Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Fee Schedule To Remove Certain Credits and Increase Trading Permit Fees, 64254-64268 [2021-25019]
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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 32 and Rule
19b–4(f)(2) 33 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
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MEMX–2021–16 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MEMX–2021–16. 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–MEMX–2021–16 and
should be submitted on or before
December 8, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–25018 Filed 11–16–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93555; File No. SR–
PEARL–2021–54]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Options Fee Schedule To Remove
Certain Credits and Increase Trading
Permit Fees
November 10, 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 October
29, 2021, MIAX PEARL, LLC (‘‘MIAX
Pearl’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
34 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
32 15
U.S.C. 78s(b)(3)(A)(ii).
33 17 CFR 240.19b–4(f)(2).
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
remove certain credits and amend the
monthly Trading Permit 3 fees for
Exchange Members.4
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule to remove certain credits
and amend the monthly Trading Permit
fees (the ‘‘Proposed Access Fees’’) for
Exchange Members.
Removal of the ‘‘Monthly Volume
Credit’’
The Exchange proposes to amend the
Definitions section of the Fee Schedule
to delete the definition and remove the
credits applicable to the Monthly
Volume Credit for Members. The
Exchange established the Monthly
Volume Credit in 2018 5 to encourage
Members to send increased Priority
3 The term ‘‘Trading Permit’’ means a permit
issued by the Exchange that confers the ability to
transact on the Exchange. See Exchange Rule 100.
4 The term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of Exchange Rules for
purposes of trading on the Exchange as an
‘‘Electronic Exchange Member’’ or ‘‘Market Maker.’’
Members are deemed ‘‘members’’ under the
Exchange Act. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
5 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
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Customer 6 order flow to the Exchange,
which the Exchange applied to the
assessment of certain non-transaction
rebates and fees for that Member. The
Exchange applies a different Monthly
Volume Credit depending on whether
the Member connects to the Exchange
via the FIX Interface 7 or MEO
Interface.8 Currently, the Exchange
assesses the Monthly Volume Credit to
each Member that has executed Priority
Customer volume along with that of its
Affiliates,9 not including Excluded
Contracts,10 of at least 0.30% of MIAX
Pearl-listed Total Consolidated Volume
6 The term ‘‘Priority Customer’’ means a person
or entity that (i) is not a broker or dealer in
securities, and (ii) does not place more than 390
orders in listed options per day on average during
a calendar month for its own beneficial accounts(s).
The number of orders shall be counted in
accordance with Interpretation and Policy .01 of
Exchange Rule 100. See the Definitions Section of
the Fee Schedule and Exchange Rule 100, including
Interpretation and Policy .01.
7 The term ‘‘FIX Interface’’ means the Financial
Information Exchange interface for certain order
types as set forth in Exchange Rule 516. See the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
8 The term ‘‘MEO Interface’’ or ‘‘MEO’’ means a
binary order interface for certain order types as set
forth in Rule 516 into the MIAX Pearl System. See
the Definitions Section of the Fee Schedule and
Exchange Rule 100.
9 ‘‘Affiliate’’ means (i) an affiliate of a Member of
at least 75% common ownership between the firms
as reflected on each firm’s Form BD, Schedule A,
or (ii) the Appointed Market Maker of an Appointed
EEM (or, conversely, the Appointed EEM of an
Appointed Market Maker). An ‘‘Appointed Market
Maker’’ is a MIAX Pearl Market Maker (who does
not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has
been appointed by an EEM and an ‘‘Appointed
EEM’’ is an EEM (who does not otherwise have a
corporate affiliation based upon common
ownership with a MIAX Pearl Market Maker) that
has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl
Market Maker appoints an EEM and an EEM
appoints a MIAX Pearl Market Maker, for the
purposes of the Fee Schedule, by each completing
and sending an executed Volume Aggregation
Request Form by email to membership@
miaxoptions.com no later than 2 business days
prior to the first business day of the month in which
the designation is to become effective. Transmittal
of a validly completed and executed form to the
Exchange along with the Exchange’s
acknowledgement of the effective designation to
each of the Market Maker and EEM will be viewed
as acceptance of the appointment. The Exchange
will only recognize one designation per Member. A
Member may make a designation not more than
once every 12 months (from the date of its most
recent designation), which designation shall remain
in effect unless or until the Exchange receives
written notice submitted 2 business days prior to
the first business day of the month from either
Member indicating that the appointment has been
terminated. Designations will become operative on
the first business day of the effective month and
may not be terminated prior to the end of the
month. Execution data and reports will be provided
to both parties. See the Definitions Section of the
Fee Schedule.
10 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
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The Exchange established the Trading
Permit fee credit when it first launched
operations to attract order flow and
Monthly
increase membership by lowering the
Type of member connection
volume
costs for Members that connect via both
credit
the MEO Interface and FIX Interface.
The Trading Permit fee credit has
Member that connects via the FIX
Interface ....................................
$250 achieved its purpose and the Exchange
now believes that it is appropriate to
Member that connects via the
MEO Interface ...........................
1,000 remove this credit in light of the current
operating conditions and membership
If a Member connects via both the
population on the Exchange.
MEO Interface and FIX Interface and
Amendment of Trading Permit Fees
qualifies for the Monthly Volume Credit
The Exchange proposes to amend
based upon its Priority Customer
Section 3)b) of the Fee Schedule to
volume, the greater Monthly Volume
Credit shall apply to such Member. The increase the amount of the monthly
Trading Permit fees. The Exchange
Monthly Volume Credit is a single,
issues Trading Permits to Members who
once-per-month credit towards the
are either Electronic Exchange
aggregate monthly total of non12
transaction fees assessable to a Member. Members (‘‘EEMs’’) or Market
13
The Exchange now proposes to amend Makers. The Exchange assesses
Trading Permit fees based upon the
the Definitions section of the Fee
monthly total volume executed by the
Schedule to delete the definition and
remove the Monthly Volume Credit. The Member and its Affiliates on the
Exchange across all origin types, not
Exchange established the Monthly
including Excluded Contracts, as
Volume Credit when it first launched
compared to the total TCV in all MIAX
operations to attract order flow by
Pearl-listed options. The Exchange
lowering the initial fixed cost for
adopted a tier-based fee structure based
Members. The Monthly Volume Credit
upon the volume-based tiers detailed in
has achieved its purpose and the
Fees
Exchange now believes it is appropriate the definition of ‘‘Non-Transaction
Volume-Based Tiers’’ 14 in the
to remove this credit. The Exchange
Definitions section of the Fee Schedule.
believes that the Exchange’s existing
The Exchange also assesses Trading
Priority Customer rebates and fees will
Permit fees based upon the type of
continue to allow the Exchange to
remain highly competitive and continue interface used by the Member to connect
to the Exchange—the FIX Interface and/
to attract order flow and maintain
or the MEO Interface.
market share.
Current Trading Permit Fees.
Currently, each Member who connects
Removal of the Trading Permit Fee
to the System 15 via the FIX Interface is
Credit
assessed the following monthly Trading
The Exchange proposes to amend
Permit fees:
Section 3)b) of the Fee Schedule to
(i) If its volume falls within the
remove the Trading Permit fee credit
parameters of Tier 1 of the Nonthat is denoted in footnote ‘‘*’’ below
Transaction Fees Volume-Based Tiers,
the Trading Permit fee table. The
or volume up to 0.30%, $250;
Trading Permit fee credit is applicable
(ii) if its volume falls within the
to Members that connect via both the
parameters of Tier 2 of the NonMEO and FIX Interfaces. Currently,
Transaction Fees Volume-Based Tiers,
Members who connect via both the
MEO and FIX Interfaces are assessed the
12 The term ‘‘Electronic Exchange Member’’ or
rates for both types of Trading Permits,
‘‘EEM’’ means the holder of a Trading Permit who
is a Member representing as agent Public Customer
but these Members receive a $100
Orders or Non-Customer Orders on the Exchange
monthly credit towards the Trading
and those non-Market Maker Members conducting
Permit fees applicable to the MEO
proprietary trading. Electronic Exchange Members
Interface. The Exchange now proposes
are deemed ‘‘members’’ under the Exchange Act.
See the Definitions Section of the Fee Schedule.
to remove the Trading Permit fee credit
13 The term ‘‘Market Maker’’ or ‘‘MM’’ means a
and delete footnote ‘‘*’’ from Section
Member registered with the Exchange for the
3)b) of the Fee Schedule.
purpose of making markets in options contracts
(‘‘TCV’’),11 as set forth in the following
table:
11 ‘‘TCV’’
means total consolidated volume
calculated as the total national volume in those
classes listed on MIAX Pearl for the month for
which the fees apply, excluding consolidated
volume executed during the period of time in
which the Exchange experiences an Exchange
System Disruption (solely in the option classes of
the affected Matching Engine). See the Definitions
Section of the Fee Schedule.
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traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI
of these Rules. See the Definitions Section of the
Fee Schedule.
14 See the Definitions Section of the Fee Schedule
for the monthly volume thresholds associated with
each Tier.
15 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
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or volume above 0.30% up to 0.60%,
$350; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $450.
Each Member who connects to the
System via the MEO Interface is
assessed the following monthly Trading
Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $300;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$400; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $500.
Proposed Trading Permit Fees. The
Exchange now proposes to amend its
Trading Permit fees as follows. Each
Member who connects to the System via
the FIX Interface will be assessed the
following monthly Trading Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
$500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
$1,000; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
$1,500.
Each Member who connects to the
System via the MEO Interface will be
assessed the following monthly Trading
Permit fees:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
$2,500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
$4,000; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
$6,000.
Members who use the MEO Interface
may also connect to the System through
the FIX Interface as well, and vice versa.
The Exchange notes that the Trading
Permit fees for Members who connect
through the MEO Interface are higher
than the Trading Permit fees for
Members who connect through the FIX
Interface, since the FIX Interface utilizes
less capacity and resources of the
Exchange. The MEO Interface offers
lower latency and higher throughput,
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which utilizes greater capacity and
resources of the Exchange. The FIX
Interface offers lower bandwidth
requirements and an industry-wide
uniform message format. Both EEMs and
Market Makers may connect to the
Exchange using either interface.
Trading Permits grant access to the
Exchange, thus providing the ability to
submit orders and trade on the
Exchange, in the manner defined in the
relevant Trading Permit. Without a
Trading Permit, a Member cannot
directly trade on the Exchange.
Therefore, a Trading Permit is a means
to directly access the Exchange (which
offers meaningful value), and the
Exchange now proposes to increase its
monthly fees since it has not done so
since the fees were first adopted in
2018 16 and are designed to recover a
portion of the costs associated with
directly accessing the Exchange. The
Exchange notes that the its affiliates,
Miami International Securities
Exchange, LLC (‘‘MIAX’’) and MIAX
Emerald, LLC (‘‘MIAX Emerald’’),
charge a similar, fixed trading permit fee
to certain users, and a similar, varying
trading permit fee to other users, based
upon the number of assignments of
option classes or the percentage of
volume in option classes.17 The
Exchange notes that other options
exchanges assess certain of their
membership fees at different rates,
based upon a member’s participation on
that exchange,18 and, as such, this
concept is not new or novel. The
Exchange also notes that the proposed
increased Trading Permit fees are in line
16 See
supra note 5.
the MIAX Fee Schedule, Section 3)b);
MIAX Emerald Fee Schedule, Section 3)b).
18 See e.g., NYSE Arca Options Fees and Charges,
OTP Trading Participant Rights, p.1 (assessing
market makers an options trading permit (‘‘OTP’’)
monthly fee of $6,000 for up to 175 option issues,
an additional $5,000 for up to 350 option issues, an
additional $4,000 for up to 1,000 option issues, an
additional $3,000 for all option issues on the
exchange, and an additional $1,000 for the fifth
OTP and for each OTP thereafter); NYSE American
Options Fee Schedule, Section III, Monthly Trading
Permit, Rights, Floor Access and Premium Product
Fees, p. 23 (assessing market makers an ATP
monthly fee of $8,000 for up to 60 plus the bottom
45% of option issues, an additional $6,000 for up
to 150 plus the bottom 45% of option issues, an
additional $5,000 for up to 500 plus the bottom
45% of option issues, and additional $4,000 for up
to 1,100 plus the bottom 45% of option issues, an
additional $3,000 for all issues traded on the
exchange, and an additional $2,000 for 6th to 9th
ATPs; plus an addition fee for premium products).
See also Cboe BZX Options Exchange (‘‘BZX
Options’’), which assesses the Participant Fee, a
type of membership fee, according to a member’s
average daily volume (‘‘ADV’’). See Cboe BZX
Options Exchange Fee Schedule, Membership Fees.
The monthly Participant Fee for BZX Options is
$500 if the member’s ADV is less than 5,000
contracts and $1,000 if the member’s ADV is equal
to or greater than 5,000 contracts. Id.
17 See
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with, or cheaper than, the trading
permit fees or similar membership fees
charged by other options exchanges.19
Implementation
The proposed rule change will be
effective beginning November 1, 2021.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 20
in general, and furthers the objectives of
Section 6(b)(4) of the Act 21 in
particular, in that it is an equitable
allocation of reasonable dues, fees and
other charges among its members and
issuers and other persons using its
facilities. The Exchange also believes
the proposal furthers the objectives of
Section 6(b)(5) of the Act in that it is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest and is not designed to
permit unfair discrimination between
customers, issuers, brokers and dealers.
The Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various access fees for market
participants to access an exchange’s
marketplace. The Exchange deems
Trading Permit fees to be Access Fees.
It records these fees as part of its
‘‘Access Fees’’ revenue in its financial
statements. The Exchange believes that
it is important to demonstrate that these
fees are based on its costs and
reasonable business needs. The
Exchange believes the Proposed Access
Fees will allow the Exchange to offset
expenses the Exchange has and will
incur, and that the Exchange is
providing sufficient transparency (as
described below) into how the Exchange
determined to charge such fees.
Accordingly, the Exchange is providing
an analysis of its revenues, costs, and
profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
19 See
id.
U.S.C. 78f(b).
21 15 U.S.C. 78f(b)(4) and (5).
20 15
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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 revenues associated with the
Proposed Access Fees, the Exchange
analyzed the number of Members
currently utilizing the Trading Permits,
and, utilizing a recent monthly billing
cycle representative of 2021 monthly
revenue, extrapolated annualized
revenue on a going-forward basis. The
Exchange does not believe it is
appropriate to factor into its analysis
future revenue growth or decline into its
projections for purposes of these
calculations, given the uncertainty of
such projections due to the continually
changing access needs of market
participants, discounts that can be
achieved due to lower trading volume
and vice versa, market participant
consolidation, etc. Additionally, the
Exchange similarly does not factor into
its analysis future cost growth or
decline. The Exchange is presenting its
revenue and expense associated with
the Proposed Access Fees in this filing
in a manner that is consistent with how
the Exchange presents its revenue and
expense in its Audited Unconsolidated
Financial Statements. The Exchange’s
most recent Audited Unconsolidated
Financial Statement is for 2020.
However, since the revenue and
expense associated with the Proposed
Access Fees were not in place in 2020
or for the majority of 2021 (other than
July and August 2021), the Exchange
believes its 2020 Audited
Unconsolidated Financial Statement is
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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. The Exchange
notes that this is the same justification
process utilized by the Exchange’s
affiliate, MIAX Emerald, in a filing
recently noticed by the Commission
when MIAX Emerald adopted its own
trading permit fees.22
*
*
*
*
*
On March 29, 2019, the Commission
issued its Order Disapproving Proposed
Rule Changes to Amend the Fee
Schedule on the BOX Market LLC
Options Facility to Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network (the ‘‘BOX Order’’).23 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.24 Accordingly, the
Exchange believes that the Proposed
Access Fees are consistent with the Act
because they (i) are reasonable,
equitably allocated, not unfairly
discriminatory, and not an undue
burden on competition; (ii) comply with
the BOX Order and the Guidance; (iii)
are supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange, and
22 See Securities Exchange Act Release No. 91033
(February 1, 2021), 86 FR 8455 (February 5, 2021)
(SR–EMERALD–2021–03) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Monthly
Trading Permit Fees).
23 See Securities Exchange Act Release No. 85459
(March 29, 2019), 84 FR 13363 (April 4, 2019) (SR–
BOX–2018–24, SR–BOX–2018–37, and SR–BOX–
2019–04).
24 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Guidance’’).
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64257
its affiliates MIAX and MIAX Emerald,
to establish or increase other nontransaction fees. Accordingly, the
Exchange believes that the Commission
should find that the Proposed Access
Fees are consistent with the Act.
*
*
*
*
*
Over the course of 2021, the
Exchange’s market share has fluctuated
between approximately 3–6% of the
U.S. equity options industry.25 The
Exchange is not aware of any evidence
that a market share of approximately 3–
6% provides the Exchange with anticompetitive pricing power. If the
Exchange were to attempt to establish
unreasonable pricing, then no market
participant would join or connect, and
existing market participants would
disconnect.
Removal of Monthly Volume Credit and
Trading Permit Fee Credit
The Exchange believes its proposal to
remove the Monthly Volume Credit is
reasonable, equitable and not unfairly
discriminatory because all market
participants will no longer be offered
the ability to achieve the extra credits
associated with the Monthly Volume
Credit for submitting Priority Customer
volume to the Exchange and access to
the Exchange is offered on terms that are
not unfairly discriminatory. The
Exchange believes it is equitable and not
unfairly discriminatory to remove the
Monthly Volume Credit from the Fee
Schedule for business and competitive
reasons because, in order to attract order
flow when the Exchange first launched
operations, the Exchange established the
Monthly Volume Credit to lower the
initial fixed cost for Members. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions
and the current type and amount of
Priority Customer volume executed on
the Exchange. The Exchange believes
that the Exchange’s Priority Customer
rebates and fees will still allow the
Exchange to remain highly competitive
such that the Exchange should continue
to attract order flow and maintain
market share.
The Exchange believes its proposal to
remove the Trading Permit fee credit for
Members that connect via both the MEO
Interface and FIX Interface is
reasonable, equitable and not unfairly
discriminatory because all market
participants will no longer be offered
the ability to receive the credit and
access to the Exchange is offered on
terms that are not unfairly
25 See ‘‘The market at a glance’’, available at
www.miaxoptions.com (last visited October 29,
2021).
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discriminatory. The Exchange believes
it is equitable and not unfairly
discriminatory to remove the Trading
Permit fee credit for business and
competitive reasons because, in order to
attract order flow and membership after
the Exchange first launched operations,
the Exchange established the Trading
Permit fee credit to lower the costs for
Members that connect via both the MEO
Interface and FIX Interface. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions
and membership on the Exchange.
proposed, is similar to or less than the
similar access/membership fees of
competing options exchanges with like
market share. Further, as described in
more detail below, many of those
exchanges generate higher overall
operating profit margins and higher
‘‘access fees’’ than the Exchange,
inclusive of the projected revenues
associated with the proposed fees. The
Exchange believes that it provides a
premium network experience to its
Members and non-Members via a highly
deterministic system, enhanced network
monitoring and customer reporting, and
a superior network infrastructure than
Trading Permit Fee Increase
markets with higher market shares and
The Exchange believes the proposed
more expensive access fees. Each of the
Trading Permit fees are equitable and
access fee rates in place at competing
reasonable because the proposed highest options exchanges were filed with the
tiered fee is less than or equal to similar Commission for immediate effectiveness
fees charged for access on other options and remain in place today.
exchanges with comparable market
The Exchange also notes that the
shares. For example, Nasdaq ISE, LLC
higher (or similar) trading permit fees
(‘‘ISE’’) (equity options market share of
described above for competing
approximately 5–7% throughout 2021)
exchanges have been in place for years
charges the following access fees: $500
(over 8 years in some cases), allowing
per month for Electronic Access
those exchanges to derive significantly
Members; $5,000 per month for Primary more revenue from their access or
Market Makers; and $2,500 per month
membership fees. For example, in 2012,
for Competitive Market Makers.26
NYSE American adopted the sliding
Additionally, Cboe C2 Exchange, Inc.
scale pricing that ranges from $8,000 to
(‘‘C2’’) (equity options market share of
$3,000 per month for NYSE American
approximately 3–4% throughout 2021),
trading permits.30 In that filing, NYSE
charges the following access permit fees: American also noted that prior to
$5,000 per month for market makers;
introducing the sliding scale pricing,
and $1,000 per month for electronic
each NYSE American market maker was
access permits.27 NYSE American LLC
charged $5,000 per month per trading
(‘‘NYSE American’’) (equity options
permit (similar to the Exchange’s
market share of approximately 7–8%
proposed highest tier for MEO interface
throughout 2021), charges the following users, nearly a decade later).31 NYSE
range of trading permit and access fees,
American received no comment letters
which are dependent upon the number
on their proposal to institute trading
of issues permitted in market makers’
permit fees that were higher 8 years ago
quoting assignments: $8,000 per month
as compared to the Exchange’s current
for the first ATP; 28 $6,000 per month for proposal. Similarly, C2 adopted the
the second ATP; $5,000 per month for
pricing for its access permits in 2010 of
the third ATP; $4,000 per month for the $5,000 per month for market makers and
fourth ATP; $3,000 per month for the
$1,000 per month for electronic access
sixth ATP; $2,000 per month for the
members.32
seventh to the ninth ATP; and $500 per
Separately, the Exchange is not aware
month for the tenth ATP and each one
of any reason why market participants
thereafter.29
could not simply drop their access to an
In the each of the above cases, the
exchange (or not initially access an
Exchange’s highest tiered fee, as
exchange) if an exchange were to
establish prices for its non-transaction
26 See Nasdaq ISE LLC Options 7 Pricing
fees that, in the determination of such
Schedule, Section 8.A. Access Services, at https://
market participant, did not make
listingcenter.nasdaq.com/rulebook/ise/rules/
business or economic sense for such
ISE%20Options%207.
27 See C2 Fee Schedule, Access Fees, at https://
market participant to access such
www.cboe.com/us/options/membership/fee_
exchange. No options market participant
schedule/ctwo/.
is required by rule, regulation, or
28
An ‘‘ATP’’ or ‘‘ATP Holder’’ is a registered
Broker-Dealer who is a permit holder on Amex, per
Amex Rule 900.2NY(4),(5). See Amex Fee Schedule,
Section III, Monthly Trading Permit, Rights, Floor
Access and Premium Product Fees, at https://
www.nyse.com/publicdocs/nyse/markets/americanoptions/NYSE_American_Options_Fee_
Schedule.pdf.
29 See id.
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30 See Securities Exchange Act Release No. 67634
(August 9, 2012), 77 FR 49038 (August 15, 2012)
(SR–NYSEMKT–2012–33).
31 See id.
32 See Securities Exchange Act Release No. 63175
(October 25, 2010), 75 FR 66813 (October 29, 2010)
(SR–C2–2010–006).
PO 00000
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competitive forces to be a Member of the
Exchange. As evidence of the fact that
market participants can and do drop
their access to exchanges based on nontransaction fee pricing, R2G Services
LLC (‘‘R2G’’) filed a comment letter after
BOX’s proposed rule changes to
increase its connectivity fees (SR–BOX–
2018–24, SR–BOX–2018–37, and SR–
BOX–2019–04). The R2G Letter stated,
‘‘[w]hen BOX instituted a $10,000/
month price increase for connectivity;
we had no choice but to terminate
connectivity into them as well as
terminate our market data relationship.
The cost benefit analysis just didn’t
make any sense for us at those new
levels.’’ Similarly, the Exchange’s
affiliate, MIAX Emerald, noted in a
recent filing that once MIAX Emerald
issued a notice that it was instituting
Trading Permit fees, among other nontransaction fees, one Member dropped
its access to the Exchange as a result of
those fees.33 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.
The Exchange believes that its
proposal is consistent with Section
6(b)(4) of the Act because the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. The
Proposed Access Fees are also
reasonable and equitable because they
are in line with, or cheaper than, the
trading permit fees or similar
membership fees charged by other
options exchanges.34 The costs
associated with providing access to
Exchange Members and non-Members,
as well as the general expansion of a
state-of-the-art infrastructure, are
extensive, have increased year-overyear, and are projected to increase yearover-year in the future.
The Exchange’s high performance
network solutions and supporting
infrastructure (including employee
support), provides unparalleled system
throughput and the capacity to handle
approximately 10.7 million order
messages per second. On an average
day, the Exchange handles over
approximately 2.7 billion total
messages. However, in order to achieve
a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
33 See
34 See
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supra notes 26, 27 and 28.
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consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall expense for storage and
network transport capabilities.
In order to provide more detail and to
quantify the Exchange’s costs associated
with providing access to the Exchange
in general, the Exchange notes that there
are material costs associated with
providing the infrastructure and
headcount to fully-support access to the
Exchange. The Exchange incurs
technology expense related to
establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
mandated processes, associated with its
network technology. While some of the
expense is fixed, much of the expense
is not fixed, and thus increases as the
services associated with the Proposed
Access Fees increase. For example, new
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number of Members
increases, the Exchange and its affiliates
may need to increase their data center
footprint and consume more power,
resulting in increased costs charged by
their third-party data center provider.
Accordingly, the cost to the Exchange
and its affiliates to provide access to its
Members is not fixed. The Exchange
believes the Proposed Access Fees are
reasonable in order to offset a portion of
the costs to the Exchange associated
with providing access to its network
infrastructure.
The Exchange only has four primary
sources of revenue: transaction fees,
access fees (which includes the
Proposed Access Fees), regulatory fees,
and market data fees. Accordingly, the
Exchange must cover all of its expenses
from these four primary sources of
revenue.
The Exchange believes that the
Proposed Access Fees are fair and
reasonable because they will not result
in excessive pricing or 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
2021,35 the total annual expense for
providing the access services associated
35 The Exchange has not yet finalized its 2021
year end results.
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17:11 Nov 16, 2021
Jkt 256001
with the Proposed Access Fees for the
Exchange is projected to be
approximately $844,741. The $844,741
in projected total annual expense is
comprised of the following, all of which
are directly related to the access services
associated with the Proposed Access
Fees: (1) Third-party expense, relating to
fees paid by the Exchange to thirdparties for certain products and services;
and (2) internal expense, relating to the
internal costs of the Exchange to
provide the services associated with the
Proposed Access Fees.36 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.37 The $844,741 in projected
total annual expense is directly related
to the access services associated with
the Proposed Access Fees, and not any
other product or service offered by the
Exchange. It does not include general
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 nearly
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
36 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.
37 For example, the Exchange previously noted
that all third-party expense described in its prior fee
filing was contained in the information technology
and communication costs line item under the
section titled ‘‘Operating Expenses Incurred
Directly or Allocated From Parent,’’ in the
Exchange’s 2019 Form 1 Amendment containing its
financial statements for 2018. See Securities
Exchange Act Release No. 87876 (December 31,
2019), 85 FR 757 (January 7, 2020) (SR–PEARL–
2019–36). Accordingly, the third-party expense
described in this filing is attributed to the same line
item for the Exchange’s 2021 Form 1 Amendment,
which will be filed in 2022.
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64259
third-parties for certain products and
services for the Exchange to be able to
provide the access services associated
with the Proposed Access Fees, is
projected to be $188,815. This includes,
but is not limited to, a portion of the
fees paid to: (1) Equinix, for data center
services, for the primary, secondary, and
disaster recovery locations of the
Exchange’s trading system
infrastructure; (2) Zayo Group Holdings,
Inc. (‘‘Zayo’’) for network services (fiber
and bandwidth products and services)
linking the Exchange’s office locations
in Princeton, New Jersey and Miami,
Florida, to all data center locations; (3)
Secure Financial Transaction
Infrastructure (‘‘SFTI’’),38 which
supports connectivity and feeds for the
entire U.S. options industry; (4) various
other services providers (including
Thompson Reuters, NYSE, Nasdaq, and
Internap), which provide content,
connectivity services, and infrastructure
services for critical components of
options connectivity and network
services; and (5) various other hardware
and software providers (including Dell
and Cisco, which support the
production environment in which
Members connect to the network to
trade, receive market data, etc.).
For clarity, only a portion of all fees
paid to such third-parties is included in
the third-party expense herein, and no
expense amount is allocated twice.
Accordingly, the Exchange does not
allocate its entire information
technology and communication costs to
the access services associated with the
Proposed Access Fees. Further, the
Exchange notes that, with respect to the
MIAX Pearl expenses included herein,
those expenses only cover the MIAX
Pearl options market; expenses
associated with the MIAX Pearl equities
market are accounted for separately and
are not included within the scope of this
38 In fact, on October 20, 2021, ICE Data Services
announced a 3.5% price increase effective January
1, 2022 for most services. The price increase by ICE
Data Services includes their SFTI network, which
is relied on by a majority of market participants,
including the Exchange. See email from ICE Data
Services to the Exchange, dated October 20, 2021.
This fee increase by ICE data services, while not
subject to Commission review, has a material
impact on costs to exchanges and other market
participants that provide downstream access to
other market participants. The Exchange notes that
on October 22, 2019, the Exchange was notified by
ICE Data Services that it was raising its fees charged
to the Exchange by approximately 11% for the SFTI
network, 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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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 believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange to provide the access
services associated with the Proposed
Access Fees. In particular, the Exchange
believes it is reasonable to allocate the
identified portion of the Equinix
expense because Equinix operates the
data centers (primary, secondary, and
disaster recovery) that host the
Exchange’s network infrastructure. This
includes, among other things, the
necessary storage space, which
continues to expand and increase in
cost, power to operate the network
infrastructure, and cooling apparatuses
to ensure the Exchange’s network
infrastructure maintains stability.
Without these services from Equinix,
the Exchange would not be able to
operate and support the network and
provide the access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
Equinix expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only
that portion which the Exchange
identified as being specifically mapped
to providing the access services
associated with the Proposed Access
Fees, approximately 8% of the total
applicable Equinix expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.39
39 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.
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The Exchange believes it is reasonable
to allocate the identified portion of the
Zayo expense because Zayo provides
the internet, fiber and bandwidth
connections with respect to the
network, linking the Exchange with its
affiliates, MIAX and MIAX Emerald, as
well as the data center and disaster
recovery locations. As such, all of the
trade data, including the billions of
messages each day per exchange, flow
through Zayo’s infrastructure over the
Exchange’s network. Without these
services from Zayo, the Exchange would
not be able to operate and support the
network and provide the access services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the Zayo expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only the
portion which the Exchange identified
as being specifically mapped to
providing the Proposed Access Fees,
approximately 4% of the total
applicable Zayo expense. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
services associated with the Proposed
Access Fees, and not any other service,
as supported by its cost review.40
The Exchange believes it is reasonable
to allocate the identified portions of the
SFTI expense and various other service
providers’ (including Thompson
Reuters, NYSE, Nasdaq, and Internap)
expense because those entities provide
connectivity and feeds for the entire
U.S. options industry, as well as the
content, connectivity services, and
infrastructure services for critical
components of the network. Without
these services from SFTI and various
other service providers, the Exchange
would not be able to operate and
support the network and provide access
to its Members and their customers. The
Exchange did not allocate all of the SFTI
and other service providers’ expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
3% of the total applicable SFTI and
other service providers’ expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access services associated with the
Proposed Access Fees.41
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 5% of the total
applicable hardware and software
provider expense. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
services associated with the Proposed
Access Fees.42
For 2021, total projected internal
expense, relating to the internal costs of
the Exchange to provide the access
services associated with the Proposed
Access Fees, is projected to be $655,925.
This includes, but is not limited to,
costs associated with: (1) Employee
compensation and benefits for full-time
employees that support the access
services associated with the Proposed
Access Fees, including staff in network
operations, trading operations,
development, system operations,
business, as well as staff in general
corporate departments (such as legal,
regulatory, and finance) that support
those employees and functions; (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.
40 Id.
41 Id.
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The Exchange believes it is reasonable
to allocate such internal expense
described above towards the total cost to
the Exchange to provide the access
services associated with the Proposed
Access Fees. In particular, the
Exchange’s employee compensation and
benefits expense relating to providing
the access services associated with the
Proposed Access Fees is projected to be
$549,834, which is only a portion of the
$9,163,894 total projected expense for
employee compensation and benefits.
The Exchange believes it is reasonable
to allocate the identified portion of such
expense because this includes the time
spent by employees of several
departments, including Technology,
Back Office, Systems Operations,
Networking, Business Strategy
Development (who create the business
requirement documents that the
Technology staff use to develop network
features and enhancements), Trade
Operations, Finance (who provide
billing and accounting services relating
to the network), and Legal (who provide
legal services relating to the network,
such as rule filings and various license
agreements and other contracts). As part
of the extensive cost review conducted
by the Exchange, the Exchange reviewed
the amount of time spent by each
employee on matters relating to the
provision of access services associated
with the Proposed Access Fees. Without
these employees, the Exchange would
not be able to provide the access
services associated with the Proposed
Access Fees to its Members and their
customers. The Exchange did not
allocate all of the employee
compensation and benefits expense
toward the cost of the access services
associated with the Proposed Access
Fees, only the portions which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
6% of the total applicable employee
compensation and benefits expense. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.43
The Exchange’s depreciation and
amortization expense relating to
providing the access services associated
with the Proposed Access Fees is
projected to be $66,316, which is only
a portion of the $1,326,325 total
projected expense for depreciation and
amortization. The Exchange believes it
43 Id.
VerDate Sep<11>2014
is reasonable to allocate the identified
portion of such expense because such
expense includes the actual cost of the
computer equipment, such as dedicated
servers, computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network and
provide the access services associated
with the Proposed Access Fees. Without
this equipment, the Exchange would not
be able to operate the network and
provide the access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portion which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees, approximately
5% of the total applicable depreciation
and amortization expense, as these
access services would not be possible
without relying on such. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the access
services associated with the Proposed
Access Fees, and not any other service,
as supported by its cost review.44
The Exchange’s occupancy expense
relating to providing the access services
associated with the Proposed Access
Fees is projected to be $39,775, which
is only a portion of the $497,180 total
projected expense for occupancy. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense
represents the portion of the Exchange’s
cost to rent and maintain a physical
location for the Exchange’s staff who
operate and support the network,
including providing the access services
associated with the Proposed Access
Fees. This amount consists primarily of
rent for the Exchange’s Princeton, New
Jersey 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
44 Id.
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PO 00000
Frm 00085
department, and the majority of those
staff have some role in the operation
and performance of the access services
associated with the proposed Trading
Permit fees. Without this office space,
the Exchange would not be able to
operate and support the network and
provide the access services associated
with the Proposed Access Fees to its
Members and their customers.
Accordingly, the Exchange believes it is
reasonable to allocate the identified
portion of its occupancy expense
because such amount represents the
Exchange’s actual cost to house the
equipment and personnel who operate
and support the Exchange’s network
infrastructure and the access services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the occupancy expense toward the
cost of providing the access services
associated with the Proposed Access
Fees, only the portion which the
Exchange identified as being
specifically mapped to operating and
supporting the network, approximately
8% of the total applicable occupancy
expense. The Exchange believes this
allocation is reasonable because it
represents the Exchange’s cost to
provide the access services associated
with the Proposed Access Fees, and not
any other service, as supported by its
cost review.45
The Exchange notes that a material
portion of its total overall expense is
allocated to the provision of access
services (including connectivity, ports,
and trading permits). The Exchange
believes this is reasonable and in line,
as the Exchange operates a technologybased business that differentiates itself
from its competitors based on its trading
systems that rely on access to a high
performance network, resulting in
significant technology expense. Over
two-thirds of Exchange staff are
technology-related employees. The
majority of the Exchange’s expense is
technology-based. As described above,
the Exchange has only four primary
sources of fees to recover its costs, thus
the Exchange believes it is reasonable to
allocate a material portion of its total
overall expense towards access fees.
Accordingly, based on the facts and
circumstances presented, the Exchange
believes that its provision of the access
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. To
illustrate, on a going-forward, fullyannualized basis, the Exchange projects
that its annualized revenue for
providing the access services associated
with the Proposed Access Fees would
45 Id.
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be approximately $1,170,000 per
annum, based on a recent billing cycle.
The Exchange projects that its
annualized expense for providing the
access services associated with the
Proposed Access Fees would be
approximately $844,741 per annum.
Accordingly, on a fully-annualized
basis, the Exchange believes its total
projected revenue for providing the
access services associated with the
Proposed Access Fees will not result in
excessive pricing or supra-competitive
profit, as the Exchange will make only
a 28% profit margin on the Proposed
Access Fees ($1,170,000 in revenue
minus $844,741 in expense = $325,259
profit per annum). The Exchange notes
that the fees charged for Trading Permits
can vary from month to month
depending on the type of interface used
and the Non-Transaction Fees VolumeBased Tier that is achieved for that
month. As such, the revenue projection
is not a static number, with monthly
Trading Permit fees likely to fluctuate
month to month.
For the avoidance of doubt, none of
the expenses included herein relating to
the access services associated with the
Proposed Access Fees relate to the
provision of any other services offered
by the Exchange. Stated differently, no
expense amount of the Exchange is
allocated twice. The Exchange notes
that, with respect to the MIAX Pearl
expenses included herein, those
expenses only cover the MIAX Pearl
options market; expenses associated
with the MIAX Pearl equities market
and the Exchange’s affiliate exchanges,
MIAX and MIAX Emerald, are
accounted for separately and are not
included within the scope of this filing.
Stated differently, no expense amount of
the Exchange is also allocated to MIAX
Pearl Equities, MIAX or MIAX Emerald.
The Exchange believes it is
reasonable, equitable and not unfairly
discriminatory to allocate the respective
percentages of each expense category
described above towards the total cost to
the Exchange of operating and
supporting the network, including
providing the access services associated
with the Proposed Access Fees because
the Exchange performed a line-by-line
item analysis of 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
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hardware, software, employee
compensation and benefits, occupancy
costs, and the depreciation and
amortization of equipment, have been
identified through a line-by-line item
analysis to be integral to providing
access services. The Proposed Access
Fees are intended to recover the
Exchange’s costs of providing access to
Exchange Systems. Accordingly, the
Exchange believes that the Proposed
Access Fees are fair and reasonable
because they do not result in excessive
pricing or supra-competitive profit,
when comparing the actual costs to the
Exchange versus the projected annual
revenue from the Proposed Access Fees.
The Exchange believes the proposed
changes are reasonable, equitably
allocated and not unfairly
discriminatory, and do not result in a
‘‘supra-competitive’’ 46 profit. Of note,
the Guidance defines ‘‘supracompetitive profit’’ as profits that
exceed the profits that can be obtained
in a competitive market.47 With the
proposed changes, the Exchange
anticipates that its profit margin will be
approximately 28%, inclusive of the
Proposed Access Fees. 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 resources, network
consumers, and Members that use the
MEO and FIX interfaces, which generate
billions of messages per day across the
Exchange.48 Such profit margin should
enable the Exchange to continue to
invest in its network and systems,
maintain its current infrastructure,
support future enhancements to
46 See
supra note 24.
id.
48 Over the period from April 2021 until
September 2021, the Exchange processed 3.15
billion messages via the FIX interface (0.43% of
total messages received). Over that same time
period, the Exchange processed 731.4 billion
messages (99.57% of total messages received) over
the MEO interface. This marked difference between
the number of FIX and MEO messages processed,
when mapped to servers, software, storage, and
networking results in a much higher allocation of
total capital and operational expense to support the
MEO interface. For one, the Exchange incurs greater
expense in maintaining the resilience of the MEO
interface to ensure its ongoing operation in
accordance with Regulation SCI. Another, the
Exchange must purchase and expand its storage
capacity to retain these increased messages in
compliance with its record keeping obligations. The
Exchange has also seen significant inflationary
pressure on capital items that it needs to purchase
to maintain its technology. The Exchange has seen
pricing increases upwards of 30% on network
equipment due to supply chain shortages.
47 See
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network access, 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,49 as discussed above, the
incremental increase in revenue
generated from the 28% profit margin
for trading permits will allow the
Exchange to further invest in its system
architecture and matching engine
functionality to the benefit of all market
participants. 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
revenue from ‘‘access fees’’ 50 for 2020
for MIAX Pearl was $11,422,000. MIAX
Pearl projects that the total revenue
from ‘‘access fees’’ for will be
$20,001,243, 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’’ 51 revenue for
2020. Cboe C2 Exchange, Inc. (‘‘C2’’)
reported $19,016,000 in ‘‘access and
capacity fee’’ revenue for 2020.52 Cboe
BZX Exchange, Inc. (‘‘BZX’’) reported
$38,387,000 in ‘‘access and capacity
49 See
supra notes 26, 27 and 28.
described in MIAX Pearl’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 Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2100/
21000460.pdf.
51 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.
52 See id.
50 As
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fee’’ revenue for 2020.53 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
$26,126,000 in ‘‘access and capacity
fee’’ revenue for 2020.54 Nasdaq PHLX
LLC (‘‘PHLX’’) reported $20,817,000 in
‘‘Trade Management Services’’ revenue
for 2019.55 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.’’ 56
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
Pearl was ¥18%. 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%; NYSE American’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%. ISE’s operating
profit margin, for all of 2019, was
83%.57 ISE’s equity options market
share for all of 2019 was 8.99% 58 while
its access fees are as follows: $500 per
month for Electronic Access Members;
$5,000 per month for Primary Market
Makers; and $2,500 per month for
Competitive Market Makers.59 PHLX’s
53 See
id.
id.
55 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.
56 See Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
57 See PHLX Form 1, Exhibit D, filed June 30,
2020 available at https://sec.report/Document/
9999999997-20-003902/.
58 See https://www.theocc.com/Market-Data/
Market-Data-Reports/Volume-and-Open-Interest/
Volume-by-Exchange.
59 See Nasdaq ISE LLC Options 7 Pricing
Schedule, Section 8.A. Access Services, at https://
listingcenter.nasdaq.com/rulebook/ise/rules/
ISE%20Options%207.
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54 See
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operating profit margin, for all of 2019,
was 67%.60 PHLX’s equity options
market share for all of 2019 was
15.85% 61 while its permit fees are as
follows: $4,000 per month for Floor
Brokers; $6,000 per month for Floor
Lead Market Makers and Floor Market
Makers; and $4,000 per month for
Remote Lead Market Makers and
Remote Market Makers.62
In the Initial Proposed Fee Change,63
the Exchange compared projected profit
margins to the 2019 operating profit
margin of ISE and PHLX, which were
83% and 67% respectively. The SIG
Letter 64 contained the opinion that a
using the overall operating profit
margins of ISE and PHLX was an ‘‘apple
to oranges’’ comparison because 2019
was a ‘‘record setting year.’’ 65 The SIG
Letter’s argument assumes that because
2019 was a record setting year for
options volumes, that each options
exchange generated above average
profits without provided any evidence
to support this assumption. The
Exchange sought to provide additional
data to support a 28% profit margin
based on the best, most recent data
available. The Exchange did not provide
this data to do an ‘‘apple-to-apples’’
comparison, but rather to provide
insight into the profit margins of other
exchanges to put the projected profit
margin, inclusive of the proposed fees,
into perspective. While the Exchange
provided a detailed analysis and
disclosure of its projected profit margins
in this proposed fee change and the
Initial Proposed Fee Change, other
exchanges are generally not required to
disclose profit margins on a more
granular, per-product/non-transaction
fee basis within their annual Form 1
filings. The Exchange, therefore, used
the best, most recent data available to
generate percentages of other exchange’s
profit margins.
The Exchange further believes its
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because the Exchange,
and its affiliates, are still recouping the
initial expenditures from building out
their systems while the legacy
60 See ISE Form 1, filed June 29, 2020 available
at Form 1 - ISE - Final (1).pdf (sec.gov).
61 See supra note 58.
62 See Nasdaq PHLX Options 7 Pricing Schedule,
Section 8.A. Permit and Registration Fees, at
https://listingcenter.nasdaq.com/rulebook/phlx/
rules/Phlx%20Options%207.
63 See Securities Exchange Act Release No. 92366
(July 9, 2021), 86 FR 37379 (SR–PEARL–2021–32)
(‘‘Initial Proposed Fee Change’’).
64 See letter from Richard J. McDonald,
Susquehanna International Group, LLP (‘‘SIG’’) to
Vanessa Countryman, Secretary, Commission, dated
September 28, 2021 (‘‘SIG Letter’’).
65 See id.
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64263
exchanges have already paid for and
built their systems.
The Exchange believes that the
Proposed Access Fees are reasonable,
equitable and not unfairly
discriminatory because they are in line
with, or cheaper than, the trading
permit fees or similar membership fees
charged by other options exchanges.66
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive. In such an environment,
the Exchange must continually adjust its
fees for services and products, in
addition to order flow, to remain
competitive with other exchanges. The
Exchange believes that the proposed
changes reflect this competitive
environment.
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.67 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.68 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.69
66 See
supra notes 26, 27 and 28.
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.
68 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.
69 Id.
67 See
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes that the
Proposed Access Fees do not place
certain market participants at a relative
disadvantage to other market
participants because the Proposed
Access Fees do not favor certain
categories of market participants in a
manner that would impose a burden on
competition; rather, the fee rates are
designed in order to provide objective
criteria for users that connect via the
MEO Interface of different sizes and
business models that best matches their
activity on the Exchange.
The Exchange believes the removal of
the Monthly Volume Credit and Trading
Permit fee credit will not place certain
market participants at a relative
disadvantage to other market
participants because, in order to attract
order flow when the Exchange first
launched operations, the Exchange
established these credits to lower the
initial fixed cost for Members. The
Exchange now believes that it is
appropriate to remove this credit in
light of the current operating conditions,
including the Exchange’s overall
membership and the current type and
amount of volume executed on the
Exchange. The Exchange believes that
the Exchange’s rebates and fees will still
allow the Exchange to remain highly
competitive such that the Exchange
should continue to attract order flow
and maintain market share.
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Inter-Market Competition
The Exchange believes the Proposed
Access Fees do not place an undue
burden on competition on other options
exchanges that is not necessary or
appropriate. In particular, options
market participants are not forced to
become members of all options
exchanges. The Exchange notes that it
has far less Members as compared to the
much greater number of members at
other options exchanges. There are a
number of large users that connect via
the MEO Interface and broker-dealers
that are members of other options
exchange but not Members of the
Exchange. The Exchange is also
unaware of any assertion that its
existing fee levels or the Proposed
Access Fees would somehow unduly
impair its competition with other
options exchanges. To the contrary, if
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the fees charged are deemed too high by
market participants, they can simply
discontinue their membership with the
Exchange.
The Exchange operates in a highly
competitive market in which market
participants can readily favor one of the
15 competing options venues if they
deem fee levels at a particular venue to
be excessive. Based on publiclyavailable information, and excluding
index-based options, no single exchange
has more than approximately 16%
market share. Therefore, no exchange
possesses significant pricing power in
the execution of multiply-listed equity
and ETF options order flow. Over the
course of 2021, the Exchange’s market
share has fluctuated between
approximately 3–6% of the U.S. equity
options industry.70 The Exchange is not
aware of any evidence that a market
share of approximately 3–6% provides
the Exchange with anti-competitive
pricing power. The Exchange believes
that the ever-shifting market share
among exchanges from month to month
demonstrates that market participants
can discontinue or reduce use of certain
categories of products, or shift order
flow, in response to fee changes. In such
an environment, the Exchange must
continually adjust its fees to remain
competitive with other exchanges and to
attract order flow to the Exchange.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange initially filed this
proposed fee change on July 1, 2021 and
that proposal was published in the
Federal Register on July 15, 2021.71 The
Commission received one comment
letter on the Initial Proposed Fee
Change.72 The Exchange withdrew
Initial Proposed Fee Change on October
12, 2021.73 The Exchange now responds
to the SIG Letter in this filing.
The SIG letter cites Rule 700(b)(3) of
the Commission’s Rules of Fair Practice
which places ‘‘the burden to
demonstrate that a proposed rule change
is consistent with the Act on the selfregulatory organization that proposed
the rule change’’ and states that a ‘‘mere
assertion that the proposed rule change
is consistent with those requirements
70 See ‘‘The market at a glance’’, available at
www.miaxoptions.com (last visited October 19,
2021).
71 See supra note 63.
72 See supra note 64.
73 See Securities Exchange Act Release No. 93346
(October 15, 2021), 86 FR 58367 (October 21, 2021)
(SR–PEARL–2021–32) (Notice of Withdrawal of a
Proposed Rule Change to Amend the MIAX Pearl
Options Fee Schedule to Remove Certain Credits
and Increase Trading Permit Fees).
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. . . is not sufficient.’’ 74 The SIG
Letter’s assertion that the Exchange has
not met this burden is without merit,
especially considering the
overwhelming amounts of revenue and
cost information the Exchange included
in the Initial Proposed Fee Change and
this filing.
Until recently, the Exchange has
operated at a net annual loss since it
launched operations in 2017.75 As
stated above, 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 believes it
has achieved this standard in this filing
and also in the Initial Proposed Fee
Change. A similar justification for the
proposed fee change included in the
Initial Proposed Fee Change, but also in
this filing, was previously included in a
similar proposed fee change filed by the
Exchange’s affiliate, MIAX Emerald, and
SIG did not submit a comment letter on
that filing.76 Nor was that filing
suspended by the Commission and
continues to remain in effect. The
Exchange and its affiliates have worked
diligently with Commission Staff on
ensuring the justification included in
past fee filings fully supported an
assertion that those proposed fee
changes were consistent with the Act.77
74 17
CFR 201.700(b)(3).
Exchange has incurred a cumulative loss
of $86 million since its inception in 2017 to 2020,
the last year for which the Exchange’s Form 1 data
is available. See Exchange’s Form 1/A, Application
for Registration or Exemption from Registration as
a National Securities Exchange, filed July 29, 2021,
available at https://sec.report/Document/
9999999997-21-004367/.
76 See Securities Exchange Act Release No. 91033
(February 1, 2021), 86 FR 8455 (February 5, 2021)
(SR–EMERALD–2021–03) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Amend Its Fee Schedule To Adopt Monthly
Trading Permit Fees).
77 See, e.g., Securities Exchange Act Release No.
90196 (October 15, 2020), 85 FR 67064 (October 21,
2020) (SR–EMERALD–2020–11) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt OneTime Membership Application Fees and Monthly
Trading Permit Fees). See Securities Exchange Act
Release Nos. 90601 (December 8, 2020), 85 FR
80864 (December 14, 2020) (SR–EMERALD–2020–
18) (re-filing with more detail added in response to
Commission Staff’s feedback and after withdrawing
SR–EMERALD–2020–11); and 91033 (February 1,
2021), 86 FR 8455 (February 5, 2021) (SR–
EMERALD–2021–03) (re-filing with more detail
75 The
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The Exchange leveraged its past work
with Commission Staff to ensure the
justification provided herein and in the
Initial Proposed Fee Change included
the same level of detail (or more) as
those past proposed fee changes that
previously survived Commission
scrutiny. Further, as stated above, the
Exchange notes that the justification and
process included in this filing and the
Initial Proposed Fee Change was
utilized by the Exchange’s affiliate,
MIAX Emerald, in a filing to adopt
Trading Permit fees for MIAX Emerald,
which filing was recently noticed by the
Commission and remains in effect.78
Therefore, a finding by the Commission
that the Exchange has not met its
burden to show that the proposed fee
change is consistent with the Act would
be different than the Commission’s
treatment of similar past filings, would
create further ambiguity regarding the
standards exchange fee changes should
satisfy, and is not warranted here.
In addition, the arguments in the SIG
Letter do not support their claim that
the Exchange has not met its burden to
show the proposed rule change is
consistent with the Act. Prior to and
after submitting the Initial Proposed Fee
Change, the Exchange solicited feedback
from its Members, including SIG. SIG
relayed their concerns regarding the
proposed change. The Exchange then
sought to work with SIG to address their
concerns and gain a better
understanding of the access/
connectivity/quoting infrastructure of
other exchanges. In response, SIG
provided no substantive suggestions on
how to amend the Initial Proposed to
address their concerns and instead
chose to submit a comment letter. One
could argue that SIG is using the
comment letter process not to raise
added in response to Commission Staff’s feedback
and after withdrawing SR–EMERALD–2020–18).
The Exchange initially filed a proposal to remove
the cap on the number of additional Limited
Service MEO Ports available to Members on April
9, 2021. See SR–PEARL–2021–17 (the ‘‘First
Proposed Rule Change’’). On April 22, 2021, the
Exchange withdrew the First Proposed Rule Change
and refiled that proposal (without increasing the
actual fee amounts) to provide further clarification
regarding the Exchange’s revenues, costs, and
profitability any time more Limited Service MEO
Ports become available, in general, (including
information regarding the Exchange’s methodology
for determining the costs and revenues for
additional Limited Service MEO Ports). See SR–
PEARL–2021–20 (the ‘‘Second Proposed Rule
Change’’). On May 3, 2021, the Exchange withdrew
the Second Proposed Rule Change and refiled that
proposal to further clarify its cost methodology. See
SR–PEARL–2021–22 (the ‘‘Third Proposed Rule
Change’’). On May 10, 2021, the Exchange
withdrew the Third Proposed Rule Change and
refiled SR–PEARL–2021–23. See Securities
Exchange Act Release No. 91858 (May 12, 2021), 86
FR 26967 (May 18, 2021).
78 See supra note 76.
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legitimate regulatory concerns regarding
the proposal, but to inhibit or delay
proposed fee changes by the Exchange.
Nonetheless, the Exchange submits the
below response to the SIG Letter.
MIAX Pearl Provided More Than
Sufficient Justification for the Proposed
Fees
The SIG Letter asserts that the
Exchange provided ‘‘no affirmative
justifiable reason that its legacy fees are
no longer sufficient.’’ 79 This statement
assumes that the previous fees were
‘‘sufficient’’ and does not state how the
legacy fees might have been sufficient to
cover the Exchange’s expenses. To
clarify, the previous fees were not
sufficient to cover the costs the
Exchange incurred in providing access
to the Exchange. However, the previous
fees were sufficient to attract order flow
as the pricing was set to not discourage
participation on the Exchange. The
Exchange is relatively new as it only
began operations in 2017.80 Like other
new exchange entrants, the Exchange
chose to charge lower fees than other
more established exchanges to attract
order flow and increase membership.81
The Exchange chose that approach by
setting the price of its Trading Permits
(as well as other access-type fees) below
market rates. SIG’s statement assumes
that exchanges should charge at market
rates that are sufficient to cover its costs.
This statement ignores pricing
79 See
SIG Letter at page 3, supra note 64.
‘‘Miami International Holdings Receives
Approval from SEC to Launch MIAX PEARL;
Targets February 6, 2017 Launch’’ (December 14,
2016) available at https://www.miaxoptions.com/
sites/default/files/press_release-files/MIAX_Press_
Release_12142016.pdf (last visited October 18,
2021) (stating that the Exchange ‘‘plans to launch
with an initial moratorium on most non-transaction
fees.’’)
81 See, e.g., ‘‘Members Exchange Unveils
Transaction Pricing’’ (September 10, 2020),
available at https://www.businesswire.com/news/
home/20200910005183/en/Members-ExchangeUnveils-Transaction-Pricing (last visited October
18, 2021) (quoting Jonathan Kellner, CEO of
Members Exchange, ‘‘[t]o further incentivize
participants to connect to a new destination, we are
implementing initial pricing that generates a net
loss for the exchange on each transaction. We are
confident that as participants experience the
benefits of our platform, they will continue to
incorporate MEMX in their routing strategies.’’);
and ‘‘Miami International Holdings Announces
Fully Subscribed Strategic Equity Rights
Transaction with Leading Equities Firms to Trade
on MIAX PEARL Equities Trading to Begin
September 25, 2020’’ available at https://
www.miaxoptions.com/sites/default/files/press_
release-files/Press_Release_09142020.pdf (last
visited October 18, 2021) (quoting Douglas M.
Schafer, Jr., Executive Vice President and Chief
Information Officer of MIH, MIAX PEARL Equities,
‘‘[w]e are excited to be offering a simpler,
transparent, low cost venue to market participants
and have no doubt that MIAX PEARL Equities will
become a competitive alternative venue following
our launch on September 25th.’’)
80 See
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
64265
incentives exchanges may offer to attract
order flow and that exchanges, like
many businesses including SIG, may
make a business decision to price
certain offerings at a loss or ‘‘on sale’’
as they build their business. Further, a
vast majority of the Exchange’s
Members, if not all, benefited from these
lower fees.
As a new entrant in the market, the
Exchange chose to forgo any potential
additional revenue that may have been
generated by higher Trading Permit fees
to encourage participation on the new
platform. This served to attract
participation on the Exchange so market
participants could evaluate the
Exchange’s quality, technology and the
quality of their overall customer/user
experience. Setting higher rates for nontransaction fees could have served to
dissuade market participants from
trading on the Exchange and not
experiencing the high quality
technological system the Exchange
built.
Nonetheless, the Exchange provided
significant cost based justification for
the proposed fees not only in this filing,
but also in the Initial Proposed Fee
Change. The SIG Letter conveniently
ignores this fact. In fact, the level of
disclosure by the Exchange provided in
this filing and the Initial Proposed Fee
Change has been worked on with
Commission Staff over numerous past
filings that have been published for
comment and remain effect.82 The
Exchange’s detailed disclosures in fee
filings have also been applauded by one
industry group which noted, ‘‘[the
Exchange’s] filings contain significantly
greater information about who is
impacted and how than other filings
that have been permitted to take effect
without suspension.’’ 83 That same
commenter also noted their ‘‘worry that
the Commission’s process for reviewing
and evaluating exchange filings may be
inconsistently applied.’’ 84
The Exchange believes the proposed
fees will allow the Exchange to offset
expenses the Exchange has and will
incur, and that the Exchange provided
sufficient transparency into how the
Exchange determined to charge such
fees. Accordingly, the Exchange
provided an analysis of its revenues,
costs, and profitability associated with
82 See
supra note 77.
letter from Tyler Gellasch, Executive
Director, Healthy Markets Association, to Hon. Gary
Gensler, Chair, Commission, dated October 29,
2021.
84 Id. (providing examples where non-transaction
fee filings by other exchanges have been permitted
to remain effective and not suspended by the
Commission despite less disclosure and
justification).
83 See
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the proposed fees. This analysis
included information regarding its
methodology for determining the costs
and revenues associated with the
proposal.
To determine the Exchange’s costs to
provide the access services associated
with the proposed 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 fees, and, if such expense
did so relate, what portion (or
percentage) of such expense actually
supports the access services. The sum of
all such portions of expenses represents
the total cost of the Exchange to provide
the access services associated with the
proposed fees.
Furthermore, the Exchange is
beginning to see significant inflationary
pressure on capital items that it needs
to purchase to maintain the Exchange’s
technology and systems.85 The
Exchange has seen pricing increases
upwards of 30% on network equipment
due to supply chain shortages. This, in
turn, results in higher overall costs for
ongoing system maintenance, but also to
purchase the items necessary to ensure
ongoing system resiliency, performance,
and determinism. These costs are
expected to continue to go up as the
U.S. economy continues to struggle with
supply chain and inflation related
issues.
khammond on DSKJM1Z7X2PROD with NOTICES
The Proposed Fee Increases Are Not
Part of a Discriminatory Fee Structure
and Tiered Fee Structures Are
Commonplace Amongst Exchanges
The SIG Letter correctly notes that the
proposed Trading Permit fees are higher
for Members who connect through the
MEO Interface than for Members who
connect through the FIX Interface.
Members who use the MEO Interface
may also connect to the System through
the FIX Interface as well, and vice versa.
The Exchange notes that the Trading
Permit fees for Members who connect
through the MEO Interface are higher
than the Trading Permit fees for
Members who connect through the FIX
Interface, since the FIX Interface utilizes
less capacity and resources of the
85 See ‘‘Supply chain chaos is already hitting
global growth. And it’s about to get worse’’, by
Holly Ellyatt, CNBC, available at https://
www.cnbc.com/2021/10/18/supply-chain-chaos-ishitting-global-growth-and-could-get-worse.html
(October 18, 2021); and ‘‘There will be things that
people can’t get, at Christmas, White House warns’’
by Jarrett Renshaw and Trevor Hunnicutt, Reuters,
available at https://www.reuters.com/world/us/
americans-may-not-get-some-christmas-treatswhite-house-officials-warn-2021-10-12/ (October 12,
2021).
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Exchange. The MEO Interface offers
lower latency and higher throughput,
which utilizes greater capacity and
resources of the Exchange. The FIX
Interface offers lower bandwidth
requirements and an industry-wide
uniform message format. Both EEMs and
Market Makers may connect to the
Exchange using either interface.
The SIG Letter asserts that the
Exchange ‘‘provides no description of
the ‘capacity and resources’ being
utilized, and no information on the
nature or extent of the disparity in such
utilization between the two Interface
types.’’ As a MEO user, SIG is uniquely
positioned to understand and appreciate
the differences between the MEO and
FIX interfaces and why rates for the
MEO interface are justifiably higher.
Nonetheless, the Exchange is providing
the below additional data to address the
statements made in the SIG Letter.
Orders on the Exchange are supplied
by Members via two different interfaces,
FIX and MEO. MEO is the Exchange’s
proprietary binary order interface. Over
the period from April 2021 until
September 2021, 3.15 billion messages
were processed via the FIX interface
(0.43% of total messages received). Over
that same time period, 731.4 billion
messages (99.57% of total messages
received) were processed over the MEO
interface. Also, the MEO interface
allows for mass purging of orders which
has a significant impact on the number
of messages processed. This marked
difference between the number of FIX
and MEO messages processed, when
mapped to servers, software, storage,
and networking results in a much higher
allocation of total capital and
operational expense to support the MEO
interface. For one, the Exchange incurs
greater expense in maintaining the
resilience of the MEO interface to
ensure its ongoing operation in
accordance with Regulation SCI.
Another, the Exchange must purchase
and expand its storage capacity to retain
these increased messages in compliance
with its record keeping obligations. As
noted above, the Exchange has seen
significant inflationary pressure on
capital items that it needs to purchase
to maintain its technology.86 The
Exchange has seen pricing increases
upwards of 30% on network equipment
due to supply chain shortages.
SIG is also uniquely positioned to
know that the fee structure utilized by
the Exchange, which charges different
Trading Permit fees for MEO interface
users than FIX interface users is not a
new proposal. In fact, it was first
adopted by the Exchange over 31⁄2 years
86 See
PO 00000
id.
Frm 00090
Fmt 4703
Sfmt 4703
ago in March 2018, published by the
Commission and received no comment
letters, not even by SIG.87 SIG claims a
fee structure that they have been subject
to for years as an MEO interface user is
just now unfairly discriminatory.
The Proposed Fees Are in Line With, or
Cheaper Than, the Trading Permit Fees
or Similar Membership/Access Fees
Charged by Other Options Exchanges
The Exchange correctly asserts herein
and in the Initial Proposed Fee Change
that it’s proposed Trading Permit fees
‘‘are in line with, or cheaper than, the
trading permit fees or similar
membership fees charged by other
options exchanges.’’ The SIG letter
challenges this assertion is an ‘‘apples to
oranges’’ comparison because NYSE
American and NYSE Arca based their
rates on the number of options issued to
the member and not trading volume,
like the exchange does. In fact, the
number of options traded by a member
of NYSE American or NYSE Arca is an
appropriate proxy for trading volume as
the more options issued to the member
would result in higher volumes traded
by that member. Firms that trade more
liquid options generate increased
message traffic and greater pull on
exchange resources. Therefore,
comparing options traded to trading
volume is an ‘‘apples to apples’’
comparison.
The Exchange proposes a range of fees
from $500 to $6,000 per month
depending on trading volume and the
type of interface that is utilized by the
Member. These rates are undoubtedly
similar to or lower than the rates
charged by NYSE Arca and NYSE
American. As of October 14, 2021, the
Exchange maintained a market share of
approximately 3.95%.88 Among
Exchanges with similar market share,
the Exchange’s proposed Trading Permit
Fees remain similar to or lower than
fees charged by other options exchanges
with comparable market share for
access/membership fees.89 The
87 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
88 See ‘‘The Market at a Glance’’ available at
https://www.miaxoptions.com/ (last visited October
4, 2021).
89 See supra notes 26, 27 and 28 and
accompanying text. The below market share
numbers are as of October 14, 2021. Id. C2 had a
market share of 4.44% and charges a monthly
Access Fee of $5,000 for market makers and $1,000
per month for an additional Electronic Access
Permit regardless of trading volume or options
traded. See the C2 fee schedule available at https://
www.cboe.com/us/options/membership/fee_
schedule/ctwo/ (last visited October 14, 2021). ISE
had a market share of 6.74% and charges a monthly
Access Fee to Primary Market Makers of $5,000 and
Competitive Market Maker of $2,500 regardless of
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Federal Register / Vol. 86, No. 219 / Wednesday, November 17, 2021 / Notices
proposed rates are also lower than those
of its affiliates, MIAX and Emerald,
which remain in effect today.90
The SIG Letter states that ‘‘[the
Exchange] offers no information about
the capacity and resource costs of access
to the other exchanges or any other basis
to support the reasonability of those
fees, let alone compare such costs to
those of MIAX Pearl.’’ 91 This statement
is misleading as SIG should be aware
that the Exchange does not have access
to this information and when it asked
SIG to assist the Exchange in better
understanding the access structure of
other exchanges, SIG refused.
The SIG Letter further asserts that the
Exchange ‘‘has not established that the
other exchange fees are reasonable, nor
that this would mean that the MIAX
Pearl fees are reasonable as well.92 SIG
should be aware that it is not the
Exchange’s obligation to justify why
another exchange’s fees are reasonable
and it is presumed that such fees were
deemed reasonable by the Commission
when filed by the exchange that
proposed said fee. If SIG felt another
exchange’s fees were or are
unreasonable, they are free to share that
concern with the Commission and were
provided an opportunity to submit
comment letter on those earlier
proposals from other exchanges. It is the
Exchange’s responsibility to show that
its own proposed fee change is
reasonable and consistent with the Act,
and that assertion is amply supported
by the statements made in this Item 5
and elsewhere herein.
khammond on DSKJM1Z7X2PROD with NOTICES
The Proposed Fees Are Consistent With
Section 6(b)(4) of the Act Because the
Proposed Fees Will Not Result in
Excessive Pricing or Supra-Competitive
Profit
In the Initial Proposed Fee Change,
the Exchange provided data that the
proposed fee change would not result in
excessive pricing or a supra-competitive
profit. The Exchange outlined its
projected revenues and expense related
to the proposed fee change and
estimated it would generate a 28%
profit margin. The Exchange then
trading volume or options traded. See Section 8.A.
of the ISE fee schedule available at https://
listingcenter.nasdaq.com/rulebook/ise/rules/
ISE%20Options%207 (last visited October 14,
2021).
90 See Section 3)b) of the MIAX fee schedule
available at https://www.miaxoptions.com/sites/
default/files/fee_schedule-files/MIAX_Options_Fee_
Schedule_10142021.pdf, and Section 3)b) of the
Emerald fee schedule available at https://
www.miaxoptions.com/sites/default/files/fee_
schedule-files/MIAX_Emerald_Fee_Schedule_
10142021.pdf (both charging monthly trading
permit fees ranging from $7,000 to $22,000).
91 See SIG Letter at page 5, supra note 64.
92 See id.
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compared its projected profit margin to
the 2019 operating profit margin of ISE
and PHLX, which were 83% and 67%
respectively. SIG opined that a using the
overall operating profit margins of ISE
and PHLX is an ‘‘apple-to-oranges’’
comparison because 2019 was ‘‘record
setting year.’’ 93 SIG assumes that
because 2019 was a record setting year
for options volumes, that each options
exchange generated above average
profits without provided any evidence
to support this assumption. Data for
2019 was the most recent data available
at the time the Exchange filed the Initial
Proposed Fee Change on July 1, 2021.
Since that time, data for 2020 became
available and the Exchange discusses
that data for numerous other options
exchanges under Section 3.b. above in
this proposed fee change.94
The Exchange sought to provide
additional data to support a 28% profit
margin based on the best, most recent
data available. It did not provide this
data to do an ‘‘apple-to-apples’’
comparison, but rather to provide
insight into the profit margins of other
exchanges to put the projected profit
margin here into perspective. While the
Exchange provided a detailed analysis
and disclosure of its projected profit
margins in this proposed fee change and
the Initial Proposed Fee Change, other
exchanges are generally not required to
disclose profit margins on a more
granular, per-product/non-transaction
fee basis within their annual Form 1
filings. The Exchange, therefore, used
the best, most recent data available to
generate percentages of other exchange’s
profit margins. SIG has access to the
same public data as the Exchange used
in making the above projections
regarding ISE and PHLX and is free to
generate its own assumptions on that
data if it believes the Exchange’s
calculations are wrong or misguided.
SIG also challenges the Exchange’s
methodology in determining its
projected revenues and allocation of
internal and third party expenses
related to the proposed fee change. As
stated above, the Exchange and its
affiliates have worked diligently with
Commission Staff on ensuring the
justification included in past fee filings
fully supported an assertion that those
proposed fee changes were consistent
with the Act.95 This work with
Commission Staff included thorough
reviews of the Exchange’s projected
revenues and assignment of internal and
third party expenses. The SIG Letter
93 See
94 See
SIG Letter at page 6, supra note 64.
supra notes 50 to 62 and accompanying
95 See
PO 00000
simply seeks to ignore the vast amount
of disclosure the Exchange provided
and kick up some sand in the hopes that
raising questions about the analysis
with no support on whether the answers
to those questions would cause the
proposed fee change to be excessive or
result in supra-competitive pricing.
The Proposed Fee Change Is Reasonable,
Equitably Allocated and Not Unfairly
Discriminatory Because the Exchange,
and Its Affiliates, Are Still Recouping
Their Initial Expenditures
The Exchange asserts above that its
‘‘proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because the Exchange,
and its affiliates, are still recouping the
initial expenditures from building out
their systems while the legacy
exchanges have already paid for and
built their systems.’’ The SIG Letter
states that ‘‘[t]he Exchange, however,
draws no link between the recoupment
of capital outlays with the reasonability,
equitable allocation, and lack of unfair
discriminatory nature of the proposed
fees.’’ 96 As stated above, the Exchange
and its affiliates have worked diligently
with Commission Staff on ensuring the
justification included in past fee filings
fully supported an assertion that those
proposed fee changes were consistent
with the Act.97 The Exchange leveraged
its past work with Commission Staff to
ensure the justification provided herein
and in the Initial Proposed Fee Change
included the same level of detail as
those past proposed fee changes that
previously survived Commission
scrutiny. Asserting that the proposed
fees are reasonable, equitably allocated
and not unfairly discriminatory because
the Exchange, and its affiliates, are still
recouping the initial expenditures from
building out their systems is one of
many justifications for the proposed fees
and not a cornerstone of the Exchange’s
proposal.
As stated above, until recently, the
Exchange has operated at a net annual
loss since it launched operations in
2017.98 This is a result of providing a
low cost alternative to attract order flow
and encourage market participants to
experience the determinism and
resiliency of the Exchange’s trading
systems. To do so, the Exchange chose
to offer some non-transaction related
services for no or little cost. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing higher fees and then use that
revenue to more quickly recover its
96 See
SIG Letter at page 6, supra note 64.
supra note 77.
98 See supra note 75.
97 See
text.
supra note 77.
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Federal Register / Vol. 86, No. 219 / Wednesday, November 17, 2021 / Notices
initial capital expenditures. Further, a
vast majority of the Exchange’s
Members, if not all, benefited from these
lower fees. The Exchange could have
sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low cost exchange
alternative to the options industry
which resulted in lower initial revenues
and extending the duration during
which it would recoup its initial capital
expenditures. The SIG Letter choses to
ignore this reality and instead criticize
the Exchange for initially charging
lower fees or providing a moratorium on
certain non-transaction fees to the
benefit of all market participants. The
Exchange is now trying to amend its fee
structure to enable it to continue to
maintain and improve its overall market
and systems while also providing a
highly reliable and deterministic trading
system to the marketplace.
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,99 and Rule
19b–4(f)(2) 100 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:
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PEARL–2021–54. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2021–54 and
should be submitted on or before
December 8, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.101
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–25019 Filed 11–16–21; 8:45 am]
BILLING CODE 8011–01–P
khammond on DSKJM1Z7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2021–54 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93557; File No. SR–IEX–
2021–14]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Its
Fee Schedule for Market Data Fees
November 10, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on
November 1, 2021, the Investors
Exchange LLC (‘‘IEX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the 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
Pursuant to the provisions of Section
19(b)(1) under the Act,3 and Rule 19b–
4 thereunder,4 the Exchange is filing
with the Commission a proposed rule
change to modify its Fee Schedule,
pursuant to IEX Rules 15.110(a) and (c),
to assess fees for receipt and
distribution of its proprietary market
data feeds. IEX will implement the
proposed fee beginning on January 3,
2022, to provide an opportunity for
subscribers to update their data
subscriptions to suit their particular
market data needs.
The text of the proposed rule change
is available at the Exchange’s website at
www.iextrading.com, at the principal
office of the Exchange, 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
self-regulatory organization 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 self-regulatory organization has
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(1).
4 17 CFR 240.19b–4.
2 17
99 15
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
100 17
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17:11 Nov 16, 2021
101 17
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PO 00000
CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 86, Number 219 (Wednesday, November 17, 2021)]
[Notices]
[Pages 64254-64268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25019]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93555; File No. SR-PEARL-2021-54]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Options Fee Schedule To Remove Certain Credits and Increase
Trading Permit Fees
November 10, 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 October 29, 2021, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to remove certain credits and amend
the monthly Trading Permit \3\ fees for Exchange Members.\4\
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\3\ The term ``Trading Permit'' means a permit issued by the
Exchange that confers the ability to transact on the Exchange. See
Exchange Rule 100.
\4\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of Exchange
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See Exchange Rule 100 and the
Definitions Section of the Fee Schedule.
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The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to remove certain
credits and amend the monthly Trading Permit fees (the ``Proposed
Access Fees'') for Exchange Members.
Removal of the ``Monthly Volume Credit''
The Exchange proposes to amend the Definitions section of the Fee
Schedule to delete the definition and remove the credits applicable to
the Monthly Volume Credit for Members. The Exchange established the
Monthly Volume Credit in 2018 \5\ to encourage Members to send
increased Priority
[[Page 64255]]
Customer \6\ order flow to the Exchange, which the Exchange applied to
the assessment of certain non-transaction rebates and fees for that
Member. The Exchange applies a different Monthly Volume Credit
depending on whether the Member connects to the Exchange via the FIX
Interface \7\ or MEO Interface.\8\ Currently, the Exchange assesses the
Monthly Volume Credit to each Member that has executed Priority
Customer volume along with that of its Affiliates,\9\ not including
Excluded Contracts,\10\ of at least 0.30% of MIAX Pearl-listed Total
Consolidated Volume (``TCV''),\11\ as set forth in the following table:
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\5\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\6\ The term ``Priority Customer'' means a person or entity that
(i) is not a broker or dealer in securities, and (ii) does not place
more than 390 orders in listed options per day on average during a
calendar month for its own beneficial accounts(s). The number of
orders shall be counted in accordance with Interpretation and Policy
.01 of Exchange Rule 100. See the Definitions Section of the Fee
Schedule and Exchange Rule 100, including Interpretation and Policy
.01.
\7\ The term ``FIX Interface'' means the Financial Information
Exchange interface for certain order types as set forth in Exchange
Rule 516. See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
\8\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Pearl System. See the Definitions Section of the Fee Schedule
and Exchange Rule 100.
\9\ ``Affiliate'' means (i) an affiliate of a Member of at least
75% common ownership between the firms as reflected on each firm's
Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market
Maker (who does not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has been appointed by an EEM
and an ``Appointed EEM'' is an EEM (who does not otherwise have a
corporate affiliation based upon common ownership with a MIAX Pearl
Market Maker) that has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl Market Maker
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for
the purposes of the Fee Schedule, by each completing and sending an
executed Volume Aggregation Request Form by email to
[email protected] no later than 2 business days prior to
the first business day of the month in which the designation is to
become effective. Transmittal of a validly completed and executed
form to the Exchange along with the Exchange's acknowledgement of
the effective designation to each of the Market Maker and EEM will
be viewed as acceptance of the appointment. The Exchange will only
recognize one designation per Member. A Member may make a
designation not more than once every 12 months (from the date of its
most recent designation), which designation shall remain in effect
unless or until the Exchange receives written notice submitted 2
business days prior to the first business day of the month from
either Member indicating that the appointment has been terminated.
Designations will become operative on the first business day of the
effective month and may not be terminated prior to the end of the
month. Execution data and reports will be provided to both parties.
See the Definitions Section of the Fee Schedule.
\10\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\11\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
------------------------------------------------------------------------
Monthly
Type of member connection volume
credit
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Member that connects via the FIX Interface................... $250
Member that connects via the MEO Interface................... 1,000
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If a Member connects via both the MEO Interface and FIX Interface
and qualifies for the Monthly Volume Credit based upon its Priority
Customer volume, the greater Monthly Volume Credit shall apply to such
Member. The Monthly Volume Credit is a single, once-per-month credit
towards the aggregate monthly total of non-transaction fees assessable
to a Member.
The Exchange now proposes to amend the Definitions section of the
Fee Schedule to delete the definition and remove the Monthly Volume
Credit. The Exchange established the Monthly Volume Credit when it
first launched operations to attract order flow by lowering the initial
fixed cost for Members. The Monthly Volume Credit has achieved its
purpose and the Exchange now believes it is appropriate to remove this
credit. The Exchange believes that the Exchange's existing Priority
Customer rebates and fees will continue to allow the Exchange to remain
highly competitive and continue to attract order flow and maintain
market share.
Removal of the Trading Permit Fee Credit
The Exchange proposes to amend Section 3)b) of the Fee Schedule to
remove the Trading Permit fee credit that is denoted in footnote ``*''
below the Trading Permit fee table. The Trading Permit fee credit is
applicable to Members that connect via both the MEO and FIX Interfaces.
Currently, Members who connect via both the MEO and FIX Interfaces are
assessed the rates for both types of Trading Permits, but these Members
receive a $100 monthly credit towards the Trading Permit fees
applicable to the MEO Interface. The Exchange now proposes to remove
the Trading Permit fee credit and delete footnote ``*'' from Section
3)b) of the Fee Schedule.
The Exchange established the Trading Permit fee credit when it
first launched operations to attract order flow and increase membership
by lowering the costs for Members that connect via both the MEO
Interface and FIX Interface. The Trading Permit fee credit has achieved
its purpose and the Exchange now believes that it is appropriate to
remove this credit in light of the current operating conditions and
membership population on the Exchange.
Amendment of Trading Permit Fees
The Exchange proposes to amend Section 3)b) of the Fee Schedule to
increase the amount of the monthly Trading Permit fees. The Exchange
issues Trading Permits to Members who are either Electronic Exchange
Members \12\ (``EEMs'') or Market Makers.\13\ The Exchange assesses
Trading Permit fees based upon the monthly total volume executed by the
Member and its Affiliates on the Exchange across all origin types, not
including Excluded Contracts, as compared to the total TCV in all MIAX
Pearl-listed options. The Exchange adopted a tier-based fee structure
based upon the volume-based tiers detailed in the definition of ``Non-
Transaction Fees Volume-Based Tiers'' \14\ in the Definitions section
of the Fee Schedule. The Exchange also assesses Trading Permit fees
based upon the type of interface used by the Member to connect to the
Exchange--the FIX Interface and/or the MEO Interface.
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\12\ The term ``Electronic Exchange Member'' or ``EEM'' means
the holder of a Trading Permit who is a Member representing as agent
Public Customer Orders or Non-Customer Orders on the Exchange and
those non-Market Maker Members conducting proprietary trading.
Electronic Exchange Members are deemed ``members'' under the
Exchange Act. See the Definitions Section of the Fee Schedule.
\13\ The term ``Market Maker'' or ``MM'' means a Member
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI of these Rules.
See the Definitions Section of the Fee Schedule.
\14\ See the Definitions Section of the Fee Schedule for the
monthly volume thresholds associated with each Tier.
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Current Trading Permit Fees. Currently, each Member who connects to
the System \15\ via the FIX Interface is assessed the following monthly
Trading Permit fees:
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\15\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
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(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $250;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers,
[[Page 64256]]
or volume above 0.30% up to 0.60%, $350; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $450.
Each Member who connects to the System via the MEO Interface is
assessed the following monthly Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $300;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $400; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $500.
Proposed Trading Permit Fees. The Exchange now proposes to amend
its Trading Permit fees as follows. Each Member who connects to the
System via the FIX Interface will be assessed the following monthly
Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, $500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, $1,000; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, $1,500.
Each Member who connects to the System via the MEO Interface will
be assessed the following monthly Trading Permit fees:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, $2,500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, $4,000; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, $6,000.
Members who use the MEO Interface may also connect to the System
through the FIX Interface as well, and vice versa. The Exchange notes
that the Trading Permit fees for Members who connect through the MEO
Interface are higher than the Trading Permit fees for Members who
connect through the FIX Interface, since the FIX Interface utilizes
less capacity and resources of the Exchange. The MEO Interface offers
lower latency and higher throughput, which utilizes greater capacity
and resources of the Exchange. The FIX Interface offers lower bandwidth
requirements and an industry-wide uniform message format. Both EEMs and
Market Makers may connect to the Exchange using either interface.
Trading Permits grant access to the Exchange, thus providing the
ability to submit orders and trade on the Exchange, in the manner
defined in the relevant Trading Permit. Without a Trading Permit, a
Member cannot directly trade on the Exchange. Therefore, a Trading
Permit is a means to directly access the Exchange (which offers
meaningful value), and the Exchange now proposes to increase its
monthly fees since it has not done so since the fees were first adopted
in 2018 \16\ and are designed to recover a portion of the costs
associated with directly accessing the Exchange. The Exchange notes
that the its affiliates, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald''), charge a similar,
fixed trading permit fee to certain users, and a similar, varying
trading permit fee to other users, based upon the number of assignments
of option classes or the percentage of volume in option classes.\17\
The Exchange notes that other options exchanges assess certain of their
membership fees at different rates, based upon a member's participation
on that exchange,\18\ and, as such, this concept is not new or novel.
The Exchange also notes that the proposed increased Trading Permit fees
are in line with, or cheaper than, the trading permit fees or similar
membership fees charged by other options exchanges.\19\
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\16\ See supra note 5.
\17\ See the MIAX Fee Schedule, Section 3)b); MIAX Emerald Fee
Schedule, Section 3)b).
\18\ See e.g., NYSE Arca Options Fees and Charges, OTP Trading
Participant Rights, p.1 (assessing market makers an options trading
permit (``OTP'') monthly fee of $6,000 for up to 175 option issues,
an additional $5,000 for up to 350 option issues, an additional
$4,000 for up to 1,000 option issues, an additional $3,000 for all
option issues on the exchange, and an additional $1,000 for the
fifth OTP and for each OTP thereafter); NYSE American Options Fee
Schedule, Section III, Monthly Trading Permit, Rights, Floor Access
and Premium Product Fees, p. 23 (assessing market makers an ATP
monthly fee of $8,000 for up to 60 plus the bottom 45% of option
issues, an additional $6,000 for up to 150 plus the bottom 45% of
option issues, an additional $5,000 for up to 500 plus the bottom
45% of option issues, and additional $4,000 for up to 1,100 plus the
bottom 45% of option issues, an additional $3,000 for all issues
traded on the exchange, and an additional $2,000 for 6th to 9th
ATPs; plus an addition fee for premium products). See also Cboe BZX
Options Exchange (``BZX Options''), which assesses the Participant
Fee, a type of membership fee, according to a member's average daily
volume (``ADV''). See Cboe BZX Options Exchange Fee Schedule,
Membership Fees. The monthly Participant Fee for BZX Options is $500
if the member's ADV is less than 5,000 contracts and $1,000 if the
member's ADV is equal to or greater than 5,000 contracts. Id.
\19\ See id.
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Implementation
The proposed rule change will be effective beginning November 1,
2021.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \20\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \21\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest and is not designed to permit unfair discrimination between
customers, issuers, brokers and dealers.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee increase meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. The Exchange deems Trading Permit fees to be
Access Fees. It records these fees as part of its ``Access Fees''
revenue in its financial statements. The Exchange believes that it is
important to demonstrate that these fees are based on its costs and
reasonable business needs. The Exchange believes the Proposed Access
Fees will allow the Exchange to offset expenses the Exchange has and
will incur, and that the Exchange is providing sufficient transparency
(as described below) into how the Exchange determined to charge such
fees. Accordingly, the Exchange is providing an analysis of its
revenues, costs, and profitability associated with the Proposed Access
Fees. This analysis includes information regarding its methodology for
determining the costs
[[Page 64257]]
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 revenues associated
with the Proposed Access Fees, the Exchange analyzed the number of
Members currently utilizing the Trading Permits, and, utilizing a
recent monthly billing cycle representative of 2021 monthly revenue,
extrapolated annualized revenue on a going-forward basis. The Exchange
does not believe it is appropriate to factor into its analysis future
revenue growth or decline into its projections for purposes of these
calculations, given the uncertainty of such projections due to the
continually changing access needs of market participants, discounts
that can be achieved due to lower trading volume and vice versa, market
participant consolidation, etc. Additionally, the Exchange similarly
does not factor into its analysis future cost growth or decline. The
Exchange is presenting its revenue and expense associated with the
Proposed Access Fees in this filing in a manner that is consistent with
how the Exchange presents its revenue and expense in its Audited
Unconsolidated Financial Statements. The Exchange's most recent Audited
Unconsolidated Financial Statement is for 2020. However, since the
revenue and expense associated with the Proposed Access Fees were not
in place in 2020 or for the majority of 2021 (other than July and
August 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. The Exchange notes that this is the same justification
process utilized by the Exchange's affiliate, MIAX Emerald, in a filing
recently noticed by the Commission when MIAX Emerald adopted its own
trading permit fees.\22\
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\22\ See Securities Exchange Act Release No. 91033 (February 1,
2021), 86 FR 8455 (February 5, 2021) (SR-EMERALD-2021-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Monthly Trading Permit Fees).
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* * * * *
On March 29, 2019, the Commission issued its Order Disapproving
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC
Options Facility to Establish BOX Connectivity Fees for Participants
and Non-Participants Who Connect to the BOX Network (the ``BOX
Order'').\23\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\24\ Accordingly, the Exchange
believes that the Proposed Access Fees are consistent with the Act
because they (i) are reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) comply
with the BOX Order and the Guidance; (iii) are supported by evidence
(including comprehensive revenue and cost data and analysis) that they
are fair and reasonable because they will not result in excessive
pricing or supra-competitive profit; and (iv) utilize a cost-based
justification framework that is substantially similar to a framework
previously used by the Exchange, and its affiliates MIAX and MIAX
Emerald, to establish or increase other non-transaction fees.
Accordingly, the Exchange believes that the Commission should find that
the Proposed Access Fees are consistent with the Act.
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\23\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04).
\24\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Guidance'').
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* * * * *
Over the course of 2021, the Exchange's market share has fluctuated
between approximately 3-6% of the U.S. equity options industry.\25\ The
Exchange is not aware of any evidence that a market share of
approximately 3-6% provides the Exchange with anti-competitive pricing
power. If the Exchange were to attempt to establish unreasonable
pricing, then no market participant would join or connect, and existing
market participants would disconnect.
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\25\ See ``The market at a glance'', available at
www.miaxoptions.com (last visited October 29, 2021).
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Removal of Monthly Volume Credit and Trading Permit Fee Credit
The Exchange believes its proposal to remove the Monthly Volume
Credit is reasonable, equitable and not unfairly discriminatory because
all market participants will no longer be offered the ability to
achieve the extra credits associated with the Monthly Volume Credit for
submitting Priority Customer volume to the Exchange and access to the
Exchange is offered on terms that are not unfairly discriminatory. The
Exchange believes it is equitable and not unfairly discriminatory to
remove the Monthly Volume Credit from the Fee Schedule for business and
competitive reasons because, in order to attract order flow when the
Exchange first launched operations, the Exchange established the
Monthly Volume Credit to lower the initial fixed cost for Members. The
Exchange now believes that it is appropriate to remove this credit in
light of the current operating conditions and the current type and
amount of Priority Customer volume executed on the Exchange. The
Exchange believes that the Exchange's Priority Customer rebates and
fees will still allow the Exchange to remain highly competitive such
that the Exchange should continue to attract order flow and maintain
market share.
The Exchange believes its proposal to remove the Trading Permit fee
credit for Members that connect via both the MEO Interface and FIX
Interface is reasonable, equitable and not unfairly discriminatory
because all market participants will no longer be offered the ability
to receive the credit and access to the Exchange is offered on terms
that are not unfairly
[[Page 64258]]
discriminatory. The Exchange believes it is equitable and not unfairly
discriminatory to remove the Trading Permit fee credit for business and
competitive reasons because, in order to attract order flow and
membership after the Exchange first launched operations, the Exchange
established the Trading Permit fee credit to lower the costs for
Members that connect via both the MEO Interface and FIX Interface. The
Exchange now believes that it is appropriate to remove this credit in
light of the current operating conditions and membership on the
Exchange.
Trading Permit Fee Increase
The Exchange believes the proposed Trading Permit fees are
equitable and reasonable because the proposed highest tiered fee is
less than or equal to similar fees charged for access on other options
exchanges with comparable market shares. For example, Nasdaq ISE, LLC
(``ISE'') (equity options market share of approximately 5-7% throughout
2021) charges the following access fees: $500 per month for Electronic
Access Members; $5,000 per month for Primary Market Makers; and $2,500
per month for Competitive Market Makers.\26\ Additionally, Cboe C2
Exchange, Inc. (``C2'') (equity options market share of approximately
3-4% throughout 2021), charges the following access permit fees: $5,000
per month for market makers; and $1,000 per month for electronic access
permits.\27\ NYSE American LLC (``NYSE American'') (equity options
market share of approximately 7-8% throughout 2021), charges the
following range of trading permit and access fees, which are dependent
upon the number of issues permitted in market makers' quoting
assignments: $8,000 per month for the first ATP; \28\ $6,000 per month
for the second ATP; $5,000 per month for the third ATP; $4,000 per
month for the fourth ATP; $3,000 per month for the sixth ATP; $2,000
per month for the seventh to the ninth ATP; and $500 per month for the
tenth ATP and each one thereafter.\29\
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\26\ See Nasdaq ISE LLC Options 7 Pricing Schedule, Section 8.A.
Access Services, at https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207.
\27\ See C2 Fee Schedule, Access Fees, at https://www.cboe.com/us/options/membership/fee_schedule/ctwo/.
\28\ An ``ATP'' or ``ATP Holder'' is a registered Broker-Dealer
who is a permit holder on Amex, per Amex Rule 900.2NY(4),(5). See
Amex Fee Schedule, Section III, Monthly Trading Permit, Rights,
Floor Access and Premium Product Fees, at https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf.
\29\ See id.
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In the each of the above cases, the Exchange's highest tiered fee,
as proposed, is similar to or less than the similar access/membership
fees of competing options exchanges with like market share. Further, as
described in more detail below, many of those exchanges generate higher
overall operating profit margins and higher ``access fees'' than the
Exchange, inclusive of the projected revenues associated with the
proposed fees. The Exchange believes that it provides a premium network
experience 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 access fees. Each of the access fee 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 (or similar) trading permit
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 or membership fees. For
example, in 2012, NYSE American adopted the sliding scale pricing that
ranges from $8,000 to $3,000 per month for NYSE American trading
permits.\30\ In that filing, NYSE American also noted that prior to
introducing the sliding scale pricing, each NYSE American market maker
was charged $5,000 per month per trading permit (similar to the
Exchange's proposed highest tier for MEO interface users, nearly a
decade later).\31\ NYSE American received no comment letters on their
proposal to institute trading permit fees that were higher 8 years ago
as compared to the Exchange's current proposal. Similarly, C2 adopted
the pricing for its access permits in 2010 of $5,000 per month for
market makers and $1,000 per month for electronic access members.\32\
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\30\ See Securities Exchange Act Release No. 67634 (August 9,
2012), 77 FR 49038 (August 15, 2012) (SR-NYSEMKT-2012-33).
\31\ See id.
\32\ See Securities Exchange Act Release No. 63175 (October 25,
2010), 75 FR 66813 (October 29, 2010) (SR-C2-2010-006).
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their access to an exchange (or not
initially access an exchange) if an exchange were to establish prices
for its non-transaction fees that, in the determination of such market
participant, did not make business or economic sense for such market
participant to access such exchange. No options market participant is
required by rule, regulation, or competitive forces to be a Member of
the Exchange. As evidence of the fact that market participants can and
do drop their access to exchanges based on non-transaction fee pricing,
R2G Services LLC (``R2G'') filed a comment letter after BOX's proposed
rule changes to increase its connectivity fees (SR-BOX-2018-24, SR-BOX-
2018-37, and SR-BOX-2019-04). The R2G Letter stated, ``[w]hen BOX
instituted a $10,000/month price increase for connectivity; we had no
choice but to terminate connectivity into them as well as terminate our
market data relationship. The cost benefit analysis just didn't make
any sense for us at those new levels.'' Similarly, the Exchange's
affiliate, MIAX Emerald, noted in a recent filing that once MIAX
Emerald issued a notice that it was instituting Trading Permit fees,
among other non-transaction fees, one Member dropped its access to the
Exchange as a result of those fees.\33\ 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.
---------------------------------------------------------------------------
\33\ See supra note 22.
---------------------------------------------------------------------------
The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the Proposed Access Fees will not result in
excessive pricing or supra-competitive profit. The Proposed Access Fees
are also reasonable and equitable because they are in line with, or
cheaper than, the trading permit fees or similar membership fees
charged by other options exchanges.\34\ The costs associated with
providing access to Exchange Members and non-Members, as well as the
general expansion of a state-of-the-art infrastructure, are extensive,
have increased year-over-year, and are projected to increase year-over-
year in the future.
---------------------------------------------------------------------------
\34\ See supra notes 26, 27 and 28.
---------------------------------------------------------------------------
The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 10.7 million
order messages per second. On an average day, the Exchange handles over
approximately 2.7 billion total messages. However, in order to achieve
a consistent, premium network performance, the Exchange must build out
and maintain a network that has the capacity to handle the message rate
requirements of its most heavy network
[[Page 64259]]
consumers. These billions of messages per day consume the Exchange's
resources and significantly contribute to the overall expense for
storage and network transport capabilities.
In order to provide more detail and to quantify the Exchange's
costs associated with providing access to the Exchange in general, the
Exchange notes that there are material costs associated with providing
the infrastructure and headcount to fully-support access to the
Exchange. The Exchange incurs technology expense related to
establishing and maintaining Information Security services, enhanced
network monitoring and customer reporting, as well as Regulation SCI
mandated processes, associated with its network technology. While some
of the expense is fixed, much of the expense is not fixed, and thus
increases as the services associated with the Proposed Access Fees
increase. For example, new Members to the Exchange may require the
purchase of additional hardware to support those Members as well as
enhanced monitoring and reporting of customer performance that the
Exchange and its affiliates provide. Further, as the total number of
Members increases, the Exchange and its affiliates may need to increase
their data center footprint and consume more power, resulting in
increased costs charged by their third-party data center provider.
Accordingly, the cost to the Exchange and its affiliates to provide
access to its Members is not fixed. The Exchange believes the Proposed
Access Fees are reasonable in order to offset a portion of the costs to
the Exchange associated with providing access to its network
infrastructure.
The Exchange only has four primary sources of revenue: transaction
fees, access fees (which includes the Proposed Access Fees), regulatory
fees, and market data fees. Accordingly, the Exchange must cover all of
its expenses from these four primary sources of revenue.
The Exchange believes that the Proposed Access Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the
Exchange projects to incur in connection with providing these access
services versus the total annual revenue that the Exchange projects to
collect in connection with services associated with the Proposed Access
Fees. For 2021,\35\ the total annual expense for providing the access
services associated with the Proposed Access Fees for the Exchange is
projected to be approximately $844,741. The $844,741 in projected total
annual expense is comprised of the following, all of which are directly
related to the access services associated with the Proposed Access
Fees: (1) Third-party expense, relating to fees paid by the Exchange to
third-parties for certain products and services; and (2) internal
expense, relating to the internal costs of the Exchange to provide the
services associated with the Proposed Access Fees.\36\ 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.\37\ The
$844,741 in projected total annual expense is directly related to the
access services associated with the Proposed Access Fees, and not any
other product or service offered by the Exchange. It does not include
general costs of operating matching systems and other trading
technology, and no expense amount was allocated twice.
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\35\ The Exchange has not yet finalized its 2021 year end
results.
\36\ 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.
\37\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020)
(SR-PEARL-2019-36). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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As discussed, the Exchange conducted an extensive cost review in
which the Exchange analyzed nearly every expense item in the Exchange's
general expense ledger (this includes over 150 separate and distinct
expense items) to determine whether each such expense relates to the
access services associated with the Proposed Access Fees, and, if such
expense did so relate, what portion (or percentage) of such expense
actually supports those services, and thus bears a relationship that
is, ``in nature and closeness,'' directly related to those services.
The sum of all such portions of expenses represents the total cost of
the Exchange to provide access services associated with the Proposed
Access Fees.
For 2021, total third-party expense, relating to fees paid by the
Exchange to third-parties for certain products and services for the
Exchange to be able to provide the access services associated with the
Proposed Access Fees, is projected to be $188,815. This includes, but
is not limited to, a portion of the fees paid to: (1) Equinix, for data
center services, for the primary, secondary, and disaster recovery
locations of the Exchange's trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking the Exchange's office
locations in Princeton, New Jersey and Miami, Florida, to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\38\ which supports connectivity and feeds for the entire
U.S. options industry; (4) various other services providers (including
Thompson Reuters, NYSE, Nasdaq, and Internap), which provide content,
connectivity services, and infrastructure services for critical
components of options connectivity and network services; and (5)
various other hardware and software providers (including Dell and
Cisco, which support the production environment in which Members
connect to the network to trade, receive market data, etc.).
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\38\ In fact, on October 20, 2021, ICE Data Services announced a
3.5% price increase effective January 1, 2022 for most services. The
price increase by ICE Data Services includes their SFTI network,
which is relied on by a majority of market participants, including
the Exchange. See email from ICE Data Services to the Exchange,
dated October 20, 2021. This fee increase by ICE data services,
while not subject to Commission review, has a material impact on
costs to exchanges and other market participants that provide
downstream access to other market participants. The Exchange notes
that on October 22, 2019, the Exchange was notified by ICE Data
Services that it was raising its fees charged to the Exchange by
approximately 11% for the SFTI network, without having to show that
such fee change complies with the Act by being reasonable, equitably
allocated, and not unfairly discriminatory. It is unfathomable to
the Exchange that, given the critical nature of the infrastructure
services provided by SFTI, that its fees are not required to be
rule-filed with the Commission pursuant to Section 19(b)(1) of the
Act and Rule 19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4, respectively.
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For clarity, only a portion of all fees paid to such third-parties
is included in the third-party expense herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
information technology and communication costs to the access services
associated with the Proposed Access Fees. Further, the Exchange notes
that, with respect to the MIAX Pearl expenses included herein, those
expenses only cover the MIAX Pearl options market; expenses associated
with the MIAX Pearl equities market are accounted for separately and
are not included within the scope of this
[[Page 64260]]
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 believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the access
services associated with the Proposed Access Fees to its Members and
their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only that portion which the Exchange
identified as being specifically mapped to providing the access
services associated with the Proposed Access Fees, approximately 8% of
the total applicable Equinix expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees, and not any other service, as supported by its cost review.\39\
---------------------------------------------------------------------------
\39\ 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 and MIAX Emerald, as well as the
data center and disaster recovery locations. As such, all of the trade
data, including the billions of messages each day per exchange, flow
through Zayo's infrastructure over the Exchange's network. Without
these services from Zayo, the Exchange would not be able to operate and
support the network and provide the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to providing the Proposed
Access Fees, approximately 4% of the total applicable Zayo expense. The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to provide the access services associated
with the Proposed Access Fees, and not any other service, as supported
by its cost review.\40\
---------------------------------------------------------------------------
\40\ Id.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees, approximately 3% of the total applicable SFTI
and other service providers' expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees.\41\
---------------------------------------------------------------------------
\41\ 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 5% of the total applicable
hardware and software provider expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the access services associated with the Proposed Access
Fees.\42\
---------------------------------------------------------------------------
\42\ 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 $655,925.
This includes, but is not limited to, costs associated with: (1)
Employee compensation and benefits for full-time employees that support
the access services associated with the Proposed Access Fees, including
staff in network operations, trading operations, development, system
operations, business, as well as staff in general corporate departments
(such as legal, regulatory, and finance) that support those employees
and functions; (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.
[[Page 64261]]
The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange's employee compensation and benefits
expense relating to providing the access services associated with the
Proposed Access Fees is projected to be $549,834, which is only a
portion of the $9,163,894 total projected expense for employee
compensation and benefits. The Exchange believes it is reasonable to
allocate the identified portion of such expense because this includes
the time spent by employees of several departments, including
Technology, Back Office, Systems Operations, Networking, Business
Strategy Development (who create the business requirement documents
that the Technology staff use to develop network features and
enhancements), Trade Operations, Finance (who provide billing and
accounting services relating to the network), and Legal (who provide
legal services relating to the network, such as rule filings and
various license agreements and other contracts). As part of the
extensive cost review conducted by the Exchange, the Exchange reviewed
the amount of time spent by each employee on matters relating to the
provision of access services associated with the Proposed Access Fees.
Without these employees, the Exchange would not be able to provide the
access services associated with the Proposed Access Fees to its Members
and their customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of the access
services associated with the Proposed Access Fees, only the portions
which the Exchange identified as being specifically mapped to providing
the access services associated with the Proposed Access Fees,
approximately 6% of the total applicable employee compensation and
benefits expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide the access
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.\43\
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\43\ Id.
---------------------------------------------------------------------------
The Exchange's depreciation and amortization expense relating to
providing the access services associated with the Proposed Access Fees
is projected to be $66,316, which is only a portion of the $1,326,325
total projected expense for depreciation and amortization. The Exchange
believes it is reasonable to allocate the identified portion of such
expense because such expense includes the actual cost of the computer
equipment, such as dedicated servers, computers, laptops, monitors,
information security appliances and storage, and network switching
infrastructure equipment, including switches and taps that were
purchased to operate and support the network and provide the access
services associated with the Proposed Access Fees. Without this
equipment, the Exchange would not be able to operate the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portion which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees,
approximately 5% of the total applicable depreciation and amortization
expense, as these access services would not be possible without relying
on such. The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the access services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.\44\
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\44\ Id.
---------------------------------------------------------------------------
The Exchange's occupancy expense relating to providing the access
services associated with the Proposed Access Fees is projected to be
$39,775, which is only a portion of the $497,180 total projected
expense for occupancy. The Exchange believes it is reasonable to
allocate the identified portion of such expense because such expense
represents the portion of the Exchange's cost to rent and maintain a
physical location for the Exchange's staff who operate and support the
network, including providing the access services associated with the
Proposed Access Fees. This amount consists primarily of rent for the
Exchange's Princeton, New Jersey office, as well as various related
costs, such as physical security, property management fees, property
taxes, and utilities. The Exchange operates its Network Operations
Center (``NOC'') and Security Operations Center (``SOC'') from its
Princeton, New Jersey office location. A centralized office space is
required to house the staff that operates and supports the network. The
Exchange currently has approximately 150 employees. Approximately two-
thirds of the Exchange's staff are in the Technology department, and
the majority of those staff have some role in the operation and
performance of the access services associated with the proposed Trading
Permit fees. Without this office space, the Exchange would not be able
to operate and support the network and provide the access services
associated with the Proposed Access Fees to its Members and their
customers. Accordingly, the Exchange believes it is reasonable to
allocate the identified portion of its occupancy expense because such
amount represents the Exchange's actual cost to house the equipment and
personnel who operate and support the Exchange's network infrastructure
and the access services associated with the Proposed Access Fees. The
Exchange did not allocate all of the occupancy expense toward the cost
of providing the access services associated with the Proposed Access
Fees, only the portion which the Exchange identified as being
specifically mapped to operating and supporting the network,
approximately 8% of the total applicable occupancy expense. The
Exchange believes this allocation is reasonable because it represents
the Exchange's cost to provide the access services associated with the
Proposed Access Fees, and not any other service, as supported by its
cost review.\45\
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\45\ Id.
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The Exchange notes that a material portion of its total overall
expense is allocated to the provision of access services (including
connectivity, ports, and trading permits). The Exchange believes this
is reasonable and in line, as the Exchange operates a technology-based
business that differentiates itself from its competitors based on its
trading systems that rely on access to a high performance network,
resulting in significant technology expense. Over two-thirds of
Exchange staff are technology-related employees. The majority of the
Exchange's expense is technology-based. As described above, the
Exchange has only four primary sources of fees to recover its costs,
thus the Exchange believes it is reasonable to allocate a material
portion of its total overall expense towards access fees.
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the access services associated
with the Proposed Access Fees will not result in excessive pricing or
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that its annualized revenue for
providing the access services associated with the Proposed Access Fees
would
[[Page 64262]]
be approximately $1,170,000 per annum, based on a recent billing cycle.
The Exchange projects that its annualized expense for providing the
access services associated with the Proposed Access Fees would be
approximately $844,741 per annum. Accordingly, on a fully-annualized
basis, the Exchange believes its total projected revenue for providing
the access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit, as the
Exchange will make only a 28% profit margin on the Proposed Access Fees
($1,170,000 in revenue minus $844,741 in expense = $325,259 profit per
annum). The Exchange notes that the fees charged for Trading Permits
can vary from month to month depending on the type of interface used
and the Non-Transaction Fees Volume-Based Tier that is achieved for
that month. As such, the revenue projection is not a static number,
with monthly Trading Permit fees likely to fluctuate month to month.
For the avoidance of doubt, none of the expenses included herein
relating to the access services associated with the Proposed Access
Fees relate to the provision of any other services offered by the
Exchange. Stated differently, no expense amount of the Exchange is
allocated twice. The Exchange notes that, with respect to the MIAX
Pearl expenses included herein, those expenses only cover the MIAX
Pearl options market; expenses associated with the MIAX Pearl equities
market and the Exchange's affiliate exchanges, MIAX and MIAX Emerald,
are accounted for separately and are not included within the scope of
this filing. Stated differently, no expense amount of the Exchange is
also allocated to MIAX Pearl Equities, MIAX or MIAX Emerald.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the access
services associated with the Proposed Access Fees because the Exchange
performed a line-by-line item analysis of 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 Exchange's costs of providing
access to Exchange Systems. Accordingly, the Exchange believes that the
Proposed Access Fees are fair and reasonable because they do not result
in excessive pricing or supra-competitive profit, when comparing the
actual costs to the Exchange versus the projected annual revenue from
the Proposed Access Fees.
The Exchange believes the proposed changes are reasonable,
equitably allocated and not unfairly discriminatory, and do not result
in a ``supra-competitive'' \46\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\47\ With the proposed changes,
the Exchange anticipates that its profit margin will be approximately
28%, inclusive of the Proposed Access Fees. 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 resources, network consumers, and Members that use the
MEO and FIX interfaces, which generate billions of messages per day
across the Exchange.\48\ 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 access, and
continue to offer enhanced customer reporting and monitoring services.
---------------------------------------------------------------------------
\46\ See supra note 24.
\47\ See id.
\48\ Over the period from April 2021 until September 2021, the
Exchange processed 3.15 billion messages via the FIX interface
(0.43% of total messages received). Over that same time period, the
Exchange processed 731.4 billion messages (99.57% of total messages
received) over the MEO interface. This marked difference between the
number of FIX and MEO messages processed, when mapped to servers,
software, storage, and networking results in a much higher
allocation of total capital and operational expense to support the
MEO interface. For one, the Exchange incurs greater expense in
maintaining the resilience of the MEO interface to ensure its
ongoing operation in accordance with Regulation SCI. Another, the
Exchange must purchase and expand its storage capacity to retain
these increased messages in compliance with its record keeping
obligations. The Exchange has also seen significant inflationary
pressure on capital items that it needs to purchase to maintain its
technology. The Exchange has seen pricing increases upwards of 30%
on network equipment due to supply chain shortages.
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While the proposed fees are similar to or less than that of other
options exchanges,\49\ as discussed above, the incremental increase in
revenue generated from the 28% profit margin for trading permits will
allow the Exchange to further invest in its system architecture and
matching engine functionality to the benefit of all market
participants. 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.
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\49\ See supra notes 26, 27 and 28.
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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 revenue from
``access fees'' \50\ for 2020 for MIAX Pearl was $11,422,000. MIAX
Pearl projects that the total revenue from ``access fees'' for will be
$20,001,243, inclusive of the Proposed Access Fees described herein.
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\50\ As described in MIAX Pearl'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 Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000460.pdf.
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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'' \51\ revenue for 2020. Cboe C2 Exchange, Inc. (``C2'') reported
$19,016,000 in ``access and capacity fee'' revenue for 2020.\52\ Cboe
BZX Exchange, Inc. (``BZX'') reported $38,387,000 in ``access and
capacity
[[Page 64263]]
fee'' revenue for 2020.\53\ Cboe EDGX Exchange, Inc. (``EDGX'')
reported $26,126,000 in ``access and capacity fee'' revenue for
2020.\54\ Nasdaq PHLX LLC (``PHLX'') reported $20,817,000 in ``Trade
Management Services'' revenue for 2019.\55\ 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.'' \56\
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\51\ 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.
\52\ See id.
\53\ See id.
\54\ See id.
\55\ 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.
\56\ See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
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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 Pearl was -18%. 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%; NYSE American'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%. ISE's operating profit margin, for all of 2019, was
83%.\57\ ISE's equity options market share for all of 2019 was 8.99%
\58\ while its access fees are as follows: $500 per month for
Electronic Access Members; $5,000 per month for Primary Market Makers;
and $2,500 per month for Competitive Market Makers.\59\ PHLX's
operating profit margin, for all of 2019, was 67%.\60\ PHLX's equity
options market share for all of 2019 was 15.85% \61\ while its permit
fees are as follows: $4,000 per month for Floor Brokers; $6,000 per
month for Floor Lead Market Makers and Floor Market Makers; and $4,000
per month for Remote Lead Market Makers and Remote Market Makers.\62\
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\57\ See PHLX Form 1, Exhibit D, filed June 30, 2020 available
at https://sec.report/Document/9999999997-20-003902/.
\58\ See https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange.
\59\ See Nasdaq ISE LLC Options 7 Pricing Schedule, Section 8.A.
Access Services, at https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207.
\60\ See ISE Form 1, filed June 29, 2020 available at Form 1 -
ISE - Final (1).pdf (sec.gov).
\61\ See supra note 58.
\62\ See Nasdaq PHLX Options 7 Pricing Schedule, Section 8.A.
Permit and Registration Fees, at https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Options%207.
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In the Initial Proposed Fee Change,\63\ the Exchange compared
projected profit margins to the 2019 operating profit margin of ISE and
PHLX, which were 83% and 67% respectively. The SIG Letter \64\
contained the opinion that a using the overall operating profit margins
of ISE and PHLX was an ``apple to oranges'' comparison because 2019 was
a ``record setting year.'' \65\ The SIG Letter's argument assumes that
because 2019 was a record setting year for options volumes, that each
options exchange generated above average profits without provided any
evidence to support this assumption. The Exchange sought to provide
additional data to support a 28% profit margin based on the best, most
recent data available. The Exchange did not provide this data to do an
``apple-to-apples'' comparison, but rather to provide insight into the
profit margins of other exchanges to put the projected profit margin,
inclusive of the proposed fees, into perspective. While the Exchange
provided a detailed analysis and disclosure of its projected profit
margins in this proposed fee change and the Initial Proposed Fee
Change, other exchanges are generally not required to disclose profit
margins on a more granular, per-product/non-transaction fee basis
within their annual Form 1 filings. The Exchange, therefore, used the
best, most recent data available to generate percentages of other
exchange's profit margins.
---------------------------------------------------------------------------
\63\ See Securities Exchange Act Release No. 92366 (July 9,
2021), 86 FR 37379 (SR-PEARL-2021-32) (``Initial Proposed Fee
Change'').
\64\ See letter from Richard J. McDonald, Susquehanna
International Group, LLP (``SIG'') to Vanessa Countryman, Secretary,
Commission, dated September 28, 2021 (``SIG Letter'').
\65\ See id.
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The Exchange further believes its proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange, and its affiliates, are still recouping the initial
expenditures from building out their systems while the legacy exchanges
have already paid for and built their systems.
The Exchange believes that the Proposed Access Fees are reasonable,
equitable and not unfairly discriminatory because they are in line
with, or cheaper than, the trading permit fees or similar membership
fees charged by other options exchanges.\66\
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\66\ See supra notes 26, 27 and 28.
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Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive. In such an environment, the Exchange must continually adjust
its fees for services and products, in addition to order flow, to
remain competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.
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.\67\ 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.\68\ 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.\69\
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\67\ 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.
\68\ 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.
\69\ Id.
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[[Page 64264]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the Proposed Access Fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the fee rates are designed in order to
provide objective criteria for users that connect via the MEO Interface
of different sizes and business models that best matches their activity
on the Exchange.
The Exchange believes the removal of the Monthly Volume Credit and
Trading Permit fee credit will not place certain market participants at
a relative disadvantage to other market participants because, in order
to attract order flow when the Exchange first launched operations, the
Exchange established these credits to lower the initial fixed cost for
Members. The Exchange now believes that it is appropriate to remove
this credit in light of the current operating conditions, including the
Exchange's overall membership and the current type and amount of volume
executed on the Exchange. The Exchange believes that the Exchange's
rebates and fees will still allow the Exchange to remain highly
competitive such that the Exchange should continue to attract order
flow and maintain market share.
Inter-Market Competition
The Exchange believes the Proposed Access Fees do not place an
undue burden on competition on other options exchanges that is not
necessary or appropriate. In particular, options market participants
are not forced to become members of all options exchanges. The Exchange
notes that it has far less Members as compared to the much greater
number of members at other options exchanges. There are a number of
large users that connect via the MEO Interface and broker-dealers that
are members of other options exchange but not Members of the Exchange.
The Exchange is also unaware of any assertion that its existing fee
levels or the Proposed Access Fees would somehow unduly impair its
competition with other options exchanges. To the contrary, if the fees
charged are deemed too high by market participants, they can simply
discontinue their membership with the Exchange.
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than approximately 16% market
share. Therefore, no exchange possesses significant pricing power in
the execution of multiply-listed equity and ETF options order flow.
Over the course of 2021, the Exchange's market share has fluctuated
between approximately 3-6% of the U.S. equity options industry.\70\ The
Exchange is not aware of any evidence that a market share of
approximately 3-6% provides the Exchange with anti-competitive pricing
power. The Exchange believes that the ever-shifting market share among
exchanges from month to month demonstrates that market participants can
discontinue or reduce use of certain categories of products, or shift
order flow, in response to fee changes. In such an environment, the
Exchange must continually adjust its fees to remain competitive with
other exchanges and to attract order flow to the Exchange.
---------------------------------------------------------------------------
\70\ See ``The market at a glance'', available at
www.miaxoptions.com (last visited October 19, 2021).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange initially filed this proposed fee change on July 1,
2021 and that proposal was published in the Federal Register on July
15, 2021.\71\ The Commission received one comment letter on the Initial
Proposed Fee Change.\72\ The Exchange withdrew Initial Proposed Fee
Change on October 12, 2021.\73\ The Exchange now responds to the SIG
Letter in this filing.
---------------------------------------------------------------------------
\71\ See supra note 63.
\72\ See supra note 64.
\73\ See Securities Exchange Act Release No. 93346 (October 15,
2021), 86 FR 58367 (October 21, 2021) (SR-PEARL-2021-32) (Notice of
Withdrawal of a Proposed Rule Change to Amend the MIAX Pearl Options
Fee Schedule to Remove Certain Credits and Increase Trading Permit
Fees).
---------------------------------------------------------------------------
The SIG letter cites Rule 700(b)(3) of the Commission's Rules of
Fair Practice which places ``the burden to demonstrate that a proposed
rule change is consistent with the Act on the self-regulatory
organization that proposed the rule change'' and states that a ``mere
assertion that the proposed rule change is consistent with those
requirements . . . is not sufficient.'' \74\ The SIG Letter's assertion
that the Exchange has not met this burden is without merit, especially
considering the overwhelming amounts of revenue and cost information
the Exchange included in the Initial Proposed Fee Change and this
filing.
---------------------------------------------------------------------------
\74\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
Until recently, the Exchange has operated at a net annual loss
since it launched operations in 2017.\75\ As stated above, 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 believes it has achieved this
standard in this filing and also in the Initial Proposed Fee Change. A
similar justification for the proposed fee change included in the
Initial Proposed Fee Change, but also in this filing, was previously
included in a similar proposed fee change filed by the Exchange's
affiliate, MIAX Emerald, and SIG did not submit a comment letter on
that filing.\76\ Nor was that filing suspended by the Commission and
continues to remain in effect. The Exchange and its affiliates have
worked diligently with Commission Staff on ensuring the justification
included in past fee filings fully supported an assertion that those
proposed fee changes were consistent with the Act.\77\
[[Page 64265]]
The Exchange leveraged its past work with Commission Staff to ensure
the justification provided herein and in the Initial Proposed Fee
Change included the same level of detail (or more) as those past
proposed fee changes that previously survived Commission scrutiny.
Further, as stated above, the Exchange notes that the justification and
process included in this filing and the Initial Proposed Fee Change was
utilized by the Exchange's affiliate, MIAX Emerald, in a filing to
adopt Trading Permit fees for MIAX Emerald, which filing was recently
noticed by the Commission and remains in effect.\78\ Therefore, a
finding by the Commission that the Exchange has not met its burden to
show that the proposed fee change is consistent with the Act would be
different than the Commission's treatment of similar past filings,
would create further ambiguity regarding the standards exchange fee
changes should satisfy, and is not warranted here.
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\75\ The Exchange has incurred a cumulative loss of $86 million
since its inception in 2017 to 2020, the last year for which the
Exchange's Form 1 data is available. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed July 29, 2021, available at
https://sec.report/Document/9999999997-21-004367/.
\76\ See Securities Exchange Act Release No. 91033 (February 1,
2021), 86 FR 8455 (February 5, 2021) (SR-EMERALD-2021-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Amend Its Fee Schedule To Adopt Monthly Trading Permit Fees).
\77\ See, e.g., Securities Exchange Act Release No. 90196
(October 15, 2020), 85 FR 67064 (October 21, 2020) (SR-EMERALD-2020-
11) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt One-Time Membership
Application Fees and Monthly Trading Permit Fees). See Securities
Exchange Act Release Nos. 90601 (December 8, 2020), 85 FR 80864
(December 14, 2020) (SR-EMERALD-2020-18) (re-filing with more detail
added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-11); and 91033 (February 1, 2021), 86 FR
8455 (February 5, 2021) (SR-EMERALD-2021-03) (re-filing with more
detail added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-18). The Exchange initially filed a
proposal to remove the cap on the number of additional Limited
Service MEO Ports available to Members on April 9, 2021. See SR-
PEARL-2021-17 (the ``First Proposed Rule Change''). On April 22,
2021, the Exchange withdrew the First Proposed Rule Change and
refiled that proposal (without increasing the actual fee amounts) to
provide further clarification regarding the Exchange's revenues,
costs, and profitability any time more Limited Service MEO Ports
become available, in general, (including information regarding the
Exchange's methodology for determining the costs and revenues for
additional Limited Service MEO Ports). See SR-PEARL-2021-20 (the
``Second Proposed Rule Change''). On May 3, 2021, the Exchange
withdrew the Second Proposed Rule Change and refiled that proposal
to further clarify its cost methodology. See SR-PEARL-2021-22 (the
``Third Proposed Rule Change''). On May 10, 2021, the Exchange
withdrew the Third Proposed Rule Change and refiled SR-PEARL-2021-
23. See Securities Exchange Act Release No. 91858 (May 12, 2021), 86
FR 26967 (May 18, 2021).
\78\ See supra note 76.
---------------------------------------------------------------------------
In addition, the arguments in the SIG Letter do not support their
claim that the Exchange has not met its burden to show the proposed
rule change is consistent with the Act. Prior to and after submitting
the Initial Proposed Fee Change, the Exchange solicited feedback from
its Members, including SIG. SIG relayed their concerns regarding the
proposed change. The Exchange then sought to work with SIG to address
their concerns and gain a better understanding of the access/
connectivity/quoting infrastructure of other exchanges. In response,
SIG provided no substantive suggestions on how to amend the Initial
Proposed to address their concerns and instead chose to submit a
comment letter. One could argue that SIG is using the comment letter
process not to raise legitimate regulatory concerns regarding the
proposal, but to inhibit or delay proposed fee changes by the Exchange.
Nonetheless, the Exchange submits the below response to the SIG Letter.
MIAX Pearl Provided More Than Sufficient Justification for the Proposed
Fees
The SIG Letter asserts that the Exchange provided ``no affirmative
justifiable reason that its legacy fees are no longer sufficient.''
\79\ This statement assumes that the previous fees were ``sufficient''
and does not state how the legacy fees might have been sufficient to
cover the Exchange's expenses. To clarify, the previous fees were not
sufficient to cover the costs the Exchange incurred in providing access
to the Exchange. However, the previous fees were sufficient to attract
order flow as the pricing was set to not discourage participation on
the Exchange. The Exchange is relatively new as it only began
operations in 2017.\80\ Like other new exchange entrants, the Exchange
chose to charge lower fees than other more established exchanges to
attract order flow and increase membership.\81\ The Exchange chose that
approach by setting the price of its Trading Permits (as well as other
access-type fees) below market rates. SIG's statement assumes that
exchanges should charge at market rates that are sufficient to cover
its costs. This statement ignores pricing incentives exchanges may
offer to attract order flow and that exchanges, like many businesses
including SIG, may make a business decision to price certain offerings
at a loss or ``on sale'' as they build their business. Further, a vast
majority of the Exchange's Members, if not all, benefited from these
lower fees.
---------------------------------------------------------------------------
\79\ See SIG Letter at page 3, supra note 64.
\80\ See ``Miami International Holdings Receives Approval from
SEC to Launch MIAX PEARL; Targets February 6, 2017 Launch''
(December 14, 2016) available at https://www.miaxoptions.com/sites/default/files/press_release-files/MIAX_Press_Release_12142016.pdf
(last visited October 18, 2021) (stating that the Exchange ``plans
to launch with an initial moratorium on most non-transaction
fees.'')
\81\ See, e.g., ``Members Exchange Unveils Transaction Pricing''
(September 10, 2020), available at https://www.businesswire.com/news/home/20200910005183/en/Members-Exchange-Unveils-Transaction-Pricing (last visited October 18, 2021) (quoting Jonathan Kellner,
CEO of Members Exchange, ``[t]o further incentivize participants to
connect to a new destination, we are implementing initial pricing
that generates a net loss for the exchange on each transaction. We
are confident that as participants experience the benefits of our
platform, they will continue to incorporate MEMX in their routing
strategies.''); and ``Miami International Holdings Announces Fully
Subscribed Strategic Equity Rights Transaction with Leading Equities
Firms to Trade on MIAX PEARL Equities Trading to Begin September 25,
2020'' available at https://www.miaxoptions.com/sites/default/files/press_release-files/Press_Release_09142020.pdf (last visited October
18, 2021) (quoting Douglas M. Schafer, Jr., Executive Vice President
and Chief Information Officer of MIH, MIAX PEARL Equities, ``[w]e
are excited to be offering a simpler, transparent, low cost venue to
market participants and have no doubt that MIAX PEARL Equities will
become a competitive alternative venue following our launch on
September 25th.'')
---------------------------------------------------------------------------
As a new entrant in the market, the Exchange chose to forgo any
potential additional revenue that may have been generated by higher
Trading Permit fees to encourage participation on the new platform.
This served to attract participation on the Exchange so market
participants could evaluate the Exchange's quality, technology and the
quality of their overall customer/user experience. Setting higher rates
for non-transaction fees could have served to dissuade market
participants from trading on the Exchange and not experiencing the high
quality technological system the Exchange built.
Nonetheless, the Exchange provided significant cost based
justification for the proposed fees not only in this filing, but also
in the Initial Proposed Fee Change. The SIG Letter conveniently ignores
this fact. In fact, the level of disclosure by the Exchange provided in
this filing and the Initial Proposed Fee Change has been worked on with
Commission Staff over numerous past filings that have been published
for comment and remain effect.\82\ The Exchange's detailed disclosures
in fee filings have also been applauded by one industry group which
noted, ``[the Exchange's] filings contain significantly greater
information about who is impacted and how than other filings that have
been permitted to take effect without suspension.'' \83\ That same
commenter also noted their ``worry that the Commission's process for
reviewing and evaluating exchange filings may be inconsistently
applied.'' \84\
---------------------------------------------------------------------------
\82\ See supra note 77.
\83\ See letter from Tyler Gellasch, Executive Director, Healthy
Markets Association, to Hon. Gary Gensler, Chair, Commission, dated
October 29, 2021.
\84\ Id. (providing examples where non-transaction fee filings
by other exchanges have been permitted to remain effective and not
suspended by the Commission despite less disclosure and
justification).
---------------------------------------------------------------------------
The Exchange believes the proposed fees will allow the Exchange to
offset expenses the Exchange has and will incur, and that the Exchange
provided sufficient transparency into how the Exchange determined to
charge such fees. Accordingly, the Exchange provided an analysis of its
revenues, costs, and profitability associated with
[[Page 64266]]
the proposed fees. This analysis included information regarding its
methodology for determining the costs and revenues associated with the
proposal.
To determine the Exchange's costs to provide the access services
associated with the proposed 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 fees, and, if such expense did so
relate, what portion (or percentage) of such expense actually supports
the access services. The sum of all such portions of expenses
represents the total cost of the Exchange to provide the access
services associated with the proposed fees.
Furthermore, the Exchange is beginning to see significant
inflationary pressure on capital items that it needs to purchase to
maintain the Exchange's technology and systems.\85\ The Exchange has
seen pricing increases upwards of 30% on network equipment due to
supply chain shortages. This, in turn, results in higher overall costs
for ongoing system maintenance, but also to purchase the items
necessary to ensure ongoing system resiliency, performance, and
determinism. These costs are expected to continue to go up as the U.S.
economy continues to struggle with supply chain and inflation related
issues.
---------------------------------------------------------------------------
\85\ See ``Supply chain chaos is already hitting global growth.
And it's about to get worse'', by Holly Ellyatt, CNBC, available at
https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html (October 18, 2021); and
``There will be things that people can't get, at Christmas, White
House warns'' by Jarrett Renshaw and Trevor Hunnicutt, Reuters,
available at https://www.reuters.com/world/us/americans-may-not-get-some-christmas-treats-white-house-officials-warn-2021-10-12/
(October 12, 2021).
---------------------------------------------------------------------------
The Proposed Fee Increases Are Not Part of a Discriminatory Fee
Structure and Tiered Fee Structures Are Commonplace Amongst Exchanges
The SIG Letter correctly notes that the proposed Trading Permit
fees are higher for Members who connect through the MEO Interface than
for Members who connect through the FIX Interface. Members who use the
MEO Interface may also connect to the System through the FIX Interface
as well, and vice versa. The Exchange notes that the Trading Permit
fees for Members who connect through the MEO Interface are higher than
the Trading Permit fees for Members who connect through the FIX
Interface, since the FIX Interface utilizes less capacity and resources
of the Exchange. The MEO Interface offers lower latency and higher
throughput, which utilizes greater capacity and resources of the
Exchange. The FIX Interface offers lower bandwidth requirements and an
industry-wide uniform message format. Both EEMs and Market Makers may
connect to the Exchange using either interface.
The SIG Letter asserts that the Exchange ``provides no description
of the `capacity and resources' being utilized, and no information on
the nature or extent of the disparity in such utilization between the
two Interface types.'' As a MEO user, SIG is uniquely positioned to
understand and appreciate the differences between the MEO and FIX
interfaces and why rates for the MEO interface are justifiably higher.
Nonetheless, the Exchange is providing the below additional data to
address the statements made in the SIG Letter.
Orders on the Exchange are supplied by Members via two different
interfaces, FIX and MEO. MEO is the Exchange's proprietary binary order
interface. Over the period from April 2021 until September 2021, 3.15
billion messages were processed via the FIX interface (0.43% of total
messages received). Over that same time period, 731.4 billion messages
(99.57% of total messages received) were processed over the MEO
interface. Also, the MEO interface allows for mass purging of orders
which has a significant impact on the number of messages processed.
This marked difference between the number of FIX and MEO messages
processed, when mapped to servers, software, storage, and networking
results in a much higher allocation of total capital and operational
expense to support the MEO interface. For one, the Exchange incurs
greater expense in maintaining the resilience of the MEO interface to
ensure its ongoing operation in accordance with Regulation SCI.
Another, the Exchange must purchase and expand its storage capacity to
retain these increased messages in compliance with its record keeping
obligations. As noted above, the Exchange has seen significant
inflationary pressure on capital items that it needs to purchase to
maintain its technology.\86\ The Exchange has seen pricing increases
upwards of 30% on network equipment due to supply chain shortages.
---------------------------------------------------------------------------
\86\ See id.
---------------------------------------------------------------------------
SIG is also uniquely positioned to know that the fee structure
utilized by the Exchange, which charges different Trading Permit fees
for MEO interface users than FIX interface users is not a new proposal.
In fact, it was first adopted by the Exchange over 3\1/2\ years ago in
March 2018, published by the Commission and received no comment
letters, not even by SIG.\87\ SIG claims a fee structure that they have
been subject to for years as an MEO interface user is just now unfairly
discriminatory.
---------------------------------------------------------------------------
\87\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------
The Proposed Fees Are in Line With, or Cheaper Than, the Trading Permit
Fees or Similar Membership/Access Fees Charged by Other Options
Exchanges
The Exchange correctly asserts herein and in the Initial Proposed
Fee Change that it's proposed Trading Permit fees ``are in line with,
or cheaper than, the trading permit fees or similar membership fees
charged by other options exchanges.'' The SIG letter challenges this
assertion is an ``apples to oranges'' comparison because NYSE American
and NYSE Arca based their rates on the number of options issued to the
member and not trading volume, like the exchange does. In fact, the
number of options traded by a member of NYSE American or NYSE Arca is
an appropriate proxy for trading volume as the more options issued to
the member would result in higher volumes traded by that member. Firms
that trade more liquid options generate increased message traffic and
greater pull on exchange resources. Therefore, comparing options traded
to trading volume is an ``apples to apples'' comparison.
The Exchange proposes a range of fees from $500 to $6,000 per month
depending on trading volume and the type of interface that is utilized
by the Member. These rates are undoubtedly similar to or lower than the
rates charged by NYSE Arca and NYSE American. As of October 14, 2021,
the Exchange maintained a market share of approximately 3.95%.\88\
Among Exchanges with similar market share, the Exchange's proposed
Trading Permit Fees remain similar to or lower than fees charged by
other options exchanges with comparable market share for access/
membership fees.\89\ The
[[Page 64267]]
proposed rates are also lower than those of its affiliates, MIAX and
Emerald, which remain in effect today.\90\
---------------------------------------------------------------------------
\88\ See ``The Market at a Glance'' available at https://www.miaxoptions.com/ (last visited October 4, 2021).
\89\ See supra notes 26, 27 and 28 and accompanying text. The
below market share numbers are as of October 14, 2021. Id. C2 had a
market share of 4.44% and charges a monthly Access Fee of $5,000 for
market makers and $1,000 per month for an additional Electronic
Access Permit regardless of trading volume or options traded. See
the C2 fee schedule available at https://www.cboe.com/us/options/membership/fee_schedule/ctwo/ (last visited October 14, 2021). ISE
had a market share of 6.74% and charges a monthly Access Fee to
Primary Market Makers of $5,000 and Competitive Market Maker of
$2,500 regardless of trading volume or options traded. See Section
8.A. of the ISE fee schedule available at https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207 (last
visited October 14, 2021).
\90\ See Section 3)b) of the MIAX fee schedule available at
https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10142021.pdf, and Section 3)b) of the
Emerald fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Emerald_Fee_Schedule_10142021.pdf (both charging monthly
trading permit fees ranging from $7,000 to $22,000).
---------------------------------------------------------------------------
The SIG Letter states that ``[the Exchange] offers no information
about the capacity and resource costs of access to the other exchanges
or any other basis to support the reasonability of those fees, let
alone compare such costs to those of MIAX Pearl.'' \91\ This statement
is misleading as SIG should be aware that the Exchange does not have
access to this information and when it asked SIG to assist the Exchange
in better understanding the access structure of other exchanges, SIG
refused.
---------------------------------------------------------------------------
\91\ See SIG Letter at page 5, supra note 64.
---------------------------------------------------------------------------
The SIG Letter further asserts that the Exchange ``has not
established that the other exchange fees are reasonable, nor that this
would mean that the MIAX Pearl fees are reasonable as well.\92\ SIG
should be aware that it is not the Exchange's obligation to justify why
another exchange's fees are reasonable and it is presumed that such
fees were deemed reasonable by the Commission when filed by the
exchange that proposed said fee. If SIG felt another exchange's fees
were or are unreasonable, they are free to share that concern with the
Commission and were provided an opportunity to submit comment letter on
those earlier proposals from other exchanges. It is the Exchange's
responsibility to show that its own proposed fee change is reasonable
and consistent with the Act, and that assertion is amply supported by
the statements made in this Item 5 and elsewhere herein.
---------------------------------------------------------------------------
\92\ See id.
---------------------------------------------------------------------------
The Proposed Fees Are Consistent With Section 6(b)(4) of the Act
Because the Proposed Fees Will Not Result in Excessive Pricing or
Supra-Competitive Profit
In the Initial Proposed Fee Change, the Exchange provided data that
the proposed fee change would not result in excessive pricing or a
supra-competitive profit. The Exchange outlined its projected revenues
and expense related to the proposed fee change and estimated it would
generate a 28% profit margin. The Exchange then compared its projected
profit margin to the 2019 operating profit margin of ISE and PHLX,
which were 83% and 67% respectively. SIG opined that a using the
overall operating profit margins of ISE and PHLX is an ``apple-to-
oranges'' comparison because 2019 was ``record setting year.'' \93\ SIG
assumes that because 2019 was a record setting year for options
volumes, that each options exchange generated above average profits
without provided any evidence to support this assumption. Data for 2019
was the most recent data available at the time the Exchange filed the
Initial Proposed Fee Change on July 1, 2021. Since that time, data for
2020 became available and the Exchange discusses that data for numerous
other options exchanges under Section 3.b. above in this proposed fee
change.\94\
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\93\ See SIG Letter at page 6, supra note 64.
\94\ See supra notes 50 to 62 and accompanying text.
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The Exchange sought to provide additional data to support a 28%
profit margin based on the best, most recent data available. It did not
provide this data to do an ``apple-to-apples'' comparison, but rather
to provide insight into the profit margins of other exchanges to put
the projected profit margin here into perspective. While the Exchange
provided a detailed analysis and disclosure of its projected profit
margins in this proposed fee change and the Initial Proposed Fee
Change, other exchanges are generally not required to disclose profit
margins on a more granular, per-product/non-transaction fee basis
within their annual Form 1 filings. The Exchange, therefore, used the
best, most recent data available to generate percentages of other
exchange's profit margins. SIG has access to the same public data as
the Exchange used in making the above projections regarding ISE and
PHLX and is free to generate its own assumptions on that data if it
believes the Exchange's calculations are wrong or misguided.
SIG also challenges the Exchange's methodology in determining its
projected revenues and allocation of internal and third party expenses
related to the proposed fee change. As stated above, the Exchange and
its affiliates have worked diligently with Commission Staff on ensuring
the justification included in past fee filings fully supported an
assertion that those proposed fee changes were consistent with the
Act.\95\ This work with Commission Staff included thorough reviews of
the Exchange's projected revenues and assignment of internal and third
party expenses. The SIG Letter simply seeks to ignore the vast amount
of disclosure the Exchange provided and kick up some sand in the hopes
that raising questions about the analysis with no support on whether
the answers to those questions would cause the proposed fee change to
be excessive or result in supra-competitive pricing.
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\95\ See supra note 77.
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The Proposed Fee Change Is Reasonable, Equitably Allocated and Not
Unfairly Discriminatory Because the Exchange, and Its Affiliates, Are
Still Recouping Their Initial Expenditures
The Exchange asserts above that its ``proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange, and its affiliates, are still recouping the initial
expenditures from building out their systems while the legacy exchanges
have already paid for and built their systems.'' The SIG Letter states
that ``[t]he Exchange, however, draws no link between the recoupment of
capital outlays with the reasonability, equitable allocation, and lack
of unfair discriminatory nature of the proposed fees.'' \96\ As stated
above, the Exchange and its affiliates have worked diligently with
Commission Staff on ensuring the justification included in past fee
filings fully supported an assertion that those proposed fee changes
were consistent with the Act.\97\ The Exchange leveraged its past work
with Commission Staff to ensure the justification provided herein and
in the Initial Proposed Fee Change included the same level of detail as
those past proposed fee changes that previously survived Commission
scrutiny. Asserting that the proposed fees are reasonable, equitably
allocated and not unfairly discriminatory because the Exchange, and its
affiliates, are still recouping the initial expenditures from building
out their systems is one of many justifications for the proposed fees
and not a cornerstone of the Exchange's proposal.
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\96\ See SIG Letter at page 6, supra note 64.
\97\ See supra note 77.
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As stated above, until recently, the Exchange has operated at a net
annual loss since it launched operations in 2017.\98\ This is a result
of providing a low cost alternative to attract order flow and encourage
market participants to experience the determinism and resiliency of the
Exchange's trading systems. To do so, the Exchange chose to offer some
non-transaction related services for no or little cost. This resulted
in the Exchange forgoing revenue it could have generated from assessing
higher fees and then use that revenue to more quickly recover its
[[Page 64268]]
initial capital expenditures. Further, a vast majority of the
Exchange's Members, if not all, benefited from these lower fees. The
Exchange could have sought to charge higher fees at the outset, but
that could have served to discourage participation on the Exchange.
Instead, the Exchange chose to provide a low cost exchange alternative
to the options industry which resulted in lower initial revenues and
extending the duration during which it would recoup its initial capital
expenditures. The SIG Letter choses to ignore this reality and instead
criticize the Exchange for initially charging lower fees or providing a
moratorium on certain non-transaction fees to the benefit of all market
participants. The Exchange is now trying to amend its fee structure to
enable it to continue to maintain and improve its overall market and
systems while also providing a highly reliable and deterministic
trading system to the marketplace.
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\98\ See supra note 75.
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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,\99\ and Rule 19b-4(f)(2) \100\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\99\ 15 U.S.C. 78s(b)(3)(A)(ii).
\100\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to sec.gov">[email protected]sec.gov. Please include
File Number SR-PEARL-2021-54 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2021-54. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2021-54 and should be submitted on
or before December 8, 2021.
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\101\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\101\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25019 Filed 11-16-21; 8:45 am]
BILLING CODE 8011-01-P
