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, 54760-54770 [2021-21492]
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Federal Register / Vol. 86, No. 189 / Monday, October 4, 2021 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange received one comment
on the proposed rule change.55 The
Exchange notes that the Exchange, and
its affiliates MIAX Pearl and MIAX
Emerald, justified similar fee changes in
the past with similar, if not identical,
justifications in previous filings that
have been noticed by the Commission
for public comment and are currently in
effect.56 Nonetheless, the Exchange has
sought to address the commenters
concerns via the enhanced justification
and additional information included in
this proposal.
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,57 and Rule
19b–4(f)(2) 58 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–
MIAX–2021–41 on the subject line.
the SIG Comment Letter, supra note 7.
Securities Exchange Act Release Nos.
90980 (January 25, 2021), 86 FR 7602 (January 29,
2021) (SR–MIAX–2021–02); 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR–PEARL–
2021–01); 91033 (February 1, 2021), 86 FR 8455
(February 5, 2021) (SR–EMERALD–2021–03); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11).
57 15 U.S.C. 78s(b)(3)(A)(ii).
58 17 CFR 240.19b–4(f)(2).
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2021–41. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2021–41 and should
be submitted on or before October 25,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21491 Filed 10–1–21; 8:45 am]
BILLING CODE 8011–01–P
55 See
56 See
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93166; File No. SR–
EMERALD–2021–29]
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
September 28, 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
September 24, 2021, MIAX Emerald,
LLC (‘‘MIAX Emerald’’ or ‘‘Exchange’’),
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Emerald Fee Schedule
(the ‘‘Fee Schedule’’) 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.
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
59 17
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CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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’’) 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
The Exchange initially filed this
proposal on July 30, 2021, with the
proposed fee changes effective
beginning August 1, 2021.5 The First
Proposed Rule Change was published
for comment in the Federal Register on
August 17, 2021.6 The Commission
received one comment letter on the First
Proposed Rule Change.7 The Exchange
has withdrawn the First Proposed Rule
Change and now submits this proposal,
which is immediately effective. This
proposal provides additional
justification for the proposed fee
changes and addresses certain points
raised in the single comment letter that
submitted on the First Proposed Rule
Change.
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 under
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.
5 See Securities Exchange Act Release No. 92645
(August 11, 2021), 86 FR 46048 (August 17, 2021)
(SR–EMERALD–2021–23) (the ‘‘First Proposed Rule
Change’’).
6 Id.
7 See Letter from Richard J. McDonald,
Susquehanna International Group, LLC (‘‘SIG’’), to
Vanessa Countryman, Secretary, Commission, dated
September 7, 2021 (‘‘SIG Comment Letter’’).
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which the monthly fee would vary
depending on the number of 10Gb ULL
connections each Member or nonMember 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 nonMembers that purchase more than two
10Gb ULL connections. In particular, (i)
the third and fourth 10Gb ULL
connections for each Member or nonMember 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 each 10Gb
ULL connection purchased by Members
and non-Members 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 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.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 8
in general, and furthers the objectives of
Section 6(b)(4) of the Act 9 in particular,
in that it provides for the equitable
8 15
9 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(4).
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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 10
in that it is designed to promote just and
equitable principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general 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
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. After the effective date
of the First Proposed Rule Change on
August 1, 2021, approximately 60% of
the firms that purchased at least one
10Gb ULL connection experienced a
decrease in their monthly connectivity
fees while only approximately 40% of
firms experienced an increase in their
monthly connectivity fees as a result of
the proposed tiered-pricing structure
when compared to the flat monthly fee
structure. To illustrate, firms that
purchase only one 10Gb ULL
connection per month used to pay the
10 15
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U.S.C. 78f(b)(5).
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Federal Register / Vol. 86, No. 189 / Monday, October 4, 2021 / Notices
flat rate of $10,000 per month for that
one 10Gb ULL connection. Pursuant to
the proposed tiered-pricing structure,
these firms 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
previously paid a 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 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 firms
that primarily route orders seeking bestexecution generally only need a limited
number of connections to fulfill that
obligation. 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 experienced
increased connectivity costs based on
the proposed tiered-pricing structure, as
shown by the 40% of firms that may
have experienced an increase in their
monthly connectivity fees. Additionally,
the firms that purchase a higher amount
of 10Gb ULL connections tend to have
specific business-drive trading
strategies, as opposed to firms engaging
solely in order routing as part of their
best-execution obligations.
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
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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 nearly 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 to 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
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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
representative of its current total
annualized 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
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’’).11 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.12 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 non11 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).
12 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Guidance’’).
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transaction fees.13 Accordingly, the
Exchange believes that the Proposed
Access Fees are consistent with the Act.
*
*
*
*
*
As of September 23, 2021, the
Exchange had a market share of only
5.01% of the U.S. equity options
industry for the month of September
2021.14 The Exchange is not aware of
any evidence that a market share of
approximately 5–6% provides the
Exchange with anti-competitive pricing
power. If the Exchange were to attempt
to establish unreasonable pricing for any
of its means provided to access the
Exchange, market participants may look
to access the Exchange via other means
such as through a third party service
provider, or look to connect to the
Exchange via a competing exchange
with cheaper access alternatives that
also provides routing services to the
Exchange. In addition, existing market
participants that are connected to the
Exchange may choose to disconnect
from the Exchange or reduce their
number of connections to the Exchange
as a means to reduce their overall costs.
The Exchange believes the proposed
tiered-pricing structure for 10Gb ULL
connections is equitable and reasonable
because the proposed highest tier is still
less than fees charged for similar
connectivity provided by other options
exchanges with comparable market
shares. For example, The Nasdaq Stock
Market LLC (‘‘NASDAQ’’) (equity
options market share of 7.79% as of
September 22, 2021 for the month of
September) 15 charges a monthly fee of
$10,000 per 10Gb fiber connection and
$15,000 per 10Gb Ultra fiber
connection.16 The highest tier of the
Exchange’s proposed fee structure for a
10Gb ULL connection is $2,000 per
month less than NASDAQ and, unlike
NASDAQ, the Exchange does not charge
installation fees. The Exchange notes
that the same connectivity fees
described above for NASDAQ also apply
to its affiliates, Nasdaq ISE, LLC (‘‘ISE’’)
(equity options market share of 6.47%
as of September 22, 2021 for the month
of September) 17 and NASDAQ PHLX
13 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).
14 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited
September 23, 2021).
15 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited
September 22, 2021).
16 See Nasdaq Stock Market LLC Rules, General
8: Connectivity, Section 1. Co-Location Services;
Nasdaq ISE Rules, General 8: Connectivity.
17 See supra note 15.
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LLC (‘‘PHLX’’) (equity options market
share of 11.25% as of September 22,
2021 for the month of September).18
NYSE American LLC (‘‘Amex’’) (equity
options market share of 7.89% as of
September 22, 2021 for the month of
September) 19 charges $15,000 per
connection initially plus $22,000
monthly per 10Gb LX LCN circuit
connection.20 Again, the highest tier of
the Exchange’s proposed fee structure
for a 10Gb ULL connection is $9,000 per
month lower than the Amex
connectivity fee after the first month.
In the each of the above cases, the
Exchange’s highest tier in the proposed
tiered-pricing structure is significantly
lower than that of competing options
exchanges with similar market share.
Further, as described in more detail
below, those exchanges generate higher
operating profit margins and higher
‘‘access fees’’ than the Exchange, even
with this proposed fee change. Despite
proposing lower or similar fees to that
of competing options exchanges with
similar market share, the Exchange
believes that it provides a premium
network experiencer to its Members and
non-Members via a highly deterministic
system, enhanced network monitoring
and customer reporting, and a superior
network infrastructure than markets
with higher market shares and more
expensive connectivity alternatives.
Each of the connectivity rates in place
at competing options exchanges were
filed with the Commission for
immediate effectiveness and remain in
place today.
The Exchange also notes that the
higher connectivity fees described above
for competing exchanges have been in
place for years (over 8 years in some
cases), allowing those exchanges to
derive significantly more revenue from
their access fees. For example, in 2013,
Amex adopted the pricing for its 10Gb
LX LCN connection of $15,000 as an
initial charge per connection and then a
monthly fee of $20,000 per connection.
The initial fee per connection is higher
than the Exchange’s highest proposed
tier of $13,000 per connection,
notwithstanding the fact that the
monthly fee is $7,000 more than the
Exchange’s highest proposed tier and
Amex’s fees have been in place for
nearly 8 years.21 NYSE Arca, Inc.
(‘‘Arca’’) also adopted the exact same
fees as Amex in 2013 and has been
18 See id. See also PHLX Rules, General 8:
Connectivity.
19 See supra note 15.
20 See NYSE American Options Fee Schedule,
Section IV.
21 See Securities Exchange Act Release No. 70982
(December 4, 2013), 78 FR 74197 (December 10,
2013) (SR–NYSEMKT–2013–97).
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54763
collecting higher fees than the
Exchange’s current proposal for nearly 8
years as well (initial charge of $15,000
per connection and then a monthly fee
of $20,000 per connection).22 Not only
were the fees that Amex and Arca
adopted in 2013 significantly higher
than the fees the Exchange currently
proposes, in 2016, Amex and Arca
raised the monthly fees even higher to
$22,000 per connection.23 Similarly, in
2013, NASDAQ adopted the pricing for
its 10Gb Ultra connection of $1,500 per
connection as a one-time installation fee
and then a monthly fee of $15,000 per
connection.24 The Exchange’s current
proposal does not contemplate any sort
of installation fee or one-time fee and
the monthly fee for the Exchange’s
highest connectivity tier ($13,000) is
$2,000 lower than the fees adopted 8
years ago by Amex, Arca and NASDAQ.
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 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
22 See Securities Exchange Act Release No. 70981
(December 4, 2013), 78 FR 74203 (December 10,
2013) (SR–NYSEARCA–2013–131).
23 See Securities Exchange Act Release Nos.
79729 (January 4, 2017), 82 FR 3061 (January 10,
2017) (SR–NYSEARCA–2016–172); 79728 (January
4, 2017), 82 FR 3035 (January 10, 2017) (SR–
NYSEMKT–2016–126).
24 See Securities Exchange Act Release No. 70129
(August 7, 2013), 78 FR 49308 (August 13, 2013)
(SR–NASDAQ–2013–099).
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Emerald as a result of those fees.25
Accordingly, these examples show that
if a market participant believes, based
on its business model, that an exchange
charges 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.
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 a
reasonable attempt 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
25 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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22:52 Oct 01, 2021
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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
2021,26 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.27 As noted
above, the Exchange believes it is more
appropriate to analyze the Proposed
Access Fees utilizing its 2021 revenue
and costs, which utilize the same
presentation methodology as set forth in
the Exchange’s previously-issued
Audited Unconsolidated Financial
Statements.28 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
26 The Exchange has not yet finalized its 2021
year end results.
27 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.
28 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.
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
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’’),29 which
supports connectivity and feeds for the
entire U.S. options industry; (4) various
other services providers (including
Thomson 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
29 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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with its affiliates, MIAX and MIAX
Pearl (the options and equities markets),
are accounted for separately and are not
included within the scope of this filing.
As noted above, 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. Further, as
part its ongoing assessment of costs and
expenses, the Exchange recently
conducted a periodic thorough review
of its expenses and resource allocations
which, in turn, resulted in a revised
percentage allocations in this filing. The
Exchange notes that the expense
allocations differ from the Exchange’s
filing earlier this year, SR–EMERALD–
2021–11, because that prior filing
pertained to several different access
fees, which the Exchange had not been
charging for since the Exchange
launched operations in March 2019.30 In
SR–EMERALD–2021–11, the Exchange
sought to adopt fees for FIX Ports, MEI
Ports, Purge Ports, Clearing Trade Drop
Ports, and FIX Drop Copy Ports, all of
which had been free for market
participants for over two years.
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
30 See Securities Exchange Act Release No. 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11).
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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.31
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.32
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
31 As noted above, 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. Again, as
part its ongoing assessment of costs and expenses,
the Exchange recently conducted a periodic
thorough review of its expenses and resource
allocations which, in turn, resulted in a revised
percentage allocations in this filing.
32 Id.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
54765
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
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.33
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.34
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
33 Id.
34 Id.
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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
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22:52 Oct 01, 2021
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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.35
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.36
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
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.37
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
35 Id.
36 Id.
PO 00000
Frm 00094
37 Id.
Fmt 4703
Sfmt 4703
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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
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.38 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
38 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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22:52 Oct 01, 2021
Jkt 256001
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 nearly every expense 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’’ 39 profit. Of note,
the Guidance defines ‘‘supracompetitive profit’’ as profits that
exceed the profits that can be obtained
in a competitive market.40
With the proposed changes, the
Exchange anticipates that its collective
connectivity profit margin will be
approximately 51%, inclusive of the
Proposed Access Fees and all other
connectivity alternatives. In order to
achieve a consistent, premium network
performance, the Exchange must build
out and continue to maintain a network
that has the capacity to handle the
message rate requirements of not only
firms that consume minimal Exchange
connectivity resources, but also those
39 See
40 See
PO 00000
supra note 12.
id.
Frm 00095
Fmt 4703
firms that most heavily consume
Exchange connectivity resources,
network consumers, and purchasers of
10Gb ULL connectivity, which generate
billions of messages per day across the
Exchange. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. Given that 10Gb
ULL purchasers utilize the most
resources across the network, the
Exchange believes that it is reasonable
to operate at a profit margin of
approximately 51% for connectivity,
inclusive of the Proposed Access Fees
and all other connectivity alternatives.
Such profit margin should enable the
Exchange to continue to invest in its
network and systems, maintain its
current infrastructure, support future
enhancements to network connectivity,
and continue to offer enhanced
customer reporting and monitoring
services.
While the proposed fees are similar to
or less than that of other options
exchanges,41 as discussed above, the
incremental increase in revenue
generated from the 51% profit margin
for connectivity will allow the Exchange
to further invest in its system
architecture and matching engine
functionality to the benefit of all market
participants. The ability to continue to
invest in technology and systems will
also enable the Exchange to improve the
determinism and overall performance of
not only its system connectivity, but
overall performance including the
resiliency and efficiency of its matching
engines. The revenue generated under
the proposed rule change would also
provide the exchange with the resources
necessary to further innovate and
enhance its systems and seek additional
improvements or functionality to offer
market participants generally. The
Exchange believes that these
investments, in turn, will benefit all
investors by encouraging other
exchanges to further invest, innovate,
and improve their own systems in
response.
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
revenue that is derived from its access
fees is in line with the revenue that is
derived from access fees of competing
exchanges. For example, the total
41 See
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revenue from ‘‘access fees’’ 42 for 2020
for MIAX Emerald was $7,244,000.
MIAX Emerald projects that the total
revenue from ‘‘access fees’’ for 2021 for
MIAX Emerald will be $20,910,179,
inclusive of the Proposed Access Fees
described herein.
The Exchange’s projected revenue
from access fees is still less than, or
similar to, the access fee revenues
generated by access fees charged by
other U.S. options exchanges. For
example, the Cboe Exchange, Inc.
(‘‘Cboe’’) reported $70,893,000 in
‘‘access and capacity fee’’ 43 revenue for
2020. Cboe C2 Exchange, Inc. (‘‘C2’’)
reported $19,016,000 in ‘‘access and
capacity fee’’ revenue for 2020.44 Cboe
BZX Exchange, Inc. (‘‘BZX’’) reported
$38,387,000 in ‘‘access and capacity
fee’’ revenue for 2020.45 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
$26,126,000 in ‘‘access and capacity
fee’’ revenue for 2020.46 PHLX reported
$20,817,000 in ‘‘Trade Management
Services’’ revenue for 2019.47 The
Exchange notes it is unable to compare
‘‘access fee’’ revenues with PHLX (or
other affiliated NASDAQ exchanges)
because after 2019, the ‘‘Trade
Management Services’’ line item was
bundled into a much larger line item in
PHLX’s Form 1, simply titled ‘‘Market
services.’’ 48
The Exchange also believes that,
based on the 2020 Audited Financial
Statements of competing options
exchanges, the Exchange’s overall
operating margin is in line with or less
than the operating margins of competing
options exchanges, including the
revenue and expense associated with
the Proposed Access Fees. For example,
the 2020 operating margin for MIAX
Emerald was ¥12%.49 Based on
42 As described in the Exchange’s Audited
Financial Statements, fees for ‘‘access services’’ are
assessed to exchange members for the opportunity
to trade and use other related functions of the
exchanges. See https://www.sec.gov/Archives/
edgar/vprr/2100/21000461.pdf.
43 According to Cboe, access and capacity fees
represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See
Form 1 Amendment, at https://www.sec.gov/
Archives/edgar/vprr/2100/21000465.pdf.
44 See id.
45 See id.
46 See id.
47 According to PHLX, ‘‘Trade Management
Services’’ includes ‘‘a wide variety of alternatives
for connectivity to and accessing [the PHLX]
markets for a fee. These participants are charged
monthly fees for connectivity and support in
accordance with [PHLX’s] published fee
schedules.’’ See Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2001/
20012246.pdf.
48 See Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
49 This information is provided in response to the
SIG Comment Letter. See supra note 7.
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competing exchanges’ Form 1
Amendments, ISE’s operating profit
margin for 2020 was approximately
85%; PHLX’s operating profit margin for
2020 was approximately 49%;
NASDAQ’s operating profit margin for
2020 was approximately 62%; Arca’s
operating profit margin for 2020 was
approximately 55%; Amex’s operating
profit margin for 2020 was
approximately 59%; Cboe’s operating
profit margin for 2020 was
approximately 74%; and BZX’s
operating profit margin for 2020 was
approximately 52%.
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 (12) matching engines on
MIAX Emerald and a vast majority
choose to connect to all twelve (12)
matching engines. The Exchange
believes that other exchanges require
firms to connect to multiple matching
engines.50 Further, the Exchange notes
that no Member or non-Member has
altered its use of 10Gb ULL connectivity
since the proposed fee changes went
into effect on August 1, 2021 via the
First Proposed Rule Change.
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.
50 See
Specialized Quote Interface Specification,
Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX
Options, Version 6.5a, Section 2, Architecture
(revised August 16, 2019), available at https://
www.nasdaqtrader.com/content/technicalsupport/
specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear
whether the NASDAQ exchanges include
connectivity to each matching engine for the single
fee or charge per connection, per matching engine.
See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020). The
Exchange notes that NYSE provides a link to an
Excel file detailing the number of matching engines
per options exchange, with Arca and Amex having
19 and 17 matching engines, respectively.
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The Guidance provides that in
determining whether a proposed fee is
constrained by significant competitive
forces, the Commission will consider
whether there are reasonable substitutes
for the product or service that is the
subject of a proposed fee. As described
below, the Exchange believes substitute
products and services are available to
market participants, including, among
other things, other options exchanges
that market participants may connect to
in lieu of the Exchange, indirect
connectivity to the Exchange via a thirdparty reseller.
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.51 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.52 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.53
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
51 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.
52 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.
53 Id.
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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
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.54 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.
54 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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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/
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.
PO 00000
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Fmt 4703
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54769
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange received one comment
on the proposed rule change.55 The
Exchange notes that the Exchange, and
its affiliates MIAX Pearl and MIAX,
justified similar fee changes in the past
with similar, if not identical,
justifications in previous filings that
have been noticed by the Commission
for public comment and are currently in
effect.56 Nonetheless, the Exchange has
sought to address the commenters
concerns via the enhanced justification
and additional information included in
this proposal.
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,57 and Rule
19b–4(f)(2) 58 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–2021–29 on the subject line.
55 See
the SIG Comment Letter, supra note 7.
Securities Exchange Act Release Nos.
90980 (January 25, 2021), 86 FR 7602 (January 29,
2021) (SR–MIAX–2021–02); 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR–PEARL–
2021–01); 91033 (February 1, 2021), 86 FR 8455
(February 5, 2021) (SR–EMERALD–2021–03); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11).
57 15 U.S.C. 78s(b)(3)(A)(ii).
58 17 CFR 240.19b–4(f)(2).
56 See
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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–2021–29. 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–2021–29 and
should be submitted on or before
October 25, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21492 Filed 10–1–21; 8:45 am]
BILLING CODE 8011–01–P
59 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93160; File Nos. SR–NYSE–
2021–25, SR–NYSEAMER–2021–21, SR–
NYSEArca–2021–24, SR–NYSECHX–2021–
07, SR–NYSENAT–2021–09]
Self-Regulatory Organizations; New
York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., and NYSE National, Inc.;
Notice of Designation of a Longer
Period for Commission Action on
Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule
Changes To Amend the Fee Schedule
To Add Meet-Me-Room Connectivity
Services Available at the Mahwah Data
Center
September 28, 2021.
On April 9, 2021, New York Stock
Exchange LLC, NYSE American LLC,
NYSE Arca, Inc., NYSE Chicago, Inc.,
and NYSE National, Inc. each filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend the schedule of
connectivity services available at the
Mahwah data center to add services
available to customers in the meet me
rooms in the Mahwah data center and
procedures for the allocation of cabinets
and power to such customers. The
proposed rule changes were published
for comment in the Federal Register on
April 22, 2021.3 On June 2, 2021,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to either approve
the proposed rule changes, disapprove
the proposed rule changes, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule changes.5 On July 9, 2021, the
Commission instituted proceedings to
determine whether to approve or
disapprove the proposed rule changes.6
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release Nos. 91598
(April 16, 2021), 86 FR 21373 (April 22, 2021) (SR–
NYSE–2021–25); 91599 (April 16, 2021), 86 FR
21365 (April 22, 2021) (SR–NYSEAMER–2021–21);
91600 (April 16, 2021), 86 FR 21384 (April 22,
2021) (SR–NYSEArca–2021–24); 91601 (April 16,
2021), 86 FR 21410 (April 22, 2021) (SR–
NYSECHX–2021–07); and 91602 (April 16, 2021),
86 FR 21393 (April 22, 2021) (SR–NYSENAT–2021–
09) (collectively, the ‘‘Notices’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 92089
(June 2, 2021), 86 FR 30510 (June 8, 2021). The
Commission designated July 21, 2021, as the date
by which it should approve, disapprove, or institute
proceedings to determine whether to approve or
disapprove the proposed rule changes.
6 See Securities Exchange Act Release No. 92368
(July 9, 2021), 86 FR 37356 (July 15, 2021).
2 17
PO 00000
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Sfmt 4703
The Commission has received no
comment letters on the proposed rule
changes.
Section 19(b)(2) of the Act 7 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of filing
of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
changes were published for notice and
comment in the Federal Register on
April 22, 2021.8 October 19, 2021 is 180
days from that date, and December 18,
2021 is 240 days from that date.
The Commission finds it appropriate
to designate a longer period within
which to issue an order approving or
disapproving the proposed rule changes
so that it has sufficient time to consider
the proposed rule changes. Accordingly,
the Commission, pursuant to Section
19(b)(2) of the Act,9 designates
December 18, 2021 as the date by which
the Commission should either approve
or disapprove the proposed rule changes
(File Nos. SR–NYSE–2021–25, SR–
NYSEAMER–2021–21, SR–NYSEArca–
2021–24, SR–NYSECHX–2021–07, SR–
NYSENAT–2021–09).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21489 Filed 10–1–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93143; File No. SR–BX–
2021–042]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Establish a New Rule
Requiring Members To Input Accurate
Information Into BX Systems
September 28, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
7 15
U.S.C. 78s(b)(2).
Notices, supra note 3.
9 15 U.S.C. 78s(b)(2).
10 17 CFR 200.30–3(a)(31).
8 See
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]]>Agencies
[Federal Register Volume 86, Number 189 (Monday, October 4, 2021)]
[Notices]
[Pages 54760-54770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21492]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93166; File No. SR-EMERALD-2021-29]
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
September 28, 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 September 24, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or
``Exchange''), filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Emerald Fee
Schedule (the ``Fee Schedule'') 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.
[[Page 54761]]
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
The Exchange initially filed this proposal on July 30, 2021, with
the proposed fee changes effective beginning August 1, 2021.\5\ The
First Proposed Rule Change was published for comment in the Federal
Register on August 17, 2021.\6\ The Commission received one comment
letter on the First Proposed Rule Change.\7\ The Exchange has withdrawn
the First Proposed Rule Change and now submits this proposal, which is
immediately effective. This proposal provides additional justification
for the proposed fee changes and addresses certain points raised in the
single comment letter that submitted on the First Proposed Rule Change.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 92645 (August 11,
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23) (the
``First Proposed Rule Change'').
\6\ Id.
\7\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Comment
Letter'').
---------------------------------------------------------------------------
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 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. In particular, (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 each 10Gb ULL connection
purchased by Members and non-Members 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.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \8\ in general, and furthers
the objectives of Section 6(b)(4) of the Act \9\ 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 \10\ in that it is designed to promote just
and equitable principles of trade, remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general protect investors and the public interest and is not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor competing venues if they
deem fee levels at a particular venue to be excessive. In such an
environment, the Exchange must continually adjust its fees for services
and products, in addition to order flow, to remain competitive with
other exchanges. The Exchange believes that the proposed changes
reflect this competitive environment.
The 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. After the effective date of the First Proposed Rule Change
on August 1, 2021, approximately 60% of the firms that purchased at
least one 10Gb ULL connection experienced a decrease in their monthly
connectivity fees while only approximately 40% of firms experienced an
increase in their monthly connectivity fees as a result of the proposed
tiered-pricing structure when compared to the flat monthly fee
structure. To illustrate, firms that purchase only one 10Gb ULL
connection per month used to pay the
[[Page 54762]]
flat rate of $10,000 per month for that one 10Gb ULL connection.
Pursuant to the proposed tiered-pricing structure, these firms 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 previously paid a 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 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 firms that primarily route orders
seeking best-execution generally only need a limited number of
connections to fulfill that obligation. 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 experienced increased connectivity costs based on the
proposed tiered-pricing structure, as shown by the 40% of firms that
may have experienced an increase in their monthly connectivity fees.
Additionally, the firms that purchase a higher amount of 10Gb ULL
connections tend to have specific business-drive trading strategies, as
opposed to firms engaging solely in order routing as part of their
best-execution obligations.
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
nearly 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 to 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 representative of its
current total annualized revenue and costs associated with the Proposed
Access Fees. Accordingly, the Exchange believes it is more appropriate
to analyze the Proposed Access Fees utilizing its 2021 revenue and
costs, as described herein, which utilize the same presentation
methodology as set forth in the Exchange's previously-issued Audited
Unconsolidated Financial Statements. Based on this analysis, the
Exchange believes that the Proposed Access Fees are fair and reasonable
because they will not result in excessive pricing or supra-competitive
profit when comparing the Exchange's total annual expense associated
with providing the services associated with the Proposed Access Fees
versus the total projected annual revenue the Exchange will collect for
providing those services.
* * * * *
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'').\11\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\12\ 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-
[[Page 54763]]
transaction fees.\13\ Accordingly, the Exchange believes that the
Proposed Access Fees are consistent with the Act.
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\11\ 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).
\12\ 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'').
\13\ 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 September 23, 2021, the Exchange had a market share of only
5.01% of the U.S. equity options industry for the month of September
2021.\14\ The Exchange is not aware of any evidence that a market share
of approximately 5-6% provides the Exchange with anti-competitive
pricing power. If the Exchange were to attempt to establish
unreasonable pricing for any of its means provided to access the
Exchange, market participants may look to access the Exchange via other
means such as through a third party service provider, or look to
connect to the Exchange via a competing exchange with cheaper access
alternatives that also provides routing services to the Exchange. In
addition, existing market participants that are connected to the
Exchange may choose to disconnect from the Exchange or reduce their
number of connections to the Exchange as a means to reduce their
overall costs.
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\14\ See ``The market at a glance,'' available at https://
www.miaxoptions.com/ (last visited September 23, 2021).
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The Exchange believes the proposed tiered-pricing structure for
10Gb ULL connections is equitable and reasonable because the proposed
highest tier is still less than fees charged for similar connectivity
provided by other options exchanges with comparable market shares. For
example, The Nasdaq Stock Market LLC (``NASDAQ'') (equity options
market share of 7.79% as of September 22, 2021 for the month of
September) \15\ charges a monthly fee of $10,000 per 10Gb fiber
connection and $15,000 per 10Gb Ultra fiber connection.\16\ The highest
tier of the Exchange's proposed fee structure for a 10Gb ULL connection
is $2,000 per month less than NASDAQ and, unlike NASDAQ, the Exchange
does not charge installation fees. The Exchange notes that the same
connectivity fees described above for NASDAQ also apply to its
affiliates, Nasdaq ISE, LLC (``ISE'') (equity options market share of
6.47% as of September 22, 2021 for the month of September) \17\ and
NASDAQ PHLX LLC (``PHLX'') (equity options market share of 11.25% as of
September 22, 2021 for the month of September).\18\ NYSE American LLC
(``Amex'') (equity options market share of 7.89% as of September 22,
2021 for the month of September) \19\ charges $15,000 per connection
initially plus $22,000 monthly per 10Gb LX LCN circuit connection.\20\
Again, the highest tier of the Exchange's proposed fee structure for a
10Gb ULL connection is $9,000 per month lower than the Amex
connectivity fee after the first month.
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\15\ See ``The market at a glance,'' available at https://
www.miaxoptions.com/ (last visited September 22, 2021).
\16\ See Nasdaq Stock Market LLC Rules, General 8: Connectivity,
Section 1. Co-Location Services; Nasdaq ISE Rules, General 8:
Connectivity.
\17\ See supra note 15.
\18\ See id. See also PHLX Rules, General 8: Connectivity.
\19\ See supra note 15.
\20\ See NYSE American Options Fee Schedule, Section IV.
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In the each of the above cases, the Exchange's highest tier in the
proposed tiered-pricing structure is significantly lower than that of
competing options exchanges with similar market share. Further, as
described in more detail below, those exchanges generate higher
operating profit margins and higher ``access fees'' than the Exchange,
even with this proposed fee change. Despite proposing lower or similar
fees to that of competing options exchanges with similar market share,
the Exchange believes that it provides a premium network experiencer to
its Members and non-Members via a highly deterministic system, enhanced
network monitoring and customer reporting, and a superior network
infrastructure than markets with higher market shares and more
expensive connectivity alternatives. Each of the connectivity rates in
place at competing options exchanges were filed with the Commission for
immediate effectiveness and remain in place today.
The Exchange also notes that the higher connectivity fees described
above for competing exchanges have been in place for years (over 8
years in some cases), allowing those exchanges to derive significantly
more revenue from their access fees. For example, in 2013, Amex adopted
the pricing for its 10Gb LX LCN connection of $15,000 as an initial
charge per connection and then a monthly fee of $20,000 per connection.
The initial fee per connection is higher than the Exchange's highest
proposed tier of $13,000 per connection, notwithstanding the fact that
the monthly fee is $7,000 more than the Exchange's highest proposed
tier and Amex's fees have been in place for nearly 8 years.\21\ NYSE
Arca, Inc. (``Arca'') also adopted the exact same fees as Amex in 2013
and has been collecting higher fees than the Exchange's current
proposal for nearly 8 years as well (initial charge of $15,000 per
connection and then a monthly fee of $20,000 per connection).\22\ Not
only were the fees that Amex and Arca adopted in 2013 significantly
higher than the fees the Exchange currently proposes, in 2016, Amex and
Arca raised the monthly fees even higher to $22,000 per connection.\23\
Similarly, in 2013, NASDAQ adopted the pricing for its 10Gb Ultra
connection of $1,500 per connection as a one-time installation fee and
then a monthly fee of $15,000 per connection.\24\ The Exchange's
current proposal does not contemplate any sort of installation fee or
one-time fee and the monthly fee for the Exchange's highest
connectivity tier ($13,000) is $2,000 lower than the fees adopted 8
years ago by Amex, Arca and NASDAQ.
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\21\ See Securities Exchange Act Release No. 70982 (December 4,
2013), 78 FR 74197 (December 10, 2013) (SR-NYSEMKT-2013-97).
\22\ See Securities Exchange Act Release No. 70981 (December 4,
2013), 78 FR 74203 (December 10, 2013) (SR-NYSEARCA-2013-131).
\23\ See Securities Exchange Act Release Nos. 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR-NYSEARCA-2016-172); 79728
(January 4, 2017), 82 FR 3035 (January 10, 2017) (SR-NYSEMKT-2016-
126).
\24\ See Securities Exchange Act Release No. 70129 (August 7,
2013), 78 FR 49308 (August 13, 2013) (SR-NASDAQ-2013-099).
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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
[[Page 54764]]
Emerald as a result of those fees.\25\ Accordingly, these examples show
that if a market participant believes, based on its business model,
that an exchange charges 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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\25\ 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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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 a reasonable attempt 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,\26\ 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.\27\ As
noted above, the Exchange believes it is more appropriate to analyze
the Proposed Access Fees utilizing its 2021 revenue and costs, which
utilize the same presentation methodology as set forth in the
Exchange's previously-issued Audited Unconsolidated Financial
Statements.\28\ 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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\26\ The Exchange has not yet finalized its 2021 year end
results.
\27\ 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.
\28\ 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''),\29\ which supports connectivity and feeds
for the entire U.S. options industry; (4) various other services
providers (including Thomson 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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\29\ 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
[[Page 54765]]
with its affiliates, MIAX and MIAX Pearl (the options and equities
markets), are accounted for separately and are not included within the
scope of this filing. As noted above, 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. Further, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic thorough
review of its expenses and resource allocations which, in turn,
resulted in a revised percentage allocations in this filing. The
Exchange notes that the expense allocations differ from the Exchange's
filing earlier this year, SR-EMERALD-2021-11, because that prior filing
pertained to several different access fees, which the Exchange had not
been charging for since the Exchange launched operations in March
2019.\30\ In SR-EMERALD-2021-11, the Exchange sought to adopt fees for
FIX Ports, MEI Ports, Purge Ports, Clearing Trade Drop Ports, and FIX
Drop Copy Ports, all of which had been free for market participants for
over two years.
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\30\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11).
---------------------------------------------------------------------------
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.\31\
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\31\ As noted above, 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. Again, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------
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.\32\
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\32\ Id.
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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 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.\33\
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
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.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
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
[[Page 54766]]
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.\35\
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\35\ Id.
---------------------------------------------------------------------------
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.\36\
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\36\ Id.
---------------------------------------------------------------------------
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 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.\37\
---------------------------------------------------------------------------
\37\ Id.
---------------------------------------------------------------------------
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
[[Page 54767]]
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.\38\ 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.
---------------------------------------------------------------------------
\38\ 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.
---------------------------------------------------------------------------
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 nearly every expense 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'' \39\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\40\
---------------------------------------------------------------------------
\39\ See supra note 12.
\40\ See id.
---------------------------------------------------------------------------
With the proposed changes, the Exchange anticipates that its
collective connectivity profit margin will be approximately 51%,
inclusive of the Proposed Access Fees and all other connectivity
alternatives. In order to achieve a consistent, premium network
performance, the Exchange must build out and continue to maintain a
network that has the capacity to handle the message rate requirements
of not only firms that consume minimal Exchange connectivity resources,
but also those firms that most heavily consume Exchange connectivity
resources, network consumers, and purchasers of 10Gb ULL connectivity,
which generate billions of messages per day across the Exchange. These
billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. Given that 10Gb ULL
purchasers utilize the most resources across the network, the Exchange
believes that it is reasonable to operate at a profit margin of
approximately 51% for connectivity, inclusive of the Proposed Access
Fees and all other connectivity alternatives. Such profit margin should
enable the Exchange to continue to invest in its network and systems,
maintain its current infrastructure, support future enhancements to
network connectivity, and continue to offer enhanced customer reporting
and monitoring services.
While the proposed fees are similar to or less than that of other
options exchanges,\41\ as discussed above, the incremental increase in
revenue generated from the 51% profit margin for connectivity will
allow the Exchange to further invest in its system architecture and
matching engine functionality to the benefit of all market
participants. The ability to continue to invest in technology and
systems will also enable the Exchange to improve the determinism and
overall performance of not only its system connectivity, but overall
performance including the resiliency and efficiency of its matching
engines. The revenue generated under the proposed rule change would
also provide the exchange with the resources necessary to further
innovate and enhance its systems and seek additional improvements or
functionality to offer market participants generally. The Exchange
believes that these investments, in turn, will benefit all investors by
encouraging other exchanges to further invest, innovate, and improve
their own systems in response.
---------------------------------------------------------------------------
\41\ See supra notes 16, 18 and 20.
---------------------------------------------------------------------------
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 revenue that is derived from its
access fees is in line with the revenue that is derived from access
fees of competing exchanges. For example, the total
[[Page 54768]]
revenue from ``access fees'' \42\ for 2020 for MIAX Emerald was
$7,244,000. MIAX Emerald projects that the total revenue from ``access
fees'' for 2021 for MIAX Emerald will be $20,910,179, inclusive of the
Proposed Access Fees described herein.
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\42\ As described in the Exchange's Audited Financial
Statements, fees for ``access services'' are assessed to exchange
members for the opportunity to trade and use other related functions
of the exchanges. See https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
---------------------------------------------------------------------------
The Exchange's projected revenue from access fees is still less
than, or similar to, the access fee revenues generated by access fees
charged by other U.S. options exchanges. For example, the Cboe
Exchange, Inc. (``Cboe'') reported $70,893,000 in ``access and capacity
fee'' \43\ revenue for 2020. Cboe C2 Exchange, Inc. (``C2'') reported
$19,016,000 in ``access and capacity fee'' revenue for 2020.\44\ Cboe
BZX Exchange, Inc. (``BZX'') reported $38,387,000 in ``access and
capacity fee'' revenue for 2020.\45\ Cboe EDGX Exchange, Inc.
(``EDGX'') reported $26,126,000 in ``access and capacity fee'' revenue
for 2020.\46\ PHLX reported $20,817,000 in ``Trade Management
Services'' revenue for 2019.\47\ The Exchange notes it is unable to
compare ``access fee'' revenues with PHLX (or other affiliated NASDAQ
exchanges) because after 2019, the ``Trade Management Services'' line
item was bundled into a much larger line item in PHLX's Form 1, simply
titled ``Market services.'' \48\
---------------------------------------------------------------------------
\43\ According to Cboe, access and capacity fees represent fees
assessed for the opportunity to trade, including fees for trading-
related functionality. See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\44\ See id.
\45\ See id.
\46\ See id.
\47\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\48\ See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
---------------------------------------------------------------------------
The Exchange also believes that, based on the 2020 Audited
Financial Statements of competing options exchanges, the Exchange's
overall operating margin is in line with or less than the operating
margins of competing options exchanges, including the revenue and
expense associated with the Proposed Access Fees. For example, the 2020
operating margin for MIAX Emerald was -12%.\49\ Based on competing
exchanges' Form 1 Amendments, ISE's operating profit margin for 2020
was approximately 85%; PHLX's operating profit margin for 2020 was
approximately 49%; NASDAQ's operating profit margin for 2020 was
approximately 62%; Arca's operating profit margin for 2020 was
approximately 55%; Amex's operating profit margin for 2020 was
approximately 59%; Cboe's operating profit margin for 2020 was
approximately 74%; and BZX's operating profit margin for 2020 was
approximately 52%.
---------------------------------------------------------------------------
\49\ This information is provided in response to the SIG Comment
Letter. See supra note 7.
---------------------------------------------------------------------------
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 (12) matching engines on MIAX Emerald and a vast
majority choose to connect to all twelve (12) matching engines. The
Exchange believes that other exchanges require firms to connect to
multiple matching engines.\50\ Further, the Exchange notes that no
Member or non-Member has altered its use of 10Gb ULL connectivity since
the proposed fee changes went into effect on August 1, 2021 via the
First Proposed Rule Change.
---------------------------------------------------------------------------
\50\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
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.
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.\51\ 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.\52\ 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.\53\
---------------------------------------------------------------------------
\51\ 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.
\52\ 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.
\53\ Id.
---------------------------------------------------------------------------
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
[[Page 54769]]
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.\54\ 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.
---------------------------------------------------------------------------
\54\ 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.
---------------------------------------------------------------------------
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/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
The Exchange received one comment on the proposed rule change.\55\
The Exchange notes that the Exchange, and its affiliates MIAX Pearl and
MIAX, justified similar fee changes in the past with similar, if not
identical, justifications in previous filings that have been noticed by
the Commission for public comment and are currently in effect.\56\
Nonetheless, the Exchange has sought to address the commenters concerns
via the enhanced justification and additional information included in
this proposal.
---------------------------------------------------------------------------
\55\ See the SIG Comment Letter, supra note 7.
\56\ See Securities Exchange Act Release Nos. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02); 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-
01); 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03); 91460 (April 2, 2021), 86 FR 18349 (April 8, 2021)
(SR-EMERALD-2021-11).
---------------------------------------------------------------------------
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,\57\ and Rule 19b-4(f)(2) \58\ 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.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78s(b)(3)(A)(ii).
\58\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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-2021-29 on the subject line.
[[Page 54770]]
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-2021-29. 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-2021-29 and should be submitted
on or before October 25, 2021.
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\59\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21492 Filed 10-1-21; 8:45 am]
BILLING CODE 8011-01-P
