Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network Connectivity Fees, and Increase the Number of Additional Limited Service MIAX Emerald Express Interface Ports Available to Market Makers, 18349-18362 [2021-07194]
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Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
All comments received to date on the
Proposed Order will be considered and
need not be resubmitted.
By the Commission.
Dated: April 5, 2021.
Vanessa A. Countryman,
Secretary.
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[FR Doc. 2021–07254 Filed 4–7–21; 8:45 am]
[Release No. 34–91460; File No. SR–
EMERALD–2021–11]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Its Fee
Schedule To Adopt Port Fees, Increase
Certain Network Connectivity Fees,
and Increase the Number of Additional
Limited Service MIAX Emerald Express
Interface Ports Available to Market
Makers
April 2, 2021.
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 March 24,
2021, 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’’).
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
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proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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The Exchange proposes to amend the
Fee Schedule to: (1) Adopt Port fees; (2)
increase the Exchange’s network
connectivity fees for its 10 gigabit
(‘‘Gb’’) ultra-low latency (‘‘ULL’’) fiber
connection for Members 3 and nonMembers (collectively, the ‘‘Proposed
Access Fees’’); and (3) increase the
number of Additional Limited Service
MIAX Emerald Express Interface
(‘‘MEI’’) 4 Ports available to Market
Makers.5
On September 15, 2020, the Exchange
issued a Regulatory Circular, which
announced, among other things, that the
Exchange would adopt Port fees,
thereby terminating the Waiver Period 6
for such fees, and increase the fees for
its 10Gb ULL connection for Members
and non-Members, beginning October 1,
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 MIAX Emerald Express Interface is a connection
to the MIAX Emerald System that enables Market
Makers to submit simple and complex electronic
quotes to MIAX Emerald. ‘‘Full Service MEI Ports’’
means a port which provides Market Makers with
the ability to send Market Maker simple and
complex quotes, eQuotes, and quote purge messages
to the MIAX Emerald System. Full Service MEI
Ports are also capable of receiving administrative
information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. ‘‘Limited
Service MEI Ports’’ means a port which provides
Market Makers with the ability to send simple and
complex eQuotes and quote purge messages only,
but not Market Maker Quotes, to the MIAX Emerald
System. Limited Service MEI Ports are also capable
of receiving administrative information. Market
Makers initially receive two Limited Service MEI
Ports per Matching Engine. See the Definitions
Section of the Fee Schedule.
5 ‘‘Market Maker’’ refers to ‘‘Lead Market Maker’’
(‘‘LMM’’), ‘‘Primary Lead Market Maker’’ (‘‘PLMM’’)
and ‘‘Registered Market Maker’’ (‘‘RMM’’),
collectively. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
6 ‘‘Waiver Period’’ means, for each applicable fee,
the period of time from the initial effective date of
the MIAX Emerald Fee Schedule until such time
that the Exchange has an effective fee filing
establishing the applicable fee. The Exchange will
issue a Regulatory Circular announcing the
establishment of an applicable fee that was subject
to a Waiver Period at least fifteen (15) days prior
to the termination of the Waiver Period and
effective date of any such applicable fee. See the
Definitions Section of the Fee Schedule.
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18349
2020.7 On January 14, 2021, the
Exchange announced that it would offer
Market Makers the ability to purchase
an additional six Limited Service MEI
Ports,8 without changing the Limited
Service MEI Port fee amount.
The Exchange initially filed its
proposal to adopt certain Port fees and
increase the fees for its 10Gb ULL
connection on October 1, 2020.9 The
First Proposed Rule Change was
published for comment in the Federal
Register on October 20, 2020.10 The
Exchange notes that the First Proposed
Rule Change did not receive any
comment letters. Nonetheless, the
Exchange withdrew the First Proposed
Rule Change on November 25, 2020 11
and resubmitted a replacement
proposal.12 The Second Proposed Rule
Change was published for comment in
the Federal Register on December 14,
2020.13 The Exchange notes that the
Second Proposed Rule Change did not
receive any comment letters.
Nonetheless, the Exchange withdrew
the Second Proposed Rule Change on
January 22, 2021 14 and resubmitted a
replacement proposal.15 The Third
Proposed Rule Change was published
for comment in the Federal Register on
February 5, 2021.16 The Exchange
withdrew the Third Proposed Rule
Change on February 16, 2021 17 and
7 See MIAX Emerald Regulatory Circular 2020–41
available at https://www.miaxoptions.com/sites/
default/files/circular-files/MIAX_Emerald_RC_
2020_41.pdf.
8 See https://www.miaxoptions.com/alerts/2021/
01/14/miax-emerald-options-announce-supportadditional-mei-limited-service-ports. In a
subsequent alert, the Exchange announced that the
six Additional Limited Service MEI Ports would be
available beginning February 16, 2021, pending
filing with the Commission.
9 See Securities Exchange Act Release No. 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020)
(SR–EMERALD–2020–12) (the ‘‘First Proposed Rule
Change’’).
10 See id.
11 See Comment Letter from Joseph Ferraro, SVP,
Deputy General Counsel, the Exchange, dated
November 20, 2020, notifying the Commission that
the Exchange would withdraw the First Proposed
Rule Change.
12 See Securities Exchange Act Release No. 90600
(December 8, 2020), 85 FR 80831 (December 14,
2020) (SR–EMERALD–2020–17) (the ‘‘Second
Proposed Rule Change’’).
13 See id.
14 See Comment Letter from Joseph Ferraro, SVP,
Deputy General Counsel, the Exchange, dated
January 15, 2021, notifying the Commission that the
Exchange would withdraw the Second Proposed
Rule Change.
15 See Securities Exchange Act Release No. 91032
(February 1, 2021), 86 FR 8428 (February 5, 2021)
(SR–EMERALD–2021–02) (the ‘‘Third Proposed
Rule Change’’).
16 See id.
17 See Comment Letter from Joseph Ferraro, SVP,
Deputy General Counsel, the Exchange, dated
February 16, 2021, notifying the Commission that
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resubmitted a replacement proposal,
which included the proposal to offer six
Additional Limited Service MEI Ports
available to Market Makers.18 On March
24, 2021, the Exchange withdrew the
Fourth Proposed Rule Change and
resubmitted this proposal to further
clarify its expense and revenue
projections and to make certain
technical corrections.
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Port Fees
The Exchange proposes to adopt fees
for ‘‘Ports’’, which are used by Members
and non-Members to access the
Exchange. MIAX Emerald provides four
Port types: (i) The Financial Information
Exchange (‘‘FIX’’) Port,19, which allows
Members to electronically send orders
in all products traded on the Exchange;
(ii) the MEI Port, which allows Market
Makers to submit electronic orders and
quotes to the Exchange; (iii) the Clearing
Trade Drop Port (‘‘CTD’’) Port,20 which
provides real-time trade clearing
information to the participants to a trade
on MIAX Emerald and to the
participants’ respective clearing firms;
and (iv) the FIX Drop Copy (‘‘FXD’’)
Port,21 which provides a copy of realtime trade execution, correction and
cancellation information through a FIX
Port to any number of FIX Ports
designated by an Electronic Exchange
Member (‘‘EEM’’) 22 to receive such
the Exchange would withdraw the Third Proposed
Rule Change.
18 See Securities Exchange Act Release No. 91200
(February 24, 2021), 86 FR 12221 (March 2, 2021)
(SR–EMERALD–2021–07) (the ‘‘Fourth Proposed
Rule Change’’).
19 ‘‘FIX Port’’ means an interface with MIAX
Emerald systems that enables the Port user to
submit simple and complex orders electronically to
MIAX Emerald. See the Definitions Section of the
Fee Schedule.
20 ‘‘CTD Port’’ or ‘‘Clearing Trade Drop Port’’
provides an Exchange Member with a real-time
clearing trade updates. The updates include the
Member’s clearing trade messages on a low latency,
real-time basis. The trade messages are routed to a
Member’s connection containing certain
information. The information includes, among other
things, the following: (i) Trade date and time; (ii)
symbol information; (iii) trade price/size
information; (iv) Member type (for example, and
without limitation, Market Maker, Electronic
Exchange Member, Broker-Dealer); and (v)
Exchange MPID for each side of the transaction,
including Clearing Member MPID. See the
Definitions Section of the Fee Schedule.
21 The FIX Drop Copy (‘‘FXD’’) Port is a
messaging interface that will provide a copy of realtime trade execution, trade correction and trade
cancellation information to FXD Port users who
subscribe to the service. FXD Port users are those
users who are designated by an EEM to receive the
information and the information is restricted for use
by the EEM. FXD Port Fees will be assessed in any
month the Member is credentialed to use the FXD
Port in the production environment. See Fee
Schedule, Section 5)d)iv).
22 ‘‘Electronic Exchange Member’’ or ‘‘EEM’’
means the holder of a Trading Permit who is not
a Market Maker. Electronic Exchange Members are
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messages. The Exchange also proposes
to increase the monthly fee for each
Additional Limited Service MEI Port per
matching engine for Market Makers, as
described below.
Since the launch of the Exchange, all
Port fees have been waived by the
Exchange in order to incentivize market
participants to connect to the Exchange,
except for Additional Limited Service
MEI Ports. However, also at launch, the
Exchange introduced the structure of
Port fees on its Fee Schedule (without
proposing the actual fee amounts), in
order to indicate to market participants
that Port fees would ultimately apply
upon expiration of the Waiver Period.
The Exchange now proposes to assess
monthly Port fees for Members and nonMembers in each month the market
participant is credentialed to use a Port
in the production environment and
based upon the number of credentialed
Ports that a user is entitled to use. MIAX
Emerald has Primary and Secondary
Facilities and a Disaster Recovery
Facility. Each type of Port provides
access to all Exchange facilities for a
single fee. The Exchange notes that,
unless otherwise specifically set forth in
the Fee Schedule, the Port fees include
the information communicated through
the Port. That is, unless otherwise
specifically set forth in the Fee
Schedule, there is no additional charge
for the information that is
communicated through the Port apart
from what the user is assessed for each
Port.23
FIX Port Fees
Since the launch of the Exchange, fees
for FIX Ports have been waived for the
Waiver Period. The Exchange now
proposes to assess a monthly FIX Port
fee to Members in each month the
Member is credentialed to use a FIX
Port in the production environment and
based upon the number of credentialed
FIX Ports, as follows: $550 for the first
FIX Port; $350 for FIX Ports two through
five; and $150 for each FIX Port over
five.
Below is the proposed table showing
the FIX Port fees:
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100 and the Definitions Section of
the Fee Schedule.
23 An example of one such exception where there
is an additional charge for information that is
communicated through a Port is for certain market
data products, such as ToM, AIS, and MOR, that are
received via a direct connection to the Exchange.
See Sections (6a)–(c) of the Fee Schedule.
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FIX port fees
1st FIX Port ...........................
FIX Ports 2 through 5 ...........
Additional FIX Ports over 5 ...
MIAX Emerald
monthly
port fees
includes connectivity
to the primary,
secondary and
disaster recovery
data centers
$550.00
350.00
150.00
MEI Port Fees
MIAX Emerald offers different options
of MEI Ports depending on the services
required by Market Makers. Since the
launch of the Exchange, fees for MEI
Ports have been waived for the Waiver
Period. The Exchange now proposes to
assess monthly MEI Port Fees to Market
Makers based upon the number of
classes or class volume accessed by the
Market Maker. Market Makers are
allocated two (2) Full Service MEI
Ports 24 and two (2) Limited Service MEI
Ports 25 per Matching Engine 26 to which
they connect. The Full Service MEI
Ports, Limited Service MEI Ports and the
Additional Limited Service MEI Ports
all include access to the Exchange’s
Primary and Secondary data centers and
its Disaster Recovery center.
Specifically, the Exchange proposes to
adopt MEI Port fees assessable to Market
Makers based upon the number of
classes or class volume accessed by the
Market Maker. The Exchange proposes
to adopt the following MEI Port fees: (i)
$5,000 for Market Maker Assignments in
up to 5 option classes or up to 10% of
option classes by volume; (ii) $10,000
for Market Maker Assignments in up to
10 option classes or up to 20% of option
classes by volume; (iii) $14,000 for
Market Maker Assignments in up to 40
option classes or up to 35% of option
classes by volume; (iv) $17,500 for
Market Maker Assignments in up to 100
option classes or up to 50% of option
classes by volume; and (v) $20,500 for
Market Maker Assignments in over 100
option classes or over 50% of option
classes by volume up to all option
classes listed on MIAX Emerald.
The Exchange also proposes to adopt
new footnote ‘‘■’’ for its MEI Port fees
that will apply to the Market Makers
24 See
supra note 4.
id.
26 A ‘‘matching engine’’ is a part of the MIAX
Emerald electronic system that processes options
quotes and trades on a symbol-by-symbol basis.
Some matching engines will process option classes
with multiple root symbols, and other matching
engines will be dedicated to one single option root
symbol (for example, options on SPY will be
processed by one single matching engine that is
dedicated only to SPY). A particular root symbol
may only be assigned to a single designated
matching engine. A particular root symbol may not
be assigned to multiple matching engines. See the
Definitions Section of the Fee Schedule.
25 See
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who fall within the following MEI Port
fee levels, which represent the 4th and
5th levels of the fee table: Market
Makers who have (i) Assignments in up
to 100 option classes or up to 50% of
option classes by volume and (ii)
Assignments in over 100 option classes
or over 50% of option classes by volume
up to all option classes listed on MIAX
Emerald. Specifically, the Exchange
proposes for these monthly MEI Port tier
levels, if the Market Maker’s total
monthly executed volume during the
relevant month is less than 0.025% of
the total monthly executed volume
reported by OCC in the customer
account type for MIAX Emerald–listed
option classes for that month, then the
fee will be $14,500 instead of the fee
otherwise applicable to such level.
The purpose of this proposed lower
monthly MEI Port fee is to provide a
lower fixed cost to those Market Makers
who are willing to quote the entire
Exchange market (or substantial amount
of the Exchange market), as objectively
measured by either number of classes
assigned or national ADV, but who do
not otherwise execute a significant
amount of volume on the Exchange. The
Exchange believes that, by offering
lower fixed costs to Market Makers that
execute less volume, the Exchange will
retain and attract smaller-scale Market
Makers, which are an integral
component of the option industry
marketplace, but have been decreasing
in number in recent years, due to
industry consolidation and lower
market maker profitability. Since these
smaller-scale Market Makers utilize less
Exchange capacity due to lower overall
volume executed, the Exchange believes
it is reasonable and appropriate to offer
such Market Makers a lower fixed cost.
The Exchange notes that other options
exchanges assess certain of their fees at
different rates, based upon a member’s
participation on that exchange,27 and, as
such, this concept is not novel. The
proposed changes to the MEI Port fees
for Market Makers who fall within the
4th and 5th levels of the fee table are
based upon a business determination of
current Market Maker assignments and
trading volume.
For the calculation of the monthly
MEI Port Fees that apply to Market
Makers, the number of classes is defined
as the greatest number of classes the
Market Maker was assigned to quote in
on any given day within the calendar
month and the class volume percentage
is based on the total national average
daily volume in classes listed on MIAX
Emerald in the prior calendar quarter.28
Newly listed option classes are
excluded from the calculation of the
monthly MEI Port Fee until the calendar
quarter following their listing, at which
time the newly listed option classes will
be included in both the per class count
and the percentage of total national
average daily volume. The Exchange
proposes to assess Market Makers the
monthly MEI Port Fees based on the
greatest number of classes listed on
MIAX Emerald that the Market Maker
18351
was assigned to quote in on any given
day within a calendar month and the
applicable fee rate that is the lesser of
either the per class basis or percentage
of total national average daily volume
measurement.
The Exchange charges $50 per month
for each Additional Limited Service MEI
Port per matching engine for Market
Makers over and above the two (2)
Limited Service MEI Ports per matching
engine that are allocated with the Full
Service MEI Ports. The Full Service MEI
Ports, Limited Service MEI Ports and the
Additional Limited Service MEI Ports
all include access to the Exchange’s
Primary and Secondary data centers and
its Disaster Recovery center. Currently,
footnote ‘‘*’’ in the MEI Port Fee table
provides that the fees for Additional
Limited Service MEI Ports are not
subject to the Waiver Period.
Accordingly, in connection with this
proposal, the Exchange proposes to
delete footnote ‘‘*’’ since the Exchange
proposes to begin assessing MEI Port
fees, which will no longer be subject to
the Waiver Period. The Exchange also
proposes to increase the monthly fee
from $50 to $100 for each Additional
Limited Service MEI Port per matching
engine for Market Makers over and
above the two (2) Limited Service MEI
Ports per matching engine that are
allocated with the Full Service MEI
Ports.
Below is the proposed table showing
the MEI Port fees:
Market maker assignments
(the lesser of the applicable measurements below)
Monthly MIAX Emerald MEI fees
$5,000.00 ............................................................
$10,000.00 ..........................................................
$14,000.00 ..........................................................
$17,500.00 D ........................................................
$20,500.00 D ........................................................
Per class
% of national average daily volume
Up to 5 Classes ...............................................
Up to 10 Classes .............................................
Up to 40 Classes .............................................
Up to 100 Classes ...........................................
Over 100 Classes ............................................
Up to 10% of Classes by volume.
Up to 20% of Classes by volume.
Up to 35% of Classes by volume.
Up to 50% of Classes by volume.
Over 50% of Classes by volume up to all
Classes listed on MIAX Emerald.
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D For these Monthly MIAX Emerald MEI Port tier levels, if the Market Maker’s total monthly executed volume during the relevant month is less
than 0.025% of the total monthly executed volume reported by OCC in the customer account type for MIAX Emerald-listed option classes for that
month, then the fee will be $14,500 instead of the fee otherwise applicable to such level.
The Exchange also proposes to offer
six (6) Additional Limited Service MEI
Ports to Market Makers. Currently,
Market Makers are limited to six
Additional Limited Service MEI Ports
per Matching Engine, for a total of eight
per Matching Engine. The Exchange
originally provided Limited Service MEI
Ports to enhance the MEI Port
connectivity available to Market Makers.
Limited Service MEI Ports have been
well received by Market Makers since
the Exchange launched operations in
March of 2019. The Exchange now
proposes to offer to Market Makers the
ability to purchase an additional six (6)
Limited Service MEI Ports per Matching
Engine over and above the current six
(6) Additional Limited Service MEI
Ports per Matching Engine that are
available for purchase by Market
Makers. The Exchange proposes to make
a corresponding change to Section
5)d)ii) of the Fee Schedule to specify
27 See, e.g., Cboe BZX Options Exchange (‘‘BZX
Options’’) assesses the Participant Fee, which is a
membership fee, according to a member’s ADV. See
Cboe BZX Options Exchange Fee Schedule under
‘‘Membership Fees’’. The Participant Fee is $500 if
the member ADV is less than 5000 contracts and
$1,000 if the member ADV is equal to or greater
than 5000 contracts.
28 The Exchange will use the following formula to
calculate the percentage of total national average
daily volume that the Market Maker assignment is
for purposes of the MEI Port Fee for a given month:
Market Maker assignment percentage of national
average daily volume = [total volume during the
prior calendar quarter in a class in which the
Market Maker was assigned]/[total national volume
in classes listed on MIAX in the prior calendar
quarter].
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that Market Makers will now be limited
to purchasing twelve (12) Additional
Limited Service MEI Ports per Matching
Engine, for a total of fourteen (14) per
Matching Engine.
The Exchange proposes to increase
the number of Additional Limited
Service MEI Ports because the Exchange
is expanding its network. This network
expansion is necessary due to increased
customer demand and increased
volatility in the marketplace, both of
which have translated into increased
message traffic rates across the network.
Consequently, this network expansion,
which increases the number of switches
supporting customer-facing systems, is
necessary in order to provide sufficient
access to new and existing Members, to
maintain a sufficient amount of network
capacity head-room, and to continue to
provide the same level of service across
the Exchange’s low-latency, highthroughput technology environment.
The Exchange notes that its affiliates,
Miami International Securities
Exchange, LLC (‘‘MIAX’’) and MIAX
Pearl, LLC (‘‘MIAX Pearl’’), recently
filed similar proposals to increase the
number of Additional Limited Service
Ports available for purchase due to
similar network expansions and
customer demand.29
The Exchange has 6 network switches
that support the entire customer base of
MIAX Emerald. The Exchange plans to
increase this to 12 switches, which will
increase the number of available
customer ports by 100%. The proposed
increase in the number of available
customer ports will enable the Exchange
to continue to provide sufficient and
equal access to the MIAX Emerald
System to all Members. Absent the
proposed increase in available MEI
Ports, the Exchange projects that its
current inventory will be depleted and
it will lack sufficient capacity to
continue to meet Members’ access
needs.
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Purge Port Fees
The Exchange also offers Market
Makers the ability to request and be
allocated two (2) Purge Ports 30 per
Matching Engine to which it connects.
Purge Ports provide Market Makers with
the ability to send quote purge messages
to the MIAX Emerald System. Purge
29 See Securities Exchange Act Release Nos.
90811 (December 29, 2020), 86 FR 344 (January 5,
2021) (SR–MIAX–2020–41) and 90812 (December
29, 2020), 86 FR 338 (January 5, 2021) (SR–PEARL–
2020–35).
30 ‘‘Purge Ports’’ provide Market Makers with the
ability to send quote purge messages to the MIAX
Emerald System. Purge Ports are not capable of
sending or receiving any other type of messages or
information. See the Definitions Section of the Fee
Schedule.
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16:53 Apr 07, 2021
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Ports are not capable of sending or
receiving any other type of messages or
information. Since the launch of the
Exchange, fees for Purge Ports have been
waived for the Waiver Period. The
Exchange now proposes to amend its
Fee Schedule to adopt fees for Purge
Ports. For each month in which the
MIAX Emerald Market Maker has been
credentialed to use Purge Ports in the
production environment and has been
assigned to quote in at least one class,
the Exchange proposes to assess the
MIAX Emerald Market Maker a flat fee
$1,500, regardless of the number of
Purge Ports allocated to the MIAX
Emerald Market Maker.
CTD Port Fees
The Exchange proposes to assess a
CTD Port fee as a monthly fixed amount,
not tied to transacted volume of the
Member. This fixed fee structure is the
same structure in place at Nasdaq PHLX
with respect to the proposed CTD Port
Fees.31 Since the launch of the
Exchange, CTD Port Fees have been
waived for the Waiver Period. CTD
provides Exchange members with realtime clearing trade updates. The
updates include the Member’s clearing
trade messages on a low latency, realtime basis. The trade messages are
routed to a Member’s connection
containing certain information. The
information includes, among other
things, the following: (i) Trade date and
time; (ii) symbol information; (iii) trade
price/size information; (iv) Member type
(for example, and without limitation,
Market Maker, Electronic Exchange
Member, Broker-Dealer); (v) Exchange
Member Participant Identifier (‘‘MPID’’)
for each side of the transaction,
including Clearing Member MPID; and
(vi) strategy specific information for
complex transactions. CTD Port fees
will be assessed in any month the
Member is credentialed to use the CTD
Port in the production environment.
The Exchange proposes to assess a CTD
Port fee of $450 per month.
Below is the proposed table for the
CTD Port fees:
Description
Monthly
fee
Real-Time CTD Information .........
$450.00
FXD Port Fee
The Exchange proposes to assess an
FXD Port Fee as a monthly fixed
amount, not tied to transacted volume of
the Member. This fixed fee structure is
the same structure in place at Nasdaq
31 See Nasdaq PHLX Pricing Schedule, Options 7,
Section 9, Other Member Fees, B. Port Fees.
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PHLX with respect to FXD Port Fees.32
Since the launch of the Exchange, FXD
Port Fees have been waived for the
Waiver Period. FXD is a messaging
interface that will provide a copy of
real-time trade execution, trade
correction and trade cancellation
information to FXD Port users who
subscribe to the service. FXD Port users
are those users who are designated by
an EEM to receive the information and
the information is restricted for use by
the EEM. FXD Port fees will be assessed
in any month the Member is
credentialed to use the FXD Port in the
production environment. The Exchange
proposes to assess an FXD Port fee of
$500 per month. Below is the proposed
table for the FXD Port fees:
Description
MIAX Emerald
monthly port fees
includes connectivity
to the primary,
secondary and
disaster recovery
data centers
FIX Drop Copy Port ..............
$500.00
10Gb ULL Connectivity Fee
The Exchange proposes to amend
Sections 5(a) and (b) of the Fee
Schedule to increase the monthly
network connectivity fees for the 10Gb
ULL fiber connection, which is charged
to both Members and non-Members of
the Exchange for connectivity to the
Exchange’s primary/secondary facility.
The Exchange offers to both Members
and non-Members two 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 now proposes to increase
its monthly network connectivity fee for
its 10Gb ULL connection to $10,000 for
Members and non-Members.
*
*
*
*
*
MIAX Emerald believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. MIAX Emerald
believes this high standard is especially
important when an exchange imposes
various access fees for market
participants to access an exchange’s
32 Id.
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marketplace. MIAX Emerald deems Port
fees and Connectivity fees to be access
fees, and that Ports and Connectivity are
inextricably linked components of the
network. Accordingly, the Exchange
believes that it is reasonable and
appropriate that the costs and revenues
for both should be considered together,
as the services associated with
connectivity and ports are linked pieces
of the network’s infrastructure, both of
which are necessary for a market
participant to access and use the trading
System of the Exchange. Finally, both
Connectivity fee and Port fee revenue
are consolidated into a single line item
(‘‘Access Fees’’) on the Exchange’s
financial statements. The Exchange
believes that it is important to
demonstrate that these fees are based on
its costs to provide access to the
Exchange’s network and reasonable
business needs. Accordingly, the
Exchange believes the Proposed Access
Fees will allow the Exchange to offset
expense the Exchange has and will
incur, and that the Exchange is
providing sufficient transparency (as
described below) into how the Exchange
determined to charge such fees.
Accordingly, the Exchange is providing
an analysis of its revenues, costs, and
profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
and revenues associated with the
Proposed Access Fees.
In order to determine the Exchange’s
costs associated with providing the
Proposed Access Fees, the Exchange
conducted an extensive cost review in
which the Exchange analyzed every
expense item in the Exchange’s general
expense ledger to determine whether
each such expense relates to the
Proposed Access Fees, and, if such
expense did so relate, what portion (or
percentage) of such expense actually
supports the services included in the
Proposed Access Fees. The sum of all
such portions of expenses represents the
total cost of the Exchange to provide the
Proposed Access Fees. For the
avoidance of doubt, no expense amount
was allocated twice. The Exchange is
also providing detailed information
regarding the Exchange’s cost allocation
methodology—namely, information that
explains the Exchange’s rationale for
determining that it was reasonable to
allocate certain expenses described in
this filing towards the total cost to the
Exchange to provide the Proposed
Access Fees.
In order to determine the Exchange’s
projected revenues associated with
providing the Proposed Access Fees, the
Exchange analyzed the number of
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Members and non-Members currently
utilizing the Exchange’s services
associated with the Proposed Access
Fees, and, utilizing a recent monthly
billing cycle representative of the
Exchange’s monthly revenue,
extrapolated annualized revenue on a
going-forward basis. The Exchange does
not believe it is appropriate to factor
into its analysis future revenue growth
or decline into its projections for
purposes of these calculations, given the
uncertainty of such projections due to
the continually changing access needs
of market participants, discounts that
can be achieved through reaching
certain tiers, market participant
consolidation, etc. Additionally, the
Exchange similarly does not factor into
its analysis future cost growth or
decline.
The Exchange is presenting its
revenue and expense associated with
the Proposed Access Fees in this filing
in a manner that is consistent with how
the Exchange presents its revenue and
expense in its Audited Unconsolidated
Financial Statements. The Exchange’s
most recent Audited Unconsolidated
Financial Statement is for 2019.
However, since the revenue and
expense associated with the Proposed
Access Fees were not in place in 2019
or for the first three quarters of 2020, the
Exchange believes its 2019 Audited
Unconsolidated Financial Statement is
not useful for analyzing the
reasonableness of the total annual
revenue and costs associated with the
Proposed Access Fees. Accordingly, the
Exchange believes it is more appropriate
to analyze the Proposed Access Fees
utilizing a recent monthly billing cycle
representative of the Exchange’s
revenue and costs, as described herein,
which utilize the same presentation
methodology as set forth in the
Exchange’s previously-issued Audited
Unconsolidated Financial Statements.
Based on this analysis, the Exchange
believes that the Proposed Access Fees
are fair and reasonable because they will
not result in excessive pricing or supracompetitive profit when comparing the
Exchange’s total annual expense
associated with providing the services
associated with the Proposed Access
Fees versus the total projected annual
revenue the Exchange will collect for
providing those services.
*
*
*
*
*
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
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18353
BOX Network (the ‘‘BOX Order’’).33 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.34 On December 20,
2019, the Exchange adopted
Connectivity Fees in a filing utilizing a
cost-based justification framework that
is substantially similar to the cost-based
justification framework utilized for the
instant Proposed Access Fees.35
Accordingly, the Exchange believes that
the Proposed Access 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 supported by
evidence (including comprehensive
revenue and cost data and analysis) that
they are fair and reasonable because
they do not result in excessive pricing
or supra-competitive profit; and (iv)
utilize a cost-based justification
framework that is substantially similar
to a framework previously used by the
Exchange to establish Connectivity Fees.
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.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 36
in general, and furthers the objectives of
Section 6(b)(4) of the Act 37 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 38 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
33 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).
34 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 ‘‘Guidance’’).
35 See Securities Exchange Act Release No. 87877
(December 31, 2019), 84 FR 738 (January 7, 2020)
(SR–EMERALD–2019–39).
36 15 U.S.C. 78f(b).
37 15 U.S.C. 78f(b)(4).
38 15 U.S.C. 78f(b)(5).
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investors and the public interest and is
not designed to permit unfair
discrimination between customer,
issuers, brokers and dealers.
The Exchange launched trading on
March 1, 2019. For the month of
December 2020, the Exchange had a
market share of only approximately
3.58% of the U.S. options industry.39
The Exchange is not aware of any
evidence that a market share of
approximately 3.6% provides the
Exchange with anti-competitive pricing
power. If the Exchange were to attempt
to establish unreasonable pricing, then
no market participant would join or
connect, and existing market
participants would disconnect.
Separately, the Exchange is not aware
of any reason why market participants
could not simply drop their connections
to an exchange (or not connect to an
exchange) if an exchange were to
establish prices for its non-transaction
fees that, in the determination of such
market participant, did not make
business or economic sense for such
market participant to connect to such
exchange. No options market participant
is required by rule, regulation, or
competitive forces to be a Member of the
Exchange. As evidence of the fact that
market participants can and do
disconnect from exchanges based on
non-transaction fee pricing, R2G
Services LLC (‘‘R2G’’) filed a comment
letter after BOX’s proposed rule changes
to increase its connectivity fees (SR–
BOX–2018–24, SR–BOX–2018–37, and
SR–BOX–2019–04).40 The R2G Letter
stated, ‘‘[w]hen BOX instituted a
$10,000/month price increase for
connectivity; we had no choice but to
terminate connectivity into them as well
as terminate our market data
relationship. The cost benefit analysis
just didn’t make any sense for us at
those new levels.’’ 41 Since the Exchange
issued its notice for the Proposed
Access Fees, one Member discontinued
the use of the Exchange’s connectivity
and port services as a result of the
Proposed Access Fees. Accordingly,
these examples show that if an exchange
sets too high of a fee for connectivity
and/or other non-transaction fees for its
relevant marketplace, market
39 See The Options Clearing Corporation (‘‘OCC’’)
publishes options and futures volume in a variety
of formats, including daily and monthly volume by
exchange, available here: https://www.theocc.com/
market-data/volume/default.jsp.
40 See Letter from Stefano Durdic, R2G, to
Vanessa Countryman, Acting Secretary,
Commission, dated March 27, 2019 (the ‘‘R2G
Letter’’).
41 See id.
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participants can choose to disconnect
from such exchange.
The Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act because the Proposed
Access Fees will not result in excessive
or supra-competitive profit. The costs
associated with providing access to
Exchange Members and non-Members,
as well as the general expansion of a
state-of-the-art infrastructure, are
extensive, have increased year-overyear, and are projected to increase yearover-year in the future. In particular, the
Exchange has experienced a material
increase in its costs in 2020, in
connection with a project to make its
network environment more transparent
and deterministic, based on customer
demand. This project will allow the
Exchange to enhance its network
architecture with the intent of ensuring
a best-in-class, transparent and
deterministic trading system while
maintaining its industry leading latency
and throughput capabilities. In order to
provide this greater amount of
transparency and higher determinism,
MIAX Emerald has made significant
capital expenditures (‘‘CapEx’’),
incurred increased ongoing operational
expenditures (‘‘OpEx’’), and undertaken
additional engineering research and
development (‘‘R&D’’) in the numerous
areas. This includes expenditures and
R&D in the following areas: (i)
Implementation of an improved network
design to ensure the minimum latency
between multicast market data signals
disseminated by the Exchange across
the extranet switches; (ii) an
improvement to the unicast jitter profile
to reduce the occurrence of message
sequence inversions from Members to
the Exchange quoting gateway
processors; (iii) introduction of new
optical fiber network infrastructure that
ensures the optical fiber path for
participants within extremely tight
tolerances; (iv) introduction of a rearchitected and engineered participant
quoting gateway that ensures the
delivery of messages to the match
engine with absolute determinism,
eliminating the message processing
inversions that can occur with messages
received nanoseconds apart; and (v) an
improved monitoring platform to better
measure the performance of the network
and systems at extremely tight
tolerances and to provide Members with
reporting on the performance of their
systems. The CapEx associated with
only phase 1 of this project in 2020 was
approximately $1.85 million. This
expense does not include the significant
increase in employee time and other
resources necessary to maintain and
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service this network, which expense is
captured in the operating expense
discussed below. This project, which
results in a material increase in expense
of the Exchange, is a primary driver for
the increase in network connectivity
fees proposed by the Exchange.
The Exchange believes the proposed
increase to the 10Gb ULL connection is
an equitable allocation of reasonable
fees because 10Gb ULL purchasers: (1)
Consume the most bandwidth and
resources of the network; (2) transact the
vast majority of the volume on the
Exchange; and (3) require the high touch
network support services provided by
the Exchange and its staff, including
more costly network monitoring,
reporting and support services, resulting
in a much higher cost to the Exchange.
Further, the Exchange believes the
Proposed Access Fees are equitably
allocated because of customer demand
for an even more transparent and
deterministic network, as described
above, which has resulted in higher
CapEx, increasingly higher OpEx, and
increased costs to engineering R&D. The
Proposed Access Fees are equitably
allocated in this regard because the
majority of customer demand is coming
from purchasers of the 10Gb ULL
connections, which Member and nonMember firms transact the vast majority
of volume on the Exchange.
Accordingly, the Exchange believes it is
reasonable, equitably allocated and not
unfairly discriminatory to recoup the
majority of its costs associated with the
project to make the network more
transparent and deterministic from
market participants utilizing 10Gb ULL
connections on the Exchange.
The Exchange believes that the
proposed increase to the 10Gb ULL fees
are equitably allocated among users of
the network connectivity alternatives, as
the users of the 10Gb ULL connections
consume the most bandwidth and
resources of the network. Specifically,
the Exchange notes that these users
account for approximately greater than
99% of message traffic over the network,
while the users of the 1Gb connections
account for approximately less than 1%
of message traffic over the network. In
the Exchange’s experience, users of the
1Gb connections do not have a business
need for the high performance network
solutions required by 10Gb ULL users.
The Exchange’s high performance
network solutions and supporting
infrastructure (including employee
support), provides unparalleled system
throughput and the capacity to handle
approximately 18 million quote
messages per second. On an average
day, the Exchange handles over
approximately 3 billion total messages.
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Of those, users of the 10Gb ULL
connections generate approximately 3
billion messages, and users of the 1Gb
connections generate 500,000 messages.
However, in order to achieve a
consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. Given this
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
Member and non-Member users benefit,
but is designed and maintained from a
capacity standpoint to specifically
handle the message rate and
performance requirements of 10Gb ULL
users.
The Exchange also believes that the
connectivity fees are equitably allocated
amongst users of the network
connectivity alternatives, when these
fees are viewed in the context of the
overall trading volume on the Exchange.
To illustrate, the purchasers of the 10Gb
ULL connectivity account for
approximately 98% of the volume on
the Exchange for the month of October
2020. This overall volume percentage
(98% of total Exchange volume) is in
line with the amount of network
connectivity revenue collected from
10Gb ULL purchasers (99% of total
Exchange connectivity revenue). For
example, utilizing a recent billing cycle,
Exchange Members and non-Members
that purchased 10Gb ULL connections
accounted for approximately 99% of the
total network connectivity revenue
collected by the Exchange from all
connectivity alternatives; and (ii)
Members and non-Members that
purchased 1Gb connections accounted
for approximately 1% of the revenue
collected by the Exchange from all
connectivity alternatives.
The Exchange further believes that the
increased fee for the 10Gb ULL
connection is an equitable allocation of
reasonable fees as the fees for the
various connectivity alternatives are
directly related to the actual costs
associated with providing the respective
connectivity alternatives. That is, the
cost to the Exchange of providing a 1Gb
network connection is significantly
lower than the cost to the Exchange of
providing a 10Gb ULL network
connection. Pursuant to its extensive
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cost review described above and in
connection with the Exchange’s new
project to increase transparency and
determinism, the Exchange believes that
the average cost to provide a 10Gb ULL
network connection is approximately 8
times more than the average cost to
provide a 1Gb connection. The simple
hardware and software component costs
alone of a 10Gb ULL connection are not
8 times more than the 1Gb connection.
Rather, it is the associated premiumproduct level network monitoring,
reporting, and support services costs
that accompany a 10Gb ULL connection
which cause it to be 8 times more costly
to provide than the 1Gb connection.
Accordingly, the Exchange believes it is
equitable to allocate those network
infrastructure costs that accompany a
10Gb ULL connection to the purchasers
of those connections, and not to
purchasers of 1Gb connections.
The Exchange differentiates itself by
offering a ‘‘premium-product’’ network
experience, as an operator of a high
performance, ultra-low latency network
with unparalleled system throughput,
which network can support access to
three distinct options markets and
multiple competing market-makers
having affirmative obligations to
continuously quote over 750,000
distinct trading products (per exchange),
and the capacity to handle
approximately 18 million quote
messages per second. The ‘‘premiumproduct’’ network experience enables
users of 10Gb ULL connections to
receive the network monitoring and
reporting services for those
approximately 750,000 distinct trading
products. There is a significant,
quantifiable amount of R&D effort,
employee compensation and benefits
expense, and other expense associated
with providing the high touch network
monitoring and reporting services that
are utilized by the 10Gb ULL
connections offered by the Exchange.
These value add services are fullydiscussed herein, and the actual costs
associated with providing these services
are the basis for the differentiated
amount of the fees for the various
connectivity alternatives.
In order to provide more detail and to
quantify the Exchange’s costs associated
with providing access to the Exchange
in general, the Exchange notes that there
are material costs associated with
providing the infrastructure and
headcount to fully-support access to the
Exchange. The Exchange incurs
technology expense related to
establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
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18355
mandated processes, associated with its
network technology. While some of the
expense is fixed, much of the expense
is not fixed, and thus increases as the
services associated with the Proposed
Access Fees increase. For example, new
10Gb ULL connections and Ports 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.
Further, as the total number of all
connections and Ports 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,
the cost to MIAX Emerald and its
affiliates is not fixed. The Exchange
believes the Proposed Access Fees are
reasonable in order to offset the costs to
the Exchange associated with providing
access to its network infrastructure.
Further, because the costs of operating
its own data center are significant and
not economically feasible for the
Exchange at this time, the Exchange
does not operate its own data centers,
and instead contracts with a third-party
data center provider. The Exchange
notes that other competing 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. The Proposed Access
Fees, charged for accessing the
Exchange’s data center network
infrastructure, are directly related to the
network and offset such costs.
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 inhouse, and some of which are licensed
from third-parties), that continually
monitor, detect, and report network
performance, many of which serve as
significant value-adds to the Exchange’s
Members and enable the Exchange to
provide a high level of customer service.
These tools detect and report
performance issues, and thus enable the
Exchange to proactively notify a
Member (and the SIPs) when the
Exchange detects a problem with a
Member’s connectivity. In fact, the
Exchange often receives inquiries from
other industry participants regarding the
status of networking issues outside of
the Exchange’s own network
environment that are impacting the
industry as a whole via the SIPs. This
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includes inquiries from regulators
because the Exchange has a superior,
state-of the-art network that, through its
enhanced monitoring and reporting
solutions, often detects and identifies
industry-wide networking issues ahead
of the SIPs. The Exchange also incurs
costs associated with the maintenance
and improvement of existing tools and
the development of new tools.
Additionally, certain Exchangedeveloped 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.
In sum, the costs associated with
maintaining and enhancing a state-ofthe-art exchange network 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
those costs through the Proposed Access
Fees. 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
Proposed Access Fees that must be
charged to access it, in order to recover
those costs.
The Exchange believes it is reasonable
to consider the expense and revenue for
ports and connectivity alternatives
together because ports and connectivity
are inextricably linked components of
the network infrastructure, and that
both are necessary for a market
participant to access the Exchange. The
various types of connectivity and port
alternatives that the Exchange offers
provide a wide array of access
alternatives necessary for a market
participant to conduct its business using
the Exchange, which is a business
decision to be made by each particular
type of market participant. The different
types of connectivity and port
alternatives allows Members to conduct
their different business strategies—some
Members put an emphasis on speed,
while others emphasize other strategies,
such as redundancy and certainty of
execution. The Exchange does not
require a Member to have a certain
framework for accessing the Exchange,
but provides various connectivity and
port alternatives for each Member’s
distinct business lines.
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The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, MEI ports
allow for a higher throughput and can
handle much higher quote/order rates
than FIX ports. Members that are Market
Makers or high frequency trading firms
utilize these ports (typically coupled
with 10Gb ULL connectivity) because
they transact in significantly higher
amounts of messages being sent to and
from the Exchange, versus FIX port
users, who are traditionally customers
sending only orders to the Exchange
(typically coupled with 1Gb
connectivity). The different types of
ports cater to the different types of
Exchange Memberships and different
capabilities of the various Exchange
Members. Market Makers have quoting
and other obligations that traditional
customers do not. Market Makers,
therefore, need ports and connections
that can handle using far more of the
network’s capacity for message
throughput, risk protections, and the
amount of information that has to be
assessed. Market Makers account for the
vast majority of network capacity
utilization and volume executed on the
Exchange, as discussed throughout.42
Accordingly, the Exchange believes that
it is reasonable and appropriate to
charge market participants more for MEI
ports versus FIX ports and other lower
capacity ports.
The Exchange believes that its
proposal to increase the number of
Additional Limited Service Ports
available to Market Makers is consistent
with the objectives of Section 6(b)(5) of
the Act 43 because the proposed addition
of Limited Service MEI Ports will be
available to all Market Makers and the
current fees for the Additional Limited
Service MEI Ports apply equally to all
Market Makers regardless of type, and
access to the Exchange is offered on
terms that are not unfairly
discriminatory. The Exchange proposes
to increase the number of available
Limited Service MEI Ports because the
Exchange is expanding its network. This
42 See supra page 72 (discussing how purchasers
of the 10Gb ULL connectivity accounted for
approximately 98% of the volume on the Exchange
for the month of October 2020; 99% of total
Exchange connectivity revenue; Members and nonMembers that purchased 10Gb ULL connections
accounted for approximately 99% of the total
network connectivity revenue collected by the
Exchange from all connectivity alternatives; and
Members and non-Members that purchased 1Gb
connections accounted for approximately 1% of the
revenue collected by the Exchange from all
connectivity alternatives).
43 15 U.S.C. 78f(b)(5).
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network expansion is necessary due to
increased customer demand and
increased volatility in the marketplace,
both of which have translated into
increased message traffic rates across
the network. Consequently, this network
expansion, which increases the number
of switches supporting customer facing
systems, is necessary in order to provide
sufficient and equal access to new and
existing Members, to maintain a
sufficient amount of network capacity
head-room, and to continue to provide
the same level of service across the
Exchange’s low-latency, highthroughput technology environment.
Currently, the Exchange has 6
network switches that support the entire
customer base of MIAX Emerald. The
Exchange plans to increase this to 12
switches, which will increase the
number of available customer ports by
100%. This increase in the number of
available customer ports will enable the
Exchange to continue to provide
sufficient and equal access to the MIAX
Emerald System for all Members.
Absent the proposed increase in
available MEI Ports, the Exchange
projects that its current inventory will
be depleted and it will lack sufficient
capacity to continue to meet Members’
access needs. Further, the Exchange
notes the decision of whether to
purchase any Additional Limited
Service MEI Ports is completely
optional and it is a business decision for
each Market Maker to determine
whether Additional Limited Service
MEI Ports are necessary to meet their
business requirements.
The Exchange further believes that the
availability of the Additional Limited
Service MEI Ports is equitable and not
unfairly discriminatory because it will
enable Market Makers to maintain
uninterrupted access to the MIAX
Emerald System and consequently
enhance the marketplace by helping
Market Makers to better manage risk,
thus preserving the integrity of the
MIAX Emerald markets, all to the
benefit of and protection of investors
and the public as a whole. The
Exchange also believes that its proposal
is consistent with Section 6(b)(4) of the
Act because only Market Makers that
voluntarily purchase Additional
Limited Service MEI Ports will be
charged the monthly fee per port.
As stated above, the Exchange
proposes to expand its network by
making available six Additional Limit
Service MEI Ports due to increased
customer demand and increased
volatility in the marketplace, both of
which have translated into increased
message traffic rates across the network.
The cost to expand the network in this
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manner is greater than the revenue the
Exchange anticipates the Additional
Limited Service MEI Ports will generate.
Specifically, the Exchange estimates it
has already incurred a one-time cost of
approximately $175,000 in capital
expenditures (‘‘CapEx’’) on hardware,
software, and other items to expand the
network to make available the six
Additional Limited Service MEI Ports.
This estimated cost also includes
expense associated with providing the
necessary engineering and support
personnel to transition those Market
Makers who wish to acquire any
number of Additional Limited Service
MEI Ports.
The Exchange cannot predict with
certainty how many Market Makers will
purchase the Additional Limited
Service MEI Ports, in what quantity, or
if Market Makers will add/drop Limited
Service MEI Ports from month to month.
However, utilizing a recent monthly
billing cycle, the Exchange notes four
Market Makers purchased all six of the
Additional Limited Service MEI Ports,
and two Market Makers purchased two
out of six of the Additional Limited
Service MEI Ports, which will be subject
to the proposed fee of $100 per month
per Additional Limited Service MEI Port
for each Matching Engine. Therefore,
utilizing the recent monthly billing
cycle, Market Makers purchased 28 total
Additional Limited Service MEI Ports.
The Exchange has 12 Matching
Engines.44 Assuming that each Market
Maker that purchased the 28 Additional
Limited Service MEI Ports connected to
all 12 Matching Engines at a rate of $100
per month, the Exchange projects
monthly revenue for the Additional
Limited Service MEI Ports of
approximately $33,600 (28 Additional
LSPs × 12 Matching Engines × $100 =
$33,600 per month). On a going-forward
basis and assuming no Market Maker
drops or adds Additional Limited
Service MEI Ports, the Exchange
projects to collect an additional
$403,200 in annualized revenue from
the Additional Limited Service MEI
Ports that are part of this proposal.
The Exchange only has four primary
sources of revenue: Transaction fees,
access fees (of which the Proposed
Access Fees 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.
44 The Exchange notes that several Market
Makers, including those that purchased the
Additional Limited Service MEI Ports, do not
connect to all 12 Matching Engines. It is a business
decision of each Market Maker whether to purchase
one or more types of ports that connect to each
Matching Engine.
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The Exchange believes that the
Proposed Access Fees are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit, when comparing the
total annual expense that the Exchange
projects to incur in connection with
providing these services versus the total
annual revenue that the Exchange
projects to collect in connection with
providing these services. For 2020,45 the
total annual expense for providing the
services associated with the Proposed
Access Fees for MIAX Emerald is
projected to be approximately $9.3
million. The $9.3 million in expense
includes expense associated with
providing all ports and all connectivity
alternatives. The Exchange is unable to
separate out its expense by connectivity
alternative, as all connectivity
alternatives are intricately combined in
a single network infrastructure.
Nevertheless, the Exchange attributes
the majority of connectivity expense to
the 10Gb ULL connections because the
majority of network capacity is used by
10Gb ULL purchasers.46 The $9.3
million in projected total annual
expense is comprised of the following,
all of which are directly related to the
services associated with the Proposed
Access Fees: (1) Third-party expense,
relating to fees paid by MIAX Emerald
to third-parties for certain products and
services; and (2) internal expense,
relating to the internal costs of MIAX
Emerald to provide the services
associated with the Proposed Access
Fees. As noted above, the Exchange
believes it is more appropriate to
analyze the Proposed Access Fees
utilizing its 2020 revenue and costs,
which utilize the same presentation
methodology as set forth in the
Exchange’s previously-issued Audited
Unconsolidated Financial Statements.47
The $9.3 million in projected total
annual expense is directly related to the
services associated with the Proposed
Access Fees, and not any other product
or service offered by the Exchange. It
does not include general costs of
operating matching systems and other
45 The Exchange has not yet finalized its 2020year end results.
46 See supra note 42.
47 For example, the Exchange previously noted
that all third-party expense described in its prior fee
filing was contained in the information technology
and communication costs line item under the
section titled ‘‘Operating Expenses Incurred
Directly or Allocated From Parent,’’ in the
Exchange’s 2019 Form 1 Amendment containing its
financial statements for 2018. See Securities
Exchange Act Release No. 87877 (December 31,
2019), 85 FR 738 (January 7, 2020) (SR–EMERALD–
2019–39). Accordingly, the third-part expense
described in this filing is attributed to the same line
item for the Exchange’s 2020 Form 1 Amendment,
which will be filed in 2021.
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trading technology, and no expense
amount was allocated twice.
As discussed, the Exchange
conducted an extensive cost review in
which the Exchange analyzed every
expense item in the Exchange’s general
expense ledger (this includes over 150
separate and distinct expense items) to
determine whether each such expense
relates to the services associated with
the Proposed Access Fees, and, if such
expense did so relate, what portion (or
percentage) of such expense actually
supports those services, and thus bears
a relationship that is, ‘‘in nature and
closeness,’’ directly related to those
services. The sum of all such portions
of expenses represents the total cost of
the Exchange to provide services
associated with the Proposed Access
Fees.
For 2020, total third-party expense,
relating to fees paid by MIAX Emerald
to third-parties for certain products and
services for the Exchange to be able to
provide the services associated with the
Proposed Access Fees, is projected to be
$1,932,519. This includes, but is not
limited to, a portion of the fees paid to:
(1) Equinix, for data center services, for
the primary, secondary, and disaster
recovery locations of the MIAX Emerald
trading system infrastructure; (2) Zayo
Group Holdings, Inc. (‘‘Zayo’’) for
network services (fiber and bandwidth
products and services) linking MIAX
Emerald’s office locations in Princeton,
NJ and Miami, FL to all data center
locations; (3) Secure Financial
Transaction Infrastructure (‘‘SFTI’’),48
which supports connectivity and feeds
for the entire U.S. options industry; (4)
various other services providers
(including Thompson Reuters, NYSE,
Nasdaq, and Internap), which provide
content, connectivity services, and
infrastructure services for critical
components of options connectivity and
network services; and (5) various other
hardware and software providers
(including Dell and Cisco, which
support the production environment in
which Members and non-Members
connect to the network to trade, receive
market data, etc.).
For clarity, only a portion of all fees
paid to such third-parties is included in
48 In fact, on October 22, 2019, the Exchange was
notified by SFTI that it is again raising its fees
charged to the Exchange by approximately 11%,
without having to show that such fee change
complies with the Act by being reasonable,
equitably allocated, and not unfairly
discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure
services provided by SFTI, that its fees are not
required to be rule-filed with the Commission
pursuant to Section 19(b)(1) of the Act and Rule
19b–4 thereunder. See 15 U.S.C. 78s(b)(1) and 17
CFR 240.19b–4, respectively.
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the third-party expense herein, and no
expense amount is allocated twice.
Accordingly, MIAX Emerald does not
allocate its entire information
technology and communication costs to
the services associated with the
Proposed Access Fees.
The Exchange believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange to provide the services
associated with the Proposed Access
Fees. In particular, the Exchange
believes it is reasonable to allocate the
identified portion of the Equinix
expense because Equinix operates the
data centers (primary, secondary, and
disaster recovery) that host the
Exchange’s network infrastructure. This
includes, among other things, the
necessary storage space, which
continues to expand and increase in
cost, power to operate the network
infrastructure, and cooling apparatuses
to ensure the Exchange’s network
infrastructure maintains stability.
Without these services from Equinix,
the Exchange would not be able to
operate and support the network and
provide the services associated with the
Proposed Access Fees to its Members
and non-Members and their customers.
The Exchange did not allocate all of the
Equinix expense toward the cost of
providing the services associated with
the Proposed Access Fees, only that
portion which the Exchange identified
as being specifically mapped to
providing the services associated with
the Proposed Access Fees,
approximately 73% of the total Equinix
expense (68% allocated towards the cost
of providing the provision of network
connectivity and 5% allocated towards
the cost of providing ports). The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
services associated with the Proposed
Access Fees, and not any other service,
as supported by its cost review.
The Exchange believes it is reasonable
to allocate the identified portion of the
Zayo expense because Zayo provides
the internet, fiber and bandwidth
connections with respect to the
network, linking MIAX Emerald with its
affiliates, Miami International Securities
Exchange, LLC (‘‘MIAX’’) and MIAX
Pearl, LLC (‘‘MIAX Pearl’’), as well as
the data center and disaster recovery
locations. As such, all of the trade data,
including the billions of messages each
day per exchange, flow through Zayo’s
infrastructure over the Exchange’s
network. Without these services from
Zayo, the Exchange would not be able
to operate and support the network and
provide the services associated with the
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Proposed Access Fees. The Exchange
did not allocate all of the Zayo expense
toward the cost of providing the services
associated with the Proposed Access
Fees, only the portion which the
Exchange identified as being
specifically mapped to providing the
Proposed Access Fees, approximately
66% of the total Zayo expense (62%
allocated towards the cost of providing
the provision of network connectivity
and 4% allocated towards the cost of
providing ports). The Exchange believes
this allocation is reasonable because it
represents the Exchange’s actual cost to
provide the services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.
The Exchange believes it is reasonable
to allocate the identified portions of the
SFTI expense and various other service
providers’ (including Thompson
Reuters, NYSE, Nasdaq, and Internap)
expense because those entities provide
connectivity and feeds for the entire
U.S. options industry, as well as the
content, connectivity services, and
infrastructure services for critical
components of the network. Without
these services from SFTI and various
other service providers, the Exchange
would not be able to operate and
support the network and provide access
to its Members and non-Members and
their customers. The Exchange did not
allocate all of the SFTI and other service
providers’ expense toward the cost of
providing the services associated with
the Proposed Access Fees, only the
portions which the Exchange identified
as being specifically mapped to
providing the services associated with
the Proposed Access Fees,
approximately 94% of the total SFTI
and other service providers’ expense
(89% allocated towards the cost of
providing the provision of network
connectivity and 5% allocated towards
the cost of providing ports).49 The
Exchange believes this allocation is
reasonable because it represents the
49 The Exchange notes an increase to the SFTI and
other service providers’ expense percentage
contained herein versus the same expense category
percentage the Exchange used in its initial filing to
adopt connectivity fees. See Securities Exchange
Act Release No. 87877 (December 31, 2019), 85 FR
738 (January 7, 2020) (SR–EMERALD–2019–39).
This is because at the time the Exchange performed
its cost analysis for the initial connectivity fee
filing, the Exchange was operational for only part
of the year. Since that time, the Exchange has been
fully operational, increased market share and
number of market participants, and undertaken
significant performance upgrades, resulting in
increased expense. Accordingly, the Exchange
believes it is appropriate to analyze its SFTI and
other service providers’ expense more in line with
its affiliate options exchanges, MIAX and MIAX
PEARL.
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Exchange’s actual cost to provide the
services associated with the Proposed
Access Fees.
The Exchange believes it is reasonable
to allocate the identified portion of the
other hardware and software provider
expense because this includes costs for
dedicated hardware licenses for
switches and servers, as well as
dedicated software licenses for security
monitoring and reporting across the
network. Without this hardware and
software, the Exchange would not be
able to operate and support the network
and provide access to its Members and
non-Members and their customers. The
Exchange did not allocate all of the
hardware and software provider
expense toward the cost of providing
the services associated with the
Proposed Access Fees, only the portions
which the Exchange identified as being
specifically mapped to providing the
services associated with the Proposed
Access Fees, approximately 57% of the
total hardware and software provider
expense (54% allocated towards the cost
of providing the provision of network
connectivity and 3% allocated towards
the cost of providing ports). The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
services associated with the Proposed
Access Fees.
For 2020, total projected internal
expense, relating to the internal costs of
MIAX Emerald to provide the services
associated with the Proposed Access
Fees, is projected to be $7,367,259. This
includes, but is not limited to, costs
associated with: (1) Employee
compensation and benefits for full-time
employees that support the services
associated with the Proposed Access
Fees, including staff in network
operations, trading operations,
development, system operations,
business, as well as staff in general
corporate departments (such as legal,
regulatory, and finance) that support
those employees and functions
(including an increase as a result of the
higher determinism project); (2)
depreciation and amortization of
hardware and software used to provide
the services associated with the
Proposed Access Fees, including
equipment, servers, cabling, purchased
software and internally developed
software used in the production
environment to support the network for
trading; and (3) occupancy costs for
leased office space for staff that provide
the services associated with the
Proposed Access Fees. The breakdown
of these costs is more fully-described
below. For clarity, only a portion of all
such internal expenses are included in
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the internal expense herein, and no
expense amount is allocated twice.
Accordingly, MIAX Emerald does not
allocate its entire costs contained in
those items to the services associated
with the Proposed Access Fees.
The Exchange believes it is reasonable
to allocate such internal expense
described above towards the total cost to
the Exchange to provide the services
associated with the Proposed Access
Fees. In particular, MIAX Emerald’s
employee compensation and benefits
expense relating to providing the
services associated with the Proposed
Access Fees is projected to be
$4,489,924, which is only a portion of
the $9,354,009 total projected expense
for employee compensation and
benefits. The Exchange believes it is
reasonable to allocate the identified
portion of such expense because this
includes the time spent by employees of
several departments, including
Technology, Back Office, Systems
Operations, Networking, Business
Strategy Development (who create the
business requirement documents that
the Technology staff use to develop
network features and enhancements),
Trade Operations, Finance (who provide
billing and accounting services relating
to the network), and Legal (who provide
legal services relating to the network,
such as rule filings and various license
agreements and other contracts). As part
of the extensive cost review conducted
by the Exchange, the Exchange reviewed
the amount of time spent by each
employee on matters relating to the
provision of services associated with the
Proposed Access Fees. Without these
employees, the Exchange would not be
able to provide the services associated
with the Proposed Access Fees to its
Members and non-Members and their
customers. The Exchange did not
allocate all of the employee
compensation and benefits expense
toward the cost of the services
associated with the Proposed Access
Fees, only the portions which the
Exchange identified as being
specifically mapped to providing the
services associated with the Proposed
Access Fees, approximately 48% of the
total employee compensation and
benefits expense (39% allocated
towards the cost of providing the
provision of network connectivity and
9% allocated towards the cost of
providing ports). The Exchange believes
this allocation is reasonable because it
represents the Exchange’s actual cost to
provide the services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.
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MIAX Emerald’s depreciation and
amortization expense relating to
providing the services associated with
the Proposed Access Fees is projected to
be $2,630,687, which is only a portion
of the $3,812,590 total projected
expense for depreciation and
amortization. The Exchange believes it
is reasonable to allocate the identified
portion of such expense because such
expense includes the actual cost of the
computer equipment, such as dedicated
servers, computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network and
provide the services associated with the
Proposed Access Fees. Without this
equipment, the Exchange would not be
able to operate the network and provide
the services associated with the
Proposed Access Fees to its Members
and non-Members and their customers.
The Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing the services
associated with the Proposed Access
Fees, only the portion which the
Exchange identified as being
specifically mapped to providing the
services associated with the Proposed
Access Fees, approximately 69% of the
total depreciation and amortization
expense, as these services would not be
possible without relying on such
equipment (65% allocated towards the
cost of providing the provision of
network connectivity and 4% allocated
towards the cost of providing ports).
The Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
services associated with the Proposed
Access Fees, and not any other service,
as supported by its cost review.
MIAX Emerald’s occupancy expense
relating to providing the services
associated with the Proposed Access
Fees is projected to be $246,648, which
is only a portion of the $474,323 total
projected expense for occupancy. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense
represents the portion of the Exchange’s
cost to rent and maintain a physical
location for the Exchange’s staff who
operate and support the network,
including providing the services
associated with the Proposed Access
Fees. This amount consists primarily of
rent for the Exchange’s Princeton, NJ
office, as well as various related costs,
such as physical security, property
management fees, property taxes, and
utilities. The Exchange operates its
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18359
Network Operations Center (‘‘NOC’’)
and Security Operations Center (‘‘SOC’’)
from its Princeton, New Jersey office
location. A centralized office space is
required to house the staff that operates
and supports the network. The
Exchange currently has approximately
150 employees. Approximately twothirds of the Exchange’s staff are in the
Technology department, and the
majority of those staff have some role in
the operation and performance of the
services associated with the Proposed
Access Fees. Without this office space,
the Exchange would not be able to
operate and support the network and
provide the services associated with the
Proposed Access Fees to its Members
and non-Members and their customers.
Accordingly, the Exchange believes it is
reasonable to allocate the identified
portion of its occupancy expense
because such amount represents the
Exchange’s actual cost to house the
equipment and personnel who operate
and support the Exchange’s network
infrastructure and the services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the occupancy expense toward the
cost of providing the services associated
with the Proposed Access Fees, only the
portion which the Exchange identified
as being specifically mapped to
operating and supporting the network,
approximately 52% of the total
occupancy expense (48% allocated
towards the cost of providing the
provision of network connectivity and
4% allocated towards the cost of
providing ports). The Exchange believes
this allocation is reasonable because it
represents the Exchange’s cost to
provide the services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.
The Exchange notes that a material
portion of its total overall expense is
allocated to the provision of services
associated with the Proposed Access
Fees. The Exchange believes this is
reasonable and in line, as the Exchange
operates a technology-based business
that differentiates itself from its
competitors based on its trading systems
that rely on its high performance
network, resulting in significant
technology expense. Over two-thirds of
Exchange staff are technology-related
employees. The majority of the
Exchange’s expense is technologybased. As described above, the
Exchange has only four primary sources
of fees in to recover its costs, thus the
Exchange believes it is reasonable to
allocate a material portion of its total
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overall expense towards the Proposed
Access Fees.
The Exchange’s monthly projected
revenue for the Proposed Access Fees is
based on the following projected
purchases by Members and nonMembers, which is based on a recent
billing cycle: (i) 62 10Gb ULL
connections; (ii) 14 CTD Ports; (iii) 8
FXD Ports; (iv) 113 FIX Ports; (v) 363
Limited Service MEI Ports; (vi) 37 Full
Service MEI Ports; 50 and (vii) 10 Purge
Ports. As described above, the fee
charged to each Market Maker for MEI
Ports can vary from month to month
depending on the number of classes in
which the Market Maker was assigned
to quote on any given day within the
calendar month, and upon certain class
volume percentages. The Exchange also
provides a further discount for a Market
Maker’s MEI Port fees if the Market
Maker’s total monthly executed volume
during the relevant month is less than
0.025% of the total monthly executed
volume reported by OCC in the
customer account type for MIAX
Emerald-listed option classes for that
month. The Exchange has at least one
Member consistently quoting in the
highest tier for MEI Port fees, but
receiving this discount, resulting in
lower revenue for the Exchange.
Further, the projected revenue from FIX
Port fees is subject to change from
month to month depending on the
number of FIX Ports purchased.
Accordingly, based on current
assumptions and approximations, the
Exchange projects total monthly Port
revenue (including the Additional
Limited Service MEI Port revenue
described above and the cancellation of
Ports by one Member) of approximately
$268,200 and total 10Gb ULL
connectivity revenue of approximately
$620,000 (including the cancellation of
one 10Gb ULL connection by one
Member). The Exchange notes that the
port revenue projections are subject to
change depending on the number of
classes that Market Makers are quoting
in and the tiers achieved. As such, the
projection of $268,200 per month is not
a static number and can fluctuate month
to month. Further, as noted above, one
Member dropped its connections and
ports as a direct result of the
introduction of the Proposed Access
Fees. Accordingly, reflecting that
cancellation of approximately $324,000
per year ($27,000 total per month in
50 The Exchange’s projections included 9 firms or
their affiliates purchasing Full Service MEI Ports.
Of those firms, the Exchange projects that 6 firms
will achieve the highest tier in the MEI Port fee
table, 2 firms will achieve the lowest tier in the MEI
Port fee table, and 1 firm will achieve the middle
tier in the MEI Port fee table.
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connectivity and port fees), and
including the revenue from the
proposed Additional Limited Service
MEI Ports, the Exchange projects
annualized revenue of approximately
$10,658,400 from all connectivity
alternatives and port types.51 This is
broken down as follows:
• $268,200/month × 12 months =
$3,218,400/annually for all ports
(including the subtraction of one
Member who dropped ports, plus the
Additional LSPs described above)
• $620,000/month × 12 months =
$7,440,000/annually for all
connectivity (including the
subtraction of one Member who
dropped its 10Gb ULL connection)
• $3,218,400 + $7,440,000 =
$10,658,400/annually for the
Proposed Access Fees
Accordingly, based on the facts and
circumstances presented, the Exchange
believes that its provision of the services
associated with the Proposed Access
Fees will not result in excessive pricing
or supra-competitive profit. As
described above, on a going-forward,
fully-annualized basis, the Exchange
projects that its annualized revenue for
providing the services associated with
the Proposed Access Fees would be
approximately $10,658,400, based on a
recent billing cycle. The Exchange
projects that its annualized expense for
providing the services associated with
the Proposed Access Fees would be
approximately $9.3 million per annum.
Accordingly, on a fully-annualized
basis, the Exchange believes its total
projected revenue for the providing the
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit, as
the Exchange will make only a 12.7%
profit margin on the Proposed Access
Fees ($10,658,400¥$9.3 million =
$1,358,400 per annum). This profit
margin does not take into account the
cost of the CapEx the Exchange
projected to spend in 2020 of $1.85
million on the project to make the
Exchange’s network more deterministic,
or the amounts the Exchange is
projected to spend each year on CapEx
going forward for that project. This
profit margin also does not take into
account the cost of the CapEx of
51 This revenue projection includes revenue from
all connectivity sources, including all 10Gb ULL
connections discussed above (after giving effect to
the recent cancellation), two 1Gb connections (the
Exchange is not increasing fees for 1Gb
connections, however, those connections are
included in total connectivity revenue in order to
have a true comparison between all connectivity
revenue and all connectivity expense), and all port
types discussed above (after giving effect to the
recent cancellation).
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
$175,000 for adding the six Additional
Limited Service MEI Ports.
For the avoidance of doubt, none of
the expenses included herein relating to
the services associated with the
Proposed Access Fees relate to the
provision of any other services offered
by MIAX Emerald. Stated differently, no
expense amount of the Exchange is
allocated twice. The Exchange notes
that, with respect to the MIAX Emerald
expenses included herein, those
expenses only cover the MIAX Emerald
market; expenses associated with the
Exchange’s affiliate exchanges, MIAX
and MIAX Pearl, are accounted for
separately and are not included within
the scope of this filing. Stated
differently, no expense amount of the
Exchange is also allocated to MIAX or
MIAX Pearl.
The Exchange believes it is
reasonable, equitable and not unfairly
discriminatory to allocate the respective
percentages of each expense category
described above towards the total cost to
the Exchange of operating and
supporting the network, including
providing the services associated with
the Proposed Access Fees because the
Exchange performed a line-by-line item
analysis of all the expenses of the
Exchange, and has determined the
expenses that directly relate to
operation and support of the network.
Further, the Exchange notes that,
without the specific third-party and
internal items listed above, the
Exchange would not be able to operate
and support the network, including
providing the services associated with
the Proposed Access Fees to its
Members and non-Members and their
customers. Each of these expense items,
including physical hardware, software,
employee compensation and benefits,
occupancy costs, and the depreciation
and amortization of equipment, have
been identified through a line-by-line
item analysis to be integral to the
operation and support of the network.
The Proposed Access Fees are intended
to recover the Exchange’s costs of
operating and supporting the network.
Accordingly, the Exchange believes that
the Proposed Access Fee Increases are
fair and reasonable because they do not
result in excessive pricing or supracompetitive profit, when comparing the
actual network operation and support
costs to the Exchange versus the
projected annual revenue from the
Proposed Access Fees, including the
increased amount.
The Exchange also points out that it
is not seeking to recoup any of its past
costs associated with the provision of
any Ports during the Waiver Period. The
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08APN1
Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
Exchange currently has 35 Members,52
all of whom did not pay Port fees during
the Waiver Period from the time these
firms all became Members of the
Exchange. Further, the majority of firms
that are Members of the Exchange’s
affiliate options exchanges, MIAX and
MIAX Pearl, also became Members of
those exchanges during similar Waiver
Periods for the MIAX and MIAX Pearl
Port fees. Accordingly, the Exchange
(and MIAX and MIAX Pearl) have
assumed approximately 100% of the
costs associated with providing Ports for
the majority of Member firms of the
Exchange, MIAX, and MIAX Pearl
during their respective Waiver Periods.
Accordingly, the Exchange believes that
it is reasonable, equitable, and not
unfairly discriminatory to now adopt
Port fees that are reasonably related to
(and designed to recover) the
Exchange’s cost associated with the
provision of such Ports.
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.
khammond on DSKJM1Z7X2PROD with NOTICES
Intra-Market Competition
The Exchange believes that the
Proposed Access Fees do not place
certain market participants at a relative
disadvantage to other market
participants because the Proposed
Access 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 Access 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
Access 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. The Exchange had one of its
member firms cancel its membership
with the Exchange as a direct result of
52 See https://www.miaxoptions.com/exchangemembers/emerald.
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16:53 Apr 07, 2021
Jkt 253001
the Proposed Access Fees. The
Exchange also notes that it has far less
Members as compared to the much
greater number of members at other
options exchanges. 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. The
Exchange is also unaware of any
assertion that its existing fee levels or
the Proposed Access 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, as described
above.
The Exchange operates in a highly
competitive market in which market
participants can readily favor one of the
15 competing options venues if they
deem fee levels at a particular venue to
be excessive. Based on publiclyavailable information, and excluding
index-based options, no single exchange
has more than 16% market share.
Therefore, no exchange possesses
significant pricing power in the
execution of multiply-listed equity and
ETF options order flow. For the month
of December 2020, the Exchange had a
market share of approximately 3.58% of
executed multiply-listed equity
options 53 and the Exchange believes
that the ever-shifting market share
among exchanges from month to month
demonstrates that market participants
can discontinue or reduce use of certain
categories of products, or shift order
flow, in response to fee changes. In such
an environment, the Exchange must
continually adjust its fees and fee
waivers to remain competitive with
other exchanges and to attract order
flow to the Exchange.
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,54 and Rule
PO 00000
supra note 39.
U.S.C. 78s(b)(3)(A)(ii).
19b–4(f)(2) 55 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:
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–2021–11 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–2021–11. 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
53 See
54 15
Frm 00118
Fmt 4703
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18361
55 17
E:\FR\FM\08APN1.SGM
CFR 240.19b–4(f)(2).
08APN1
18362
Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
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–2021–11 and
should be submitted on or before April
29, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.56
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07194 Filed 4–7–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91471; File No. SR–NYSE–
2020–85]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Amendment No. 1 and Order
Granting Accelerated Approval to a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the
NYSE Listed Company Manual To
Revise the Shareholder Approval
Requirements in Sections 312.03 and
312.04 and the Requirements for
Related Party Transactions in Section
314.00
khammond on DSKJM1Z7X2PROD with NOTICES
April 2, 2021.
On December 16, 2020, New York
Stock Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend the NYSE Listed
Company Manual (‘‘Manual’’) to revise
the shareholder approval requirements
in Sections 312.03 and 312.04 and the
requirements for related party
transactions in Section 314.00. The
Commission published notice of the
proposed rule change in the Federal
Register on January 4, 2021.3 On
February 12, 2021, pursuant to Section
19(b)(2) of the Exchange Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
56 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 90803
(December 28, 2020), 86 FR 0148.
4 15 U.S.C. 78s(b)(2).
1 15
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16:53 Apr 07, 2021
Jkt 253001
determine whether to disapprove the
proposed rule change.5 The Commission
has received no comment letters on the
proposal. On March 30, 2021, the
Exchange filed Amendment No. 1 to the
proposed rule change.6 The Commission
is publishing notice of the filing of
Amendment No. 1 to solicit comment
from interested persons and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
I. Description of the Proposal, as
Modified by Amendment No. 1
The Exchange is proposing to amend
its shareholder approval rules for
issuances of securities to certain related
parties, as set forth in Section 312.03(b)
of the Manual. Section 312.03(b) of the
Manual currently requires shareholder
approval prior to certain issuances of
common stock, or securities convertible
into or exercisable for common stock, to:
5 See Securities Exchange Act Release No. 91126,
86 FR 10362 (February 19, 2021).
6 In Amendment No. 1, the Exchange: (1) Revised
the proposed rule text in Section 312.03(b)(3) of the
Manual to state that shareholder approval would be
required for issuances of stock to Related Parties
that exceed one percent of the common stock or the
voting power outstanding before the issuance, other
than cash sales for a price that is at least the
Minimum Price (defined herein); (2) revised the
proposed rule text in Section 312.03(c)(2) of the
Manual to state that shareholder approval is
required for securities issued in connection with an
acquisition of the stock or assets of another
company if the issuance of securities, when alone
or combined with any other present or potential
issuance of common stock or securities convertible
into common stock in connection with such
acquisition, is equal to or exceeds either 20 percent
of the number of shares of common stock or 20
percent of the voting power before the issuance; (3)
revised the proposed rule text in Section 314.00 of
the Manual to state that a company’s audit
committee or another independent body of the
board of directors shall conduct a reasonable prior
review of related party transactions, and will
prohibit a transaction if it determines it to be
inconsistent with the interests of the company and
its shareholders; (4) revised the proposed rule text
in Section 314.00 of the Manual to state that, for
the purposes of Section 314.00, the term ‘‘related
party transactions’’ will not apply the transaction
value threshold under Item 404 of Regulation S–K
or the materiality threshold under Form 20–F, Item
7.B, as applicable; (5) clarified the discussion
regarding the applicability of Section 312.03(b); (6)
clarified that, under Nasdaq and NYSE American
rules, stock sales may be subject to shareholder
approval under equity compensation rules; (7)
deleted a description of certain requirements of
Section 312.03(b) that the Exchange has proposed
to delete because they relate to the early stage
company exemption that would no longer be
applicable; (8) clarified that the Exchange believes
that Section 312.03(c) would cause any significantly
economically dilutive transaction to be subject to
shareholder approval; (9) clarified that the
amendments to Section 312.03(c) would remove a
limitation that participation in a financing under
the exception is available only to multiple
purchasers; and (10) made other clarifying,
conforming, and technical changes. Amendment
No. 1 is available at https://www.sec.gov/rules/sro/
nyse/nysearchive/nysearchive2020.htm.
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
(1) A director, officer, or substantial
security holder 7 of the company (each
a ‘‘related party’’ for purposes of current
Section 312.03(b)); (2) a subsidiary,
affiliate, or other closely related person
of a related party; or (3) any company
or entity in which a related party has a
substantial direct or indirect interest.
Such shareholder approval is subject to
an exemption for early stage companies
set forth in Section 312.03(b) of the
Manual.
Under Section 312.03(b) of the
Manual, prior shareholder approval is
currently required if the number of
shares of common stock to be issued, or
if the number of shares of common stock
into which the securities may be
convertible or exercisable, exceeds
either one percent of the number of
shares of common stock or one percent
of the voting power outstanding before
the issuance. A limited exception to
these shareholder approval
requirements permits cash sales relating
to no more than five percent of the
number of shares of common stock or
voting power outstanding that meet a
minimum price test set forth in the rule
(‘‘Minimum Price’’) 8 if the related party
in the transaction has related party
status solely because it is a substantial
security holder of the company.
The Exchange is proposing several
changes to Section 312.03(b) of the
Manual. The Exchange states that these
changes would bring its shareholder
approval requirements into closer
alignment with those of Nasdaq and
NYSE American.9 First, the Exchange
proposes to modify the class of persons
with respect to which an issuance of
common stock would require a listed
7 For purposes of Section 312.03, Section
312.04(e) provides that: ‘‘[a]n interest consisting of
less than either five percent of the number of shares
of common stock or five percent of the voting power
outstanding of a company or entity shall not be
considered a substantial interest or cause the holder
of such an interest to be regarded as a substantial
security holder.’’
8 Section 312.04(i) defines the ‘‘Minimum Price’’
as follows: ‘‘Minimum Price’’ means a price that is
the lower of: (i) The Official Closing Price
immediately preceding the signing of the binding
agreement; or (ii) the average Official Closing Price
for the five trading days immediately preceding the
signing of the binding agreement. As proposed,
Section 312.04(j) defines ‘‘Official Closing Price’’ as
follows: ‘‘Official Closing Price’’ of the issuer’s
common stock means the official closing price on
the Exchange as reported to the Consolidated Tape
immediately preceding the signing of a binding
agreement to issue the securities. For example, if
the transaction is signed after the close of the
regular session at 4:00 p.m. Eastern Standard Time
on a Tuesday, then Tuesday’s official closing price
is used. If the transaction is signed at any time
between the close of the regular session on Monday
and the close of the regular session on Tuesday,
then Monday’s official closing price is used. The
Exchange is proposing to correct a typographical
error in the definition of ‘‘Official Closing Price.’’
9 See Amendment No. 1, supra note 6, at 4.
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]]>Agencies
[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Notices]
[Pages 18349-18362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07194]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91460; File No. SR-EMERALD-2021-11]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule To Adopt Port Fees, Increase Certain Network
Connectivity Fees, and Increase the Number of Additional Limited
Service MIAX Emerald Express Interface Ports Available to Market Makers
April 2, 2021.
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 March 24, 2021, 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'').
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 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 to: (1) Adopt Port
fees; (2) increase the Exchange's network connectivity fees for its 10
gigabit (``Gb'') ultra-low latency (``ULL'') fiber connection for
Members \3\ and non-Members (collectively, the ``Proposed Access
Fees''); and (3) increase the number of Additional Limited Service MIAX
Emerald Express Interface (``MEI'') \4\ Ports available to Market
Makers.\5\
---------------------------------------------------------------------------
\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\ MIAX Emerald Express Interface is a connection to the MIAX
Emerald System that enables Market Makers to submit simple and
complex electronic quotes to MIAX Emerald. ``Full Service MEI
Ports'' means a port which provides Market Makers with the ability
to send Market Maker simple and complex quotes, eQuotes, and quote
purge messages to the MIAX Emerald System. Full Service MEI Ports
are also capable of receiving administrative information. Market
Makers are limited to two Full Service MEI Ports per Matching
Engine. ``Limited Service MEI Ports'' means a port which provides
Market Makers with the ability to send simple and complex eQuotes
and quote purge messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
\5\ ``Market Maker'' refers to ``Lead Market Maker'' (``LMM''),
``Primary Lead Market Maker'' (``PLMM'') and ``Registered Market
Maker'' (``RMM''), collectively. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
On September 15, 2020, the Exchange issued a Regulatory Circular,
which announced, among other things, that the Exchange would adopt Port
fees, thereby terminating the Waiver Period \6\ for such fees, and
increase the fees for its 10Gb ULL connection for Members and non-
Members, beginning October 1, 2020.\7\ On January 14, 2021, the
Exchange announced that it would offer Market Makers the ability to
purchase an additional six Limited Service MEI Ports,\8\ without
changing the Limited Service MEI Port fee amount.
---------------------------------------------------------------------------
\6\ ``Waiver Period'' means, for each applicable fee, the period
of time from the initial effective date of the MIAX Emerald Fee
Schedule until such time that the Exchange has an effective fee
filing establishing the applicable fee. The Exchange will issue a
Regulatory Circular announcing the establishment of an applicable
fee that was subject to a Waiver Period at least fifteen (15) days
prior to the termination of the Waiver Period and effective date of
any such applicable fee. See the Definitions Section of the Fee
Schedule.
\7\ See MIAX Emerald Regulatory Circular 2020-41 available at
https://www.miaxoptions.com/sites/default/files/circular-files/MIAX_Emerald_RC_2020_41.pdf.
\8\ See https://www.miaxoptions.com/alerts/2021/01/14/miax-emerald-options-announce-support-additional-mei-limited-service-ports. In a subsequent alert, the Exchange announced that the six
Additional Limited Service MEI Ports would be available beginning
February 16, 2021, pending filing with the Commission.
---------------------------------------------------------------------------
The Exchange initially filed its proposal to adopt certain Port
fees and increase the fees for its 10Gb ULL connection on October 1,
2020.\9\ The First Proposed Rule Change was published for comment in
the Federal Register on October 20, 2020.\10\ The Exchange notes that
the First Proposed Rule Change did not receive any comment letters.
Nonetheless, the Exchange withdrew the First Proposed Rule Change on
November 25, 2020 \11\ and resubmitted a replacement proposal.\12\ The
Second Proposed Rule Change was published for comment in the Federal
Register on December 14, 2020.\13\ The Exchange notes that the Second
Proposed Rule Change did not receive any comment letters. Nonetheless,
the Exchange withdrew the Second Proposed Rule Change on January 22,
2021 \14\ and resubmitted a replacement proposal.\15\ The Third
Proposed Rule Change was published for comment in the Federal Register
on February 5, 2021.\16\ The Exchange withdrew the Third Proposed Rule
Change on February 16, 2021 \17\ and
[[Page 18350]]
resubmitted a replacement proposal, which included the proposal to
offer six Additional Limited Service MEI Ports available to Market
Makers.\18\ On March 24, 2021, the Exchange withdrew the Fourth
Proposed Rule Change and resubmitted this proposal to further clarify
its expense and revenue projections and to make certain technical
corrections.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 90184 (October 14,
2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-12) (the
``First Proposed Rule Change'').
\10\ See id.
\11\ See Comment Letter from Joseph Ferraro, SVP, Deputy General
Counsel, the Exchange, dated November 20, 2020, notifying the
Commission that the Exchange would withdraw the First Proposed Rule
Change.
\12\ See Securities Exchange Act Release No. 90600 (December 8,
2020), 85 FR 80831 (December 14, 2020) (SR-EMERALD-2020-17) (the
``Second Proposed Rule Change'').
\13\ See id.
\14\ See Comment Letter from Joseph Ferraro, SVP, Deputy General
Counsel, the Exchange, dated January 15, 2021, notifying the
Commission that the Exchange would withdraw the Second Proposed Rule
Change.
\15\ See Securities Exchange Act Release No. 91032 (February 1,
2021), 86 FR 8428 (February 5, 2021) (SR-EMERALD-2021-02) (the
``Third Proposed Rule Change'').
\16\ See id.
\17\ See Comment Letter from Joseph Ferraro, SVP, Deputy General
Counsel, the Exchange, dated February 16, 2021, notifying the
Commission that the Exchange would withdraw the Third Proposed Rule
Change.
\18\ See Securities Exchange Act Release No. 91200 (February 24,
2021), 86 FR 12221 (March 2, 2021) (SR-EMERALD-2021-07) (the
``Fourth Proposed Rule Change'').
---------------------------------------------------------------------------
Port Fees
The Exchange proposes to adopt fees for ``Ports'', which are used
by Members and non-Members to access the Exchange. MIAX Emerald
provides four Port types: (i) The Financial Information Exchange
(``FIX'') Port,\19\, which allows Members to electronically send orders
in all products traded on the Exchange; (ii) the MEI Port, which allows
Market Makers to submit electronic orders and quotes to the Exchange;
(iii) the Clearing Trade Drop Port (``CTD'') Port,\20\ which provides
real-time trade clearing information to the participants to a trade on
MIAX Emerald and to the participants' respective clearing firms; and
(iv) the FIX Drop Copy (``FXD'') Port,\21\ which provides a copy of
real-time trade execution, correction and cancellation information
through a FIX Port to any number of FIX Ports designated by an
Electronic Exchange Member (``EEM'') \22\ to receive such messages. The
Exchange also proposes to increase the monthly fee for each Additional
Limited Service MEI Port per matching engine for Market Makers, as
described below.
---------------------------------------------------------------------------
\19\ ``FIX Port'' means an interface with MIAX Emerald systems
that enables the Port user to submit simple and complex orders
electronically to MIAX Emerald. See the Definitions Section of the
Fee Schedule.
\20\ ``CTD Port'' or ``Clearing Trade Drop Port'' provides an
Exchange Member with a real-time clearing trade updates. The updates
include the Member's clearing trade messages on a low latency, real-
time basis. The trade messages are routed to a Member's connection
containing certain information. The information includes, among
other things, the following: (i) Trade date and time; (ii) symbol
information; (iii) trade price/size information; (iv) Member type
(for example, and without limitation, Market Maker, Electronic
Exchange Member, Broker-Dealer); and (v) Exchange MPID for each side
of the transaction, including Clearing Member MPID. See the
Definitions Section of the Fee Schedule.
\21\ The FIX Drop Copy (``FXD'') Port is a messaging interface
that will provide a copy of real-time trade execution, trade
correction and trade cancellation information to FXD Port users who
subscribe to the service. FXD Port users are those users who are
designated by an EEM to receive the information and the information
is restricted for use by the EEM. FXD Port Fees will be assessed in
any month the Member is credentialed to use the FXD Port in the
production environment. See Fee Schedule, Section 5)d)iv).
\22\ ``Electronic Exchange Member'' or ``EEM'' means the holder
of a Trading Permit who is not a Market Maker. Electronic Exchange
Members are deemed ``members'' under the Exchange Act. See Exchange
Rule 100 and the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
Since the launch of the Exchange, all Port fees have been waived by
the Exchange in order to incentivize market participants to connect to
the Exchange, except for Additional Limited Service MEI Ports. However,
also at launch, the Exchange introduced the structure of Port fees on
its Fee Schedule (without proposing the actual fee amounts), in order
to indicate to market participants that Port fees would ultimately
apply upon expiration of the Waiver Period. The Exchange now proposes
to assess monthly Port fees for Members and non-Members in each month
the market participant is credentialed to use a Port in the production
environment and based upon the number of credentialed Ports that a user
is entitled to use. MIAX Emerald has Primary and Secondary Facilities
and a Disaster Recovery Facility. Each type of Port provides access to
all Exchange facilities for a single fee. The Exchange notes that,
unless otherwise specifically set forth in the Fee Schedule, the Port
fees include the information communicated through the Port. That is,
unless otherwise specifically set forth in the Fee Schedule, there is
no additional charge for the information that is communicated through
the Port apart from what the user is assessed for each Port.\23\
---------------------------------------------------------------------------
\23\ An example of one such exception where there is an
additional charge for information that is communicated through a
Port is for certain market data products, such as ToM, AIS, and MOR,
that are received via a direct connection to the Exchange. See
Sections (6a)-(c) of the Fee Schedule.
---------------------------------------------------------------------------
FIX Port Fees
Since the launch of the Exchange, fees for FIX Ports have been
waived for the Waiver Period. The Exchange now proposes to assess a
monthly FIX Port fee to Members in each month the Member is
credentialed to use a FIX Port in the production environment and based
upon the number of credentialed FIX Ports, as follows: $550 for the
first FIX Port; $350 for FIX Ports two through five; and $150 for each
FIX Port over five.
Below is the proposed table showing the FIX Port fees:
------------------------------------------------------------------------
MIAX Emerald
monthly port fees
includes
connectivity to the
FIX port fees primary, secondary
and disaster
recovery data
centers
------------------------------------------------------------------------
1st FIX Port....................................... $550.00
FIX Ports 2 through 5.............................. 350.00
Additional FIX Ports over 5........................ 150.00
------------------------------------------------------------------------
MEI Port Fees
MIAX Emerald offers different options of MEI Ports depending on the
services required by Market Makers. Since the launch of the Exchange,
fees for MEI Ports have been waived for the Waiver Period. The Exchange
now proposes to assess monthly MEI Port Fees to Market Makers based
upon the number of classes or class volume accessed by the Market
Maker. Market Makers are allocated two (2) Full Service MEI Ports \24\
and two (2) Limited Service MEI Ports \25\ per Matching Engine \26\ to
which they connect. The Full Service MEI Ports, Limited Service MEI
Ports and the Additional Limited Service MEI Ports all include access
to the Exchange's Primary and Secondary data centers and its Disaster
Recovery center.
---------------------------------------------------------------------------
\24\ See supra note 4.
\25\ See id.
\26\ A ``matching engine'' is a part of the MIAX Emerald
electronic system that processes options quotes and trades on a
symbol-by-symbol basis. Some matching engines will process option
classes with multiple root symbols, and other matching engines will
be dedicated to one single option root symbol (for example, options
on SPY will be processed by one single matching engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated matching engine. A particular root
symbol may not be assigned to multiple matching engines. See the
Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt MEI Port fees
assessable to Market Makers based upon the number of classes or class
volume accessed by the Market Maker. The Exchange proposes to adopt the
following MEI Port fees: (i) $5,000 for Market Maker Assignments in up
to 5 option classes or up to 10% of option classes by volume; (ii)
$10,000 for Market Maker Assignments in up to 10 option classes or up
to 20% of option classes by volume; (iii) $14,000 for Market Maker
Assignments in up to 40 option classes or up to 35% of option classes
by volume; (iv) $17,500 for Market Maker Assignments in up to 100
option classes or up to 50% of option classes by volume; and (v)
$20,500 for Market Maker Assignments in over 100 option classes or over
50% of option classes by volume up to all option classes listed on MIAX
Emerald.
The Exchange also proposes to adopt new footnote
``[squf]'' for its MEI Port fees that will apply to the
Market Makers
[[Page 18351]]
who fall within the following MEI Port fee levels, which represent the
4th and 5th levels of the fee table: Market Makers who have (i)
Assignments in up to 100 option classes or up to 50% of option classes
by volume and (ii) Assignments in over 100 option classes or over 50%
of option classes by volume up to all option classes listed on MIAX
Emerald. Specifically, the Exchange proposes for these monthly MEI Port
tier levels, if the Market Maker's total monthly executed volume during
the relevant month is less than 0.025% of the total monthly executed
volume reported by OCC in the customer account type for MIAX Emerald-
listed option classes for that month, then the fee will be $14,500
instead of the fee otherwise applicable to such level.
The purpose of this proposed lower monthly MEI Port fee is to
provide a lower fixed cost to those Market Makers who are willing to
quote the entire Exchange market (or substantial amount of the Exchange
market), as objectively measured by either number of classes assigned
or national ADV, but who do not otherwise execute a significant amount
of volume on the Exchange. The Exchange believes that, by offering
lower fixed costs to Market Makers that execute less volume, the
Exchange will retain and attract smaller-scale Market Makers, which are
an integral component of the option industry marketplace, but have been
decreasing in number in recent years, due to industry consolidation and
lower market maker profitability. Since these smaller-scale Market
Makers utilize less Exchange capacity due to lower overall volume
executed, the Exchange believes it is reasonable and appropriate to
offer such Market Makers a lower fixed cost. The Exchange notes that
other options exchanges assess certain of their fees at different
rates, based upon a member's participation on that exchange,\27\ and,
as such, this concept is not novel. The proposed changes to the MEI
Port fees for Market Makers who fall within the 4th and 5th levels of
the fee table are based upon a business determination of current Market
Maker assignments and trading volume.
---------------------------------------------------------------------------
\27\ See, e.g., Cboe BZX Options Exchange (``BZX Options'')
assesses the Participant Fee, which is a membership fee, according
to a member's ADV. See Cboe BZX Options Exchange Fee Schedule under
``Membership Fees''. The Participant Fee is $500 if the member ADV
is less than 5000 contracts and $1,000 if the member ADV is equal to
or greater than 5000 contracts.
---------------------------------------------------------------------------
For the calculation of the monthly MEI Port Fees that apply to
Market Makers, the number of classes is defined as the greatest number
of classes the Market Maker was assigned to quote in on any given day
within the calendar month and the class volume percentage is based on
the total national average daily volume in classes listed on MIAX
Emerald in the prior calendar quarter.\28\ Newly listed option classes
are excluded from the calculation of the monthly MEI Port Fee until the
calendar quarter following their listing, at which time the newly
listed option classes will be included in both the per class count and
the percentage of total national average daily volume. The Exchange
proposes to assess Market Makers the monthly MEI Port Fees based on the
greatest number of classes listed on MIAX Emerald that the Market Maker
was assigned to quote in on any given day within a calendar month and
the applicable fee rate that is the lesser of either the per class
basis or percentage of total national average daily volume measurement.
---------------------------------------------------------------------------
\28\ The Exchange will use the following formula to calculate
the percentage of total national average daily volume that the
Market Maker assignment is for purposes of the MEI Port Fee for a
given month: Market Maker assignment percentage of national average
daily volume = [total volume during the prior calendar quarter in a
class in which the Market Maker was assigned]/[total national volume
in classes listed on MIAX in the prior calendar quarter].
---------------------------------------------------------------------------
The Exchange charges $50 per month for each Additional Limited
Service MEI Port per matching engine for Market Makers over and above
the two (2) Limited Service MEI Ports per matching engine that are
allocated with the Full Service MEI Ports. The Full Service MEI Ports,
Limited Service MEI Ports and the Additional Limited Service MEI Ports
all include access to the Exchange's Primary and Secondary data centers
and its Disaster Recovery center. Currently, footnote ``*'' in the MEI
Port Fee table provides that the fees for Additional Limited Service
MEI Ports are not subject to the Waiver Period. Accordingly, in
connection with this proposal, the Exchange proposes to delete footnote
``*'' since the Exchange proposes to begin assessing MEI Port fees,
which will no longer be subject to the Waiver Period. The Exchange also
proposes to increase the monthly fee from $50 to $100 for each
Additional Limited Service MEI Port per matching engine for Market
Makers over and above the two (2) Limited Service MEI Ports per
matching engine that are allocated with the Full Service MEI Ports.
Below is the proposed table showing the MEI Port fees:
------------------------------------------------------------------------
Market maker assignments (the lesser of
the applicable measurements below)
Monthly MIAX Emerald MEI -------------------------------------------
fees % of national
Per class average daily volume
------------------------------------------------------------------------
$5,000.00................... Up to 5 Classes..... Up to 10% of Classes
by volume.
$10,000.00.................. Up to 10 Classes.... Up to 20% of Classes
by volume.
$14,000.00.................. Up to 40 Classes.... Up to 35% of Classes
by volume.
$17,500.00 [ssquf].......... Up to 100 Classes... Up to 50% of Classes
by volume.
$20,500.00 [ssquf].......... Over 100 Classes.... Over 50% of Classes
by volume up to all
Classes listed on
MIAX Emerald.
------------------------------------------------------------------------
[ssquf] For these Monthly MIAX Emerald MEI Port tier levels, if the
Market Maker's total monthly executed volume during the relevant month
is less than 0.025% of the total monthly executed volume reported by
OCC in the customer account type for MIAX Emerald-listed option
classes for that month, then the fee will be $14,500 instead of the
fee otherwise applicable to such level.
The Exchange also proposes to offer six (6) Additional Limited
Service MEI Ports to Market Makers. Currently, Market Makers are
limited to six Additional Limited Service MEI Ports per Matching
Engine, for a total of eight per Matching Engine. The Exchange
originally provided Limited Service MEI Ports to enhance the MEI Port
connectivity available to Market Makers. Limited Service MEI Ports have
been well received by Market Makers since the Exchange launched
operations in March of 2019. The Exchange now proposes to offer to
Market Makers the ability to purchase an additional six (6) Limited
Service MEI Ports per Matching Engine over and above the current six
(6) Additional Limited Service MEI Ports per Matching Engine that are
available for purchase by Market Makers. The Exchange proposes to make
a corresponding change to Section 5)d)ii) of the Fee Schedule to
specify
[[Page 18352]]
that Market Makers will now be limited to purchasing twelve (12)
Additional Limited Service MEI Ports per Matching Engine, for a total
of fourteen (14) per Matching Engine.
The Exchange proposes to increase the number of Additional Limited
Service MEI Ports because the Exchange is expanding its network. This
network expansion is necessary due to increased customer demand and
increased volatility in the marketplace, both of which have translated
into increased message traffic rates across the network. Consequently,
this network expansion, which increases the number of switches
supporting customer-facing systems, is necessary in order to provide
sufficient access to new and existing Members, to maintain a sufficient
amount of network capacity head-room, and to continue to provide the
same level of service across the Exchange's low-latency, high-
throughput technology environment. The Exchange notes that its
affiliates, Miami International Securities Exchange, LLC (``MIAX'') and
MIAX Pearl, LLC (``MIAX Pearl''), recently filed similar proposals to
increase the number of Additional Limited Service Ports available for
purchase due to similar network expansions and customer demand.\29\
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release Nos. 90811 (December
29, 2020), 86 FR 344 (January 5, 2021) (SR-MIAX-2020-41) and 90812
(December 29, 2020), 86 FR 338 (January 5, 2021) (SR-PEARL-2020-35).
---------------------------------------------------------------------------
The Exchange has 6 network switches that support the entire
customer base of MIAX Emerald. The Exchange plans to increase this to
12 switches, which will increase the number of available customer ports
by 100%. The proposed increase in the number of available customer
ports will enable the Exchange to continue to provide sufficient and
equal access to the MIAX Emerald System to all Members. Absent the
proposed increase in available MEI Ports, the Exchange projects that
its current inventory will be depleted and it will lack sufficient
capacity to continue to meet Members' access needs.
Purge Port Fees
The Exchange also offers Market Makers the ability to request and
be allocated two (2) Purge Ports \30\ per Matching Engine to which it
connects. Purge Ports provide Market Makers with the ability to send
quote purge messages to the MIAX Emerald System. Purge Ports are not
capable of sending or receiving any other type of messages or
information. Since the launch of the Exchange, fees for Purge Ports
have been waived for the Waiver Period. The Exchange now proposes to
amend its Fee Schedule to adopt fees for Purge Ports. For each month in
which the MIAX Emerald Market Maker has been credentialed to use Purge
Ports in the production environment and has been assigned to quote in
at least one class, the Exchange proposes to assess the MIAX Emerald
Market Maker a flat fee $1,500, regardless of the number of Purge Ports
allocated to the MIAX Emerald Market Maker.
---------------------------------------------------------------------------
\30\ ``Purge Ports'' provide Market Makers with the ability to
send quote purge messages to the MIAX Emerald System. Purge Ports
are not capable of sending or receiving any other type of messages
or information. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
CTD Port Fees
The Exchange proposes to assess a CTD Port fee as a monthly fixed
amount, not tied to transacted volume of the Member. This fixed fee
structure is the same structure in place at Nasdaq PHLX with respect to
the proposed CTD Port Fees.\31\ Since the launch of the Exchange, CTD
Port Fees have been waived for the Waiver Period. CTD provides Exchange
members with real-time clearing trade updates. The updates include the
Member's clearing trade messages on a low latency, real-time basis. The
trade messages are routed to a Member's connection containing certain
information. The information includes, among other things, the
following: (i) Trade date and time; (ii) symbol information; (iii)
trade price/size information; (iv) Member type (for example, and
without limitation, Market Maker, Electronic Exchange Member, Broker-
Dealer); (v) Exchange Member Participant Identifier (``MPID'') for each
side of the transaction, including Clearing Member MPID; and (vi)
strategy specific information for complex transactions. CTD Port fees
will be assessed in any month the Member is credentialed to use the CTD
Port in the production environment. The Exchange proposes to assess a
CTD Port fee of $450 per month.
---------------------------------------------------------------------------
\31\ See Nasdaq PHLX Pricing Schedule, Options 7, Section 9,
Other Member Fees, B. Port Fees.
---------------------------------------------------------------------------
Below is the proposed table for the CTD Port fees:
------------------------------------------------------------------------
Monthly
Description fee
------------------------------------------------------------------------
Real-Time CTD Information................................... $450.00
------------------------------------------------------------------------
FXD Port Fee
The Exchange proposes to assess an FXD Port Fee as a monthly fixed
amount, not tied to transacted volume of the Member. This fixed fee
structure is the same structure in place at Nasdaq PHLX with respect to
FXD Port Fees.\32\ Since the launch of the Exchange, FXD Port Fees have
been waived for the Waiver Period. FXD is a messaging interface that
will provide a copy of real-time trade execution, trade correction and
trade cancellation information to FXD Port users who subscribe to the
service. FXD Port users are those users who are designated by an EEM to
receive the information and the information is restricted for use by
the EEM. FXD Port fees will be assessed in any month the Member is
credentialed to use the FXD Port in the production environment. The
Exchange proposes to assess an FXD Port fee of $500 per month. Below is
the proposed table for the FXD Port fees:
---------------------------------------------------------------------------
\32\ Id.
------------------------------------------------------------------------
MIAX Emerald monthly
port fees includes
connectivity to the
Description primary, secondary
and disaster
recovery data
centers
------------------------------------------------------------------------
FIX Drop Copy Port................................ $500.00
------------------------------------------------------------------------
10Gb ULL Connectivity Fee
The Exchange proposes to amend Sections 5(a) and (b) of the Fee
Schedule to increase the monthly network connectivity fees for the 10Gb
ULL fiber connection, which is charged to both Members and non-Members
of the Exchange for connectivity to the Exchange's primary/secondary
facility. The Exchange offers to both Members and non-Members two
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 now proposes to increase its monthly network connectivity
fee for its 10Gb ULL connection to $10,000 for Members and non-Members.
* * * * *
MIAX Emerald believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee increase meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among members and markets. MIAX
Emerald believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's
[[Page 18353]]
marketplace. MIAX Emerald deems Port fees and Connectivity fees to be
access fees, and that Ports and Connectivity are inextricably linked
components of the network. Accordingly, the Exchange believes that it
is reasonable and appropriate that the costs and revenues for both
should be considered together, as the services associated with
connectivity and ports are linked pieces of the network's
infrastructure, both of which are necessary for a market participant to
access and use the trading System of the Exchange. Finally, both
Connectivity fee and Port fee revenue are consolidated into a single
line item (``Access Fees'') on the Exchange's financial statements. The
Exchange believes that it is important to demonstrate that these fees
are based on its costs to provide access to the Exchange's network and
reasonable business needs. Accordingly, the Exchange believes the
Proposed Access Fees will allow the Exchange to offset expense the
Exchange has and will incur, and that the Exchange is providing
sufficient transparency (as described below) into how the Exchange
determined to charge such fees. Accordingly, the Exchange is providing
an analysis of its revenues, costs, and profitability associated with
the Proposed Access Fees. This analysis includes information regarding
its methodology for determining the costs and revenues associated with
the Proposed Access Fees.
In order to determine the Exchange's costs associated with
providing the Proposed Access Fees, the Exchange conducted an extensive
cost review in which the Exchange analyzed every expense item in the
Exchange's general expense ledger to determine whether each such
expense relates to the Proposed Access Fees, and, if such expense did
so relate, what portion (or percentage) of such expense actually
supports the services included in the Proposed Access Fees. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide the Proposed Access Fees. For the avoidance of doubt, no
expense amount was allocated twice. The Exchange is also providing
detailed information regarding the Exchange's cost allocation
methodology--namely, information that explains the Exchange's rationale
for determining that it was reasonable to allocate certain expenses
described in this filing towards the total cost to the Exchange to
provide the Proposed Access Fees.
In order to determine the Exchange's projected revenues associated
with providing the Proposed Access Fees, the Exchange analyzed the
number of Members and non-Members currently utilizing the Exchange's
services associated with the Proposed Access Fees, and, utilizing a
recent monthly billing cycle representative of the Exchange's monthly
revenue, extrapolated annualized revenue on a going-forward basis. The
Exchange does not believe it is appropriate to factor into its analysis
future revenue growth or decline into its projections for purposes of
these calculations, given the uncertainty of such projections due to
the continually changing access needs of market participants, discounts
that can be achieved through reaching certain tiers, market participant
consolidation, etc. Additionally, the Exchange similarly does not
factor into its analysis future cost growth or decline.
The Exchange is presenting its revenue and expense associated with
the Proposed Access Fees in this filing in a manner that is consistent
with how the Exchange presents its revenue and expense in its Audited
Unconsolidated Financial Statements. The Exchange's most recent Audited
Unconsolidated Financial Statement is for 2019. However, since the
revenue and expense associated with the Proposed Access Fees were not
in place in 2019 or for the first three quarters of 2020, the Exchange
believes its 2019 Audited Unconsolidated Financial Statement is not
useful for analyzing the reasonableness of the total annual revenue and
costs associated with the Proposed Access Fees. Accordingly, the
Exchange believes it is more appropriate to analyze the Proposed Access
Fees utilizing a recent monthly billing cycle representative of the
Exchange's revenue and costs, as described herein, which utilize the
same presentation methodology as set forth in the Exchange's
previously-issued Audited Unconsolidated Financial Statements. Based on
this analysis, the Exchange believes that the Proposed Access Fees are
fair and reasonable because they will not result in excessive pricing
or supra-competitive profit when comparing the Exchange's total annual
expense associated with providing the services associated with the
Proposed Access Fees versus the total projected annual revenue the
Exchange will collect for providing those services.
* * * * *
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'').\33\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\34\ On December 20, 2019, the
Exchange adopted Connectivity Fees in a filing utilizing a cost-based
justification framework that is substantially similar to the cost-based
justification framework utilized for the instant Proposed Access
Fees.\35\ Accordingly, the Exchange believes that the Proposed Access
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 supported by evidence (including comprehensive revenue and
cost data and analysis) that they are fair and reasonable because they
do not result in excessive pricing or supra-competitive profit; and
(iv) utilize a cost-based justification framework that is substantially
similar to a framework previously used by the Exchange to establish
Connectivity Fees. Accordingly, the Exchange believes that the
Commission should find that the Proposed Fees are consistent with the
Act.
---------------------------------------------------------------------------
\33\ 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).
\34\ 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 ``Guidance'').
\35\ See Securities Exchange Act Release No. 87877 (December 31,
2019), 84 FR 738 (January 7, 2020) (SR-EMERALD-2019-39).
---------------------------------------------------------------------------
The proposed rule change is immediately effective upon filing with
the Commission pursuant to Section 19(b)(3)(A) of the Act.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \36\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \37\ 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 \38\ 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
[[Page 18354]]
investors and the public interest and is not designed to permit unfair
discrimination between customer, issuers, brokers and dealers.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(4).
\38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange launched trading on March 1, 2019. For the month of
December 2020, the Exchange had a market share of only approximately
3.58% of the U.S. options industry.\39\ The Exchange is not aware of
any evidence that a market share of approximately 3.6% provides the
Exchange with anti-competitive pricing power. If the Exchange were to
attempt to establish unreasonable pricing, then no market participant
would join or connect, and existing market participants would
disconnect.
---------------------------------------------------------------------------
\39\ See The Options Clearing Corporation (``OCC'') publishes
options and futures volume in a variety of formats, including daily
and monthly volume by exchange, available here: https://www.theocc.com/market-data/volume/default.jsp.
---------------------------------------------------------------------------
Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections to an exchange (or
not connect to an exchange) if an exchange were to establish prices for
its non-transaction fees that, in the determination of such market
participant, did not make business or economic sense for such market
participant to connect to such exchange. No options market participant
is required by rule, regulation, or competitive forces to be a Member
of the Exchange. As evidence of the fact that market participants can
and do disconnect from exchanges based on non-transaction fee pricing,
R2G Services LLC (``R2G'') filed a comment letter after BOX's proposed
rule changes to increase its connectivity fees (SR-BOX-2018-24, SR-BOX-
2018-37, and SR-BOX-2019-04).\40\ The R2G Letter stated, ``[w]hen BOX
instituted a $10,000/month price increase for connectivity; we had no
choice but to terminate connectivity into them as well as terminate our
market data relationship. The cost benefit analysis just didn't make
any sense for us at those new levels.'' \41\ Since the Exchange issued
its notice for the Proposed Access Fees, one Member discontinued the
use of the Exchange's connectivity and port services as a result of the
Proposed Access Fees. Accordingly, these examples show that if an
exchange sets too high of a fee for connectivity and/or other non-
transaction fees for its relevant marketplace, market participants can
choose to disconnect from such exchange.
---------------------------------------------------------------------------
\40\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman,
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G
Letter'').
\41\ See id.
---------------------------------------------------------------------------
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the Proposed Access Fees will not result in
excessive or supra-competitive profit. The costs associated with
providing access to Exchange Members and non-Members, as well as the
general expansion of a state-of-the-art infrastructure, are extensive,
have increased year-over-year, and are projected to increase year-over-
year in the future. In particular, the Exchange has experienced a
material increase in its costs in 2020, in connection with a project to
make its network environment more transparent and deterministic, based
on customer demand. This project will allow the Exchange to enhance its
network architecture with the intent of ensuring a best-in-class,
transparent and deterministic trading system while maintaining its
industry leading latency and throughput capabilities. In order to
provide this greater amount of transparency and higher determinism,
MIAX Emerald has made significant capital expenditures (``CapEx''),
incurred increased ongoing operational expenditures (``OpEx''), and
undertaken additional engineering research and development (``R&D'') in
the numerous areas. This includes expenditures and R&D in the following
areas: (i) Implementation of an improved network design to ensure the
minimum latency between multicast market data signals disseminated by
the Exchange across the extranet switches; (ii) an improvement to the
unicast jitter profile to reduce the occurrence of message sequence
inversions from Members to the Exchange quoting gateway processors;
(iii) introduction of new optical fiber network infrastructure that
ensures the optical fiber path for participants within extremely tight
tolerances; (iv) introduction of a re-architected and engineered
participant quoting gateway that ensures the delivery of messages to
the match engine with absolute determinism, eliminating the message
processing inversions that can occur with messages received nanoseconds
apart; and (v) an improved monitoring platform to better measure the
performance of the network and systems at extremely tight tolerances
and to provide Members with reporting on the performance of their
systems. The CapEx associated with only phase 1 of this project in 2020
was approximately $1.85 million. This expense does not include the
significant increase in employee time and other resources necessary to
maintain and service this network, which expense is captured in the
operating expense discussed below. This project, which results in a
material increase in expense of the Exchange, is a primary driver for
the increase in network connectivity fees proposed by the Exchange.
The Exchange believes the proposed increase to the 10Gb ULL
connection is an equitable allocation of reasonable fees because 10Gb
ULL purchasers: (1) Consume the most bandwidth and resources of the
network; (2) transact the vast majority of the volume on the Exchange;
and (3) require the high touch network support services provided by the
Exchange and its staff, including more costly network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange. Further, the Exchange believes the Proposed Access Fees are
equitably allocated because of customer demand for an even more
transparent and deterministic network, as described above, which has
resulted in higher CapEx, increasingly higher OpEx, and increased costs
to engineering R&D. The Proposed Access Fees are equitably allocated in
this regard because the majority of customer demand is coming from
purchasers of the 10Gb ULL connections, which Member and non-Member
firms transact the vast majority of volume on the Exchange.
Accordingly, the Exchange believes it is reasonable, equitably
allocated and not unfairly discriminatory to recoup the majority of its
costs associated with the project to make the network more transparent
and deterministic from market participants utilizing 10Gb ULL
connections on the Exchange.
The Exchange believes that the proposed increase to the 10Gb ULL
fees are equitably allocated among users of the network connectivity
alternatives, as the users of the 10Gb ULL connections consume the most
bandwidth and resources of the network. Specifically, the Exchange
notes that these users account for approximately greater than 99% of
message traffic over the network, while the users of the 1Gb
connections account for approximately less than 1% of message traffic
over the network. In the Exchange's experience, users of the 1Gb
connections do not have a business need for the high performance
network solutions required by 10Gb ULL users. The Exchange's high
performance network solutions and supporting infrastructure (including
employee support), provides unparalleled system throughput and the
capacity to handle approximately 18 million quote messages per second.
On an average day, the Exchange handles over approximately 3 billion
total messages.
[[Page 18355]]
Of those, users of the 10Gb ULL connections generate approximately 3
billion messages, and users of the 1Gb connections generate 500,000
messages. However, in order to achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. Given this difference in network utilization rate, the
Exchange believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all Member and non-Member users
benefit, but is designed and maintained from a capacity standpoint to
specifically handle the message rate and performance requirements of
10Gb ULL users.
The Exchange also believes that the connectivity fees are equitably
allocated amongst users of the network connectivity alternatives, when
these fees are viewed in the context of the overall trading volume on
the Exchange. To illustrate, the purchasers of the 10Gb ULL
connectivity account for approximately 98% of the volume on the
Exchange for the month of October 2020. This overall volume percentage
(98% of total Exchange volume) is in line with the amount of network
connectivity revenue collected from 10Gb ULL purchasers (99% of total
Exchange connectivity revenue). For example, utilizing a recent billing
cycle, Exchange Members and non-Members that purchased 10Gb ULL
connections accounted for approximately 99% of the total network
connectivity revenue collected by the Exchange from all connectivity
alternatives; and (ii) Members and non-Members that purchased 1Gb
connections accounted for approximately 1% of the revenue collected by
the Exchange from all connectivity alternatives.
The Exchange further believes that the increased fee for the 10Gb
ULL connection is an equitable allocation of reasonable fees as the
fees for the various connectivity alternatives are directly related to
the actual costs associated with providing the respective connectivity
alternatives. That is, the cost to the Exchange of providing a 1Gb
network connection is significantly lower than the cost to the Exchange
of providing a 10Gb ULL network connection. Pursuant to its extensive
cost review described above and in connection with the Exchange's new
project to increase transparency and determinism, the Exchange believes
that the average cost to provide a 10Gb ULL network connection is
approximately 8 times more than the average cost to provide a 1Gb
connection. The simple hardware and software component costs alone of a
10Gb ULL connection are not 8 times more than the 1Gb connection.
Rather, it is the associated premium-product level network monitoring,
reporting, and support services costs that accompany a 10Gb ULL
connection which cause it to be 8 times more costly to provide than the
1Gb connection. Accordingly, the Exchange believes it is equitable to
allocate those network infrastructure costs that accompany a 10Gb ULL
connection to the purchasers of those connections, and not to
purchasers of 1Gb connections.
The Exchange differentiates itself by offering a ``premium-
product'' network experience, as an operator of a high performance,
ultra-low latency network with unparalleled system throughput, which
network can support access to three distinct options markets and
multiple competing market-makers having affirmative obligations to
continuously quote over 750,000 distinct trading products (per
exchange), and the capacity to handle approximately 18 million quote
messages per second. The ``premium-product'' network experience enables
users of 10Gb ULL connections to receive the network monitoring and
reporting services for those approximately 750,000 distinct trading
products. There is a significant, quantifiable amount of R&D effort,
employee compensation and benefits expense, and other expense
associated with providing the high touch network monitoring and
reporting services that are utilized by the 10Gb ULL connections
offered by the Exchange. These value add services are fully-discussed
herein, and the actual costs associated with providing these services
are the basis for the differentiated amount of the fees for the various
connectivity alternatives.
In order to provide more detail and to quantify the Exchange's
costs associated with providing access to the Exchange in general, the
Exchange notes that there are material costs associated with providing
the infrastructure and headcount to fully-support access to the
Exchange. The Exchange incurs technology expense 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. While some
of the expense is fixed, much of the expense is not fixed, and thus
increases as the services associated with the Proposed Access Fees
increase. For example, new 10Gb ULL connections and Ports 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. Further, as the total number of all
connections and Ports 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, the cost to MIAX Emerald and its affiliates is not fixed.
The Exchange believes the Proposed Access Fees are reasonable in order
to offset the costs to the Exchange associated with providing access to
its network infrastructure.
Further, because the costs of operating its own data center are
significant and not economically feasible for the Exchange at this
time, the Exchange does not operate its own data centers, and instead
contracts with a third-party data center provider. The Exchange notes
that other competing 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. The Proposed Access Fees,
charged for accessing the Exchange's data center network
infrastructure, are directly related to the network and offset such
costs.
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. In
fact, the Exchange often receives inquiries from other industry
participants regarding the status of networking issues outside of the
Exchange's own network environment that are impacting the industry as a
whole via the SIPs. This
[[Page 18356]]
includes inquiries from regulators because the Exchange has a superior,
state-of the-art network that, through its enhanced monitoring and
reporting solutions, often detects and identifies industry-wide
networking issues ahead of the SIPs. The Exchange also incurs costs
associated with the maintenance and improvement of existing tools and
the development of new tools.
Additionally, certain Exchange-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. In sum, the costs associated with maintaining and
enhancing a state-of-the-art exchange network 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 those costs through the Proposed Access Fees. 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 Proposed Access Fees that must
be charged to access it, in order to recover those costs.
The Exchange believes it is reasonable to consider the expense and
revenue for ports and connectivity alternatives together because ports
and connectivity are inextricably linked components of the network
infrastructure, and that both are necessary for a market participant to
access the Exchange. The various types of connectivity and port
alternatives that the Exchange offers provide a wide array of access
alternatives necessary for a market participant to conduct its business
using the Exchange, which is a business decision to be made by each
particular type of market participant. The different types of
connectivity and port alternatives allows Members to conduct their
different business strategies--some Members put an emphasis on speed,
while others emphasize other strategies, such as redundancy and
certainty of execution. The Exchange does not require a Member to have
a certain framework for accessing the Exchange, but provides various
connectivity and port alternatives for each Member's distinct business
lines.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEI ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers or high frequency trading firms utilize these ports (typically
coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Market Makers have quoting and other obligations that
traditional customers do not. Market Makers, therefore, need ports and
connections that can handle using far more of the network's capacity
for message throughput, risk protections, and the amount of information
that has to be assessed. Market Makers account for the vast majority of
network capacity utilization and volume executed on the Exchange, as
discussed throughout.\42\ Accordingly, the Exchange believes that it is
reasonable and appropriate to charge market participants more for MEI
ports versus FIX ports and other lower capacity ports.
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\42\ See supra page 72 (discussing how purchasers of the 10Gb
ULL connectivity accounted for approximately 98% of the volume on
the Exchange for the month of October 2020; 99% of total Exchange
connectivity revenue; Members and non-Members that purchased 10Gb
ULL connections accounted for approximately 99% of the total network
connectivity revenue collected by the Exchange from all connectivity
alternatives; and Members and non-Members that purchased 1Gb
connections accounted for approximately 1% of the revenue collected
by the Exchange from all connectivity alternatives).
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The Exchange believes that its proposal to increase the number of
Additional Limited Service Ports available to Market Makers is
consistent with the objectives of Section 6(b)(5) of the Act \43\
because the proposed addition of Limited Service MEI Ports will be
available to all Market Makers and the current fees for the Additional
Limited Service MEI Ports apply equally to all Market Makers regardless
of type, and access to the Exchange is offered on terms that are not
unfairly discriminatory. The Exchange proposes to increase the number
of available Limited Service MEI Ports because the Exchange is
expanding its network. This network expansion is necessary due to
increased customer demand and increased volatility in the marketplace,
both of which have translated into increased message traffic rates
across the network. Consequently, this network expansion, which
increases the number of switches supporting customer facing systems, is
necessary in order to provide sufficient and equal access to new and
existing Members, to maintain a sufficient amount of network capacity
head-room, and to continue to provide the same level of service across
the Exchange's low-latency, high-throughput technology environment.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Currently, the Exchange has 6 network switches that support the
entire customer base of MIAX Emerald. The Exchange plans to increase
this to 12 switches, which will increase the number of available
customer ports by 100%. This increase in the number of available
customer ports will enable the Exchange to continue to provide
sufficient and equal access to the MIAX Emerald System for all Members.
Absent the proposed increase in available MEI Ports, the Exchange
projects that its current inventory will be depleted and it will lack
sufficient capacity to continue to meet Members' access needs. Further,
the Exchange notes the decision of whether to purchase any Additional
Limited Service MEI Ports is completely optional and it is a business
decision for each Market Maker to determine whether Additional Limited
Service MEI Ports are necessary to meet their business requirements.
The Exchange further believes that the availability of the
Additional Limited Service MEI Ports is equitable and not unfairly
discriminatory because it will enable Market Makers to maintain
uninterrupted access to the MIAX Emerald System and consequently
enhance the marketplace by helping Market Makers to better manage risk,
thus preserving the integrity of the MIAX Emerald markets, all to the
benefit of and protection of investors and the public as a whole. The
Exchange also believes that its proposal is consistent with Section
6(b)(4) of the Act because only Market Makers that voluntarily purchase
Additional Limited Service MEI Ports will be charged the monthly fee
per port.
As stated above, the Exchange proposes to expand its network by
making available six Additional Limit Service MEI Ports due to
increased customer demand and increased volatility in the marketplace,
both of which have translated into increased message traffic rates
across the network. The cost to expand the network in this
[[Page 18357]]
manner is greater than the revenue the Exchange anticipates the
Additional Limited Service MEI Ports will generate. Specifically, the
Exchange estimates it has already incurred a one-time cost of
approximately $175,000 in capital expenditures (``CapEx'') on hardware,
software, and other items to expand the network to make available the
six Additional Limited Service MEI Ports. This estimated cost also
includes expense associated with providing the necessary engineering
and support personnel to transition those Market Makers who wish to
acquire any number of Additional Limited Service MEI Ports.
The Exchange cannot predict with certainty how many Market Makers
will purchase the Additional Limited Service MEI Ports, in what
quantity, or if Market Makers will add/drop Limited Service MEI Ports
from month to month. However, utilizing a recent monthly billing cycle,
the Exchange notes four Market Makers purchased all six of the
Additional Limited Service MEI Ports, and two Market Makers purchased
two out of six of the Additional Limited Service MEI Ports, which will
be subject to the proposed fee of $100 per month per Additional Limited
Service MEI Port for each Matching Engine. Therefore, utilizing the
recent monthly billing cycle, Market Makers purchased 28 total
Additional Limited Service MEI Ports. The Exchange has 12 Matching
Engines.\44\ Assuming that each Market Maker that purchased the 28
Additional Limited Service MEI Ports connected to all 12 Matching
Engines at a rate of $100 per month, the Exchange projects monthly
revenue for the Additional Limited Service MEI Ports of approximately
$33,600 (28 Additional LSPs x 12 Matching Engines x $100 = $33,600 per
month). On a going-forward basis and assuming no Market Maker drops or
adds Additional Limited Service MEI Ports, the Exchange projects to
collect an additional $403,200 in annualized revenue from the
Additional Limited Service MEI Ports that are part of this proposal.
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\44\ The Exchange notes that several Market Makers, including
those that purchased the Additional Limited Service MEI Ports, do
not connect to all 12 Matching Engines. It is a business decision of
each Market Maker whether to purchase one or more types of ports
that connect to each Matching Engine.
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The Exchange only has four primary sources of revenue: Transaction
fees, access fees (of which the Proposed Access Fees 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 Exchange believes that the Proposed Access Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the
Exchange projects to incur in connection with providing these services
versus the total annual revenue that the Exchange projects to collect
in connection with providing these services. For 2020,\45\ the total
annual expense for providing the services associated with the Proposed
Access Fees for MIAX Emerald is projected to be approximately $9.3
million. The $9.3 million in expense includes expense associated with
providing all ports and all connectivity alternatives. The Exchange is
unable to separate out its expense by connectivity alternative, as all
connectivity alternatives are intricately combined in a single network
infrastructure. Nevertheless, the Exchange attributes the majority of
connectivity expense to the 10Gb ULL connections because the majority
of network capacity is used by 10Gb ULL purchasers.\46\ The $9.3
million in projected total annual expense is comprised of the
following, all of which are directly related to the services associated
with the Proposed Access Fees: (1) Third-party expense, relating to
fees paid by MIAX Emerald to third-parties for certain products and
services; and (2) internal expense, relating to the internal costs of
MIAX Emerald to provide the services associated with the Proposed
Access Fees. As noted above, the Exchange believes it is more
appropriate to analyze the Proposed Access Fees utilizing its 2020
revenue and costs, which utilize the same presentation methodology as
set forth in the Exchange's previously-issued Audited Unconsolidated
Financial Statements.\47\ The $9.3 million in projected total annual
expense is directly related to the services associated with the
Proposed Access Fees, and not any other product or service offered by
the Exchange. It does not include general costs of operating matching
systems and other trading technology, and no expense amount was
allocated twice.
---------------------------------------------------------------------------
\45\ The Exchange has not yet finalized its 2020-year end
results.
\46\ See supra note 42.
\47\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-part expense described
in this filing is attributed to the same line item for the
Exchange's 2020 Form 1 Amendment, which will be filed in 2021.
---------------------------------------------------------------------------
As discussed, the Exchange conducted an extensive cost review in
which the Exchange analyzed every expense item in the Exchange's
general expense ledger (this includes over 150 separate and distinct
expense items) to determine whether each such expense relates to the
services associated with the Proposed Access Fees, and, if such expense
did so relate, what portion (or percentage) of such expense actually
supports those services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to those services. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide services associated with the Proposed Access Fees.
For 2020, total third-party expense, relating to fees paid by MIAX
Emerald to third-parties for certain products and services for the
Exchange to be able to provide the services associated with the
Proposed Access Fees, is projected to be $1,932,519. This includes, but
is not limited to, a portion of the fees paid to: (1) Equinix, for data
center services, for the primary, secondary, and disaster recovery
locations of the MIAX Emerald trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking MIAX Emerald's office
locations in Princeton, NJ and Miami, FL to all data center locations;
(3) Secure Financial Transaction Infrastructure (``SFTI''),\48\ which
supports connectivity and feeds for the entire U.S. options industry;
(4) various other services providers (including Thompson Reuters, NYSE,
Nasdaq, and Internap), which provide content, connectivity services,
and infrastructure services for critical components of options
connectivity and network services; and (5) various other hardware and
software providers (including Dell and Cisco, which support the
production environment in which Members and non-Members connect to the
network to trade, receive market data, etc.).
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\48\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
---------------------------------------------------------------------------
For clarity, only a portion of all fees paid to such third-parties
is included in
[[Page 18358]]
the third-party expense herein, and no expense amount is allocated
twice. Accordingly, MIAX Emerald does not allocate its entire
information technology and communication costs to the services
associated with the Proposed Access Fees.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fees. In
particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the services
associated with the Proposed Access Fees to its Members and non-Members
and their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the services associated with the
Proposed Access Fees, only that portion which the Exchange identified
as being specifically mapped to providing the services associated with
the Proposed Access Fees, approximately 73% of the total Equinix
expense (68% allocated towards the cost of providing the provision of
network connectivity and 5% allocated towards the cost of providing
ports). The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking MIAX
Emerald with its affiliates, Miami International Securities Exchange,
LLC (``MIAX'') and MIAX Pearl, LLC (``MIAX Pearl''), as well as the
data center and disaster recovery locations. As such, all of the trade
data, including the billions of messages each day per exchange, flow
through Zayo's infrastructure over the Exchange's network. Without
these services from Zayo, the Exchange would not be able to operate and
support the network and provide the services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the services associated with the
Proposed Access Fees, only the portion which the Exchange identified as
being specifically mapped to providing the Proposed Access Fees,
approximately 66% of the total Zayo expense (62% allocated towards the
cost of providing the provision of network connectivity and 4%
allocated towards the cost of providing ports). The Exchange believes
this allocation is reasonable because it represents the Exchange's
actual cost to provide the services associated with the Proposed Access
Fees, and not any other service, as supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and non-Members and their customers. The
Exchange did not allocate all of the SFTI and other service providers'
expense toward the cost of providing the services associated with the
Proposed Access Fees, only the portions which the Exchange identified
as being specifically mapped to providing the services associated with
the Proposed Access Fees, approximately 94% of the total SFTI and other
service providers' expense (89% allocated towards the cost of providing
the provision of network connectivity and 5% allocated towards the cost
of providing ports).\49\ The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the services associated with the Proposed Access Fees.
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\49\ The Exchange notes an increase to the SFTI and other
service providers' expense percentage contained herein versus the
same expense category percentage the Exchange used in its initial
filing to adopt connectivity fees. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). This is because at the time the Exchange
performed its cost analysis for the initial connectivity fee filing,
the Exchange was operational for only part of the year. Since that
time, the Exchange has been fully operational, increased market
share and number of market participants, and undertaken significant
performance upgrades, resulting in increased expense. Accordingly,
the Exchange believes it is appropriate to analyze its SFTI and
other service providers' expense more in line with its affiliate
options exchanges, MIAX and MIAX PEARL.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide access to its Members and non-Members and their customers. The
Exchange did not allocate all of the hardware and software provider
expense toward the cost of providing the services associated with the
Proposed Access Fees, only the portions which the Exchange identified
as being specifically mapped to providing the services associated with
the Proposed Access Fees, approximately 57% of the total hardware and
software provider expense (54% allocated towards the cost of providing
the provision of network connectivity and 3% allocated towards the cost
of providing ports). The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the services associated with the Proposed Access Fees.
For 2020, total projected internal expense, relating to the
internal costs of MIAX Emerald to provide the services associated with
the Proposed Access Fees, is projected to be $7,367,259. This includes,
but is not limited to, costs associated with: (1) Employee compensation
and benefits for full-time employees that support the services
associated with the Proposed Access Fees, including staff in network
operations, trading operations, development, system operations,
business, as well as staff in general corporate departments (such as
legal, regulatory, and finance) that support those employees and
functions (including an increase as a result of the higher determinism
project); (2) depreciation and amortization of hardware and software
used to provide the services associated with the Proposed Access Fees,
including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the network for trading; and (3) occupancy costs for leased
office space for staff that provide the services associated with the
Proposed Access Fees. The breakdown of these costs is more fully-
described below. For clarity, only a portion of all such internal
expenses are included in
[[Page 18359]]
the internal expense herein, and no expense amount is allocated twice.
Accordingly, MIAX Emerald does not allocate its entire costs contained
in those items to the services associated with the Proposed Access
Fees.
The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fees. In
particular, MIAX Emerald's employee compensation and benefits expense
relating to providing the services associated with the Proposed Access
Fees is projected to be $4,489,924, which is only a portion of the
$9,354,009 total projected expense for employee compensation and
benefits. The Exchange believes it is reasonable to allocate the
identified portion of such expense because this includes the time spent
by employees of several departments, including Technology, Back Office,
Systems Operations, Networking, Business Strategy Development (who
create the business requirement documents that the Technology staff use
to develop network features and enhancements), Trade Operations,
Finance (who provide billing and accounting services relating to the
network), and Legal (who provide legal services relating to the
network, such as rule filings and various license agreements and other
contracts). As part of the extensive cost review conducted by the
Exchange, the Exchange reviewed the amount of time spent by each
employee on matters relating to the provision of services associated
with the Proposed Access Fees. Without these employees, the Exchange
would not be able to provide the services associated with the Proposed
Access Fees to its Members and non-Members and their customers. The
Exchange did not allocate all of the employee compensation and benefits
expense toward the cost of the services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the services associated with the
Proposed Access Fees, approximately 48% of the total employee
compensation and benefits expense (39% allocated towards the cost of
providing the provision of network connectivity and 9% allocated
towards the cost of providing ports). The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the services associated with the Proposed Access Fees,
and not any other service, as supported by its cost review.
MIAX Emerald's depreciation and amortization expense relating to
providing the services associated with the Proposed Access Fees is
projected to be $2,630,687, which is only a portion of the $3,812,590
total projected expense for depreciation and amortization. The Exchange
believes it is reasonable to allocate the identified portion of such
expense because such expense includes the actual cost of the computer
equipment, such as dedicated servers, computers, laptops, monitors,
information security appliances and storage, and network switching
infrastructure equipment, including switches and taps that were
purchased to operate and support the network and provide the services
associated with the Proposed Access Fees. Without this equipment, the
Exchange would not be able to operate the network and provide the
services associated with the Proposed Access Fees to its Members and
non-Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the services associated with the Proposed Access Fees, only the portion
which the Exchange identified as being specifically mapped to providing
the services associated with the Proposed Access Fees, approximately
69% of the total depreciation and amortization expense, as these
services would not be possible without relying on such equipment (65%
allocated towards the cost of providing the provision of network
connectivity and 4% allocated towards the cost of providing ports). The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to provide the services associated with the
Proposed Access Fees, and not any other service, as supported by its
cost review.
MIAX Emerald's occupancy expense relating to providing the services
associated with the Proposed Access Fees is projected to be $246,648,
which is only a portion of the $474,323 total projected expense for
occupancy. The Exchange believes it is reasonable to allocate the
identified portion of such expense because such expense represents the
portion of the Exchange's cost to rent and maintain a physical location
for the Exchange's staff who operate and support the network, including
providing the services associated with the Proposed Access Fees. This
amount consists primarily of rent for the Exchange's Princeton, NJ
office, as well as various related costs, such as physical security,
property management fees, property taxes, and utilities. The Exchange
operates its Network Operations Center (``NOC'') and Security
Operations Center (``SOC'') from its Princeton, New Jersey office
location. A centralized office space is required to house the staff
that operates and supports the network. The Exchange currently has
approximately 150 employees. Approximately two-thirds of the Exchange's
staff are in the Technology department, and the majority of those staff
have some role in the operation and performance of the services
associated with the Proposed Access Fees. Without this office space,
the Exchange would not be able to operate and support the network and
provide the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. Accordingly, the Exchange
believes it is reasonable to allocate the identified portion of its
occupancy expense because such amount represents the Exchange's actual
cost to house the equipment and personnel who operate and support the
Exchange's network infrastructure and the services associated with the
Proposed Access Fees. The Exchange did not allocate all of the
occupancy expense toward the cost of providing the services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to operating and supporting the
network, approximately 52% of the total occupancy expense (48%
allocated towards the cost of providing the provision of network
connectivity and 4% allocated towards the cost of providing ports). The
Exchange believes this allocation is reasonable because it represents
the Exchange's cost to provide the services associated with the
Proposed Access Fees, and not any other service, as supported by its
cost review.
The Exchange notes that a material portion of its total overall
expense is allocated to the provision of services associated with the
Proposed Access Fees. The Exchange believes this is reasonable and in
line, as the Exchange operates a technology-based business that
differentiates itself from its competitors based on its trading systems
that rely on its high performance network, resulting in significant
technology expense. Over two-thirds of Exchange staff are technology-
related employees. The majority of the Exchange's expense is
technology-based. As described above, the Exchange has only four
primary sources of fees in to recover its costs, thus the Exchange
believes it is reasonable to allocate a material portion of its total
[[Page 18360]]
overall expense towards the Proposed Access Fees.
The Exchange's monthly projected revenue for the Proposed Access
Fees is based on the following projected purchases by Members and non-
Members, which is based on a recent billing cycle: (i) 62 10Gb ULL
connections; (ii) 14 CTD Ports; (iii) 8 FXD Ports; (iv) 113 FIX Ports;
(v) 363 Limited Service MEI Ports; (vi) 37 Full Service MEI Ports; \50\
and (vii) 10 Purge Ports. As described above, the fee charged to each
Market Maker for MEI Ports can vary from month to month depending on
the number of classes in which the Market Maker was assigned to quote
on any given day within the calendar month, and upon certain class
volume percentages. The Exchange also provides a further discount for a
Market Maker's MEI Port fees if the Market Maker's total monthly
executed volume during the relevant month is less than 0.025% of the
total monthly executed volume reported by OCC in the customer account
type for MIAX Emerald-listed option classes for that month. The
Exchange has at least one Member consistently quoting in the highest
tier for MEI Port fees, but receiving this discount, resulting in lower
revenue for the Exchange. Further, the projected revenue from FIX Port
fees is subject to change from month to month depending on the number
of FIX Ports purchased.
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\50\ The Exchange's projections included 9 firms or their
affiliates purchasing Full Service MEI Ports. Of those firms, the
Exchange projects that 6 firms will achieve the highest tier in the
MEI Port fee table, 2 firms will achieve the lowest tier in the MEI
Port fee table, and 1 firm will achieve the middle tier in the MEI
Port fee table.
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Accordingly, based on current assumptions and approximations, the
Exchange projects total monthly Port revenue (including the Additional
Limited Service MEI Port revenue described above and the cancellation
of Ports by one Member) of approximately $268,200 and total 10Gb ULL
connectivity revenue of approximately $620,000 (including the
cancellation of one 10Gb ULL connection by one Member). The Exchange
notes that the port revenue projections are subject to change depending
on the number of classes that Market Makers are quoting in and the
tiers achieved. As such, the projection of $268,200 per month is not a
static number and can fluctuate month to month. Further, as noted
above, one Member dropped its connections and ports as a direct result
of the introduction of the Proposed Access Fees. Accordingly,
reflecting that cancellation of approximately $324,000 per year
($27,000 total per month in connectivity and port fees), and including
the revenue from the proposed Additional Limited Service MEI Ports, the
Exchange projects annualized revenue of approximately $10,658,400 from
all connectivity alternatives and port types.\51\ This is broken down
as follows:
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\51\ This revenue projection includes revenue from all
connectivity sources, including all 10Gb ULL connections discussed
above (after giving effect to the recent cancellation), two 1Gb
connections (the Exchange is not increasing fees for 1Gb
connections, however, those connections are included in total
connectivity revenue in order to have a true comparison between all
connectivity revenue and all connectivity expense), and all port
types discussed above (after giving effect to the recent
cancellation).
$268,200/month x 12 months = $3,218,400/annually for all ports
(including the subtraction of one Member who dropped ports, plus the
Additional LSPs described above)
$620,000/month x 12 months = $7,440,000/annually for all
connectivity (including the subtraction of one Member who dropped its
10Gb ULL connection)
$3,218,400 + $7,440,000 = $10,658,400/annually for the
Proposed Access Fees
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the services associated with
the Proposed Access Fees will not result in excessive pricing or supra-
competitive profit. As described above, on a going-forward, fully-
annualized basis, the Exchange projects that its annualized revenue for
providing the services associated with the Proposed Access Fees would
be approximately $10,658,400, based on a recent billing cycle. The
Exchange projects that its annualized expense for providing the
services associated with the Proposed Access Fees would be
approximately $9.3 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for
the providing the services associated with the Proposed Access Fees
will not result in excessive pricing or supra-competitive profit, as
the Exchange will make only a 12.7% profit margin on the Proposed
Access Fees ($10,658,400-$9.3 million = $1,358,400 per annum). This
profit margin does not take into account the cost of the CapEx the
Exchange projected to spend in 2020 of $1.85 million on the project to
make the Exchange's network more deterministic, or the amounts the
Exchange is projected to spend each year on CapEx going forward for
that project. This profit margin also does not take into account the
cost of the CapEx of $175,000 for adding the six Additional Limited
Service MEI Ports.
For the avoidance of doubt, none of the expenses included herein
relating to the services associated with the Proposed Access Fees
relate to the provision of any other services offered by MIAX Emerald.
Stated differently, no expense amount of the Exchange is allocated
twice. The Exchange notes that, with respect to the MIAX Emerald
expenses included herein, those expenses only cover the MIAX Emerald
market; expenses associated with the Exchange's affiliate exchanges,
MIAX and MIAX Pearl, are accounted for separately and are not included
within the scope of this filing. Stated differently, no expense amount
of the Exchange is also allocated to MIAX or MIAX Pearl.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the services
associated with the Proposed Access Fees because the Exchange performed
a line-by-line item analysis of all the expenses of the Exchange, and
has determined the expenses that directly relate to operation and
support of the network. Further, the Exchange notes that, without the
specific third-party and internal items listed above, the Exchange
would not be able to operate and support the network, including
providing the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. Each of these expense
items, including physical hardware, software, employee compensation and
benefits, occupancy costs, and the depreciation and amortization of
equipment, have been identified through a line-by-line item analysis to
be integral to the operation and support of the network. The Proposed
Access Fees are intended to recover the Exchange's costs of operating
and supporting the network. Accordingly, the Exchange believes that the
Proposed Access Fee Increases are fair and reasonable because they do
not result in excessive pricing or supra-competitive profit, when
comparing the actual network operation and support costs to the
Exchange versus the projected annual revenue from the Proposed Access
Fees, including the increased amount.
The Exchange also points out that it is not seeking to recoup any
of its past costs associated with the provision of any Ports during the
Waiver Period. The
[[Page 18361]]
Exchange currently has 35 Members,\52\ all of whom did not pay Port
fees during the Waiver Period from the time these firms all became
Members of the Exchange. Further, the majority of firms that are
Members of the Exchange's affiliate options exchanges, MIAX and MIAX
Pearl, also became Members of those exchanges during similar Waiver
Periods for the MIAX and MIAX Pearl Port fees. Accordingly, the
Exchange (and MIAX and MIAX Pearl) have assumed approximately 100% of
the costs associated with providing Ports for the majority of Member
firms of the Exchange, MIAX, and MIAX Pearl during their respective
Waiver Periods. Accordingly, the Exchange believes that it is
reasonable, equitable, and not unfairly discriminatory to now adopt
Port fees that are reasonably related to (and designed to recover) the
Exchange's cost associated with the provision of such Ports.
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\52\ See https://www.miaxoptions.com/exchange-members/emerald.
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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.
Intra-Market Competition
The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the Proposed Access 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 Access
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 Access 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.
The Exchange had one of its member firms cancel its membership with the
Exchange as a direct result of the Proposed Access Fees. The Exchange
also notes that it has far less Members as compared to the much greater
number of members at other options exchanges. 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. The Exchange is
also unaware of any assertion that its existing fee levels or the
Proposed Access 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, as
described above.
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than 16% market share. Therefore,
no exchange possesses significant pricing power in the execution of
multiply-listed equity and ETF options order flow. For the month of
December 2020, the Exchange had a market share of approximately 3.58%
of executed multiply-listed equity options \53\ and the Exchange
believes that the ever-shifting market share among exchanges from month
to month demonstrates that market participants can discontinue or
reduce use of certain categories of products, or shift order flow, in
response to fee changes. In such an environment, the Exchange must
continually adjust its fees and fee waivers to remain competitive with
other exchanges and to attract order flow to the Exchange.
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\53\ See supra note 39.
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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,\54\ and Rule 19b-4(f)(2) \55\ 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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\54\ 15 U.S.C. 78s(b)(3)(A)(ii).
\55\ 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-2021-11 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-2021-11. 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
[[Page 18362]]
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-2021-11 and should be submitted
on or before April 29, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07194 Filed 4-7-21; 8:45 am]
BILLING CODE 8011-01-P
