MIAX and MIAX PEARL), as well as cost savings the Exchange was able to
achieve (and thus pass through to its Members) as a result of a
dedicated architecture. The network connectivity fees for connectivity
to the Exchange's primary/secondary facility will be as follows: (a)
1,400 for the 1Gb connection; and (b) $6,000 for the 10Gb ULL
connection. The network connectivity fees for connectivity to the
Exchange's disaster recovery facility will be as follows: (a) $550 for
the 1Gb connection; and (b) $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 \16\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \17\ 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 \18\ 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.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(4).
\18\ 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.'' \19\
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------
First, the Exchange believes that its proposal is consistent with
Section 6(b)(4) of the Act, in that the Proposed Fees are fair,
equitable and not unreasonably discriminatory, because the fees for the
connectivity alternatives available on the Exchange, as proposed, 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
Emerald as compared to the much greater number of members at other
options exchanges (as further detailed below). MIAX Emerald is a brand
new exchange, having only commenced operations in March 2019. Not only
does MIAX Emerald 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 Emerald. Further, of the
number of Members that connect directly to MIAX Emerald, many such
Members do not purchase market data from MIAX Emerald. There are a
number of large market makers and broker-dealers that are members of
other options exchanges but not Members of MIAX Emerald. For example,
the following are not Members of MIAX Emerald: 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 Emerald, it
is the individual needs of the market maker that require whether they
need one connection or multiple connections to the Exchange. The
Exchange has market maker Members that only purchase one connection 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 than market makers that simply
quote all symbols on the Exchange. Even though non-Members purchase and
resell 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 Emerald
or its affiliates, MIAX and MIAX PEARL, they do not purchase
connectivity to MIAX Emerald, and they do not purchase market data from
MIAX Emerald. The Exchange further recognizes that the decision of
whether to connect to the Exchange is separate and distinct from the
decision of whether and how to trade on the Exchange. The Exchange
acknowledges that many firms may choose to connect to the Exchange, but
ultimately not trade on it, based on their particular business needs.
To assist prospective Members or firms considering connecting to
MIAX Emerald, 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.\20\ 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 a 10Gb ULL
[[Page 34034]]
connection. The 1Gb connection is too small to support those data feed
products. MIAX Emerald 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.
---------------------------------------------------------------------------
\20\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
---------------------------------------------------------------------------
Contrary to SIFMA's argument, there is competition for connectivity
to MIAX Emerald and its affiliates. MIAX Emerald competes with eight
(8) non-Members, who resell MIAX Emerald connectivity. These are
resellers of MIAX Emerald 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 Emerald (typically extranets and service bureaus). When
connectivity is re-sold by a third-party, MIAX Emerald 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
Emerald to set its connectivity pricing as indirect connectivity is a
substitute for direct connectivity. In fact, there are currently seven
(7) non-Members that purchase 1Gb direct connectivity that are able to
access MIAX Emerald, MIAX and MIAX PEARL. Those non-Members resell that
connectivity to eight (8) customers, some of whom are agency broker-
dealers that have tens of customers of their own. Some of those eight
(8) customers also purchase connectivity directly from MIAX Emerald
and/or its affiliates, MIAX and MIAX PEARL. Accordingly, indirect
connectivity is a viable alternative used by non-Members of MIAX
Emerald, constraining the price that MIAX Emerald is able to charge for
connectivity to its Exchange.
The Exchange,\21\ MIAX,\22\ and MIAX PEARL \23\ are comprised of 41
distinct members amongst all three exchanges, excluding any additional
affiliates of such members that are also members of the Exchange, MIAX,
MIAX PEARL, or any combination thereof. Of those 41 distinct members,
28 of those distinct members are Members of MIAX Emerald. (Currently,
there are no Members of MIAX Emerald that are not also members of MIAX
or MIAX PEARL, or both.) Of those 28 distinct Members of MIAX Emerald,
there are 6 Members that have no connectivity to the Exchange. Members
are not forced to purchase connectivity to the Exchange, and these
Members have elected not to purchase such connectivity. Of note, these
same 6 Members also do not have connectivity to either MIAX or MIAX
PEARL. These Members either trade indirectly through other Members or
non-Members that have connectivity to the Exchange, or do not trade and
conduct another type of business on the Exchange. Of the remaining 22
distinct Members of MIAX Emerald, all 22 of those distinct Members
already had connectivity to the Exchange via existing Shared
Connections, thus providing all such 22 MIAX Emerald Members with
instant connectivity to the Exchange without paying any new incremental
connectivity fees.
---------------------------------------------------------------------------
\21\ The Exchange has 28 distinct Members, excluding affiliated
entities. See MIAX Emerald Exchange Member Directory, available at
https://www.miaxoptions.com.
\22\ MIAX has 38 distinct Members, excluding affiliated
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com.
\23\ MIAX PEARL has 36 distinct Members, excluding affiliated
entities. See MIAX PEARL Exchange Member Directory, available at
https://www.miaxoptions.com.
---------------------------------------------------------------------------
Further, of those 22 Members, 14 of such Members elected to
purchase additional connectivity to the Exchange, including additional
Shared Connections and additional Dedicated Connections. The Exchange
made available in advance to all of its prospective Members its
proposed connectivity pricing (subject to regulatory clearance), in
order for those prospective Members to make an informed decision about
whether to become a Member of the Exchange and whether to purchase
connectivity to the Exchange. Accordingly, each such Member made the
decision to become a Member of the Exchange and to purchase
connectivity to the Exchange, knowing in advance the connectivity
pricing. And the vast majority of the additional connectivity purchased
by those Members were for Dedicated Connections, the most expensive
connectivity option.
As a result, of those 22 Members, through existing Shared
Connections, newly purchased Shared Connections, and newly purchased
Dedicated Connections: 14 Members have 1Gb (primary/secondary)
connections; 13 Members have 10Gb ULL (primary/secondary) connections;
3 Members have 10Gb (disaster recovery) connections; and 10 Members
have 1Gb (disaster recovery) connections, or some combination of
multiple various connections. All such Members with those Shared
Connections and Dedicated Connections trade on MIAX Emerald.
The 6 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 6
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.
In addition, there are 5 non-Member service bureaus that already
have connectivity to the Exchange via existing Shared Connections, thus
providing all 5 of those non-Member service bureaus with instant
connectivity to the Exchange without paying any new incremental
connectivity fees. These non-Members freely purchased their
connectivity from one of the Exchange's affiliates, either MIAX or MIAX
PEARL, in order to offer trading services to other firms and customers,
as well as access to the market data services that their connections to
the Exchange provide them, but they are not required or compelled to
purchase any of the Exchange's connectivity options.
The Exchange believes that the Proposed Fees 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 two direct connectivity alternatives
and various indirect connectivity (via third-party) alternatives, as
described above. MIAX Emerald 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 ULL direct connectivity alternative. Because
it is 1/
[[Page 34035]]
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 ULL alternative, when
measured based on the type of Exchange access it offers, which is the
basis for difference in price between a 1Gb connection and a 10Gb ULL
connection. Approximately just less than half of MIAX Emerald, MIAX and
MIAX PEARL Members that connect (15 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 Fees ($6,000 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. 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.
The Exchange launched trading on March 1, 2019. Thus, at the time
that the 14 Members who elected to purchase connectivity to the
Exchange, the Exchange was untested and unproven, and had 0% market
share of the U.S. options industry. For May 2019, the Exchange had only
a 0.77% market share of the U.S. options industry in Equity/ETF classes
according to the OCC.\24\ For May 2019, the Exchange's affiliate, MIAX,
had only 3.75% market share of the U.S. options industry in May 2019 in
Equity/ETF classes according to the OCC.\25\ For May 2019, the
Exchange's affiliate, MIAX PEARL, had only 4.8% market share of the
U.S. options industry in Equity/ETF classes according to the OCC.\26\
The Exchange is not aware of any evidence that a combined market share
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. Certainly,
an untested and unproven exchange, with less than 1% market share in
any month, and no rule or requirement that a market participant must
join or connect to it, does not have anti-competitive pricing power,
with respect to setting the pricing for the Dedicated Connections or
the Shared Connections. If the Exchange were to attempt to establish
unreasonable connectivity pricing, then no market participant would
join or connect. Therefore, since 28 distinct Members joined MIAX
Emerald and 14 of those distinct Members purchased additional
connectivity to the Exchange, all knowing, in advance, the connectivity
fees, the Exchange believes the Proposed Fees are reasonable,
equitable, and not unfairly discriminatory.
---------------------------------------------------------------------------
\24\ See Exchange Market Share of Equity Products--2019, The
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
\25\ Id.
\26\ Id.
---------------------------------------------------------------------------
Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Members of the Exchange if the Exchange were to establish unreasonable
and uncompetitive price increases for its connectivity alternatives.
Market participants choose to connect to a particular exchange and
because it is a choice, MIAX Emerald 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
are proposing to access the Exchange indirectly through another market
participant. To illustrate, the Exchange has only 34 total Members
(including all such Members' affiliate Members).
However, Cboe Exchange, Inc. (``Cboe'') has over 200 members,\27\
Nasdaq ISE, LLC has approximately 100 members,\28\ and NYSE American
LLC has over 80 members.\29\ 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 34 Members.
---------------------------------------------------------------------------
\27\ 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).
\28\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
\29\ See https://www.nyse.com/markets/american-options/membership#directory.
---------------------------------------------------------------------------
Further, since there are 41 distinct members amongst all three
exchanges, and only 28 of those distinct members decided to become
Members of MIAX Emerald, there were 13 distinct members that decided
not to become Members of MIAX Emerald. This further reinforces the fact
that all market participants are not required to be Members of the
Exchange and are not required to connect to the Exchange. It is a
choice whether to join and it is a choice to connect. Therefore, the
Exchange believes that the Proposed Fees are fair, equitable, and non-
discriminatory, as the fees are competitive.
With respect to the now MIAX Emerald Members that had Shared
Connections in place as of August 1, 2018 (via a previously purchased
Shared Connection from MIAX or MIAX PEARL), the Exchange finds it
compelling that all of those Members continued to purchase those Shared
Connections after August 1, 2018, when MIAX and MIAX PEARL increased
the connectivity fees for the Shared Connections to the current amounts
proposed by the Exchange herein. In particular, the Exchange believes
that the Proposed Fees for the Shared Connections are reasonable
because MIAX and MIAX PEARL, which charge the same amount for the
Shared Connections, did not lose any Members (or the number of Shared
Connections each Member purchased) or non-Member Shared Connections
when MIAX and MIAX PEARL proposed to increase the connectivity fees for
the Shared Connections on August 1, 2018. For example, with respect to
the Shared Connections maintained by now Members of MIAX Emerald who
had Shared Connections in place as of July 2018, 12 Members purchased
1Gb connections. The vast majority of those Members purchased multiple
such
[[Page 34036]]
connections, the number of connections depending on their 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 12 Members purchased 1Gb
connections. Furthermore, the total number of connections did not
decrease from July to August.
Further, with respect to the Shared Connections maintained by now
Members of MIAX Emerald who had Shared Connections in place as of July
2018, of those Members and non-Members that bought multiple
connections, no firm dropped any connections beginning August 1, 2018,
when MIAX and MIAX PEARL increased its fees. Furthermore, the Exchange
understands that MIAX and MIAX PEARL did not receive any official
comment letters or complaints from any now Members of MIAX Emerald who
had Shared Connections in place as of July 2018 regarding the increased
fees regarding how the change 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 Fees
are fair, equitable, and non-discriminatory, as the fees are
competitive.
The Exchange believes that the Proposed Fees are equitably
allocated among Members and non-Members, as evidenced by the fact that
the fees are allocated across all connectivity alternatives, and there
is not a disproportionate number of Members purchasing any alternative
-14 Members have 1Gb (primary/secondary) connections; 14 Members have
10Gb ULL (primary/secondary) connections; 3 Members have 10Gb (disaster
recovery) connections; and 11 Members have 1Gb (disaster recovery)
connections, or some combination of multiple various connections.
Further, the Exchange believes that the fees are reasonably allocated
as the users of the higher bandwidth connections consume the most
resources of the Exchange's network. It is these firms that account
that also account for the vast majority of the Exchange's trading
volume. The purchasers of the 10Gb ULL connectivity account for
approximately 80% of the volume on the Exchange. For example, in June
of 2019, to date, 3.1 million contracts of the 3.8 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 establishing connectivity fees, however, the
Exchange determined that establishing its connectivity fees was the
only viable alternative. This is because the 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 Fees will permit
recovery of the Exchange's costs and will not result in excessive or
supracompetitive profit. The Proposed Fees will allow the Exchange to
recover a portion (less than all) of the costs incurred by the Exchange
associated with providing and maintaining the necessary hardware and
other infrastructure to support this technology. The Exchange believes
that it is reasonable and appropriate to establish its fees charged for
use of its connectivity at a level that will partially offset the costs
to the Exchange associated with maintaining and enhancing a state-of-
the-art exchange network infrastructure in the U.S. options industry.
The costs associated with making the network accessible to Exchange
Members and non-Members, through the expansion associated with new
Shared Connections and Dedicated Connections, as well as the general
expansion of a state-of-the-art infrastructure, are extensive, have
increased year-over-year in the past two years, and are projected to
increase year-over-year in the future. This is due to several factors,
including costs associated with maintaining and expanding a team of
highly-skilled network engineers, 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
costs, the Exchange notes that costs are associated with the
infrastructure and headcount to fully-support the advances in
infrastructure and expansion of network level services, including
customer monitoring, alerting and reporting. The Exchange incurs
technology expenses related to establishing and maintaining Information
Security services, enhanced network monitoring and customer reporting,
as well as Regulation SCI mandated processes, associated with its
network technology. Additionally, the Exchange incurred costs in the
expansion/buildout of the network leading up to the launch of
operations, and the network maintenance costs continue to increase
year-over-year. 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 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 Emerald 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 Emerald 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 Emerald and its affiliates is not entirely
fixed. Just the initial fixed cost buildout of the network
infrastructure of MIAX Emerald and its affiliates, including both
primary/secondary sites and disaster recovery, was over $30 million.
A more detailed breakdown of the expense increases since the
initial phases of the buildout of the Exchange over two years ago
include the following: With respect to the network, there has been 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,
regarding market data connectivity fee cost, this is the cost
associated with MIAX Emerald consuming connectivity/content from the
equities markets in order to operate the Exchange, causing MIAX Emerald
to effectively pay its competitors for this connectivity.
There was also significant capital expenditures over this same
period to upgrade and enhance the underlying technology components. The
Exchange
[[Page 34037]]
believes that it is reasonable and appropriate to establish its fees
charged for use of its connectivity at a level that will partially
offset the costs to the Exchange associated with the buildout,
maintenance, and enhancement of its network infrastructure.
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. Connectivity fees, which
are charged for accessing the Exchange's data center network
infrastructure, are directly related to the network and offset costs
such costs.
Further, the Exchange invests significant resources in network R&D
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
Exchange also incurs costs associated with the maintenance and
improvement of existing tools and the development of new tools.
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, routine
R&D projects to improve the performance of the network's hardware
infrastructure result in additional cost. As an example, in the last
year, 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 also increases
year-over-year, and thus the Exchange believes that it is reasonable to
offset a portion of those costs through establishing network
connectivity fees, as proposed herein. Overall, the Proposed Fees are
projected to offset only a portion of the Exchange's network
connectivity costs. 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 Fees 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 annual revenue of the
Exchange associated with providing the network connectivity services.
For 2018, the annual expense associated with the provision of the
network connectivity services for MIAX Emerald was approximately $3.7
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 $1.2 million (constituting primarily the 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 development,
maintenance and support of network connectivity services was
approximately $2.5 million. This indirect expense of $2.5 million
represents approximately 20% of total annual expense of MIAX Emerald
for 2018 of approximately $13.5 million, less direct expense of $1.2
million ($13.5 million less $1.2 million equals $12.3 million
multiplied by 20% equals $2.5 million). The Exchange projects that its
expenses for 2019 will be slightly higher than they were in 2018, as
the Exchange went into operation in 2019 and thus required additional
resources and services. For 2019, the annual expense associated with
the provision of the network connectivity services for MIAX Emerald is
projected to be approximately $5.5 million, consisting of $2.5 million
in direct expense and $3 million in indirect expense.
Total revenue of the Exchange associated with selling the network
connectivity services for MIAX Emerald in 2018 was $0, as the Exchange
did not commence operations until March 2019. Total projected revenue
of the Exchange associated with selling the network connectivity
services for MIAX Emerald is projected to be approximately $2.5 million
for 2019 (reflecting 10 full months of operation). This $2.5 million in
revenue represents approximately 25% of total projected net revenue of
MIAX Emerald for 2019, of approximately $9.7 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 for 2019
represents approximately 25% of total projected net revenue for 2019,
and the Exchange's affiliates, MIAX and MIAX PEARL, utilize a 20%
expense allocation for their network connectivity fees. That is, for
2018, direct expense of $1.2 million plus indirect expense of $2.5
million fairly reflects the total annual expense associated with
providing the network connectivity services in 2018. For 2019, direct
expense of $2.5 million plus indirect expense of $3 million fairly
reflects the total projected annual expense associated with providing
the network connectivity services in 2019. The Exchange believes that
this is a conservative allocation of indirect expense. Accordingly, the
total projected MIAX Emerald connectivity revenue for 2018 of $0 is
less than total annual actual MIAX Emerald connectivity expense for
2018 of $3.7 million. Further, the total projected MIAX Emerald
connectivity revenue for 2019 of $2.5 million is less than total
projected MIAX Emerald connectivity
[[Page 34038]]
expense for 2019 of $5.5 million. Accordingly, the Proposed Fees are
fair and reasonable because they do not result in excessive pricing or
supracompetitive profit, when comparing the network connectivity costs
to the Exchange versus the network connectivity annual revenue.
Additional information on Exchange revenue and expense 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 also believes its proposal to offer 10Gb ULL
connections as dedicated connections furthers the objectives of Section
6(b)(5) of the Act \30\ 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. In particular, for the Dedicated Connection, the
Exchange's MENI is 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 the
Exchange. Any Member or non-Member can purchase a Dedicated Connection.
The Exchange determined to design its network architecture in a manner
that offered 10Gb ULL connections as dedicated connections (as opposed
to shared connections) in order to provide cost saving opportunities
for itself and for its Members, by reducing the amount of equipment
that the Exchange would have to purchase and to which the Members would
have to connect. A dedicated 10Gb ULL connection does not offer any
unfair advantage over a shared 10GB ULL connection, as is being offered
solely as a cost-saving measure to the Exchange and its Members.
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\30\ 15 U.S.C. 78f(b)(5).
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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.\31\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities,\32\ however the Exchange also notes that the
Exchange's 10Gb ULL connection is dedicated solely to one market (the
Exchange) whereas the Exchange believes that other exchanges offer a
shared 10Gb ULL connection to multiple markets. While MIAX Emerald's
proposed connectivity fees are substantially lower than the fees
charged by Phlx, ISE, Arca and NYSE American, MIAX Emerald believes
that it offers significant value to Members over other exchanges in
terms of network monitoring and reporting, which MIAX Emerald 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.\33\
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\31\ 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.
\32\ Id.
\33\ 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
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 Fees 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 Fees 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 Fees do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the Proposed Fees reflects the
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 Fees 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 the Exchange as compared to the much
greater number of members at other options exchanges (as described
above). Not only does MIAX Emerald 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 Emerald.
There are a number of large market makers and broker-dealers that are
members of other options exchange but not Members of MIAX Emerald.
Additionally, the Exchange other exchanges have similar connectivity
alternatives for their participants, including similar low-latency
connectivity, but with much higher rates to connect.\34\ The Exchange
is also unaware of any assertion that its existing fee levels or the
Proposed Fees 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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\34\ See supra note 31.
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While the Exchange recognizes the distinction between connecting to
an exchange and trading at the exchange,
[[Page 34039]]
the Exchange notes that it operates in a highly competitive options
market in which market participants can readily connect and trade with
venues they desire. In such an environment, the Exchange must
continually adjust its fees to remain competitive with other exchanges.
The Exchange believes that the proposed changes reflect this
competitive environment.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\35\ and Rule 19b-4(f)(2) \36\ 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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\35\ 15 U.S.C. 78s(b)(3)(A)(ii).
\36\ 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-EMERALD-2019-24 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-EMERALD-2019-24. 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-EMERALD-2019-24 and should be submitted
on or before August 6, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15026 Filed 7-15-19; 8:45 am]
BILLING CODE 8011-01-P
