Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Fee Schedule, 37379-37388 [2021-15036]
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Federal Register / Vol. 86, No. 133 / Thursday, July 15, 2021 / Notices
competitive environment, market
participants are free to choose which
competing exchange to use to satisfy
their business needs. As a result, the
Exchange believes this proposed rule
change permits fair competition among
national securities exchanges.
Accordingly, the Exchange does not
believe its proposed fee changes impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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,22 and Rule
19b–4(f)(2) 23 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2021–30 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PEARL–2021–30. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2021–30 and
should be submitted on or before
August 5, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–15033 Filed 7–14–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92366; File No. SR–
PEARL–2021–32]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Options Fee Schedule
July 9, 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 July 1,
2021, MIAX PEARL, LLC (‘‘MIAX Pearl’’
or ‘‘Exchange’’) filed with the Securities
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
22 15
U.S.C. 78s(b)(3)(A)(ii).
23 17 CFR 240.19b–4(f)(2).
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37379
and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
remove certain credits and amend the
monthly Trading Permit 3 fees for
Exchange Members.4
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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 remove certain credits
and amend the monthly Trading Permit
fees (‘‘Proposed Access Fees’’) for
Exchange Members.
Remove ‘‘Monthly Volume Credit’’
The Exchange proposes to amend the
Definitions section of the Fee Schedule
to delete the definition and remove the
credits applicable to the Monthly
Volume Credit for Members. The
3 The term ‘‘Trading Permit’’ means a permit
issued by the Exchange that confers the ability to
transact on the Exchange. See Exchange Rule 100.
4 The term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of Exchange Rules for
purposes of trading on the Exchange as an
‘‘Electronic Exchange Member’’ or ‘‘Market Maker.’’
Members are deemed ‘‘members’’ under the
Exchange Act. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
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Exchange established the Monthly
Volume Credit in 2018 5 to encourage
Members to send increased Priority
Customer 6 order flow to the Exchange,
which the Exchange applied to the
assessment of certain non-transaction
rebates and fees for that Member. The
Exchange applies a different Monthly
Volume Credit depending on whether
the Member connects to the Exchange
via the FIX Interface 7 or MEO
Interface.8 Currently, the Exchange
assesses the Monthly Volume Credit to
a Member whose executed Priority
Customer volume along with that of its
Affiliates,9 not including Excluded
5 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
6 ‘‘Priority Customer’’ means a person or entity
that (i) is not a broker or dealer in securities, and
(ii) does not place more than 390 orders in listed
options per day on average during a calendar month
for its own beneficial accounts(s). The number of
orders shall be counted in accordance with
Interpretation and Policy .01 of Exchange Rule 100.
See the Definitions Section of the Fee Schedule and
Exchange Rule 100, including Interpretation and
Policy .01.
7 ‘‘FIX Interface’’ means the Financial Information
Exchange interface for certain order types as set
forth in Exchange Rule 516. See the Definitions
Section of the Fee Schedule and Exchange Rule
100.
8 ‘‘MEO Interface’’ or ‘‘MEO’’ means a binary
order interface for certain order types as set forth
in Rule 516 into the MIAX Pearl System. See the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
9 ‘‘Affiliate’’ means (i) an affiliate of a Member of
at least 75% common ownership between the firms
as reflected on each firm’s Form BD, Schedule A,
or (ii) the Appointed Market Maker of an Appointed
EEM (or, conversely, the Appointed EEM of an
Appointed Market Maker). An ‘‘Appointed Market
Maker’’ is a MIAX Pearl Market Maker (who does
not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has
been appointed by an EEM and an ‘‘Appointed
EEM’’ is an EEM (who does not otherwise have a
corporate affiliation based upon common
ownership with a MIAX Pearl Market Maker) that
has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl
Market Maker appoints an EEM and an EEM
appoints a MIAX Pearl Market Maker, for the
purposes of the Fee Schedule, by each completing
and sending an executed Volume Aggregation
Request Form by email to membership@
miaxoptions.com no later than 2 business days
prior to the first business day of the month in which
the designation is to become effective. Transmittal
of a validly completed and executed form to the
Exchange along with the Exchange’s
acknowledgement of the effective designation to
each of the Market Maker and EEM will be viewed
as acceptance of the appointment. The Exchange
will only recognize one designation per Member. A
Member may make a designation not more than
once every 12 months (from the date of its most
recent designation), which designation shall remain
in effect unless or until the Exchange receives
written notice submitted 2 business days prior to
the first business day of the month from either
Member indicating that the appointment has been
terminated. Designations will become operative on
the first business day of the effective month and
may not be terminated prior to the end of the
month. Execution data and reports will be provided
to both parties. See the Definitions Section of the
Fee Schedule.
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Contracts,10 is at least 0.30% of MIAX
Pearl-listed Total Consolidated Volume
(‘‘TCV’’),11 as set forth in the following
table:
Type of member connection
Member that connects via
the FIX Interface ...............
Member that connects via
the MEO Interface .............
Monthly
volume
credit
$250
1,000
If a Member connects via both the
MEO Interface and FIX Interface and
qualifies for the Monthly Volume Credit
based upon its Priority Customer
volume, the greater Monthly Volume
Credit shall apply to such Member. The
Monthly Volume Credit is a single,
once-per-month credit towards the
aggregate monthly total of nontransaction fees assessable to a Member.
The Exchange now proposes to amend
the Definitions section of the Fee
Schedule to delete the definition and
remove the Monthly Volume Credit. The
Exchange established the Monthly
Volume Credit when it first launched
operations to attract order flow by
lowering the initial fixed cost for
Members. The Monthly Volume Credit
has achieved its purpose and the
Exchange now believes it is appropriate
to remove this credit. The Exchange
believes that the Exchange’s existing
Priority Customer rebates and fees will
continue to allow the Exchange to
remain highly competitive and continue
to attract order flow and maintain
market share.
Remove Trading Permit Fee Credit
The Exchange proposes to amend
Section 3)b) of the Fee Schedule to
remove the Trading Permit fee credit
that is denoted in footnote ‘‘*’’ below
the Trading Permit fee table. The
Trading Permit fee credit is applicable
to Members that connect via both the
MEO and FIX Interfaces. Currently,
Members who connect via both the
MEO and FIX Interfaces are assessed the
rates for both types of Trading Permits,
but these Members receive a $100
monthly credit towards the Trading
Permit fees applicable to the MEO
Interface use. The Exchange now
10 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
11 ‘‘TCV’’ means total consolidated volume
calculated as the total national volume in those
classes listed on MIAX Pearl for the month for
which the fees apply, excluding consolidated
volume executed during the period of time in
which the Exchange experiences an Exchange
System Disruption (solely in the option classes of
the affected Matching Engine). See the Definitions
Section of the Fee Schedule.
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proposes to remove the Trading Permit
fee credit and delete footnote ‘‘*’’ from
Section 3b) of the Fee Schedule.
The Exchange established the Trading
Permit fee credit when it first launched
operations to attract order flow and
increase membership by lowering the
costs for Members that connect via both
the MEO Interface and FIX Interface.
The Trading Permit fee credit has
achieved its purposes and the Exchange
now believes that it is appropriate to
remove this credit in light of the current
operating conditions and membership
population on the Exchange.
Amend Trading Permit Fees
The Exchange proposes to amend
Section 3b) of the Fee Schedule to
increase the amount of the monthly
Trading Permit fees. The Exchange
issues Trading Permits to Members who
are either Electronic Exchange
Members 12 (‘‘EEMs’’) or Market
Makers.13 The Exchange assesses
Trading Permit fees based upon the
monthly total volume executed by the
Member and its Affiliates on the
Exchange across all origin types, not
including Excluded Contracts, as
compared to the total TCV in all MIAX
Pearl-listed options. The Exchange
adopted a tier-based fee structure based
upon the volume-based tiers detailed in
the definition of ‘‘Non-Transaction Fees
Volume-Based Tiers’’ 14 in the
Definitions section of the Fee Schedule.
The Exchange also assesses Trading
Permit fees based upon the type of
interface used by the Member to connect
to the Exchange—the FIX Interface and/
or the MEO Interface.
Current Trading Permit Fees.
Currently, each Member who connects
to the System 15 via the FIX Interface is
assessed the following monthly Trading
Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $250;
12 The term ‘‘Electronic Exchange Member’’ or
‘‘EEM’’ means the holder of a Trading Permit who
is a Member representing as agent Public Customer
Orders or Non-Customer Orders on the Exchange
and those non-Market Maker Members conducting
proprietary trading. Electronic Exchange Members
are deemed ‘‘members’’ under the Exchange Act.
See the Definitions Section of the Fee Schedule.
13 The term ‘‘Market Maker’’ or ‘‘MM’’ means a
Member registered with the Exchange for the
purpose of making markets in options contracts
traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI
of these Rules. See the Definitions Section of the
Fee Schedule.
14 See the Definitions Section of the Fee Schedule
for the monthly volume thresholds associated with
each Tier.
15 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
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(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$350; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $450.
Each Member who connects to the
System via the MEO Interface is
assessed the following monthly Trading
Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $300;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$400; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $500.
Proposed Trading Permit Fees. The
Exchange now proposes to amend its
Trading Permit fees as follows. Each
Member who connects to the System via
the FIX Interface will be assessed the
following monthly Trading Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
$500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
$1,000; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
$1,500.
Each Member who connects to the
System via the MEO Interface will be
assessed the following monthly Trading
Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
$2,500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
$4,000; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
$6,000.
Members who use the MEO Interface
may also connect to the System through
the FIX Interface as well, and vice versa.
The Exchange notes that the Trading
Permit fees for Members who connect
through the MEO Interface are higher
than the Trading Permit fees for
Members who connect through the FIX
Interface, since the FIX Interface utilizes
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less capacity and resources of the
Exchange. The MEO Interface offers
lower latency and higher throughput,
which utilizes greater capacity and
resources of the Exchange. The FIX
Interface offers lower bandwidth
requirements and an industry-wide
uniform message format. Both EEMs and
Market Makers may connect to the
Exchange using either interface.
Trading Permits grant access to the
Exchange, thus providing the ability to
submit orders and trade on the
Exchange, in the manner defined in the
relevant Trading Permit. Without a
Trading Permit, a Member cannot
directly trade on the Exchange.
Therefore, a Trading Permit is a means
to directly access the Exchange (which
offers meaningful value), and the
Exchange now proposes to increase its
monthly fees since it has not done so
since the fees were first adopted in
2018 16 and are designed to recover a
portion of the costs associated with
directly accessing the Exchange. The
Exchange notes that the its affiliates,
Miami International Securities
Exchange, LLC (‘‘MIAX’’) and MIAX
Emerald, LLC (‘‘MIAX Emerald’’),
charge a similar, fixed trading permit fee
to certain users, and a similar, varying
trading permit fee to other users, based
upon the number of assignments of
option classes or the percentage of
volume in option classes.17 The
Exchange notes that other options
exchanges assess certain of their
membership fees at different rates,
based upon a member’s participation on
that exchange,18 and, as such, this
concept is not new or novel. The
Exchange also notes that the proposed
16 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
17 See the MIAX Fee Schedule, Section 3)b);
MIAX Emerald Fee Schedule, Section 3)b).
18 See e.g., NYSE Arca Options Fees and Charges,
p.1 (assessing market makers $6,000 for up to 175
option issues, an additional $5,000 for up to 350
option issues, an additional $4,000 for up to 1,000
option issues, an additional $3,000 for all option
issues on the exchange, and an additional $1,000
for the fifth trading permit and for each trading
permit thereafter); NYSE American Options Fee
Schedule, p. 23 (assessing market makers $8,000 for
up to 60 plus the bottom 45% of option issues, an
additional $6,000 for up to 150 plus the bottom
45% of option issues, an additional $5,000 for up
to 500 plus the bottom 45% of option issues, and
additional $4,000 for up to 1,100 plus the bottom
45% of option issues, an additional $3,000 for all
issues traded on the exchange, and an additional
$2,000 for 6th to 9th ATPs; plus an addition fee for
premium products). See also 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. Id.
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37381
increased Trading Permit fees are in line
with, or cheaper than, the trading
permit fees or similar membership fees
charged by other options exchanges.19
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 20
in general, and furthers the objectives of
Section 6(b)(4) of the Act 21 in
particular, in that it is an equitable
allocation of reasonable dues, fees and
other charges among its members and
issuers and other persons using its
facilities. The Exchange also believes
the proposal furthers the objectives of
Section 6(b)(5) of the Act in that it is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest and is not designed to
permit unfair discrimination between
customers, issuers, brokers and dealers.
The Exchange 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
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various access fees for market
participants to access an exchange’s
marketplace. The Exchange deems
Trading Permit fees to be Access Fees.
It records these fees as part of its
‘‘Access Fees’’ revenue in its financial
statements. The Exchange believes that
it is important to demonstrate that these
fees are based on its costs and
reasonable business needs. The
Exchange believes the Proposed Access
Fees will allow the Exchange to offset
expenses 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.
19 See
id.
U.S.C. 78f(b).
21 15 U.S.C. 78f(b)(4) and (5).
20 15
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In order to determine the Exchange’s
costs to provide the access services
associated with 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 access
services. The sum of all such portions
of expenses represents the total cost of
the Exchange to provide the access
services associated with 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 cost to the Exchange to
provide the access services associated
with the Proposed Access Fees.
In order to determine the Exchange’s
projected revenues associated with the
Proposed Access Fees, the Exchange
analyzed the number of Members
currently utilizing the Trading Permits,
and, utilizing a recent monthly billing
cycle representative of 2021 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 due to lower trading volume
and vice versa, 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 2020.
However, since the revenue and
expense associated with the Proposed
Access Fees were not in place in 2020
or for the first two quarters of 2021, the
Exchange believes its 2020 Audited
Unconsolidated Financial Statement is
not useful for analyzing the
reasonableness of the total annual
revenue and costs associated with the
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Proposed Access Fees. Accordingly, the
Exchange believes it is more appropriate
to analyze the Proposed Access Fees
utilizing its 2021 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.
The Exchange notes that this is the
same process utilized by the Exchange’s
affiliate, MIAX Emerald, in a filing
recently noticed by the Commission
when MIAX Emerald adopted its own
trading permit fees.22
*
*
*
*
*
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’’).23 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.24 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 will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange, and
its affiliates MIAX and MIAX Emerald,
to establish or increase other non22 See Securities Exchange Act Release No. 91033
(February 1, 2021), 86 FR 8455 (February 5, 2021)
(SR–EMERALD–2021–03) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Monthly
Trading Permit Fees).
23 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).
24 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’’).
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transaction fees. Accordingly, the
Exchange believes that the Commission
should find that the Proposed Access
Fees are consistent with the Act.
*
*
*
*
*
As of June 30, 2021, the Exchange had
only a 5.31% market share of the U.S.
equity options industry for the month of
June 2021.25 The Exchange is not aware
of any evidence that a market share of
approximately 5–6% 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 access to an
exchange (or not initially access 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 access 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 drop
their access to exchanges based on nontransaction 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). 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.’’ Similarly, the Exchange’s
affiliate, MIAX Emerald, noted in a
recent filing that once MIAX Emerald
issued a notice that it was instituting
Trading Permit fees, among other nontransaction fees, one Member dropped
its access to the Exchange as a result of
those fees.26 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 drop their
access to such exchange.
Removal of Monthly Volume Credit and
Trading Permit Fee Credit
The Exchange believes its proposal to
remove the Monthly Volume Credit is
25 See ‘‘The market at a glance’’, available at
www.miaxoptions.com (last visited June 30, 2021).
26 See supra note 22.
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reasonable, equitable and not unfairly
discriminatory because all market
participants will no longer be offered
the ability to achieve the extra credits
associated with the Monthly Volume
Credit for submitting Priority Customer
volume to the Exchange and access to
the Exchange is offered on terms that are
not unfairly discriminatory. The
Exchange believes it is equitable and not
unfairly discriminatory to remove the
Monthly Volume Credit from the Fee
Schedule for business and competitive
reasons because, in order to attract order
flow when the Exchange first launched
operations, the Exchange established the
Monthly Volume Credit to lower the
initial fixed cost for Members. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions
and the current type and amount of
Priority Customer volume executed on
the Exchange. The Exchange believes
that the Exchange’s Priority Customer
rebates and fees will still allow the
Exchange to remain highly competitive
such that the Exchange should continue
to attract order flow and maintain
market share.
The Exchange believes its proposal to
remove the Trading Permit fee credit for
Members that connect via both the MEO
Interface and FIX Interface is
reasonable, equitable and not unfairly
discriminatory because all market
participants will no longer be offered
the ability to receive the credit and
access to the Exchange is offered on
terms that are not unfairly
discriminatory. The Exchange believes
it is equitable and not unfairly
discriminatory to remove the Trading
Permit fee credit for business and
competitive reasons because, in order to
attract order flow and membership after
the Exchange first launched operations,
the Exchange established the Trading
Permit fee credit to lower the costs for
Members that connect via both the MEO
Interface and FIX Interface. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions
and membership on the Exchange.
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Trading Permit Fee Increase
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
pricing or supra-competitive profit. The
Proposed Access Fees are also
reasonable and equitable because they
are in line with, or cheaper than, the
trading permit fees or similar
membership fees charged by other
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options exchanges.27 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.
The Exchange’s high performance
network solutions and supporting
infrastructure (including employee
support), provides unparalleled system
throughput and the capacity to handle
approximately 10.7 million order
messages per second. On an average
day, the Exchange handles over
approximately 2.7 billion total
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 expense for storage and
network transport capabilities.
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
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number of Members
increases, the Exchange and its affiliates
may 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 the Exchange
and its affiliates to provide access to its
Members is not fixed. The Exchange
believes the Proposed Access Fees are
reasonable in order to offset a portion of
the costs to the Exchange associated
with providing access to its network
infrastructure.
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27 See
supra note 18.
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37383
The Exchange only has four primary
sources of revenue: Transaction fees,
access fees (which includes the
Proposed Access Fees), 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 supracompetitive profit, when comparing the
total annual expense that the Exchange
projects to incur in connection with
providing these access services versus
the total annual revenue that the
Exchange projects to collect in
connection with services associated
with the Proposed Access Fees. For
2021,28 the total annual expense for
providing the access services associated
with the Proposed Access Fees for the
Exchange is projected to be
approximately $844,741. The $844,741
in projected total annual expense is
comprised of the following, all of which
are directly related to the access services
associated with the Proposed Access
Fees: (1) Third-party expense, relating to
fees paid by the Exchange to thirdparties for certain products and services;
and (2) internal expense, relating to the
internal costs of the Exchange to
provide the services associated with the
Proposed Access Fees.29 As noted
above, the Exchange believes it is more
appropriate to analyze the Proposed
Access Fees utilizing its 2021 revenue
and costs, which utilize the same
presentation methodology as set forth in
the Exchange’s previously-issued
Audited Unconsolidated Financial
Statements.30 The $844,741 in projected
total annual expense is directly related
to the access services associated with
the Proposed Access Fees, and not any
other product or service offered by the
Exchange. It does not include general
28 The Exchange has not yet finalized its 2021
year end results.
29 The percentage allocations used in this
proposed rule change may differ from past filings
from the Exchange or its affiliates due to, among
other things, changes in expenses charged by thirdparties, adjustments to internal resource allocations,
and different system architecture of the Exchange
as compared to its affiliates.
30 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. 87876 (December 31,
2019), 85 FR 757 (January 7, 2020) (SR–PEARL–
2019–36). Accordingly, the third-party expense
described in this filing is attributed to the same line
item for the Exchange’s 2021 Form 1 Amendment,
which will be filed in 2022.
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costs of operating matching systems and
other 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 access 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 access services
associated with the Proposed Access
Fees.
For 2021, total third-party expense,
relating to fees paid by the Exchange to
third-parties for certain products and
services for the Exchange to be able to
provide the access services associated
with the Proposed Access Fees, is
projected to be $188,815. 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
Exchange’s trading system
infrastructure; (2) Zayo Group Holdings,
Inc. (‘‘Zayo’’) for network services (fiber
and bandwidth products and services)
linking the Exchange’s office locations
in Princeton, New Jersey and Miami,
Florida, to all data center locations; (3)
Secure Financial Transaction
Infrastructure (‘‘SFTI’’),31 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 connect to the network to
trade, receive market data, etc.).
31 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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For clarity, only a portion of all fees
paid to such third-parties is included in
the third-party expense herein, and no
expense amount is allocated twice.
Accordingly, the Exchange does not
allocate its entire information
technology and communication costs to
the access services associated with the
Proposed Access Fees. Further, the
Exchange notes that, with respect to the
MIAX Pearl expenses included herein,
those expenses only cover the MIAX
Pearl options market; expenses
associated with the MIAX Pearl equities
market are accounted for separately and
are not included within the scope of this
filing.
The Exchange believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange to provide the access
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 access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
Equinix expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only
that portion which the Exchange
identified as being specifically mapped
to providing the access services
associated with the Proposed Access
Fees, approximately 8% of the total
applicable Equinix expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access 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 the Exchange with its
affiliates, MIAX and MIAX Emerald, as
well as the data center and disaster
recovery locations. As such, all of the
trade data, including the billions of
PO 00000
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Sfmt 4703
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 access services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the Zayo expense toward the cost of
providing the access 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 4% of the total
applicable Zayo expense. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
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 their customers. The
Exchange did not allocate all of the SFTI
and other service providers’ expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
3% of the total applicable SFTI and
other service providers’ expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access 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
their customers. The Exchange did not
allocate all of the hardware and software
provider expense toward the cost of
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providing the access services associated
with the Proposed Access Fees, only the
portions which the Exchange identified
as being specifically mapped to
providing the access services associated
with the Proposed Access Fees,
approximately 5% of the total
applicable hardware and software
provider expense. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
services associated with the Proposed
Access Fees.
For 2021, total projected internal
expense, relating to the internal costs of
the Exchange to provide the access
services associated with the Proposed
Access Fees, is projected to be $655,925.
This includes, but is not limited to,
costs associated with: (1) Employee
compensation and benefits for full-time
employees that support the access
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 access 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 access 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
the internal expense herein, and no
expense amount is allocated twice.
Accordingly, the Exchange does not
allocate its entire costs contained in
those items to the access 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 access
services associated with the Proposed
Access Fees. In particular, the
Exchange’s employee compensation and
benefits expense relating to providing
the access services associated with the
Proposed Access Fees is projected to be
$549,834, which is only a portion of the
$9,163,894 total projected expense for
employee compensation and benefits.
The Exchange believes it is reasonable
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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 access services associated
with the Proposed Access Fees. Without
these employees, the Exchange would
not be able to provide the access
services associated with the Proposed
Access Fees to its Members and their
customers. The Exchange did not
allocate all of the employee
compensation and benefits expense
toward the cost of the access services
associated with the Proposed Access
Fees, only the portions which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
6% of the total applicable employee
compensation and benefits expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.
The Exchange’s depreciation and
amortization expense relating to
providing the access services associated
with the Proposed Access Fees is
projected to be $66,316, which is only
a portion of the $1,326,325 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 access services associated
with the Proposed Access Fees. Without
this equipment, the Exchange would not
be able to operate the network and
provide the access services associated
PO 00000
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37385
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portion which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
5% of the total applicable depreciation
and amortization expense, as these
access services would not be possible
without relying on such. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
services associated with the Proposed
Access Fees, and not any other service,
as supported by its cost review.
The Exchange’s occupancy expense
relating to providing the access services
associated with the Proposed Access
Fees is projected to be $39,775, which
is only a portion of the $497,180 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 access 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 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
access services associated with the
proposed Trading Permit fees. Without
this office space, the Exchange would
not be able to operate and support the
network and provide the access services
associated with the Proposed Access
Fees to its 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
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network infrastructure and the access
services associated with the Proposed
Access Fees. The Exchange did not
allocate all of the occupancy expense
toward the cost of providing the access
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
8% of the total applicable occupancy
expense. The Exchange believes this
allocation is reasonable because it
represents the Exchange’s cost to
provide the access 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 access
services (including connectivity, ports,
and trading permits). The Exchange
believes this is reasonable and in line,
as the Exchange operates a technologybased business that differentiates itself
from its competitors based on its trading
systems that rely on access to a 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 to recover its costs, thus
the Exchange believes it is reasonable to
allocate a material portion of its total
overall expense towards access fees.
Accordingly, based on the facts and
circumstances presented, the Exchange
believes that its provision of the access
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. To
illustrate, on a going-forward, fullyannualized basis, the Exchange projects
that its annualized revenue for
providing the access services associated
with the Proposed Access Fees would
be approximately $1,170,000 per
annum, based on a recent billing cycle.
The Exchange projects that its
annualized expense for providing the
access services associated with the
Proposed Access Fees would be
approximately $844,741 per annum.
Accordingly, on a fully-annualized
basis, the Exchange believes its total
projected revenue for providing the
access services associated with the
Proposed Access Fees will not result in
excessive pricing or supra-competitive
profit, as the Exchange will make only
a 28% profit margin on the Proposed
Access Fees ($1,170,000 in revenue
minus $844,741 in expense = $325,259
profit per annum). The Exchange notes
that the fees charged for Trading Permits
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can vary from month to month
depending on the type of interface used
and the Non-Transaction Fees VolumeBased Tier that is achieved for that
month. As such, the revenue projection
is not a static number, with monthly
Trading Permit fees likely to fluctuate
month to month.
For the avoidance of doubt, none of
the expenses included herein relating to
the access services associated with the
Proposed Access Fees relate to the
provision of any other services offered
by the Exchange. Stated differently, no
expense amount of the Exchange is
allocated twice. The Exchange notes
that, with respect to the MIAX Pearl
expenses included herein, those
expenses only cover the MIAX Pearl
options market; expenses associated
with the MIAX Pearl equities market
and the Exchange’s affiliate exchanges,
MIAX and MIAX Emerald, 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
Pearl Equites, MIAX or MIAX Emerald.
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 access 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
providing access to the Exchange.
Further, the Exchange notes that,
without the specific third-party and
internal items listed above, the
Exchange would not be able to provide
the access services associated with the
Proposed Access Fees to its 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 providing
access services. The Proposed Access
Fees are intended to recover the
Exchange’s costs of providing access to
Exchange Systems. Accordingly, the
Exchange believes that the Proposed
Access Fees are fair and reasonable
because they do not result in excessive
pricing or supra-competitive profit,
when comparing the actual costs to the
Exchange versus the projected annual
revenue from the Proposed Access Fees.
The Exchange believes the proposed
changes are reasonable, equitably
PO 00000
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allocated and not unfairly
discriminatory, and do not result in a
‘‘supra-competitive’’ 32 profit. Of note,
the Guidance defines ‘‘supracompetitive profit’’ as profits that
exceed the profits that can be obtained
in a competitive market.33 With the
proposed changes, the Exchange
anticipates it will have a profit margin
of 28% for its Trading Permit fees.
Based on the 2019 Audited Financial
Statements of the competing options
exchanges (since the 2020 Audited
Financial Statements will likely not
become publicly available until early
July 2021, after the Exchange has
submitted this filing), the Exchange’s
profit margin is well below the
operating profit margins of other
competing exchanges. For example,
Nasdaq ISE, LLC’s (‘‘ISE’’) operating
profit margin, for all of 2019, was
83%.34 ISE’s equity options market
share for all of 2019 was 8.99%35 while
its access fees are as follows: $500 per
month for Electronic Access Members;
$5,000 per month for Primary Market
Makers; and $2,500 per month for
Competitive Market Makers.36 Nasdaq
PHLX LLC’s (‘‘PHLX’’) operating profit
margin, for all of 2019, was 67%.37
PHLX’s equity options market share for
all of 2019 was 15.85%38 while its
permit fees are as follows: $4,000 per
month for Floor Brokers; $6,000 per
month for Floor Lead Market Makers
and Floor Market Makers; and $4,000
per month for Remote Lead Market
Makers and Remote Market Makers.39
The Exchange further believes its
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because the Exchange,
and its affiliates, are still recouping the
initial expenditures from building out
their systems while the legacy
exchanges have already paid for and
built their systems.
32 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’’).
33 See id.
34 See PHLX Form 1, Exhibit D, filed June 30,
2020 available at https://sec.report/Document/
9999999997-20-003902/.
35 See https://www.theocc.com/Market-Data/
Market-Data-Reports/Volume-and-Open-Interest/
Volume-by-Exchange.
36 See Nasdaq ISE LLC Options 7 Pricing
Schedule, Section 8.A. Access Services, at https://
listingcenter.nasdaq.com/rulebook/ise/rules/
ISE%20Options%207.
37 See ISE Form 1, filed June 29, 2020 available
at Form 1—ISE—Final (1).pdf (sec.gov).
38 See supra note 33.
39 See Nasdaq PHLX Options 7 Pricing Schedule,
Section 8.A. Permit and Registration Fees, at
https://listingcenter.nasdaq.com/rulebook/phlx/
rules/Phlx%20Options%207.
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Federal Register / Vol. 86, No. 133 / Thursday, July 15, 2021 / Notices
The Exchange believes that the
Proposed Access Fees are reasonable,
equitable and not unfairly
discriminatory because they are in line
with, or cheaper than, the trading
permit fees or similar membership fees
charged by other options exchanges.40
The Proposed Access Fees are fair and
equitable and not unreasonably
discriminatory because they apply
equally to all Members regardless of
type and access to the Exchange is
offered on terms that are not unfairly
discriminatory. The Exchange designed
the fee rates in order to provide
objective criteria for Trading Permit
holders that connect via the MEO
Interface of different sizes and business
models that best matches their activity
on the Exchange.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive. In such an environment,
the Exchange must continually adjust its
fees for services and products, in
addition to order flow, to remain
competitive with other exchanges. The
Exchange believes that the proposed
changes reflect this competitive
environment.
The Guidance provides that in
determining whether a proposed fee is
constrained by significant competitive
forces, the Commission will consider
whether there are reasonable substitutes
for the product or service that is the
subject of a proposed fee. As described
below, the Exchange believes substitute
products and services are available to
market participants, including, among
other things, other options exchanges
that market participants may connect to
in lieu of the Exchange, indirect
connectivity to the Exchange via a thirdparty reseller and/or trading of any
options products, including proprietary
products, in the Over-the-Counter
(‘‘OTC’’) markets. Indeed, there are
currently 16 registered options
exchanges that trade options, some of
which have similar or lower
connectivity fees.41 Based on publicly
available information, no single options
40 See
supra note 18.
e.g., Phlx and ISE Rules, General Equity
and Options Rules, General 8, Section 1(b). Phlx
and ISE each charge a monthly fee of $2,500 for
each 1Gb connection, $10,000 for each 10Gb
connection and $15,000 for each 10Gb Ultra
connection, which the equivalent of the Exchange’s
10Gb ULL connection. See also NYSE American
Fee Schedule, Section V.B, and Arca Fees and
Charges, Co-Location Fees. NYSE American and
Arca each charge a monthly fee of $5,000 for each
1Gb circuit, $14,000 for each 10Gb circuit and
$22,000 for each 10Gb LX circuit, which the
equivalent of the Exchange’s 10Gb ULL connection.
khammond on DSKJM1Z7X2PROD with NOTICES
41 See
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exchange has more than approximately
14–15% of the market share as of June
30, 2021.42
There is also no regulatory
requirement that any market participant
connect to any one options exchange,
that any market participant connect at a
particular connection speed or act in a
particular capacity on the Exchange, or
trade any particular product offered on
an exchange. Moreover, membership is
not a requirement to participate on the
Exchange. A market participant may
submit orders to the Exchange via a
Sponsored User.43 Indeed, the Exchange
is unaware of any one options exchange
whose membership includes every
registered broker-dealer. Based on a
recent analysis conducted by the Cboe
Exchange, Inc. (‘‘Cboe’’), as of October
21, 2020, only three (3) of the brokerdealers, out of approximately 250
broker-dealers, were members of at least
one exchange that lists options for
trading and were members of all 16
options exchanges.44 Additionally, the
Cboe Fee Filing found that several
broker-dealers were members of only a
single exchange that lists options for
trading and that the number of members
at each exchange that trades options
varies greatly.45
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
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 fee rates are
42 See https://markets.cboe.com/us/options/
market_statistics/.
43 See Exchange Rule 210. The Sponsored User is
subject to the fees, if any, of the Sponsoring
Member. The Exchange notes that the Sponsoring
Member is not required to publicize, let alone
justify or file with the Commission its fees, and as
such could charge the Sponsored User any fees it
deems appropriate, even if such fees would
otherwise be considered supra-competitive, or
otherwise potentially unreasonable or
uncompetitive.
44 See Securities Exchange Act Release No. 90333
(November 4, 2020), 85 FR 71666 (November 10,
2020) (SR–CBOE–2020–105) (the ‘‘Cboe Fee
Filing’’). The Cboe Fee Filing cited to the October
2020 Active Broker Dealer Report, provided by the
Commission’s Office of Managing Executive, on
October 8, 2020.
45 Id.
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
37387
designed in order to provide objective
criteria for users that connect via the
MEO Interface of different sizes and
business models that best matches their
activity on the Exchange.
The Exchange believes the removal of
the Monthly Volume Credit and Trading
Permit fee credit will not place certain
market participants at a relative
disadvantage to other market
participants because, in order to attract
order flow when the Exchange first
launched operations, the Exchange
established these credits to lower the
initial fixed cost for Members. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions,
including the Exchange’s overall
membership and the current type and
amount of volume executed on the
Exchange. The Exchange believes that
the Exchange’s rebates and fees will still
allow the Exchange to remain highly
competitive such that the Exchange
should continue to attract order flow
and maintain market share.
Inter-Market Competition
The Exchange believes the Proposed
Access Fees do not place an undue
burden on competition on other options
exchanges that is not necessary or
appropriate. In particular, options
market participants are not forced to
become members of all options
exchanges. The Exchange notes that it
has far less Members as compared to the
much greater number of members at
other options exchanges. There are a
number of large users that connect via
the MEO Interface and broker-dealers
that are members of other options
exchange but not Members of the
Exchange. 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
discontinue their membership with the
Exchange.
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. As of June 30,
2021, the Exchange had a market share
of approximately 5.31% of executed
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Federal Register / Vol. 86, No. 133 / Thursday, July 15, 2021 / Notices
multiply-listed equity options 46 for the
month of June 2021, 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 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,47 and Rule
19b–4(f)(2) 48 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:
khammond on DSKJM1Z7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2021–32 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PEARL–2021–32. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2021–32 and
should be submitted on or before
August 5, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–15036 Filed 7–14–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92367; File No. SR–
PEARL–2021–31]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change by MIAX PEARL, LLC To
Amend the MIAX Pearl Options Fee
Schedule
July 9, 2021.
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
46 See
supra note 25.
U.S.C. 78s(b)(3)(A)(ii).
48 17 CFR 240.19b–4(f)(2).
49 17
47 15
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17:11 Jul 14, 2021
1 15
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PO 00000
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
Frm 00115
Fmt 4703
Sfmt 4703
thereunder,2 notice is hereby given that
on July 1, 2021, MIAX PEARL, LLC
(‘‘MIAX Pearl’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options 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/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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
Add/Remove Tiered Rebates/Fees set
forth in Section 1)a) of the Fee Schedule
that apply to the MIAX Pearl Market
Maker 3 Origin, to modify the volume
threshold for the alternative Volume
Criteria in Tier 3.
Background
The Exchange currently assesses
transaction rebates and fees to all
market participants which are based
upon the total monthly volume
2 17
CFR 240.19b–4.
Maker’’ means a Member registered
with the Exchange for the purpose of making
markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See the Definitions Section of the Fee
Schedule.
3 ‘‘Market
E:\FR\FM\15JYN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 133 (Thursday, July 15, 2021)]
[Notices]
[Pages 37379-37388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15036]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92366; File No. SR-PEARL-2021-32]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Options Fee Schedule
July 9, 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 July 1, 2021, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to remove certain credits and amend
the monthly Trading Permit \3\ fees for Exchange Members.\4\
---------------------------------------------------------------------------
\3\ The term ``Trading Permit'' means a permit issued by the
Exchange that confers the ability to transact on the Exchange. See
Exchange Rule 100.
\4\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of Exchange
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
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 remove certain
credits and amend the monthly Trading Permit fees (``Proposed Access
Fees'') for Exchange Members.
Remove ``Monthly Volume Credit''
The Exchange proposes to amend the Definitions section of the Fee
Schedule to delete the definition and remove the credits applicable to
the Monthly Volume Credit for Members. The
[[Page 37380]]
Exchange established the Monthly Volume Credit in 2018 \5\ to encourage
Members to send increased Priority Customer \6\ order flow to the
Exchange, which the Exchange applied to the assessment of certain non-
transaction rebates and fees for that Member. The Exchange applies a
different Monthly Volume Credit depending on whether the Member
connects to the Exchange via the FIX Interface \7\ or MEO Interface.\8\
Currently, the Exchange assesses the Monthly Volume Credit to a Member
whose executed Priority Customer volume along with that of its
Affiliates,\9\ not including Excluded Contracts,\10\ is at least 0.30%
of MIAX Pearl-listed Total Consolidated Volume (``TCV''),\11\ as set
forth in the following table:
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\6\ ``Priority Customer'' means a person or entity that (i) is
not a broker or dealer in securities, and (ii) does not place more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial accounts(s). The number of
orders shall be counted in accordance with Interpretation and Policy
.01 of Exchange Rule 100. See the Definitions Section of the Fee
Schedule and Exchange Rule 100, including Interpretation and Policy
.01.
\7\ ``FIX Interface'' means the Financial Information Exchange
interface for certain order types as set forth in Exchange Rule 516.
See the Definitions Section of the Fee Schedule and Exchange Rule
100.
\8\ ``MEO Interface'' or ``MEO'' means a binary order interface
for certain order types as set forth in Rule 516 into the MIAX Pearl
System. See the Definitions Section of the Fee Schedule and Exchange
Rule 100.
\9\ ``Affiliate'' means (i) an affiliate of a Member of at least
75% common ownership between the firms as reflected on each firm's
Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market
Maker (who does not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has been appointed by an EEM
and an ``Appointed EEM'' is an EEM (who does not otherwise have a
corporate affiliation based upon common ownership with a MIAX Pearl
Market Maker) that has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl Market Maker
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for
the purposes of the Fee Schedule, by each completing and sending an
executed Volume Aggregation Request Form by email to
[email protected] no later than 2 business days prior to
the first business day of the month in which the designation is to
become effective. Transmittal of a validly completed and executed
form to the Exchange along with the Exchange's acknowledgement of
the effective designation to each of the Market Maker and EEM will
be viewed as acceptance of the appointment. The Exchange will only
recognize one designation per Member. A Member may make a
designation not more than once every 12 months (from the date of its
most recent designation), which designation shall remain in effect
unless or until the Exchange receives written notice submitted 2
business days prior to the first business day of the month from
either Member indicating that the appointment has been terminated.
Designations will become operative on the first business day of the
effective month and may not be terminated prior to the end of the
month. Execution data and reports will be provided to both parties.
See the Definitions Section of the Fee Schedule.
\10\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\11\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
------------------------------------------------------------------------
Monthly volume
Type of member connection credit
------------------------------------------------------------------------
Member that connects via the FIX Interface.............. $250
Member that connects via the MEO Interface.............. 1,000
------------------------------------------------------------------------
If a Member connects via both the MEO Interface and FIX Interface
and qualifies for the Monthly Volume Credit based upon its Priority
Customer volume, the greater Monthly Volume Credit shall apply to such
Member. The Monthly Volume Credit is a single, once-per-month credit
towards the aggregate monthly total of non-transaction fees assessable
to a Member.
The Exchange now proposes to amend the Definitions section of the
Fee Schedule to delete the definition and remove the Monthly Volume
Credit. The Exchange established the Monthly Volume Credit when it
first launched operations to attract order flow by lowering the initial
fixed cost for Members. The Monthly Volume Credit has achieved its
purpose and the Exchange now believes it is appropriate to remove this
credit. The Exchange believes that the Exchange's existing Priority
Customer rebates and fees will continue to allow the Exchange to remain
highly competitive and continue to attract order flow and maintain
market share.
Remove Trading Permit Fee Credit
The Exchange proposes to amend Section 3)b) of the Fee Schedule to
remove the Trading Permit fee credit that is denoted in footnote ``*''
below the Trading Permit fee table. The Trading Permit fee credit is
applicable to Members that connect via both the MEO and FIX Interfaces.
Currently, Members who connect via both the MEO and FIX Interfaces are
assessed the rates for both types of Trading Permits, but these Members
receive a $100 monthly credit towards the Trading Permit fees
applicable to the MEO Interface use. The Exchange now proposes to
remove the Trading Permit fee credit and delete footnote ``*'' from
Section 3b) of the Fee Schedule.
The Exchange established the Trading Permit fee credit when it
first launched operations to attract order flow and increase membership
by lowering the costs for Members that connect via both the MEO
Interface and FIX Interface. The Trading Permit fee credit has achieved
its purposes and the Exchange now believes that it is appropriate to
remove this credit in light of the current operating conditions and
membership population on the Exchange.
Amend Trading Permit Fees
The Exchange proposes to amend Section 3b) of the Fee Schedule to
increase the amount of the monthly Trading Permit fees. The Exchange
issues Trading Permits to Members who are either Electronic Exchange
Members \12\ (``EEMs'') or Market Makers.\13\ The Exchange assesses
Trading Permit fees based upon the monthly total volume executed by the
Member and its Affiliates on the Exchange across all origin types, not
including Excluded Contracts, as compared to the total TCV in all MIAX
Pearl-listed options. The Exchange adopted a tier-based fee structure
based upon the volume-based tiers detailed in the definition of ``Non-
Transaction Fees Volume-Based Tiers'' \14\ in the Definitions section
of the Fee Schedule. The Exchange also assesses Trading Permit fees
based upon the type of interface used by the Member to connect to the
Exchange--the FIX Interface and/or the MEO Interface.
---------------------------------------------------------------------------
\12\ The term ``Electronic Exchange Member'' or ``EEM'' means
the holder of a Trading Permit who is a Member representing as agent
Public Customer Orders or Non-Customer Orders on the Exchange and
those non-Market Maker Members conducting proprietary trading.
Electronic Exchange Members are deemed ``members'' under the
Exchange Act. See the Definitions Section of the Fee Schedule.
\13\ The term ``Market Maker'' or ``MM'' means a Member
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI of these Rules.
See the Definitions Section of the Fee Schedule.
\14\ See the Definitions Section of the Fee Schedule for the
monthly volume thresholds associated with each Tier.
---------------------------------------------------------------------------
Current Trading Permit Fees. Currently, each Member who connects to
the System \15\ via the FIX Interface is assessed the following monthly
Trading Permit fees:
---------------------------------------------------------------------------
\15\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
---------------------------------------------------------------------------
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $250;
[[Page 37381]]
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $350; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $450.
Each Member who connects to the System via the MEO Interface is
assessed the following monthly Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $300;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $400; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $500.
Proposed Trading Permit Fees. The Exchange now proposes to amend
its Trading Permit fees as follows. Each Member who connects to the
System via the FIX Interface will be assessed the following monthly
Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, $500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, $1,000; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, $1,500.
Each Member who connects to the System via the MEO Interface will
be assessed the following monthly Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, $2,500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, $4,000; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, $6,000.
Members who use the MEO Interface may also connect to the System
through the FIX Interface as well, and vice versa. The Exchange notes
that the Trading Permit fees for Members who connect through the MEO
Interface are higher than the Trading Permit fees for Members who
connect through the FIX Interface, since the FIX Interface utilizes
less capacity and resources of the Exchange. The MEO Interface offers
lower latency and higher throughput, which utilizes greater capacity
and resources of the Exchange. The FIX Interface offers lower bandwidth
requirements and an industry-wide uniform message format. Both EEMs and
Market Makers may connect to the Exchange using either interface.
Trading Permits grant access to the Exchange, thus providing the
ability to submit orders and trade on the Exchange, in the manner
defined in the relevant Trading Permit. Without a Trading Permit, a
Member cannot directly trade on the Exchange. Therefore, a Trading
Permit is a means to directly access the Exchange (which offers
meaningful value), and the Exchange now proposes to increase its
monthly fees since it has not done so since the fees were first adopted
in 2018 \16\ and are designed to recover a portion of the costs
associated with directly accessing the Exchange. The Exchange notes
that the its affiliates, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald''), charge a similar,
fixed trading permit fee to certain users, and a similar, varying
trading permit fee to other users, based upon the number of assignments
of option classes or the percentage of volume in option classes.\17\
The Exchange notes that other options exchanges assess certain of their
membership fees at different rates, based upon a member's participation
on that exchange,\18\ and, as such, this concept is not new or novel.
The Exchange also notes that the proposed increased Trading Permit fees
are in line with, or cheaper than, the trading permit fees or similar
membership fees charged by other options exchanges.\19\
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\16\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\17\ See the MIAX Fee Schedule, Section 3)b); MIAX Emerald Fee
Schedule, Section 3)b).
\18\ See e.g., NYSE Arca Options Fees and Charges, p.1
(assessing market makers $6,000 for up to 175 option issues, an
additional $5,000 for up to 350 option issues, an additional $4,000
for up to 1,000 option issues, an additional $3,000 for all option
issues on the exchange, and an additional $1,000 for the fifth
trading permit and for each trading permit thereafter); NYSE
American Options Fee Schedule, p. 23 (assessing market makers $8,000
for up to 60 plus the bottom 45% of option issues, an additional
$6,000 for up to 150 plus the bottom 45% of option issues, an
additional $5,000 for up to 500 plus the bottom 45% of option
issues, and additional $4,000 for up to 1,100 plus the bottom 45% of
option issues, an additional $3,000 for all issues traded on the
exchange, and an additional $2,000 for 6th to 9th ATPs; plus an
addition fee for premium products). See also 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. Id.
\19\ See id.
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2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \20\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \21\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest and is not designed to permit unfair discrimination between
customers, issuers, brokers and dealers.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange 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 market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. The Exchange deems Trading Permit fees to be
Access Fees. It records these fees as part of its ``Access Fees''
revenue in its financial statements. The Exchange believes that it is
important to demonstrate that these fees are based on its costs and
reasonable business needs. The Exchange believes the Proposed Access
Fees will allow the Exchange to offset expenses 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.
[[Page 37382]]
In order to determine the Exchange's costs to provide the access
services associated with 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 access services. The sum of all such
portions of expenses represents the total cost of the Exchange to
provide the access services associated with 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 cost to the Exchange to provide the access services
associated with the Proposed Access Fees.
In order to determine the Exchange's projected revenues associated
with the Proposed Access Fees, the Exchange analyzed the number of
Members currently utilizing the Trading Permits, and, utilizing a
recent monthly billing cycle representative of 2021 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 due to lower trading volume and vice versa, 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 2020. However, since the
revenue and expense associated with the Proposed Access Fees were not
in place in 2020 or for the first two quarters of 2021, the Exchange
believes its 2020 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 its 2021 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.
The Exchange notes that this is the same process utilized by the
Exchange's affiliate, MIAX Emerald, in a filing recently noticed by the
Commission when MIAX Emerald adopted its own trading permit fees.\22\
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\22\ See Securities Exchange Act Release No. 91033 (February 1,
2021), 86 FR 8455 (February 5, 2021) (SR-EMERALD-2021-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Monthly Trading Permit Fees).
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* * * * *
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'').\23\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\24\ 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 will 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, and its affiliates MIAX and MIAX
Emerald, to establish or increase other non-transaction fees.
Accordingly, the Exchange believes that the Commission should find that
the Proposed Access Fees are consistent with the Act.
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\23\ 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).
\24\ 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'').
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* * * * *
As of June 30, 2021, the Exchange had only a 5.31% market share of
the U.S. equity options industry for the month of June 2021.\25\ The
Exchange is not aware of any evidence that a market share of
approximately 5-6% 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.
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\25\ See ``The market at a glance'', available at
www.miaxoptions.com (last visited June 30, 2021).
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their access to an exchange (or not
initially access 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 access 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 drop their access to 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). 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.'' Similarly, the Exchange's
affiliate, MIAX Emerald, noted in a recent filing that once MIAX
Emerald issued a notice that it was instituting Trading Permit fees,
among other non-transaction fees, one Member dropped its access to the
Exchange as a result of those fees.\26\ 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 drop their access to such exchange.
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\26\ See supra note 22.
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Removal of Monthly Volume Credit and Trading Permit Fee Credit
The Exchange believes its proposal to remove the Monthly Volume
Credit is
[[Page 37383]]
reasonable, equitable and not unfairly discriminatory because all
market participants will no longer be offered the ability to achieve
the extra credits associated with the Monthly Volume Credit for
submitting Priority Customer volume to the Exchange and access to the
Exchange is offered on terms that are not unfairly discriminatory. The
Exchange believes it is equitable and not unfairly discriminatory to
remove the Monthly Volume Credit from the Fee Schedule for business and
competitive reasons because, in order to attract order flow when the
Exchange first launched operations, the Exchange established the
Monthly Volume Credit to lower the initial fixed cost for Members. The
Exchange now believes that it is appropriate to remove this credit in
light of the current operating conditions and the current type and
amount of Priority Customer volume executed on the Exchange. The
Exchange believes that the Exchange's Priority Customer rebates and
fees will still allow the Exchange to remain highly competitive such
that the Exchange should continue to attract order flow and maintain
market share.
The Exchange believes its proposal to remove the Trading Permit fee
credit for Members that connect via both the MEO Interface and FIX
Interface is reasonable, equitable and not unfairly discriminatory
because all market participants will no longer be offered the ability
to receive the credit and access to the Exchange is offered on terms
that are not unfairly discriminatory. The Exchange believes it is
equitable and not unfairly discriminatory to remove the Trading Permit
fee credit for business and competitive reasons because, in order to
attract order flow and membership after the Exchange first launched
operations, the Exchange established the Trading Permit fee credit to
lower the costs for Members that connect via both the MEO Interface and
FIX Interface. The Exchange now believes that it is appropriate to
remove this credit in light of the current operating conditions and
membership on the Exchange.
Trading Permit Fee Increase
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 pricing or supra-competitive profit. The Proposed Access Fees
are also reasonable and equitable because they are in line with, or
cheaper than, the trading permit fees or similar membership fees
charged by other options exchanges.\27\ 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.
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\27\ See supra note 18.
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The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 10.7 million
order messages per second. On an average day, the Exchange handles over
approximately 2.7 billion total 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 expense for storage and network transport
capabilities.
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 Members to the Exchange may require the
purchase of additional hardware to support those Members as well as
enhanced monitoring and reporting of customer performance that the
Exchange and its affiliates provide. Further, as the total number of
Members increases, the Exchange and its affiliates may 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 the Exchange and its affiliates to provide
access to its Members is not fixed. The Exchange believes the Proposed
Access Fees are reasonable in order to offset a portion of the costs to
the Exchange associated with providing access to its network
infrastructure.
The Exchange only has four primary sources of revenue: Transaction
fees, access fees (which includes the Proposed Access Fees), 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 access
services versus the total annual revenue that the Exchange projects to
collect in connection with services associated with the Proposed Access
Fees. For 2021,\28\ the total annual expense for providing the access
services associated with the Proposed Access Fees for the Exchange is
projected to be approximately $844,741. The $844,741 in projected total
annual expense is comprised of the following, all of which are directly
related to the access services associated with the Proposed Access
Fees: (1) Third-party expense, relating to fees paid by the Exchange to
third-parties for certain products and services; and (2) internal
expense, relating to the internal costs of the Exchange to provide the
services associated with the Proposed Access Fees.\29\ As noted above,
the Exchange believes it is more appropriate to analyze the Proposed
Access Fees utilizing its 2021 revenue and costs, which utilize the
same presentation methodology as set forth in the Exchange's
previously-issued Audited Unconsolidated Financial Statements.\30\ The
$844,741 in projected total annual expense is directly related to the
access services associated with the Proposed Access Fees, and not any
other product or service offered by the Exchange. It does not include
general
[[Page 37384]]
costs of operating matching systems and other trading technology, and
no expense amount was allocated twice.
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\28\ The Exchange has not yet finalized its 2021 year end
results.
\29\ The percentage allocations used in this proposed rule
change may differ from past filings from the Exchange or its
affiliates due to, among other things, changes in expenses charged
by third-parties, adjustments to internal resource allocations, and
different system architecture of the Exchange as compared to its
affiliates.
\30\ 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. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020)
(SR-PEARL-2019-36). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
---------------------------------------------------------------------------
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
access 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 access services associated with the Proposed
Access Fees.
For 2021, total third-party expense, relating to fees paid by the
Exchange to third-parties for certain products and services for the
Exchange to be able to provide the access services associated with the
Proposed Access Fees, is projected to be $188,815. 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 Exchange's trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking the Exchange's office
locations in Princeton, New Jersey and Miami, Florida, to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\31\ 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
connect to the network to trade, receive market data, etc.).
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\31\ 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 the third-party expense herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
information technology and communication costs to the access services
associated with the Proposed Access Fees. Further, the Exchange notes
that, with respect to the MIAX Pearl expenses included herein, those
expenses only cover the MIAX Pearl options market; expenses associated
with the MIAX Pearl equities market are accounted for separately and
are not included within the scope of this filing.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the access 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 access
services associated with the Proposed Access Fees to its Members and
their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only that portion which the Exchange
identified as being specifically mapped to providing the access
services associated with the Proposed Access Fees, approximately 8% of
the total applicable Equinix expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access 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 the
Exchange with its affiliates, MIAX and MIAX Emerald, 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 access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access 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 4% of the total applicable Zayo expense. The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to provide the access 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 their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees, approximately 3% of the total applicable SFTI
and other service providers' expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access 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 their customers. The Exchange did not
allocate all of the hardware and software provider expense toward the
cost of
[[Page 37385]]
providing the access services associated with the Proposed Access Fees,
only the portions which the Exchange identified as being specifically
mapped to providing the access services associated with the Proposed
Access Fees, approximately 5% of the total applicable hardware and
software provider expense. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the access services associated with the Proposed Access Fees.
For 2021, total projected internal expense, relating to the
internal costs of the Exchange to provide the access services
associated with the Proposed Access Fees, is projected to be $655,925.
This includes, but is not limited to, costs associated with: (1)
Employee compensation and benefits for full-time employees that support
the access 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 access 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 access 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 the internal expense herein, and no
expense amount is allocated twice. Accordingly, the Exchange does not
allocate its entire costs contained in those items to the access
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 access services associated with the Proposed Access Fees.
In particular, the Exchange's employee compensation and benefits
expense relating to providing the access services associated with the
Proposed Access Fees is projected to be $549,834, which is only a
portion of the $9,163,894 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 access services associated with the Proposed Access Fees.
Without these employees, the Exchange would not be able to provide the
access services associated with the Proposed Access Fees to its Members
and their customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of the access
services associated with the Proposed Access Fees, only the portions
which the Exchange identified as being specifically mapped to providing
the access services associated with the Proposed Access Fees,
approximately 6% of the total applicable employee compensation and
benefits expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide the access
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.
The Exchange's depreciation and amortization expense relating to
providing the access services associated with the Proposed Access Fees
is projected to be $66,316, which is only a portion of the $1,326,325
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 access
services associated with the Proposed Access Fees. Without this
equipment, the Exchange would not be able to operate the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portion which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees,
approximately 5% of the total applicable depreciation and amortization
expense, as these access services would not be possible without relying
on such. The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the access services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.
The Exchange's occupancy expense relating to providing the access
services associated with the Proposed Access Fees is projected to be
$39,775, which is only a portion of the $497,180 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 access 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
access services associated with the proposed Trading Permit fees.
Without this office space, the Exchange would not be able to operate
and support the network and provide the access services associated with
the Proposed Access Fees to its 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
[[Page 37386]]
network infrastructure and the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the
occupancy expense toward the cost of providing the access 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 8% of the total applicable
occupancy expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's cost to provide the access
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 access services (including
connectivity, ports, and trading permits). 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 access to a 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 to recover its costs,
thus the Exchange believes it is reasonable to allocate a material
portion of its total overall expense towards access fees.
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the access services associated
with the Proposed Access Fees will not result in excessive pricing or
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that its annualized revenue for
providing the access services associated with the Proposed Access Fees
would be approximately $1,170,000 per annum, based on a recent billing
cycle. The Exchange projects that its annualized expense for providing
the access services associated with the Proposed Access Fees would be
approximately $844,741 per annum. Accordingly, on a fully-annualized
basis, the Exchange believes its total projected revenue for providing
the access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit, as the
Exchange will make only a 28% profit margin on the Proposed Access Fees
($1,170,000 in revenue minus $844,741 in expense = $325,259 profit per
annum). The Exchange notes that the fees charged for Trading Permits
can vary from month to month depending on the type of interface used
and the Non-Transaction Fees Volume-Based Tier that is achieved for
that month. As such, the revenue projection is not a static number,
with monthly Trading Permit fees likely to fluctuate month to month.
For the avoidance of doubt, none of the expenses included herein
relating to the access services associated with the Proposed Access
Fees relate to the provision of any other services offered by the
Exchange. Stated differently, no expense amount of the Exchange is
allocated twice. The Exchange notes that, with respect to the MIAX
Pearl expenses included herein, those expenses only cover the MIAX
Pearl options market; expenses associated with the MIAX Pearl equities
market and the Exchange's affiliate exchanges, MIAX and MIAX Emerald,
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 Pearl Equites, MIAX or MIAX Emerald.
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 access
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
providing access to the Exchange. Further, the Exchange notes that,
without the specific third-party and internal items listed above, the
Exchange would not be able to provide the access services associated
with the Proposed Access Fees to its 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 providing access services. The Proposed
Access Fees are intended to recover the Exchange's costs of providing
access to Exchange Systems. Accordingly, the Exchange believes that the
Proposed Access Fees are fair and reasonable because they do not result
in excessive pricing or supra-competitive profit, when comparing the
actual costs to the Exchange versus the projected annual revenue from
the Proposed Access Fees.
The Exchange believes the proposed changes are reasonable,
equitably allocated and not unfairly discriminatory, and do not result
in a ``supra-competitive'' \32\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\33\ With the proposed changes,
the Exchange anticipates it will have a profit margin of 28% for its
Trading Permit fees. Based on the 2019 Audited Financial Statements of
the competing options exchanges (since the 2020 Audited Financial
Statements will likely not become publicly available until early July
2021, after the Exchange has submitted this filing), the Exchange's
profit margin is well below the operating profit margins of other
competing exchanges. For example, Nasdaq ISE, LLC's (``ISE'') operating
profit margin, for all of 2019, was 83%.\34\ ISE's equity options
market share for all of 2019 was 8.99%\35\ while its access fees are as
follows: $500 per month for Electronic Access Members; $5,000 per month
for Primary Market Makers; and $2,500 per month for Competitive Market
Makers.\36\ Nasdaq PHLX LLC's (``PHLX'') operating profit margin, for
all of 2019, was 67%.\37\ PHLX's equity options market share for all of
2019 was 15.85%\38\ while its permit fees are as follows: $4,000 per
month for Floor Brokers; $6,000 per month for Floor Lead Market Makers
and Floor Market Makers; and $4,000 per month for Remote Lead Market
Makers and Remote Market Makers.\39\
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\32\ 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'').
\33\ See id.
\34\ See PHLX Form 1, Exhibit D, filed June 30, 2020 available
at https://sec.report/Document/9999999997-20-003902/.
\35\ See https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange.
\36\ See Nasdaq ISE LLC Options 7 Pricing Schedule, Section 8.A.
Access Services, at https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207.
\37\ See ISE Form 1, filed June 29, 2020 available at Form 1--
ISE--Final (1).pdf (sec.gov).
\38\ See supra note 33.
\39\ See Nasdaq PHLX Options 7 Pricing Schedule, Section 8.A.
Permit and Registration Fees, at https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Options%207.
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The Exchange further believes its proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange, and its affiliates, are still recouping the initial
expenditures from building out their systems while the legacy exchanges
have already paid for and built their systems.
[[Page 37387]]
The Exchange believes that the Proposed Access Fees are reasonable,
equitable and not unfairly discriminatory because they are in line
with, or cheaper than, the trading permit fees or similar membership
fees charged by other options exchanges.\40\ The Proposed Access Fees
are fair and equitable and not unreasonably discriminatory because they
apply equally to all Members regardless of type and access to the
Exchange is offered on terms that are not unfairly discriminatory. The
Exchange designed the fee rates in order to provide objective criteria
for Trading Permit holders that connect via the MEO Interface of
different sizes and business models that best matches their activity on
the Exchange.
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\40\ See supra note 18.
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Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive. In such an environment, the Exchange must continually adjust
its fees for services and products, in addition to order flow, to
remain competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.
The Guidance provides that in determining whether a proposed fee is
constrained by significant competitive forces, the Commission will
consider whether there are reasonable substitutes for the product or
service that is the subject of a proposed fee. As described below, the
Exchange believes substitute products and services are available to
market participants, including, among other things, other options
exchanges that market participants may connect to in lieu of the
Exchange, indirect connectivity to the Exchange via a third-party
reseller and/or trading of any options products, including proprietary
products, in the Over-the-Counter (``OTC'') markets. Indeed, there are
currently 16 registered options exchanges that trade options, some of
which have similar or lower connectivity fees.\41\ Based on publicly
available information, no single options exchange has more than
approximately 14-15% of the market share as of June 30, 2021.\42\
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\41\ See e.g., Phlx and ISE Rules, General Equity and Options
Rules, General 8, Section 1(b). Phlx and ISE each charge a monthly
fee of $2,500 for each 1Gb connection, $10,000 for each 10Gb
connection and $15,000 for each 10Gb Ultra connection, which the
equivalent of the Exchange's 10Gb ULL connection. See also NYSE
American Fee Schedule, Section V.B, and Arca Fees and Charges, Co-
Location Fees. NYSE American and Arca each charge a monthly fee of
$5,000 for each 1Gb circuit, $14,000 for each 10Gb circuit and
$22,000 for each 10Gb LX circuit, which the equivalent of the
Exchange's 10Gb ULL connection.
\42\ See https://markets.cboe.com/us/options/market_statistics/.
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There is also no regulatory requirement that any market participant
connect to any one options exchange, that any market participant
connect at a particular connection speed or act in a particular
capacity on the Exchange, or trade any particular product offered on an
exchange. Moreover, membership is not a requirement to participate on
the Exchange. A market participant may submit orders to the Exchange
via a Sponsored User.\43\ Indeed, the Exchange is unaware of any one
options exchange whose membership includes every registered broker-
dealer. Based on a recent analysis conducted by the Cboe Exchange, Inc.
(``Cboe''), as of October 21, 2020, only three (3) of the broker-
dealers, out of approximately 250 broker-dealers, were members of at
least one exchange that lists options for trading and were members of
all 16 options exchanges.\44\ Additionally, the Cboe Fee Filing found
that several broker-dealers were members of only a single exchange that
lists options for trading and that the number of members at each
exchange that trades options varies greatly.\45\
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\43\ See Exchange Rule 210. The Sponsored User is subject to the
fees, if any, of the Sponsoring Member. The Exchange notes that the
Sponsoring Member is not required to publicize, let alone justify or
file with the Commission its fees, and as such could charge the
Sponsored User any fees it deems appropriate, even if such fees
would otherwise be considered supra-competitive, or otherwise
potentially unreasonable or uncompetitive.
\44\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105) (the
``Cboe Fee Filing''). The Cboe Fee Filing cited to the October 2020
Active Broker Dealer Report, provided by the Commission's Office of
Managing Executive, on October 8, 2020.
\45\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
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 fee rates are designed in order to
provide objective criteria for users that connect via the MEO Interface
of different sizes and business models that best matches their activity
on the Exchange.
The Exchange believes the removal of the Monthly Volume Credit and
Trading Permit fee credit will not place certain market participants at
a relative disadvantage to other market participants because, in order
to attract order flow when the Exchange first launched operations, the
Exchange established these credits to lower the initial fixed cost for
Members. The Exchange now believes that it is appropriate to remove
this credit in light of the current operating conditions, including the
Exchange's overall membership and the current type and amount of volume
executed on the Exchange. The Exchange believes that the Exchange's
rebates and fees will still allow the Exchange to remain highly
competitive such that the Exchange should continue to attract order
flow and maintain market share.
Inter-Market Competition
The Exchange believes the Proposed Access Fees do not place an
undue burden on competition on other options exchanges that is not
necessary or appropriate. In particular, options market participants
are not forced to become members of all options exchanges. The Exchange
notes that it has far less Members as compared to the much greater
number of members at other options exchanges. There are a number of
large users that connect via the MEO Interface and broker-dealers that
are members of other options exchange but not Members of the Exchange.
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
discontinue their membership with the Exchange.
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. As of June 30, 2021,
the Exchange had a market share of approximately 5.31% of executed
[[Page 37388]]
multiply-listed equity options \46\ for the month of June 2021, 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 to remain competitive with
other exchanges and to attract order flow to the Exchange.
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\46\ See supra note 25.
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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,\47\ and Rule 19b-4(f)(2) \48\ 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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\47\ 15 U.S.C. 78s(b)(3)(A)(ii).
\48\ 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 sec.gov">[email protected]sec.gov. Please include
File Number SR-PEARL-2021-32 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2021-32. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2021-32 and should be submitted on
or before August 5, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15036 Filed 7-14-21; 8:45 am]
BILLING CODE 8011-01-P
