Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Emerald Fee Schedule To Adopt a Tiered-Pricing Structure for Certain Connectivity Fees, 46048-46055 [2021-17539]
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92645; File No. SR–
EMERALD–2021–23]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX
Emerald Fee Schedule To Adopt a
Tiered-Pricing Structure for Certain
Connectivity Fees
August 11, 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 30,
2021, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or ‘‘Exchange’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Emerald Fee Schedule
(the ‘‘Fee Schedule’’) to amend certain
connectivity fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/emerald, at MIAX’s principal
office, and at the Commission’s Public
Reference Room.
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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.
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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1. Purpose
The Exchange proposes to amend the
Fee Schedule to adopt a tiered-pricing
structure for the 10 gigabit (‘‘Gb’’) ultralow latency (‘‘ULL’’) fiber connection
available to Members 3 and nonMembers. The Exchange believes a
tiered-pricing structure will encourage
Members and non-Members to be more
efficient and economical when
determining how to connect to the
Exchange. This should also enable the
Exchange to better monitor and provide
access to the Exchange’s network to
ensure sufficient capacity and headroom
in the System.4
10Gb ULL Tiered-Pricing Structure
The Exchange proposes to amend
Sections (5)(a)–(b) of the Fee Schedule
to provide for a tiered-pricing structure
for 10Gb ULL connections for Members
and non-Members. Currently, the
Exchange assesses Members and nonMembers a flat monthly fee of $10,000
per 10Gb ULL connection for access to
the Exchange’s primary and secondary
facilities.
The Exchange now proposes to move
from a flat monthly fee per connection
to a tiered-pricing structure per
connection under which the monthly
fee would vary depending on the
number of 10Gb ULL connections each
Member or non-Member elects to
purchase per exchange. Specifically, the
Exchange proposes to decrease the fee
for the first and second 10Gb ULL
connections for each Member and nonMember from the current flat monthly
fee of $10,000 to $9,000 per connection.
To encourage more efficient
connectivity usage, the Exchange
proposes to increase the per connection
fee for Members and non-Members that
purchase more than two 10Gb ULL
connections. Specifically, (i) the third
and fourth 10Gb ULL connections for
each Member or non-Member will
increase from the current flat monthly
fee of $10,000 to $11,000 per
connection; and (ii) for the fifth 10Gb
ULL connection, and for each 10Gb ULL
connection for each Member and nonMember purchased thereafter, the fee
will increase from the flat monthly fee
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 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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of $10,000 to $13,000 per connection.
The proposed 10Gb ULL tiered-pricing
structure and fees are collectively
referred to herein as the ‘‘Proposed
Access Fees.’’
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the MIAX Emerald APIs or
market data feeds in the production
environment. The Exchange proposes to
pro-rate the fees when a Member or nonMember makes a change to the
connectivity (by adding or deleting
connections) with such pro-rated fees
based on the number of trading days
that the Member or non-Member has
been credentialed to utilize any of the
MIAX Emerald APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate. The Exchange will
continue to assess monthly Member and
non-Member network connectivity fees
for connectivity to the disaster recovery
facility in each month during which the
Member or non-Member has established
connectivity with the disaster recovery
facility.
Implementation Date
The proposed fee changes will
become effective on August 1, 2021.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 5
in general, and furthers the objectives of
Section 6(b)(4) of the Act 6 in particular,
in that it provides for the equitable
allocation of reasonable dues, fees and
other charges among Exchange Members
and issuers and other persons using any
facility or system which the Exchange
operates or controls. The Exchange also
believes the proposal furthers the
objectives of Section 6(b)(5) of the Act 7
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 notes that it operates in
a highly competitive market in which
market participants can readily favor
5 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
7 15 U.S.C. 78f(b)(5).
6 15
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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 Exchange believes the proposal to
move from a flat fee per month for the
10Gb ULL connection to a tiered-pricing
structure is reasonable, equitably
allocated and not unfairly
discriminatory because the Exchange
believes the proposed structure would
encourage firms to be more economical
and efficient in the number of
connections they purchase. The
Exchange believes this will enable the
Exchange to better monitor and provide
access to the Exchange’s network to
ensure sufficient capacity and headroom
in the System.
The Exchange believes that the
proposal to move to a tiered-pricing
structure for its 10Gb ULL connections
is reasonable, equitably allocated and
not unfairly discriminatory because the
majority of Members and non-Members
that purchase 10Gb ULL connections
will either save money or pay the same
amount after the tiered-pricing structure
is implemented. Based on a recently
completed billing cycle, of the firms that
purchased at least one 10Gb ULL
connection, approximately 60% will see
a proposed decrease in their monthly
fees and approximately 40% will see a
proposed increase in their monthly fees
as a result of the proposed tiered-pricing
structure versus the current flat monthly
fee structure. To illustrate, firms that
purchase only one 10Gb ULL
connection per month currently pay the
flat rate of $10,000 per month for that
one 10Gb ULL connection. Pursuant to
the proposed tiered-pricing structure,
these firms will now pay $9,000 per
month for that one 10Gb ULL
connection, saving $1,000 per month or
$12,000 annually. Further, firms that
purchase two 10Gb ULL connections
per month currently pay the flat rate of
$20,000 per month ($10,000 × 2) for
those two 10Gb ULL connections.
Pursuant to the proposed tiered-pricing
structure, these firms will now pay
$18,000 per month ($9,000 × 2) for those
two 10Gb ULL connections, saving
$2,000 per month or $24,000 annually.
The Exchange also notes that, for
firms that primarily route orders seeking
best-execution, a limited number of
connections are needed. Therefore, the
connectivity costs will likely be lower
for these firms based on the proposed
tiered-pricing structure. The firms that
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engage in advanced trading strategies
typically require multiple connections
and, therefore, generate higher costs by
utilizing more of the Exchange’s
resources. These firms will absorb the
increased connectivity cost based on the
proposed tiered-pricing structure, as
shown by the 40% of firms that will
likely see an increase in their monthly
fees. Additionally, the firms that
purchase a higher amount of 10Gb ULL
connections tend to have specific
business oriented market making and
taking strategies, as opposed to firms
simply engaging in best-execution order
routing business.
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
connectivity 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 expense the Exchange has and
will incur, and that the Exchange is
providing sufficient transparency (as
described below) into how the Exchange
determined to charge such fees.
Accordingly, the Exchange is providing
an analysis of its revenues, costs, and
profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
and revenues associated with the
Proposed Access Fees.
In order to determine the Exchange’s
costs 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,
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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 revenue associated with the
Proposed Access Fees, the Exchange
analyzed the number of Members and
non-Members currently utilizing the
10Gb ULL fiber connection, 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 seven
months 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 supracompetitive profit when comparing the
Exchange’s total annual expense
associated with providing the services
associated with the Proposed Access
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Fees versus the total projected annual
revenue the Exchange will collect for
providing those services.
*
*
*
*
*
On March 29, 2019, the Commission
issued its Order Disapproving Proposed
Rule Changes to Amend the Fee
Schedule on the BOX Market LLC
Options Facility to Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network (the ‘‘BOX Order’’).8 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.9 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 Miami International
Securities Exchange, LLC (‘‘MIAX’’) and
MIAX PEARL, LLC (‘‘MIAX Pearl’’), to
establish or increase other nontransaction fees.10 Accordingly, the
Exchange believes that the Proposed
Access Fees are consistent with the Act.
*
*
*
*
*
As of July 29, 2021, the Exchange had
a market share of only 3.90% of the U.S.
equity options industry for the month of
July 2021.11 The Exchange is not aware
of any evidence that a market share of
approximately 3–4% 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
8 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).
9 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’’).
10 See Securities Exchange Act Release Nos.
90981 (January 25, 2021), 86 FR 7582 (January 29,
2021) (SR–PEARL–2021–01) (proposal to increase
connectivity fees); 90980 (January 25, 2021), 86 FR
7602 (January 29, 2021) (SR–MIAX–2021–02)
(proposal to increase connectivity fees).
11 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited July 27,
2021).
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could not simply drop their access (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 noted
in a recent filing that once MIAX
Emerald issued a notice that it was
instituting MEI Port fees, among other
non-transaction fees, one MIAX Emerald
Member dropped its access to MIAX
Emerald as a result of those fees.12
Accordingly, these examples show that
if an exchange sets too high of a fee for
connectivity and/or other nontransaction fees for its relevant
marketplace, market participants can
choose to drop their access to such
exchange.
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
12 See Securities Exchange Act Release No. 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Port Fees,
Increase Certain Network Connectivity Fees, and
Increase the Number of Additional Limited Service
MIAX Emerald Express Interface Ports Available to
Market Makers) (adopting tiered MEI Port fee
structure ranging from $5,000 to $20,500 per
month).
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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 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 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
2021,13 the total annual expense for
providing the access services associated
with the Proposed Access Fees is
projected to be approximately $7.2
million. The approximately $7.2 million
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.14 As noted
above, the Exchange believes it is more
appropriate to analyze the Proposed
Access Fees utilizing its 2021 revenue
13 The Exchange has not yet finalized its 2021
year end results.
14 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.
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and costs, which utilize the same
presentation methodology as set forth in
the Exchange’s previously-issued
Audited Unconsolidated Financial
Statements.15 The $7.2 million 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 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 $1.7 million. 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 and
its affiliates’ office locations in
Princeton, New Jersey and Miami,
Florida, to all data center locations; (3)
Secure Financial Transaction
Infrastructure (‘‘SFTI’’),16 which
15 For example, the Exchange previously noted
that all third-party expense described in its prior fee
filing was contained in the information technology
and communication costs line item under the
section titled ‘‘Operating Expenses Incurred
Directly or Allocated From Parent,’’ in the
Exchange’s 2019 Form 1 Amendment containing its
financial statements for 2018. See Securities
Exchange Act Release No. 87877 (December 31,
2019), 85 FR 738 (January 7, 2020) (SR–EMERALD–
2019–39). Accordingly, the third-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.
16 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%,
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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.).
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 expenses associated
with its affiliates, MIAX and MIAX
Pearl, 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
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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46051
associated with the Proposed Access
Fees, approximately 62% 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 Pearl and MIAX, 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 62% 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
89% of the total applicable SFTI and
other service providers’ expense. The
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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
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 51% 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
approximately $5.5 million. 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
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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
approximately $3.2 million, which is
only a portion of the approximately $9.7
million 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
33% 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
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providing the services associated with
the Proposed Access Fees is projected to
be $2 million, which is only a portion
of the $3.1 million 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
63% 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 services
associated with the Proposed Access
Fees is projected to be approximately
$0.3 million, which is only a portion of
the $0.5 million 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
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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 Access
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 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
53% 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 their costs;
thus, the Exchange believes it is
reasonable to allocate a material portion
of their 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
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that annualized revenue for providing
the access services associated with the
Proposed Access Fees would be
approximately $14.6 million per annum,
based on a recent billing cycle.17 The
Exchange projects that their annualized
revenue for providing network
connectivity services (all connectivity
alternatives) to be approximately $14.63
million per annum. The Exchange
projects that their annualized expense
for providing network connectivity
services (all connectivity alternatives) to
be approximately $7.2 million per
annum. Accordingly, on a fullyannualized basis, the Exchange believes
its total projected revenue for the
providing the access services associated
with the Proposed Access Fees will not
result in excessive pricing or supracompetitive profit, as the Exchange will
make a profit margin of only
approximately 51% inclusive of the
Proposed Access Fees and all other
connectivity alternatives ($14.63 million
in total connectivity revenue minus $7.2
million in expense = $7.43 million in
profit per annum). Additionally, this
profit margin does not take into account
the cost of capital expenditures
(‘‘CapEx’’) the Exchange historically
spent or is projected to spend each year
on CapEx going forward.
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 expenses associated with the
Exchange’s affiliates, MIAX and MIAX
Pearl, are accounted for separately and
are not included within the scope of this
filing. Stated differently, no expense
amount of the Exchange is also allocated
to MIAX or MIAX Pearl.
The Exchange believes it is
reasonable, equitable and not unfairly
discriminatory to allocate the respective
percentages of each expense category
described above towards the total cost to
the Exchange of operating and
supporting the network, including
providing the 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
17 The Exchange also projects approximately
$2,800 in monthly revenue through 1Gb
connections; however, the Exchange does not
propose to adjust the fees for those connections at
this time.
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46053
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 costs of
providing access to its System.
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’’ 18 profit. Of note,
the Guidance defines ‘‘supracompetitive profit’’ as profits that
exceed the profits that can be obtained
in a competitive market.19 With the
proposed changes, the Exchange
anticipates it will have a profit margin
of approximately 51%, inclusive of the
Proposed Access Fees and all other
connectivity alternatives. Based on the
2020 Audited Financial Statements of
competing options exchanges (since the
2021 Audited Financial Statements will
likely not become publicly available
until early July 2022, after the Exchange
has submitted this filing), the
Exchange’s profit margin is similar to or
below the operating profit margins of
other competing exchanges. For
example, Nasdaq ISE, LLC’s (‘‘ISE’’)
operating profit margin for all of 2020
was approximately 85%; Nasdaq PHLX
LLC’s (‘‘PHLX’’) operating profit margin
for all of 2020 was approximately 49%;
the Nasdaq Stock Market LLC’s
(‘‘Nasdaq’’) operating profit margin for
all of 2020 was approximately 62%;
NYSE Arca, Inc.’s (‘‘Arca’’) operating
profit margin for all of 2020 was
approximately 55%; NYSE American
LLC’s (‘‘Amex’’) operating profit margin
for all of 2020 was approximately 59%;
Cboe Exchange, Inc.’s (‘‘Cboe’’)
operating profit margin for all of 2020
was approximately 74%; and Cboe BZX
Exchange, Inc.’s (‘‘BZX’’) operating
profit margin for all of 2020 was
approximately 52%.
18 See
19 See
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The Exchange believes that the
Proposed Access Fees are reasonable,
equitably allocated and not unfairly
discriminatory because, for one 10Gb
ULL connection, the Exchange provides
each Member or non-Member access to
all twelve matching engines on MIAX
Emerald. Under the proposed pricingstructure, the Exchange will assess each
Member or non-Member $9,000 for the
first 10Gb ULL connection. For that
$9,000 monthly fee, each Member or
non-Member has access to all twelve
matching engines each month. This
results in a per matching engine
connectivity cost of only $750 ($9,000
divided by 12). The Exchange believes
its connectivity cost to be less than or
similar to connectivity fees charged by
competing options exchanges.20
The Exchange further believes its
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because the Exchange
believes that it benefits overall
competition in the marketplace to allow
relatively new entrants like the
Exchange and its affiliates, MIAX Pearl
and MIAX, to propose fees that may
help these new entrants recoup their
substantial investment in building out
costly infrastructure. The Exchange and
its affiliates have historically set their
fees purposefully low in order to attract
business and market share, and the
proposed tiered-pricing structure will
help make the rates consistent with
other exchanges while not raising costs
for a majority of the Exchange’s
Members and non-Members.
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
20 See The Nasdaq Stock Market LLC
(‘‘NASDAQ’’) Rules, General 8: Connectivity,
Section 1. Co-Location Services (charging a monthly
fee of $10,000 per 10Gb fiber connection, $15,000
per 10Gb Ultra fiber connection, and $20,000 per
40Gb fiber connection, plus installation fees ranging
from $1,000 to $1,500). The Exchange notes that the
same connectivity fees described above for
NASDAQ also apply to its affiliates, Nasdaq ISE,
LLC and NASDAQ PHLX LLC. See Nasdaq ISE
Rules, General 8: Connectivity and NASDAQ PHLX
Rules, General 8: Connectivity (both incorporating
by reference the fees in NASDAQ Rules, General 8:
Connectivity). See also NYSE American LLC
Options Fee Schedule, Section IV (charging the
following connectivity fees: $6,000 per connection
initial charge plus $5,000 monthly per 1Gb circuit
connection; $15,000 per connection initial charge
plus $22,000 monthly per 10Gb LX LCN circuit
connection; and $15,000 per connection initial
charge plus $22,000 monthly charge per 40Gb LCN
circuit connection).
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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.
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.21 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.22 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.23
The Exchange notes that non-Member
third-parties, such as Service Bureaus
and Extranets, resell the Exchange’s
connectivity. This indirect connectivity
is another viable alternative for market
participants to trade on the Exchange
without connecting directly to the
Exchange (and thus not pay the
Exchange’s connectivity fees), which
alternative is already being used by nonMembers and further constrains the
price that the Exchange is able to charge
for connectivity and other access fees to
its market. The Exchange notes that it
could, but chooses not to, preclude
market participants from reselling its
21 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.
22 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.
23 Id.
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connectivity. The Exchange also
chooses not to adopt fees that would be
assessed to third-party resellers on a per
customer basis (i.e., fees based on the
number of firms that connect to the
Exchange indirectly via the third-party).
Indeed, the Exchange does not receive
any connectivity revenue when
connectivity is resold by a third-party,
which often is resold to multiple
customers, some of whom are agency
broker-dealers that have numerous
customers of their own.24 In sum, the
Exchange believes this creates and
fosters a competitive environment and
subjects the Exchange to competitive
forces in pricing its connectivity and
access fees. Particularly, in the event
that a market participant views the
Exchange’s direct connectivity and
access fees as more or less attractive
than competing markets, that market
participant can choose to connect to the
Exchange indirectly or may choose not
to connect to the Exchange and connect
instead to one or more of the other 15
options markets. Accordingly, the
Exchange believes that the Proposed
Access Fees are fair and reasonable and
do not result in excessive pricing or
supra-competitive profit.
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act.
With respect to intra-market
competition, the Exchange does not
believe that the proposed rule change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As
stated above, the Exchange does not
believe its proposed pricing will impose
a barrier to entry to smaller participants
and notes that its proposed connectivity
pricing structure for its 10Gb ULL
connections is associated with relative
usage of the various market participants.
Further, the majority of firms that
purchase 10Gb ULL connections may
either save money or pay the same
amount after the tiered-pricing structure
is implemented. While total cost may be
increased for market participants with
larger capacity needs or for business/
24 The Exchange notes that resellers are not
required to publicize, let alone justify or file with
the Commission their fees, and as such could
charge the market participant any fees it deems
appropriate (including connectivity fees higher than
the Exchange’s connectivity fees), even if such fees
would otherwise be considered potentially
unreasonable or uncompetitive fees.
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technical preferences, such options
provide far more capacity and are
purchased by those that consume more
resources from the network.
Accordingly, the proposed tieredpricing structure does not favor certain
categories of market participants in a
manner that would impose a burden on
competition; rather, the allocation
reflects the network resources
consumed by the various usage of
market participants—lowest bandwidth
consuming members pay the least, and
highest bandwidth consuming members
pays the most, particularly since higher
bandwidth consumption translates to
higher costs to the Exchange.
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, options market participants are
not forced to connect to all options
exchanges. The Exchange operates in a
highly competitive environment, and as
discussed above, its ability to price
access and connectivity is constrained
by competition among exchanges and
third parties. There are other options
markets of which market participants
may connect to trade options. There is
also a possible range of alternative
strategies, including routing to the
exchange through another participant or
market center or accessing the Exchange
indirectly. For example, there are 15
other U.S. options exchanges, which the
Exchange must consider in its pricing
discipline in order to compete for
market participants. In this competitive
environment, market participants are
free to choose which competing
exchange or reseller 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.
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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
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19(b)(3)(A)(ii) of the Act,25 and Rule
19b–4(f)(2) 26 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
EMERALD–2021–23 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–EMERALD–2021–23. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–EMERALD–2021–23 and
should be submitted on or before
September 7, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–17539 Filed 8–16–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92644; File No. SR–
PEARL–2021–36]
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 To Adopt a
Tiered-Pricing Structure for Certain
Connectivity Fees
August 11, 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 30,
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’’) to
amend certain connectivity fees.
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.
27 17
25 15
U.S.C. 78s(b)(3)(A)(ii).
26 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
46055
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\17AUN1.SGM
17AUN1
]]>Agencies
[Federal Register Volume 86, Number 156 (Tuesday, August 17, 2021)]
[Notices]
[Pages 46048-46055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17539]
[[Page 46048]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92645; File No. SR-EMERALD-2021-23]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the MIAX Emerald Fee Schedule To Adopt a Tiered-Pricing Structure for
Certain Connectivity Fees
August 11, 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 30, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange''),
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Emerald Fee
Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/emerald, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for the 10 gigabit (``Gb'') ultra-low latency
(``ULL'') fiber connection available to Members \3\ and non-Members.
The Exchange believes a tiered-pricing structure will encourage Members
and non-Members to be more efficient and economical when determining
how to connect to the Exchange. This should also enable the Exchange to
better monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.\4\
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ 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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10Gb ULL Tiered-Pricing Structure
The Exchange proposes to amend Sections (5)(a)-(b) of the Fee
Schedule to provide for a tiered-pricing structure for 10Gb ULL
connections for Members and non-Members. Currently, the Exchange
assesses Members and non-Members a flat monthly fee of $10,000 per 10Gb
ULL connection for access to the Exchange's primary and secondary
facilities.
The Exchange now proposes to move from a flat monthly fee per
connection to a tiered-pricing structure per connection under which the
monthly fee would vary depending on the number of 10Gb ULL connections
each Member or non-Member elects to purchase per exchange.
Specifically, the Exchange proposes to decrease the fee for the first
and second 10Gb ULL connections for each Member and non-Member from the
current flat monthly fee of $10,000 to $9,000 per connection. To
encourage more efficient connectivity usage, the Exchange proposes to
increase the per connection fee for Members and non-Members that
purchase more than two 10Gb ULL connections. Specifically, (i) the
third and fourth 10Gb ULL connections for each Member or non-Member
will increase from the current flat monthly fee of $10,000 to $11,000
per connection; and (ii) for the fifth 10Gb ULL connection, and for
each 10Gb ULL connection for each Member and non-Member purchased
thereafter, the fee will increase from the flat monthly fee of $10,000
to $13,000 per connection. The proposed 10Gb ULL tiered-pricing
structure and fees are collectively referred to herein as the
``Proposed Access Fees.''
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the MIAX Emerald APIs or market data feeds in the production
environment. The Exchange proposes to pro-rate the fees when a Member
or non-Member makes a change to the connectivity (by adding or deleting
connections) with such pro-rated fees based on the number of trading
days that the Member or non-Member has been credentialed to utilize any
of the MIAX Emerald APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the disaster recovery
facility in each month during which the Member or non-Member has
established connectivity with the disaster recovery facility.
Implementation Date
The proposed fee changes will become effective on August 1, 2021.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \5\ in general, and furthers
the objectives of Section 6(b)(4) of the Act \6\ in particular, in that
it provides for the equitable allocation of reasonable dues, fees and
other charges among Exchange Members and issuers and other persons
using any facility or system which the Exchange operates or controls.
The Exchange also believes the proposal furthers the objectives of
Section 6(b)(5) of the Act \7\ 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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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(4).
\7\ 15 U.S.C. 78f(b)(5).
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The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor
[[Page 46049]]
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 Exchange believes the proposal to move from a flat fee per
month for the 10Gb ULL connection to a tiered-pricing structure is
reasonable, equitably allocated and not unfairly discriminatory because
the Exchange believes the proposed structure would encourage firms to
be more economical and efficient in the number of connections they
purchase. The Exchange believes this will enable the Exchange to better
monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.
The Exchange believes that the proposal to move to a tiered-pricing
structure for its 10Gb ULL connections is reasonable, equitably
allocated and not unfairly discriminatory because the majority of
Members and non-Members that purchase 10Gb ULL connections will either
save money or pay the same amount after the tiered-pricing structure is
implemented. Based on a recently completed billing cycle, of the firms
that purchased at least one 10Gb ULL connection, approximately 60% will
see a proposed decrease in their monthly fees and approximately 40%
will see a proposed increase in their monthly fees as a result of the
proposed tiered-pricing structure versus the current flat monthly fee
structure. To illustrate, firms that purchase only one 10Gb ULL
connection per month currently pay the flat rate of $10,000 per month
for that one 10Gb ULL connection. Pursuant to the proposed tiered-
pricing structure, these firms will now pay $9,000 per month for that
one 10Gb ULL connection, saving $1,000 per month or $12,000 annually.
Further, firms that purchase two 10Gb ULL connections per month
currently pay the flat rate of $20,000 per month ($10,000 x 2) for
those two 10Gb ULL connections. Pursuant to the proposed tiered-pricing
structure, these firms will now pay $18,000 per month ($9,000 x 2) for
those two 10Gb ULL connections, saving $2,000 per month or $24,000
annually.
The Exchange also notes that, for firms that primarily route orders
seeking best-execution, a limited number of connections are needed.
Therefore, the connectivity costs will likely be lower for these firms
based on the proposed tiered-pricing structure. The firms that engage
in advanced trading strategies typically require multiple connections
and, therefore, generate higher costs by utilizing more of the
Exchange's resources. These firms will absorb the increased
connectivity cost based on the proposed tiered-pricing structure, as
shown by the 40% of firms that will likely see an increase in their
monthly fees. Additionally, the firms that purchase a higher amount of
10Gb ULL connections tend to have specific business oriented market
making and taking strategies, as opposed to firms simply engaging in
best-execution order routing business.
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 connectivity 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 expense the Exchange has and will incur,
and that the Exchange is providing sufficient transparency (as
described below) into how the Exchange determined to charge such fees.
Accordingly, the Exchange is providing an analysis of its revenues,
costs, and profitability associated with the Proposed Access Fees. This
analysis includes information regarding its methodology for determining
the costs and revenues associated with the Proposed Access Fees.
In order to determine the Exchange's costs 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 revenue associated
with the Proposed Access Fees, the Exchange analyzed the number of
Members and non-Members currently utilizing the 10Gb ULL fiber
connection, 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 seven months 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
[[Page 46050]]
Fees versus the total projected annual revenue the Exchange will
collect for providing those services.
* * * * *
On March 29, 2019, the Commission issued its Order Disapproving
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC
Options Facility to Establish BOX Connectivity Fees for Participants
and Non-Participants Who Connect to the BOX Network (the ``BOX
Order'').\8\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\9\ 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 Miami International
Securities Exchange, LLC (``MIAX'') and MIAX PEARL, LLC (``MIAX
Pearl''), to establish or increase other non-transaction fees.\10\
Accordingly, the Exchange believes that the Proposed Access Fees are
consistent with the Act.
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\8\ 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).
\9\ 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'').
\10\ See Securities Exchange Act Release Nos. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase
connectivity fees).
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* * * * *
As of July 29, 2021, the Exchange had a market share of only 3.90%
of the U.S. equity options industry for the month of July 2021.\11\ The
Exchange is not aware of any evidence that a market share of
approximately 3-4% 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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\11\ See ``The market at a glance,'' available at https://
www.miaxoptions.com/ (last visited July 27, 2021).
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their access (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 noted
in a recent filing that once MIAX Emerald issued a notice that it was
instituting MEI Port fees, among other non-transaction fees, one MIAX
Emerald Member dropped its access to MIAX Emerald as a result of those
fees.\12\ 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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\12\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network
Connectivity Fees, and Increase the Number of Additional Limited
Service MIAX Emerald Express Interface Ports Available to Market
Makers) (adopting tiered MEI Port fee structure ranging from $5,000
to $20,500 per month).
---------------------------------------------------------------------------
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
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,\13\ the total annual expense for providing the access
services associated with the Proposed Access Fees is projected to be
approximately $7.2 million. The approximately $7.2 million 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.\14\ As
noted above, the Exchange believes it is more appropriate to analyze
the Proposed Access Fees utilizing its 2021 revenue
[[Page 46051]]
and costs, which utilize the same presentation methodology as set forth
in the Exchange's previously-issued Audited Unconsolidated Financial
Statements.\15\ The $7.2 million 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 costs of operating matching
systems and other trading technology, and no expense amount was
allocated twice.
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\13\ The Exchange has not yet finalized its 2021 year end
results.
\14\ 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.
\15\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-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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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 $1.7 million. 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 and its
affiliates' office locations in Princeton, New Jersey and Miami,
Florida, to all data center locations; (3) Secure Financial Transaction
Infrastructure (``SFTI''),\16\ 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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\16\ 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 expenses associated with its affiliates, MIAX and MIAX Pearl, 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 62% 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 Pearl and MIAX, 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 62% 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 89% of the total applicable
SFTI and other service providers' expense. The
[[Page 46052]]
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 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 51% 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
approximately $5.5 million. 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 approximately $3.2 million,
which is only a portion of the approximately $9.7 million 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 33% 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 services associated with the Proposed Access Fees is
projected to be $2 million, which is only a portion of the $3.1 million
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 63% 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 services
associated with the Proposed Access Fees is projected to be
approximately $0.3 million, which is only a portion of the $0.5 million
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
[[Page 46053]]
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 Access 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 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 53% 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 their costs;
thus, the Exchange believes it is reasonable to allocate a material
portion of their 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 annualized revenue for
providing the access services associated with the Proposed Access Fees
would be approximately $14.6 million per annum, based on a recent
billing cycle.\17\ The Exchange projects that their annualized revenue
for providing network connectivity services (all connectivity
alternatives) to be approximately $14.63 million per annum. The
Exchange projects that their annualized expense for providing network
connectivity services (all connectivity alternatives) to be
approximately $7.2 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for
the 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 a profit margin of only approximately 51%
inclusive of the Proposed Access Fees and all other connectivity
alternatives ($14.63 million in total connectivity revenue minus $7.2
million in expense = $7.43 million in profit per annum). Additionally,
this profit margin does not take into account the cost of capital
expenditures (``CapEx'') the Exchange historically spent or is
projected to spend each year on CapEx going forward.
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\17\ The Exchange also projects approximately $2,800 in monthly
revenue through 1Gb connections; however, the Exchange does not
propose to adjust the fees for those connections at this time.
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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 expenses associated with the
Exchange's affiliates, MIAX and MIAX Pearl, are accounted for
separately and are not included within the scope of this filing. Stated
differently, no expense amount of the Exchange is also allocated to
MIAX or MIAX Pearl.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the 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 costs of providing access to
its System. 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'' \18\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\19\ With the proposed changes,
the Exchange anticipates it will have a profit margin of approximately
51%, inclusive of the Proposed Access Fees and all other connectivity
alternatives. Based on the 2020 Audited Financial Statements of
competing options exchanges (since the 2021 Audited Financial
Statements will likely not become publicly available until early July
2022, after the Exchange has submitted this filing), the Exchange's
profit margin is similar to or below the operating profit margins of
other competing exchanges. For example, Nasdaq ISE, LLC's (``ISE'')
operating profit margin for all of 2020 was approximately 85%; Nasdaq
PHLX LLC's (``PHLX'') operating profit margin for all of 2020 was
approximately 49%; the Nasdaq Stock Market LLC's (``Nasdaq'') operating
profit margin for all of 2020 was approximately 62%; NYSE Arca, Inc.'s
(``Arca'') operating profit margin for all of 2020 was approximately
55%; NYSE American LLC's (``Amex'') operating profit margin for all of
2020 was approximately 59%; Cboe Exchange, Inc.'s (``Cboe'') operating
profit margin for all of 2020 was approximately 74%; and Cboe BZX
Exchange, Inc.'s (``BZX'') operating profit margin for all of 2020 was
approximately 52%.
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\18\ See supra note 9.
\19\ See id.
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[[Page 46054]]
The Exchange believes that the Proposed Access Fees are reasonable,
equitably allocated and not unfairly discriminatory because, for one
10Gb ULL connection, the Exchange provides each Member or non-Member
access to all twelve matching engines on MIAX Emerald. Under the
proposed pricing-structure, the Exchange will assess each Member or
non-Member $9,000 for the first 10Gb ULL connection. For that $9,000
monthly fee, each Member or non-Member has access to all twelve
matching engines each month. This results in a per matching engine
connectivity cost of only $750 ($9,000 divided by 12). The Exchange
believes its connectivity cost to be less than or similar to
connectivity fees charged by competing options exchanges.\20\
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\20\ See The Nasdaq Stock Market LLC (``NASDAQ'') Rules, General
8: Connectivity, Section 1. Co-Location Services (charging a monthly
fee of $10,000 per 10Gb fiber connection, $15,000 per 10Gb Ultra
fiber connection, and $20,000 per 40Gb fiber connection, plus
installation fees ranging from $1,000 to $1,500). The Exchange notes
that the same connectivity fees described above for NASDAQ also
apply to its affiliates, Nasdaq ISE, LLC and NASDAQ PHLX LLC. See
Nasdaq ISE Rules, General 8: Connectivity and NASDAQ PHLX Rules,
General 8: Connectivity (both incorporating by reference the fees in
NASDAQ Rules, General 8: Connectivity). See also NYSE American LLC
Options Fee Schedule, Section IV (charging the following
connectivity fees: $6,000 per connection initial charge plus $5,000
monthly per 1Gb circuit connection; $15,000 per connection initial
charge plus $22,000 monthly per 10Gb LX LCN circuit connection; and
$15,000 per connection initial charge plus $22,000 monthly charge
per 40Gb LCN circuit connection).
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The Exchange further believes its proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange believes that it benefits overall competition in the
marketplace to allow relatively new entrants like the Exchange and its
affiliates, MIAX Pearl and MIAX, to propose fees that may help these
new entrants recoup their substantial investment in building out costly
infrastructure. The Exchange and its affiliates have historically set
their fees purposefully low in order to attract business and market
share, and the proposed tiered-pricing structure will help make the
rates consistent with other exchanges while not raising costs for a
majority of the Exchange's Members and non-Members.
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.
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.\21\ 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.\22\ 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.\23\
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\21\ 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.
\22\ 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.
\23\ Id.
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The Exchange notes that non-Member third-parties, such as Service
Bureaus and Extranets, resell the Exchange's connectivity. This
indirect connectivity is another viable alternative for market
participants to trade on the Exchange without connecting directly to
the Exchange (and thus not pay the Exchange's connectivity fees), which
alternative is already being used by non-Members and further constrains
the price that the Exchange is able to charge for connectivity and
other access fees to its market. The Exchange notes that it could, but
chooses not to, preclude market participants from reselling its
connectivity. The Exchange also chooses not to adopt fees that would be
assessed to third-party resellers on a per customer basis (i.e., fees
based on the number of firms that connect to the Exchange indirectly
via the third-party). Indeed, the Exchange does not receive any
connectivity revenue when connectivity is resold by a third-party,
which often is resold to multiple customers, some of whom are agency
broker-dealers that have numerous customers of their own.\24\ In sum,
the Exchange believes this creates and fosters a competitive
environment and subjects the Exchange to competitive forces in pricing
its connectivity and access fees. Particularly, in the event that a
market participant views the Exchange's direct connectivity and access
fees as more or less attractive than competing markets, that market
participant can choose to connect to the Exchange indirectly or may
choose not to connect to the Exchange and connect instead to one or
more of the other 15 options markets. Accordingly, the Exchange
believes that the Proposed Access Fees are fair and reasonable and do
not result in excessive pricing or supra-competitive profit.
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\24\ The Exchange notes that resellers are not required to
publicize, let alone justify or file with the Commission their fees,
and as such could charge the market participant any fees it deems
appropriate (including connectivity fees higher than the Exchange's
connectivity fees), even if such fees would otherwise be considered
potentially unreasonable or uncompetitive fees.
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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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
With respect to intra-market competition, the Exchange does not
believe that the proposed rule change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As stated above, the Exchange does not believe
its proposed pricing will impose a barrier to entry to smaller
participants and notes that its proposed connectivity pricing structure
for its 10Gb ULL connections is associated with relative usage of the
various market participants. Further, the majority of firms that
purchase 10Gb ULL connections may either save money or pay the same
amount after the tiered-pricing structure is implemented. While total
cost may be increased for market participants with larger capacity
needs or for business/
[[Page 46055]]
technical preferences, such options provide far more capacity and are
purchased by those that consume more resources from the network.
Accordingly, the proposed tiered-pricing structure does not favor
certain categories of market participants in a manner that would impose
a burden on competition; rather, the allocation reflects the network
resources consumed by the various usage of market participants--lowest
bandwidth consuming members pay the least, and highest bandwidth
consuming members pays the most, particularly since higher bandwidth
consumption translates to higher costs to the Exchange.
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. The Exchange operates in a highly competitive
environment, and as discussed above, its ability to price access and
connectivity is constrained by competition among exchanges and third
parties. There are other options markets of which market participants
may connect to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. For example, there are 15 other U.S. options exchanges,
which the Exchange must consider in its pricing discipline in order to
compete for market participants. In this competitive environment,
market participants are free to choose which competing exchange or
reseller 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,\25\ and Rule 19b-4(f)(2) \26\ 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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\25\ 15 U.S.C. 78s(b)(3)(A)(ii).
\26\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-EMERALD-2021-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-EMERALD-2021-23. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EMERALD-2021-23 and should be submitted
on or before September 7, 2021.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17539 Filed 8-16-21; 8:45 am]
BILLING CODE 8011-01-P
