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 Increase the Monthly Fees for MIAX Express Network Full Service Ports, 64235-64248 [2021-25020]
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Federal Register / Vol. 86, No. 219 / Wednesday, November 17, 2021 / Notices
• The applicant was married to the
deceased employee or annuitant within
one year from the date the Supreme
Court issued Windsor on June 26, 2013;
or
• The applicant was married to the
deceased employee or annuitant within
one year after the Supreme Court issued
Obergefell on June 26, 2015, in
circumstances where the couple resided
in a jurisdiction that prohibited samesex marriage at any time after Windsor
—OPM will deem the 9-month marriage
requirement satisfied for purposes of
determining entitlement to survivor
annuity benefits and/or a BEDB.
Additionally, if an affected applicant
(as indicated above) was married to the
deceased annuitant after retirement, and
is additionally unable to show that the
annuitant elected a survivor annuity
benefit on the applicant’s behalf within
2 years of marriage, as required by 5
U.S.C. 8341(b)(3), 8339(j)(5)(C) and
(k)(2), 8416(b)–(c), and 8442(a)(2), the
applicant may submit evidence to OPM
showing that the annuitant intended to
elect a survivor annuity for the
applicant, and that but for the
provisions under DOMA and/or state
laws prohibiting same-sex marriage, the
annuitant would have timely elected a
survivor annuity on the applicant’s
behalf. OPM will consider any
documentary evidence for this purpose,
either in its own files or submitted by
the applicant, that shows that the
annuitant attempted to elect a survivor
annuity for the applicant through
correspondence with OPM.
Determinations regarding an affected
applicant’s corresponding entitlement to
Federal Employees Health Benefits
(FEHB) will be governed by the
provisions under chapter 89 of title 5,
United States Code; part 890 of title 5,
Code of Federal Regulations; and the
guidance OPM published in its Federal
Register notice, Post-DOMA Survivor
Annuitant Federal Health Benefit
Waiver Criteria, 80 FR 74,817 (Nov. 30,
2015).
How To Apply for Benefits: If you are
an affected same-sex spouse of a
deceased federal employee or annuitant,
you may submit an application for death
benefits to OPM, Standard Form (SF)
2800 for CSRS and SF 3104 for FERS (or
you may resubmit an application if
OPM previously denied you survivor
annuity benefits or a BEDB because you
could not establish you had met the 9month marriage requirement). You may
download these application forms from
OPM’s website at https://www.opm.gov/
forms/standard-forms/, and may submit
your applications to this address: Office
of Personnel Management, Attention:
VerDate Sep<11>2014
17:11 Nov 16, 2021
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DOMA–9MMR, P.O. Box 45, Boyers, PA
16017–0045. If, in the alternative, you
would prefer OPM mail you an
application for benefits or if you have
questions regarding submitting your
application, you may write OPM using
the address provided above, or you may
call OPM’s Retirement Information
Office at 1–888–767–6738 or may send
an email to retire@opm.gov.
Office of Personnel Management.
Alexys Stanley,
Regulatory Affairs Analyst.
[FR Doc. 2021–24792 Filed 11–16–21; 8:45 am]
BILLING CODE 6325–38–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93556; File No. SR–
PEARL–2021–53]
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 Increase the
Monthly Fees for MIAX Express
Network Full Service Ports
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 November
1, 2021, MIAX PEARL, LLC (‘‘MIAX
Pearl’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
amend the fees for the Exchange’s MIAX
Express Network Full Service (‘‘MEO’’) 3
Ports.
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 ‘‘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.
2 17
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64235
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 increase the fees for its
Full Service MEO Ports, Bulk and Single
(the ‘‘Proposed Access Fees’’), which
allow Members 4 to submit electronic
orders in all products to the Exchange.
The Exchange currently offers different
types of MEO Ports depending on the
services required by the Member,
including a Full Service MEO Port—
Bulk,5 a Full Service MEO Port—
Single,6 and a Limited Service MEO
Port.7 For one monthly price, a Member
may be allocated two (2) Full-Service
MEO Ports of either type per matching
engine 8 and may request Limited
Service MEO Ports for which MIAX
Pearl will assess Members Limited
Service MEO Port fees per matching
4 ‘‘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 the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
5 ‘‘Full Service MEO Port—Bulk’’ means an MEO
port that supports all MEO input message types and
binary bulk order entry. See the Definitions Section
of the Fee Schedule.
6 ‘‘Full Service MEO Port—Single’’ means an
MEO port that supports all MEO input message
types and binary order entry on a single order-byorder basis, but not bulk orders. See the Definitions
Section of the Fee Schedule.
7 ‘‘Limited Service MEO Port’’ means an MEO
port that supports all MEO input message types, but
does not support bulk order entry and only
supports limited order types, as specified by the
Exchange via Regulatory Circular. See the
Definitions Section of the Fee Schedule.
8 A ‘‘Matching Engine’’ is a part of the MIAX Pearl
electronic system that processes options orders and
trades on a symbol-by-symbol basis. Some Matching
Engines will process option classes with multiple
root symbols, and other Matching Engines may be
dedicated to one single option root symbol. A
particular root symbol may only be assigned to a
single designated Matching Engine. A particular
root symbol may not be assigned to multiple
Matching Engines. See the Definitions Section of
the Fee Schedule.
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engine based on a sliding scale for the
number of Limited Service MEO Ports
utilized each month. The two (2) FullService MEO Ports that may be allocated
per matching engine to a Member may
consist of: (a) Two (2) Full Service MEO
Ports—Bulk; (b) two (2) Full Service
MEO Ports—Single; or (c) one (1) Full
Service MEO Port—Bulk and one (1)
Full Service MEO Port—Single.
Unlike other options exchanges that
provide similar port functionality and
charge fees on a per port basis,9 the
Exchange offers Full Service MEO Ports
as a package and provides Members
with the option to receive up to two Full
Service MEO Ports (described above)
per matching engine to which that
Member connects. The Exchange
currently has twelve (12) matching
engines, which means Members may
receive up to twenty-four (24) Full
Service MEO Ports for a single monthly
fee, that can vary based on certain
volume percentages, as described below.
For illustrative purposes and as
described in more detail below, the
Exchange currently assesses a fee of
$5,000 per month for Members that
reach the highest Full Service MEO
Port—Bulk Tier, regardless of the
number of Full Service MEO Ports
allocated to the Member. For example,
assuming a Member connects to all
twelve (12) matching engines during a
month, with two Full Service MEO
Ports per matching engine, this results
in a cost of $208.33 per Full Service
MEO Port ($5,000 divided by 24) for the
month. This fee has been unchanged
since the Exchange adopted Full Service
MEO Port fees in 2018.10 The Exchange
now proposes to increase Full Service
MEO Port fees as further described
below, with the highest monthly fee of
$10,000 for the Full Service MEO Port—
Bulk. Members will continue to receive
two (2) Full Service MEO Ports to each
9 See Cboe Exchange, Inc. Fee Schedule, Logical
Connectivity Fees ($750 per port per month for the
first 5 BOE/FIX Logical Ports and $800 per port per
month for each port over 5; $1,500 per port per
month for the first 5 BOE Bulk Logical Ports, $2,500
per port per month for ports 6–30, and $3,000 per
port per month for each port over 30); Cboe BXZ
Exchange, Inc. (‘‘BZX’’) Options Fee Schedule,
Options Logical Port Fees, Logical Ports ($750 per
port per month), Ports with Bulk Quoting
Capabilities ($1,500 per port per month for the first
and second ports, $2,500 per port per month for
three or more); Cboe EDGX Exchange, Inc.
(‘‘EDGX’’) Options Fee Schedule, Options Logical
Port Fees, Logical Ports ($500 per port per month),
Ports with Bulk Quoting Capabilities ($600 per port
per month). See also Nasdaq Stock Market LLC,
Options 7, Pricing Schedule, Section 3 ($1,500 per
port per month for the first 5 SQF ports; $1,000 per
port per month for SQF ports 15–20; and $500 per
port per month for all SQF ports over 21).
10 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
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matching engine to which they connect
for the single flat monthly fee.
Assuming a Member connects to all
twelve (12) matching engines during the
month, with two Full Service MEO
Ports per matching engine, this would
result in a cost of $416.67 per Full
Service MEO Port ($10,000 divided by
24).
The Exchange assesses Members Full
Service MEO Port Fees, either for a Full
Service MEO Port—Bulk and/or for a
Full Service MEO Port—Single, based
upon the monthly total volume
executed by a Member and its
Affiliates 11 on the Exchange across all
origin types, not including Excluded
Contracts,12 as compared to the Total
Consolidated Volume (‘‘TCV’’),13 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 ‘‘NonTransaction Fees Volume-Based Tiers’’
11 ‘‘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.
12 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
13 ‘‘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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described in the Definitions section of
the Fee Schedule. The Exchange
assesses these and other monthly Port
fees on Members in each month the
market participant is credentialed to use
a Port in the production environment.
Current Full Service MEO Port—Bulk
Fees. Currently, the Exchange assesses
Members monthly Full Service MEO
Port—Bulk fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $3,000;
(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%,
$4,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $5,000.
Proposed Full Service MEO Port—
Bulk Fees. The Exchange now proposes
to assess Members monthly Full Service
MEO Port—Bulk fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $5,000;
(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%,
$7,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $10,000.
Current Full Service MEO Port—
Single Fees. Currently, the Exchange
assesses Members monthly Full Service
MEO Port—Single fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,000;
(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%,
$3,375; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $3,750.
Proposed Full Service MEO Port—
Single Fees. The Exchange now
proposes to assess Members monthly
Full Service MEO Port—Single fees as
follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
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or volume above 0.30% up to 0.60%,
$3,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $4,500.
The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, MEO ports
allow for a higher throughput and can
handle much higher quote/order rates
than FIX ports. Members that are Market
Makers 14 or high frequency trading
firms utilize these ports (typically
coupled with 10Gb ULL connectivity)
because they transact in significantly
higher amounts of messages being sent
to and from the Exchange, versus FIX
port users, who are traditionally
customers sending only orders to the
Exchange (typically coupled with 1Gb
connectivity). The different types of
ports cater to the different types of
Exchange Memberships and different
capabilities of the various Exchange
Members. Certain Members need ports
and connections that can handle using
far more of the network’s capacity for
message throughput, risk protections,
and the amount of information that the
System has to assess. Those Members
may account for the vast majority of
network capacity utilization and volume
executed on the Exchange, as discussed
throughout.
The Exchange now proposes to
increase its monthly Full Service MEO
Port fees since it has not done so since
the fees were adopted in 2018,15 which
are designed to recover a portion of the
costs associated with directly accessing
the Exchange. The Exchange notes that
its affiliates, Miami International
Securities Exchange, LLC (‘‘MIAX’’) and
MIAX Emerald, LLC (‘‘MIAX Emerald’’),
charge fees for their high throughput,
low latency MEI Ports in a similar
fashion as the Exchange charges for its
MEO Ports—generally, the more active
user the Member (i.e., the greater
number/greater national ADV of classes
assigned to quote on MIAX and MIAX
Emerald), the higher the MEI Port fee.16
This concept is not new or novel. The
Exchange also notes that the proposed
increased fees for the Exchange’s Full
14 The term ‘‘Market Maker’’ means a Member
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
15 See supra note 10.
16 See MIAX Fee Schedule, Section 5 (d)(ii);
MIAX Emerald Fee Schedule, Section 5 (d)(ii).
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Service MEO Ports are in line with, or
cheaper than, the similar port fees or
similar membership fees charged by
other options exchanges.17
The Exchange has historically
undercharged for Full Service MEO
Ports as compared to other options
exchanges 18 because the Exchange
provides Full Service MEO Ports as a
package for a single monthly fee. As
described above, this package includes
two Full Service MEO Ports for each of
the Exchange’s twelve (12) matching
engines. The Exchange understands
other options exchanges charge fees on
a per port basis. For example, NYSE
American, LLC (‘‘NYSE American’’) and
NYSE Arca, Inc. (‘‘NYSE Arca’’) both
charge $450 per port for order/quote
entry ports 1–40 and $150 per port for
ports 41 and greater,19 all on a per
matching engine basis, with NYSE
American and NYSE Arca having 17
match engines and 19 match engines,
respectively.20 Similarly, The Nasdaq
Stock Market LLC (‘‘NASDAQ’’) charges
$1,500 per port for Specialized Quote
Interface (‘‘SQF’’) ports 1–5, $1,000 per
SQF port for ports 6–20, and $500 per
SQF port for ports 21 and greater,21 all
on a per matching engine basis, with
NASDAQ having multiple matching
engines.22 The NASDAQ SQF Interface
Specification also provides that
NASDAQ’s affiliates, Nasdaq PHLX LLC
(‘‘Nasdaq Phlx’’) and Nasdaq BX, Inc.
(‘‘Nasdaq BX’’), have trading
infrastructures that may consist of
multiple matching engines with each
matching engine trading only a range of
option underlyings.23 Further, the
NASDAQ SQF Interface Specification
provides that the SQF infrastructure is
such that the firms connect to one or
more servers residing directly on the
matching engine infrastructure.24 Since
there may be multiple matching
engines, firms will need to connect to
each engine’s infrastructure in order to
establish the ability to quote the
17 See
supra note 9.
id.
19 See NYSE American Options Fee Schedule,
Section V.A., Port Fees; NYSE Arca Options Fee
Schedule, Port Fees.
20 See NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the
number of matching engines per options exchange).
21 See Nasdaq Stock Market, Nasdaq Options 7
Pricing Schedule, Section 3, Nasdaq Options
Market—Ports and Other Services.
22 See Nasdaq Specialized Quote Interface (SQF)
Specification, Version 6.5b (updated February 13,
2020), Section 2, Architecture, available at https://
www.nasdaq.com/docs/2020/02/18/SpecializedQuote-Interface-SQI-6.5b.pdf (the ‘‘NASDAQ SQF
Interface Specification’’).
23 See id.
24 See id.
18 See
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64237
symbols handled by that engine.25 The
proposed monthly fee increases for Full
Service MEO Ports would bring the
Exchange’s fees more in line with that
of other options exchanges, while
maintaining a competitive fee structure
for Full Service MEO Ports.
Implementation
The proposed fees will become
effective on 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 26
in general, and furthers the objectives of
Section 6(b)(4) of the Act 27 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 are
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 the
Full Service MEO Port 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
expense the Exchange has and will
incur, and that the Exchange is
providing sufficient transparency (as
described below) into how the Exchange
determined to charge such fees.
Accordingly, the Exchange is providing
an analysis of its revenues, costs, and
25 See
id.
U.S.C. 78f(b).
27 15 U.S.C. 78f(b)(4) and (5).
26 15
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profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
and revenues associated with the
Proposed Access Fees.
In order to determine the Exchange’s
costs to provide the access services
associated with the Proposed Access
Fees, the Exchange conducted an
extensive cost review in which the
Exchange analyzed nearly every
expense item in the Exchange’s general
expense ledger to determine whether
each such expense relates to the
Proposed Access Fees, and, if such
expense did so relate, what portion (or
percentage) of such expense actually
supports the access services. The sum of
all such portions of expenses represents
the total cost of the Exchange to provide
the access services associated with the
Proposed Access Fees. For the
avoidance of doubt, no expense amount
was allocated twice. The Exchange is
also providing detailed information
regarding the Exchange’s cost allocation
methodology—namely, information that
explains the Exchange’s rationale for
determining that it was reasonable to
allocate certain expenses described in
this filing towards the cost to the
Exchange to provide the access services
associated with the Proposed Access
Fees.
In order to determine the Exchange’s
projected revenues associated with the
Proposed Access Fees, the Exchange
analyzed the number of Members
currently utilizing Full Service MEO
Ports, 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
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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 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 MEI Port
fees.28
*
*
*
*
*
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’’).29 On
May 21, 2019, the Commission issued
the Staff Guidance on SRO Rule Filings
Relating to Fees.30 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
28 See Securities Exchange Act Release No. 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Port Fees,
Increase Certain Network Connectivity Fees, and
Increase the Number of Additional Limited Service
MIAX Emerald Express Interface Ports Available to
Market Makers) (adopting tiered MEI Port fee
structure ranging from $5,000 to $20,500 per
month).
29 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).
30 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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comprehensive revenue and cost data
and analysis) that they are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange and its
affiliates, MIAX and MIAX Emerald, to
establish or increase other 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.31 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.
The Exchange believes the proposed
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, some of which charge on a per
port basis, unlike the Exchange. For
example, NYSE American (equity
options market share of 7.73% as of
October 27, 2021 for the month of
October) 32 charges $450 per port for
order/quote entry ports 1–40 and $150
per port for ports 41 and greater,33 all
on a per matching engine basis, with
NYSE American having 17 match
engines.34 Similarly, NASDAQ (equity
options market share of 8.12% as of
October 27, 2021 for the month of
October) 35 charges $1,500 per port for
SQF ports 1–5, $1,000 per SQF port for
ports 6–20, and $500 per SQF port for
ports 21 and greater,36 all on a per
matching engine basis, with NASDAQ
having multiple matching engines.37
The NASDAQ SQF Interface
Specification provides that PHLX/NOM/
BX Options trading infrastructures may
consist of multiple matching engines
with each matching engine trading only
a range of option underlyings. Further,
the SQF infrastructure is such that the
31 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited October
27, 2021).
32 See id.
33 See supra note 19.
34 See supra note 20.
35 See supra note 21.
36 See supra note 21.
37 See supra note 22.
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firms connect to one or more servers
residing directly on the matching engine
infrastructure. Since there may be
multiple matching engines, firms will
need to connect to each engine’s
infrastructure in order to establish the
ability to quote the symbols handled by
that engine.38
In the each of the above cases, the
Exchange’s highest tiered port fee, as
proposed, is similar to or less than the
port fees of competing options
exchanges with like market share.
Further, as described in more detail
below, many competing 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 port fee rates in
place at competing options exchanges
were filed with the Commission for
immediate effectiveness and remain in
place today.
Separately, the Exchange is not aware
of any reason why market participants
could not simply drop their access to an
exchange (or not initially access an
exchange) if an exchange were to
establish prices for its non-transaction
fees that, in the determination of such
market participant, did not make
business or economic sense for such
market participant to access such
exchange. No options market participant
is required by rule, regulation, or
competitive forces to be a Member of the
Exchange. As evidence of the fact that
market participants can and do drop
their access to exchanges based on nontransaction fee pricing, R2G Services
LLC (‘‘R2G’’) filed a comment letter after
BOX’s proposed rule changes to
increase its connectivity fees (SR–BOX–
2018–24, SR–BOX–2018–37, and SR–
BOX–2019–04). The R2G Letter stated,
‘‘[w]hen BOX instituted a $10,000/
month price increase for connectivity;
we had no choice but to terminate
connectivity into them as well as
terminate our market data relationship.
The cost benefit analysis just didn’t
make any sense for us at those new
levels.’’ Similarly, the Exchange’s
affiliate, MIAX Emerald, noted in a
recent filing that once MIAX Emerald
issued a notice that it was instituting
MEI Port fees, among other nontransaction fees, one Member dropped
38 See
id.
VerDate Sep<11>2014
its access to the Exchange as a result of
those fees.39 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’s high performance
network solutions and supporting
infrastructure (including employee
support), provides unparalleled system
throughput and the capacity to handle
approximately 10.7 million order
messages per second. On an average
day, the Exchange handles over
approximately 2.7 billion total
messages. However, in order to achieve
a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall expense for storage and
network transport capabilities.
In order to provide more detail and to
quantify the Exchange’s costs associated
with providing access to the Exchange
in general, the Exchange notes that there
are material costs associated with
providing the infrastructure and
headcount to fully-support access to the
Exchange. The Exchange incurs
technology expense related to
establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
mandated processes, associated with its
network technology. While some of the
expense is fixed, much of the expense
is not fixed, and thus increases as the
services associated with the Proposed
Access Fees increase. For example, new
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number 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
39 See
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64239
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
2021,40 the total annual expense for
providing the access services associated
with the Proposed Access Fees for the
Exchange is projected to be
approximately $897,084. The $897,084
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.41 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.42 The $897,084 in projected
total annual expense is directly related
to the access services associated with
the Proposed Access Fees, and not any
40 The Exchange has not yet finalized its 2021
year end results.
41 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.
42 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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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
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 $40,166. 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’’),43 which
supports connectivity and feeds for the
entire U.S. options industry; (4) various
other services providers (including
Thompson Reuters, NYSE, Nasdaq, and
43 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 material impact
on cost 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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17:11 Nov 16, 2021
Jkt 256001
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
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
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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 1.80% 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.44
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 0.90% 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.45
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
44 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.
45 Id.
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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
0.90% 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.46
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 0.90% 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.47
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 $856,918.
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,
46 Id.
47 Id.
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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.
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
$783,513, 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
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64241
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
8.55% 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.48
The Exchange’s depreciation and
amortization expense relating to
providing the access services associated
with the Proposed Access Fees is
projected to be $64,456, which is only
a portion of the $2,864,716 49 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
2.25% 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
48 Id.
49 The Exchange notes that the total depreciation
expense is different from the total for the
Exchange’s filing relating to Trading Permits
because the Exchange factors in the depreciation of
its own internally developed software when
assessing costs for Full Service MEO Ports, resulting
in a higher depreciation expense number in this
filing.
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other service, as supported by its cost
review.50
The Exchange’s occupancy expense
relating to providing the access services
associated with the Proposed Access
Fees is projected to be $8,949, 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 Access
Fees. Without this office space, the
Exchange would not be able to operate
and support the network and provide
the access services associated with the
Proposed Access Fees to its Members
and their customers. Accordingly, the
Exchange believes it is reasonable to
allocate the identified portion of its
occupancy expense because such
amount represents the Exchange’s actual
cost to house the equipment and
personnel who operate and support the
Exchange’s network infrastructure and
the access services associated with the
Proposed Access Fees. The Exchange
did not allocate all of the occupancy
expense toward the cost of providing
the access services associated with the
Proposed Access Fees, only the portion
which the Exchange identified as being
specifically mapped to operating and
supporting the network, approximately
1.80% 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.51
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 in to recover its costs,
thus the Exchange believes it is
reasonable to allocate a material portion
of its total overall expense towards
access fees.
Accordingly, based on the facts and
circumstances presented, the Exchange
believes that its provision of the access
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. To
illustrate, on a going-forward, fullyannualized basis, the Exchange projects
that its annualized revenue for
providing the access services associated
with the Proposed Access Fees would
be approximately $1,476,000 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 $897,084 per annum.
Accordingly, on a fully-annualized
basis, the Exchange believes its total
projected revenue for the providing the
access services associated with the
Proposed Access Fees will not result in
excessive pricing or supra-competitive
profit, as the Exchange will make only
a 39% profit margin on the Proposed
Access Fees ($1,476,000 in revenue
minus $897,084 in expense = $578,916
profit per annum). The Exchange notes
that the fees charged to each Member for
Full Service MEO Ports can vary from
month to month depending on the type
used and the Non-Transaction Fees
Volume-Based Tier that the Member
achieves for that month. As such, the
revenue projection is not a static
number, with monthly Full Service
MEO Port 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’’ 52 profit. Of note,
the Guidance defines ‘‘supracompetitive profit’’ as profits that
exceed the profits that can be obtained
in a competitive market.53 With the
proposed changes, the Exchange
anticipates that its profit margin will be
52 See
50 Id.
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51 Id.
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53 See
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id.
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approximately 39%, 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
Full Service MEO ports, which generate
billions of messages per day across the
Exchange. 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.
While the proposed fees are similar to
or less than that of other options
exchanges,54 as discussed above, the
incremental increase in revenue
generated from the 39% profit margin
for access via Full Service MEO Ports
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’’ 55 for 2020
for MIAX Pearl was $11,422,000. MIAX
Pearl projects that the total revenue
from ‘‘access fees’’ for 2021 will be
54 See
supra notes 9, 19, and 21.
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.
55 As
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$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’’ 56 revenue for
2020. Cboe C2 Exchange, Inc. (‘‘C2’’)
reported $19,016,000 in ‘‘access and
capacity fee’’ revenue for 2020.57 Cboe
BZX Exchange, Inc. (‘‘BZX’’) reported
$38,387,000 in ‘‘access and capacity
fee’’ revenue for 2020.58 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
$26,126,000 in ‘‘access and capacity
fee’’ revenue for 2020.59 PHLX reported
$20,817,000 in ‘‘Trade Management
Services’’ revenue for 2019.60 The
Exchange notes it is unable to compare
‘‘access fee’’ revenues with Nasdaq Phlx
(or other affiliated NASDAQ exchanges)
because after 2019, the ‘‘Trade
Management Services’’ line item was
bundled into a much larger line item in
Nasdaq Phlx’s Form 1, simply titled
‘‘Market services.’’ 61
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,
Nasdaq ISE, LLC’s (‘‘Nasdaq ISE’’)
operating profit margin for 2020 was
approximately 85%; Nasdaq Phlx’s
operating profit margin for 2020 was
approximately 49%; NASDAQ’s
operating profit margin for 2020 was
approximately 62%; NYSE Arca’s
operating profit margin for 2020 was
approximately 55%; NYSE American’s
operating profit margin for 2020 was
56 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.
57 See id.
58 See id.
59 See id.
60 According to Nasdaq 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 [Nasdaq Phlx’s] published fee
schedules.’’ See Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2001/
20012246.pdf.
61 See Form 1 Amendment, at https://
www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
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approximately 59%; Cboe’s operating
profit margin for 2020 was
approximately 74%; and BZX’s
operating profit margin for 2020 was
approximately 52%. Nasdaq ISE’s
operating profit margin, for all of 2019,
was 83%.62 Nasdaq ISE’s equity options
market share for all of 2019 was
8.99% 63 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.64 Nasdaq Phlx’s operating
profit margin, for all of 2019, was
67%.65 Nasdaq Phlx’s equity options
market share for all of 2019 was
15.85% 66 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.67
In the Exchange’s Initial Proposed Fee
Change,68 the Exchange compared
projected profit margins to the 2019
operating profit margin of Nasdaq ISE
and Nasdaq Phlx, which were 83% and
67% respectively. The SIG Letter 69
contained the opinion that using the
overall operating profit margins of
Nasdaq ISE and Nasdaq Phlx was an
‘‘apple to oranges’’ comparison because
2019 was a ‘‘record setting year.’’ 70 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 39% 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
62 See Nasdaq Phlx Form 1, Exhibit D, filed June
30, 2020 available at https://sec.report/Document/
9999999997-20-003902/.
63 See https://www.theocc.com/Market-Data/
Market-Data-Reports/Volume-and-Open-Interest/
Volume-by-Exchange.
64 See Nasdaq ISE LLC Options 7 Pricing
Schedule, Section 8.A. Access Services, at https://
listingcenter.nasdaq.com/rulebook/ise/rules/
ISE%20Options%207.
65 See Nasdaq ISE Form 1, filed June 29, 2020
available at Form 1—ISE—Final (1).pdf (sec.gov).
66 See supra note 31.
67 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.
68 See Securities Exchange Act Release No. 92365
(July 9, 2021), 86 FR 37347 (SR–PEARL–2021–33)
(‘‘Initial Proposed Fee Change’’).
69 See letter from Richard J. McDonald,
Susquehanna International Group, LLP (‘‘SIG’’) to
Vanessa Countryman, Secretary, Commission, dated
September 7, 2021 (‘‘SIG Letter’’).
70 See id.
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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
exchanges have already paid for and
built their systems.
The Exchange believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee,
the Exchange provides each Member
two (2) Full Service MEO Ports for each
matching engine to which that Member
is connected. Unlike other options
exchanges that provide similar port
functionality and charge fees on a per
port basis,71 the Exchange offers Full
Service MEO Ports as a package and
provides Members with the option to
receive up to two Full Service MEO
Ports per matching engine to which it
connects. The Exchange currently has
twelve (12) matching engines, which
means Members may receive up to
twenty-four (24) Full Service MEO Ports
for a single monthly fee, that can vary
based on certain volume percentages.
The Exchange currently assesses
Members a fee of $5,000 per month in
the highest Full Service MEO Port—
Bulk Tier, regardless of the number of
Full Service MEO Ports allocated to the
Member. Assuming a Member connects
to all twelve (12) matching engines
during a month, with two Full Service
MEO Ports per matching engine, this
results in a cost of $208.33 per Full
Service MEO Port—Bulk ($5,000
divided by 24) for the month. This fee
has been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.72 The Exchange now proposes to
increase the Full Service MEO Port fees,
with the highest Tier fee for a Full
Service MEO Port—Bulk of $10,000 per
month. Members will continue to
receive two (2) Full Service MEO Ports
71 See
72 See
supra notes 19 and 21.
supra note 10.
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17:11 Nov 16, 2021
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to each matching engine to which they
are connected for the single flat monthly
fee. Assuming a Member connects to all
twelve (12) matching engines during the
month, and achieves the highest Tier for
that month, with two Full Service MEO
Ports—Bulk per matching engine, this
would result in a cost of $416.67 per
Full Service MEO Port ($10,000 divided
by 24).
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.73 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.74 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.75
73 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.
74 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.
75 Id.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete.
Intra-Market Competition
The Exchange believes that the
Proposed Access Fees do not place
certain market participants at a relative
disadvantage to other market
participants because the Proposed
Access Fees do not favor certain
categories of market participants in a
manner that would impose a burden on
competition; rather, the allocation of the
Proposed Access Fees reflects the
network resources consumed by the
various size of market participants—
lowest bandwidth consuming members
pay the least, and highest bandwidth
consuming members pays the most,
particularly since higher bandwidth
consumption translates to higher costs
to the Exchange.
Inter-Market Competition
The Exchange believes the Proposed
Access Fees do not place an undue
burden on competition on other options
exchanges that is not necessary or
appropriate. In particular, options
market participants are not forced to
connect to (and purchase MEO Ports
from) all options exchanges. The
Exchange also notes that it has far less
Members as compared to the much
greater number of members at other
options exchanges. Not only does MIAX
Pearl have less than half the number of
members as certain other options
exchanges, but there are also a number
of the Exchange’s Members that do not
connect directly to MIAX Pearl. There
are a number of large users of the MEO
Interface and broker-dealers that are
members of other options exchange but
not Members of MIAX Pearl. The
Exchange is also unaware of any
assertion that its existing fee levels or
the Proposed Access Fees would
somehow unduly impair its competition
with other options exchanges. To the
contrary, if the fees charged are deemed
too high by market participants, they
can simply disconnect.
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
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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.76 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.
The Exchange believes that the evershifting market share among exchanges
from month to month demonstrates that
market participants can discontinue or
reduce use of certain categories of
products, or shift order flow, in
response to fee changes. In such an
environment, the Exchange must
continually adjust its fees and fee
waivers to remain competitive with
other exchanges and to attract order
flow to the Exchange.
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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, 2021.77 The
Commission received one comment
letter on the Initial Proposed Fee
Change.78 The Exchange withdrew
Initial Proposed Fee Change on October
12, 2021.79 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
. . . is not sufficient.’’ 80 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
76 See
supra note 31.
supra note 68.
78 See supra note 69.
79 See Securities Exchange Act Release No. 93347
(October 15, 2021), 86 FR 58341 (October 21, 2021)
(SR–PEARL–2021–33) (Notice of Withdrawal of a
Proposed Rule Change to Amend the MIAX Pearl
Options Fee Schedule to Increase the Monthly Fees
for MIAX Express Network Full Service Ports).
80 17 CFR 201.700(b)(3).
77 See
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17:11 Nov 16, 2021
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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 2017.81 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. Similar justifications for the
proposed fee change included in the
Initial Proposed Fee Change, but also in
this filing, were previously included in
similar fee changes filed by the
Exchange and its affiliates, MIAX
Emerald and MIAX, and SIG did not
submit a comment letter on those
filings.82 Those filings were not
suspended by the Commission and
continue to remain in effect. The
justification included in each of the
prior filings was the result of numerous
withdrawals and re-filings of the
proposals to address comments received
from Commission Staff over many
months. 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
81 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/.
82 See Securities Exchange Act Release Nos.
91858 (May 12, 2021), 86 FR 26967 (May 18, 2021)
(SR–PEARL–2021–23) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Amend the MIAX Pearl Fee Schedule to Remove
the Cap on the Number of Additional Limited
Service Ports Available to Market Makers); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Port Fees,
Increase Certain Network Connectivity Fees, and
Increase the Number of Additional Limited Service
MIAX Emerald Express Interface Ports Available to
Market Makers); and 91857 (May 12, 2021), 86 FR
26973 (May 18, 2021) (SR–MIAX–2021–19) (Notice
of Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend Its Fee Schedule To
Remove the Cap on the Number of Additional
Limited Service Ports Available to Market Makers).
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with the Act.83 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 the prior fee changes that
survived Commission scrutiny. 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.’’ 84 That same
commenter also noted their ‘‘worry that
the Commission’s process for reviewing
and evaluating exchange filings may be
inconsistently applied.’’ 85
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.
83 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
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) (SR–PEARL–2021–23).
84 See letter from Tyler Gellasch, Executive
Director, Healthy Markets Association, to Hon. Gary
Gensler, Chair, Commission, dated October 29,
2021.
85 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).
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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.
The SIG Letter was submitted in
response to six (6) filings submitted by
the Exchange and its affiliates, MIAX
and MIAX Emerald, and is primarily
focused on proposed fee changes
concerning 10Gb ULL connectivity.86
With regards to the Initial Proposed Fee
Change, the SIG Letter does not directly
address the proposed fees or lay out
specific arguments as to why the
proposal is not consistent with Section
6(b)(4) of the Act. Rather, it simply
describes the proposed fee change and
flippantly states that its claims
concerning the 10Gb ULL fee change
proposals by the Exchange, and its
affiliates, apply to the Initial Proposed
Fee Change. Nonetheless, the Exchange
submits the below response to the SIG
Letter concerning the Initial Proposed
Fee Change.
General
First, the SIG Letter states that 10Gb
ULL ‘‘lines are critical to Exchange
members to be competitive and to
provide essential protection from
adverse market events’’ (emphasis
added).87 The Exchange notes that this
statement is generally not true for Full
Service MEO Ports as those ports are
used primarily for order entry and not
risk protection activities like purging
quotes resting on the MIAX Pearl
Options Book. Full Service MEO Ports
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86 See
Securities Exchange Act Release Nos.
92643 (August 11, 2021), 86 FR 46034 (August 17,
2021) (SR–MIAX–2021–35); 92661 (August 13,
2021), 86 FR 46737 (August 19, 2021) (SR–MIAX–
2021–37); 92644 (August 11, 2021), 86 FR 46055
(August 17, 2021) (SR–PEARL–2021–36); 92645
(August 11, 2021), 86 FR 46048 (August 17, 2021)
(SR–EMERALD–2021–23); and 92662 (August 13,
2021), 86 FR 46726 (August 19, 2021) (SR–
EMERALD–2021–25).
87 See SIG Letter at page 2, supra note 69.
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are essentially used for competitive
reasons and Members may choose to
utilize one or two Full Service MEO
Ports 88 based on their business needs
and desire to attempt to access the
market quicker by using one port that
may have less latency. For instance, a
Member may have just sent numerous
messages and/or orders over one of their
Full Service MEO Ports that are in
queue to be processed. That same
Member then seeks to enter an order to
remove liquidity from the Exchange’s
Book. That Member may choose to send
that order over another of their other
Full Service MEO Ports with less
message and/or order traffic or any of
their optional additional Limit Service
MEO Ports 89 to ensure that their
liquidity taking order accesses the
Exchange quicker because that port’s
queue is shorter.
The Tiered Pricing Structure for Full
Service MEO Ports Provides for the
Equitable Allocation of Reasonable
Dues, Fees, and Other Charges
The SIG Letter challenges the below
two bases the Exchange set forth in its
Initial Proposed Fee Change and herein
to support the assertion that the
proposal provides for the equitable
allocation of reasonable dues, fees, and
other charges:
• ‘‘If the Exchanges were to attempt to
establish unreasonable pricing, then no
market participant would join or
connect to the Exchanges, and existing
market participants would disconnect.
• The fees will not result in excessive
pricing or supra-competitive profit.’’ 90
The Exchange responds to each of
SIG’s challenges in turn below.
If the Exchanges Were To Attempt To
Establish Unreasonable Pricing, Then
No Market Participant Would Join or
Connect to the Exchange, and Existing
Market Participants Would Disconnect
The SIG Letter asserts that the
prospect that a market participant may
withdraw from the Exchange ‘‘if the
participant determines that any of their
fees are too high is in no way a basis for
claiming that a fee increase is
reasonable.’’ 91 The SIG Letter further
asserts that the Exchange’s ‘‘claim that
a market participant would leave the
88 The rates set forth for Full Service MEO Ports
under Section 5(d) of the Exchange’s Fee Schedule
entitle a Member to two (2) such Ports for each
Matching Engine for a single port fee.
89 Members may be allocated two (2) Full-Service
MEO Ports per Matching Engine and may request
Limited Service MEO Ports for which the Exchange
will assess no fee for the first two Limited Service
MEO Ports requested by the Member. See Section
5(d) of the Exchange’s Fee Schedule.
90 See SIG Letter at page 3, supra note 69.
91 Id.
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Exchanges, or any of them, if a given fee
was felt to be too high is an
unsupported claim.’’ 92 The Exchange,
in fact, did support its claim by
providing two examples where members
chose to depart the Exchange, or a
competing exchange, directly due to the
specific fee increases. SIG attempts to
dismiss the examples provided by the
Exchange by implying that the members
may have chosen to depart the
Exchange, or the competing exchange,
for other reasons. In the first example,
R2G explicitly stated in their comment
letter ‘‘[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.’’ There is no other way to
interpret R2G’s statement other than
that R2G terminated their access to that
particular exchange because of that
particular non-transaction fee increase.
In the second example, MIAX Emerald,
not SIG, is uniquely positioned to know
why this Member chose to depart MIAX
Emerald as it discussed the issues with
the Member at the time of their
departure and that Member stated it was
related to the imposition of nontransaction fees. The SIG Letter
correctly asserts that ‘‘[t]here are many
reasons a market participant may join,
remain at, or leave an
exchange. . . .’’ 93 However, the
members discussed in the examples
above terminated their exchange access
because of fees alone.
Further, the argument that a Member’s
ability to terminate access to an
exchange based on fees has been used
not only in this proposal, but also in
other fee filings submitted by the
Exchange and its affiliates to justify
certain non-transaction fees.94 The
Exchange discussed this basis with
Commission Staff as it shows that
market participants may choose not to
pay a fee where they view that fee as
excessive. The ability to terminate
access to an exchange shows 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. A Member’s
ability to terminate access to the
Exchange where it deems a fee increase
too excessive is not the only basis, but
one of many, used to support the
92 Id.
93 Id.
94 See
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Exchange’s justification that the
proposal is consistent with the Act.
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 39%
profit margin. The Exchange then
compared its projected profit margin to
the 2019 operating profit margin of
Nasdaq ISE and Nasdaq Phlx, which
were 83% and 67%, respectively. SIG
opined that a using the overall operating
profit margins of Nasdaq ISE and
Nasdaq Phlx is an ‘‘apple-to-oranges’’
comparison because 2019 was ‘‘record
setting year.’’ 95 SIG assumes that
because 2019 was a record setting year
for options volumes, that each options
exchange generated above average
profits without providing 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.96 The
Exchange also included in this proposal
additional data from its own 2021
Audited Financial Statements and
projections of future revenues and costs
from the proposed fee change.
The Exchange sought to provide
additional data to support a 39% 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 exchanges’
profit margins. SIG has access to the
same public data as the Exchange used
in making the above projections
95 See
SIG Letter at page 6, supra note 69.
supra notes 60, 61, 62, and 65 and
accompanying text.
96 See
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regarding Nasdaq ISE and Nasdaq Phlx
and is free to generate its own
assumptions on that data if it believes
the Exchange’s calculations are wrong
or misguided.
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 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.
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.98 The
Exchange has seen price 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.
The Proposed Tiered Pricing Structure
Is Not Part of a Discriminatory Fee
Structure and Tiered Fee Structures Are
Commonplace Amongst Exchanges
The SIG Letter challenges the below
three bases the Exchange set forth in its
Initial Proposed Fee Change and herein
to support that the proposed tiered
pricing structure provides for the
equitable allocation of reasonable dues,
fees, and other charges:
• ‘‘The Exchanges contend that the
proposed structure would encourage
firms to be more economical and
efficient in the number of connections
97 See
supra note 83.
‘‘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).
98 See
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Sfmt 4703
64247
they purchase. The Exchanges assert
that this will enable them to better
monitor and provide access to their
networks to ensure sufficient capacity
and headroom in the System.
• The Exchanges claim that the
majority of members and non-members
that purchase 10Gb ULL connections
will either save money or pay the same
amount after the tiered-pricing structure
is implemented.
• The Exchanges contend that it
benefits overall competition in the
marketplace to allow relatively new
entrants like the Exchanges to propose
fees that may help these new entrants
recoup their infrastructure
investments.’’ 99
The SIG Letter’s challenges to the first
two assertions above are not applicable
here as a tiered pricing structure for Full
Service MEO Ports is not a new
proposal, but was previously in place
prior to this proposal and the Initial
Proposed Fee Change. The Exchange is
therefore only responding to the SIG
Letter’s challenge to the Exchange’s
third assertion.
SIG Incorrectly Claims That the
Exchange Contends That It Benefits
Overall Competition in the Marketplace
To Allow Relatively New Entrants Like
the Exchange To Propose Fees That May
Help These New Entrants Recoup Their
Infrastructure Investments
Nowhere in this proposal or in the
Initial Proposed Fee change did the
Exchange assert that it benefits
competition to allow a new exchange
entrant to recoup their infrastructure
costs. Rather, 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.’’ 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.100 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
99 See
SIG Letter at page 4, supra note 69.
supra note 83.
100 See
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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
2017.101 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 little to no 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
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 chose 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,102 and Rule
19b–4(f)(2) 103 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
101 See
supra note 81.
102 15 U.S.C. 78s(b)(3)(A)(ii).
103 17 CFR 240.19b–4(f)(2).
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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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.104
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–25020 Filed 11–16–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–93554; File No. SR–MEMX–
2021–16]
• 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–2021–53 on the subject line.
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Exchange’s Fee
Schedule
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–2021–53. 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–2021–53 and
should be submitted on or before
December 8, 2021.
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
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 October
29, 2021, MEMX LLC (‘‘MEMX’’ 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
The Exchange is filing with the
Commission a proposed rule change to
amend the Exchange’s fee schedule
applicable to Members 3 (the ‘‘Fee
Schedule’’) pursuant to Exchange Rules
15.1(a) and (c). The Exchange proposes
to implement the changes to the Fee
Schedule pursuant to this proposal on
November 1, 2021. The text of the
proposed rule change is provided in
Exhibit 5.
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
104 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Exchange Rule 1.5(p).
1 15
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]]>Agencies
[Federal Register Volume 86, Number 219 (Wednesday, November 17, 2021)]
[Notices]
[Pages 64235-64248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25020]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93556; File No. SR-PEARL-2021-53]
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 Increase the Monthly Fees for MIAX
Express Network Full Service Ports
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 November 1, 2021, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to amend the fees for the
Exchange's MIAX Express Network Full Service (``MEO'') \3\ Ports.
---------------------------------------------------------------------------
\3\ ``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.
---------------------------------------------------------------------------
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. HD1>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 increase the
fees for its Full Service MEO Ports, Bulk and Single (the ``Proposed
Access Fees''), which allow Members \4\ to submit electronic orders in
all products to the Exchange. The Exchange currently offers different
types of MEO Ports depending on the services required by the Member,
including a Full Service MEO Port--Bulk,\5\ a Full Service MEO Port--
Single,\6\ and a Limited Service MEO Port.\7\ For one monthly price, a
Member may be allocated two (2) Full-Service MEO Ports of either type
per matching engine \8\ and may request Limited Service MEO Ports for
which MIAX Pearl will assess Members Limited Service MEO Port fees per
matching
[[Page 64236]]
engine based on a sliding scale for the number of Limited Service MEO
Ports utilized each month. The two (2) Full-Service MEO Ports that may
be allocated per matching engine to a Member may consist of: (a) Two
(2) Full Service MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--
Single; or (c) one (1) Full Service MEO Port--Bulk and one (1) Full
Service MEO Port--Single.
---------------------------------------------------------------------------
\4\ ``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 the Definitions Section of
the Fee Schedule and Exchange Rule 100.
\5\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\6\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\7\ ``Limited Service MEO Port'' means an MEO port that supports
all MEO input message types, but does not support bulk order entry
and only supports limited order types, as specified by the Exchange
via Regulatory Circular. See the Definitions Section of the Fee
Schedule.
\8\ A ``Matching Engine'' is a part of the MIAX Pearl electronic
system that processes options orders and trades on a symbol-by-
symbol basis. Some Matching Engines will process option classes with
multiple root symbols, and other Matching Engines may be dedicated
to one single option root symbol. A particular root symbol may only
be assigned to a single designated Matching Engine. A particular
root symbol may not be assigned to multiple Matching Engines. See
the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\9\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports (described
above) per matching engine to which that Member connects. The Exchange
currently has twelve (12) matching engines, which means Members may
receive up to twenty-four (24) Full Service MEO Ports for a single
monthly fee, that can vary based on certain volume percentages, as
described below. For illustrative purposes and as described in more
detail below, the Exchange currently assesses a fee of $5,000 per month
for Members that reach the highest Full Service MEO Port--Bulk Tier,
regardless of the number of Full Service MEO Ports allocated to the
Member. For example, assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port ($5,000 divided by 24) for the month. This fee has been unchanged
since the Exchange adopted Full Service MEO Port fees in 2018.\10\ The
Exchange now proposes to increase Full Service MEO Port fees as further
described below, with the highest monthly fee of $10,000 for the Full
Service MEO Port--Bulk. Members will continue to receive two (2) Full
Service MEO Ports to each matching engine to which they connect for the
single flat monthly fee. Assuming a Member connects to all twelve (12)
matching engines during the month, with two Full Service MEO Ports per
matching engine, this would result in a cost of $416.67 per Full
Service MEO Port ($10,000 divided by 24).
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\9\ See Cboe Exchange, Inc. Fee Schedule, Logical Connectivity
Fees ($750 per port per month for the first 5 BOE/FIX Logical Ports
and $800 per port per month for each port over 5; $1,500 per port
per month for the first 5 BOE Bulk Logical Ports, $2,500 per port
per month for ports 6-30, and $3,000 per port per month for each
port over 30); Cboe BXZ Exchange, Inc. (``BZX'') Options Fee
Schedule, Options Logical Port Fees, Logical Ports ($750 per port
per month), Ports with Bulk Quoting Capabilities ($1,500 per port
per month for the first and second ports, $2,500 per port per month
for three or more); Cboe EDGX Exchange, Inc. (``EDGX'') Options Fee
Schedule, Options Logical Port Fees, Logical Ports ($500 per port
per month), Ports with Bulk Quoting Capabilities ($600 per port per
month). See also Nasdaq Stock Market LLC, Options 7, Pricing
Schedule, Section 3 ($1,500 per port per month for the first 5 SQF
ports; $1,000 per port per month for SQF ports 15-20; and $500 per
port per month for all SQF ports over 21).
\10\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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The Exchange assesses Members Full Service MEO Port Fees, either
for a Full Service MEO Port--Bulk and/or for a Full Service MEO Port--
Single, based upon the monthly total volume executed by a Member and
its Affiliates \11\ on the Exchange across all origin types, not
including Excluded Contracts,\12\ as compared to the Total Consolidated
Volume (``TCV''),\13\ 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'' described in the Definitions section of the Fee Schedule. The
Exchange assesses these and other monthly Port fees on Members in each
month the market participant is credentialed to use a Port in the
production environment.
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\11\ ``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.
\12\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\13\ ``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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Current Full Service MEO Port--Bulk Fees. Currently, the Exchange
assesses Members monthly Full Service MEO Port--Bulk fees as follows:
(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%, $3,000;
(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%, $4,500; 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%, $5,000.
Proposed Full Service MEO Port--Bulk Fees. The Exchange now
proposes to assess Members monthly Full Service MEO Port--Bulk fees as
follows:
(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%, $5,000;
(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%, $7,500; 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%, $10,000.
Current Full Service MEO Port--Single Fees. Currently, the Exchange
assesses Members monthly Full Service MEO Port--Single fees as follows:
(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%, $2,000;
(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%, $3,375; 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%, $3,750.
Proposed Full Service MEO Port--Single Fees. The Exchange now
proposes to assess Members monthly Full Service MEO Port--Single fees
as follows:
(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%, $2,500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers,
[[Page 64237]]
or volume above 0.30% up to 0.60%, $3,500; 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%, $4,500.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers \14\ or high frequency trading firms utilize these ports
(typically coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Certain Members need ports and connections that can
handle using far more of the network's capacity for message throughput,
risk protections, and the amount of information that the System has to
assess. Those Members may account for the vast majority of network
capacity utilization and volume executed on the Exchange, as discussed
throughout.
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\14\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
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The Exchange now proposes to increase its monthly Full Service MEO
Port fees since it has not done so since the fees were adopted in
2018,\15\ which are designed to recover a portion of the costs
associated with directly accessing the Exchange. The Exchange notes
that its affiliates, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald''), charge fees for
their high throughput, low latency MEI Ports in a similar fashion as
the Exchange charges for its MEO Ports--generally, the more active user
the Member (i.e., the greater number/greater national ADV of classes
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port
fee.\16\ This concept is not new or novel. The Exchange also notes that
the proposed increased fees for the Exchange's Full Service MEO Ports
are in line with, or cheaper than, the similar port fees or similar
membership fees charged by other options exchanges.\17\
---------------------------------------------------------------------------
\15\ See supra note 10.
\16\ See MIAX Fee Schedule, Section 5 (d)(ii); MIAX Emerald Fee
Schedule, Section 5 (d)(ii).
\17\ See supra note 9.
---------------------------------------------------------------------------
The Exchange has historically undercharged for Full Service MEO
Ports as compared to other options exchanges \18\ because the Exchange
provides Full Service MEO Ports as a package for a single monthly fee.
As described above, this package includes two Full Service MEO Ports
for each of the Exchange's twelve (12) matching engines. The Exchange
understands other options exchanges charge fees on a per port basis.
For example, NYSE American, LLC (``NYSE American'') and NYSE Arca, Inc.
(``NYSE Arca'') both charge $450 per port for order/quote entry ports
1-40 and $150 per port for ports 41 and greater,\19\ all on a per
matching engine basis, with NYSE American and NYSE Arca having 17 match
engines and 19 match engines, respectively.\20\ Similarly, The Nasdaq
Stock Market LLC (``NASDAQ'') charges $1,500 per port for Specialized
Quote Interface (``SQF'') ports 1-5, $1,000 per SQF port for ports 6-
20, and $500 per SQF port for ports 21 and greater,\21\ all on a per
matching engine basis, with NASDAQ having multiple matching
engines.\22\ The NASDAQ SQF Interface Specification also provides that
NASDAQ's affiliates, Nasdaq PHLX LLC (``Nasdaq Phlx'') and Nasdaq BX,
Inc. (``Nasdaq BX''), have trading infrastructures that may consist of
multiple matching engines with each matching engine trading only a
range of option underlyings.\23\ Further, the NASDAQ SQF Interface
Specification provides that the SQF infrastructure is such that the
firms connect to one or more servers residing directly on the matching
engine infrastructure.\24\ Since there may be multiple matching
engines, firms will need to connect to each engine's infrastructure in
order to establish the ability to quote the symbols handled by that
engine.\25\ The proposed monthly fee increases for Full Service MEO
Ports would bring the Exchange's fees more in line with that of other
options exchanges, while maintaining a competitive fee structure for
Full Service MEO Ports.
---------------------------------------------------------------------------
\18\ See id.
\19\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees; NYSE Arca Options Fee Schedule, Port Fees.
\20\ See NYSE Technology FAQ and Best Practices: Options,
Section 5.1 (How many matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file detailing the
number of matching engines per options exchange).
\21\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule,
Section 3, Nasdaq Options Market--Ports and Other Services.
\22\ See Nasdaq Specialized Quote Interface (SQF) Specification,
Version 6.5b (updated February 13, 2020), Section 2, Architecture,
available at https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface
Specification'').
\23\ See id.
\24\ See id.
\25\ See id.
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Implementation
The proposed fees will become effective on 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 \26\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \27\ 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.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
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 are
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 the Full Service MEO Port
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 expense the Exchange has
and will incur, and that the Exchange is providing sufficient
transparency (as described below) into how the Exchange determined to
charge such fees. Accordingly, the Exchange is providing an analysis of
its revenues, costs, and
[[Page 64238]]
profitability associated with the Proposed Access Fees. This analysis
includes information regarding its methodology for determining the
costs and revenues associated with the Proposed Access Fees.
In order to determine the Exchange's costs to provide the access
services associated with the Proposed Access Fees, the Exchange
conducted an extensive cost review in which the Exchange analyzed
nearly every expense item in the Exchange's general expense ledger to
determine whether each such expense relates to the Proposed Access
Fees, and, if such expense did so relate, what portion (or percentage)
of such expense actually supports the access services. The sum of all
such portions of expenses represents the total cost of the Exchange to
provide the access services associated with the Proposed Access Fees.
For the avoidance of doubt, no expense amount was allocated twice. The
Exchange is also providing detailed information regarding the
Exchange's cost allocation methodology--namely, information that
explains the Exchange's rationale for determining that it was
reasonable to allocate certain expenses described in this filing
towards the cost to the Exchange to provide the access services
associated with the Proposed Access Fees.
In order to determine the Exchange's projected revenues associated
with the Proposed Access Fees, the Exchange analyzed the number of
Members currently utilizing Full Service MEO Ports, 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 MEI Port
fees.\28\
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\28\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network
Connectivity Fees, and Increase the Number of Additional Limited
Service MIAX Emerald Express Interface Ports Available to Market
Makers) (adopting tiered MEI Port fee structure ranging from $5,000
to $20,500 per month).
---------------------------------------------------------------------------
* * * * *
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'').\29\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\30\ 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.
---------------------------------------------------------------------------
\29\ 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).
\30\ 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'').
---------------------------------------------------------------------------
* * * * *
Over the course of 2021, the Exchange's market share has fluctuated
between approximately 3-6% of the U.S. equity options industry.\31\ 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.
---------------------------------------------------------------------------
\31\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited October 27, 2021).
---------------------------------------------------------------------------
The Exchange believes the proposed 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, some of which charge on a per port
basis, unlike the Exchange. For example, NYSE American (equity options
market share of 7.73% as of October 27, 2021 for the month of October)
\32\ charges $450 per port for order/quote entry ports 1-40 and $150
per port for ports 41 and greater,\33\ all on a per matching engine
basis, with NYSE American having 17 match engines.\34\ Similarly,
NASDAQ (equity options market share of 8.12% as of October 27, 2021 for
the month of October) \35\ charges $1,500 per port for SQF ports 1-5,
$1,000 per SQF port for ports 6-20, and $500 per SQF port for ports 21
and greater,\36\ all on a per matching engine basis, with NASDAQ having
multiple matching engines.\37\ The NASDAQ SQF Interface Specification
provides that PHLX/NOM/BX Options trading infrastructures may consist
of multiple matching engines with each matching engine trading only a
range of option underlyings. Further, the SQF infrastructure is such
that the
[[Page 64239]]
firms connect to one or more servers residing directly on the matching
engine infrastructure. Since there may be multiple matching engines,
firms will need to connect to each engine's infrastructure in order to
establish the ability to quote the symbols handled by that engine.\38\
---------------------------------------------------------------------------
\32\ See id.
\33\ See supra note 19.
\34\ See supra note 20.
\35\ See supra note 21.
\36\ See supra note 21.
\37\ See supra note 22.
\38\ See id.
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In the each of the above cases, the Exchange's highest tiered port
fee, as proposed, is similar to or less than the port fees of competing
options exchanges with like market share. Further, as described in more
detail below, many competing 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 port fee rates in place at competing
options exchanges were filed with the Commission for immediate
effectiveness and remain in place today.
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 MEI Port fees, among
other non-transaction fees, one Member dropped its access to the
Exchange as a result of those fees.\39\ 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.
---------------------------------------------------------------------------
\39\ See supra note 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 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
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,\40\ the total annual expense for providing the access
services associated with the Proposed Access Fees for the Exchange is
projected to be approximately $897,084. The $897,084 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.\41\ 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.\42\ The
$897,084 in projected total annual expense is directly related to the
access services associated with the Proposed Access Fees, and not any
[[Page 64240]]
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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\40\ The Exchange has not yet finalized its 2021 year end
results.
\41\ 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.
\42\ 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 $40,166. 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''),\43\ 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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\43\ 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 material impact on cost
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 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 1.80%
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.\44\
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\44\ 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 0.90% 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.\45\
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\45\ Id.
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The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical
[[Page 64241]]
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 0.90% 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.\46\
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\46\ Id.
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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 0.90% 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.\47\
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\47\ Id.
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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 $856,918.
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.
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 $783,513, 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 8.55% 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.\48\
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\48\ Id.
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The Exchange's depreciation and amortization expense relating to
providing the access services associated with the Proposed Access Fees
is projected to be $64,456, which is only a portion of the $2,864,716
\49\ 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 2.25% 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
[[Page 64242]]
other service, as supported by its cost review.\50\
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\49\ The Exchange notes that the total depreciation expense is
different from the total for the Exchange's filing relating to
Trading Permits because the Exchange factors in the depreciation of
its own internally developed software when assessing costs for Full
Service MEO Ports, resulting in a higher depreciation expense number
in this filing.
\50\ Id.
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The Exchange's occupancy expense relating to providing the access
services associated with the Proposed Access Fees is projected to be
$8,949, 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 Access Fees. Without this office space,
the Exchange would not be able to operate and support the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. Accordingly, the Exchange believes it
is reasonable to allocate the identified portion of its occupancy
expense because such amount represents the Exchange's actual cost to
house the equipment and personnel who operate and support the
Exchange's network infrastructure and the access services associated
with the Proposed Access Fees. The Exchange did not allocate all of the
occupancy expense toward the cost of providing the access services
associated with the Proposed Access Fees, only the portion which the
Exchange identified as being specifically mapped to operating and
supporting the network, approximately 1.80% 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.\51\
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\51\ 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 in to recover its costs,
thus the Exchange believes it is reasonable to allocate a material
portion of its total overall expense towards access fees.
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the access services associated
with the Proposed Access Fees will not result in excessive pricing or
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that its annualized revenue for
providing the access services associated with the Proposed Access Fees
would be approximately $1,476,000 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 $897,084 per annum. Accordingly, on a fully-annualized
basis, the Exchange believes its total projected revenue for the
providing the access services associated with the Proposed Access Fees
will not result in excessive pricing or supra-competitive profit, as
the Exchange will make only a 39% profit margin on the Proposed Access
Fees ($1,476,000 in revenue minus $897,084 in expense = $578,916 profit
per annum). The Exchange notes that the fees charged to each Member for
Full Service MEO Ports can vary from month to month depending on the
type used and the Non-Transaction Fees Volume-Based Tier that the
Member achieves for that month. As such, the revenue projection is not
a static number, with monthly Full Service MEO Port 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'' \52\ profit. Of note, the Guidance defines
``supra-competitive profit'' as profits that exceed the profits that
can be obtained in a competitive market.\53\ With the proposed changes,
the Exchange anticipates that its profit margin will be
[[Page 64243]]
approximately 39%, 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 Full Service MEO ports, which generate billions of messages per
day across the Exchange. 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.
---------------------------------------------------------------------------
\52\ See supra note 30.
\53\ See id.
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While the proposed fees are similar to or less than that of other
options exchanges,\54\ as discussed above, the incremental increase in
revenue generated from the 39% profit margin for access via Full
Service MEO Ports 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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\54\ See supra notes 9, 19, and 21.
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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'' \55\ for 2020 for MIAX Pearl was $11,422,000. MIAX
Pearl projects that the total revenue from ``access fees'' for 2021
will be $20,001,243, inclusive of the Proposed Access Fees described
herein.
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\55\ 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'' \56\ revenue for 2020. Cboe C2 Exchange, Inc. (``C2'') reported
$19,016,000 in ``access and capacity fee'' revenue for 2020.\57\ Cboe
BZX Exchange, Inc. (``BZX'') reported $38,387,000 in ``access and
capacity fee'' revenue for 2020.\58\ Cboe EDGX Exchange, Inc.
(``EDGX'') reported $26,126,000 in ``access and capacity fee'' revenue
for 2020.\59\ PHLX reported $20,817,000 in ``Trade Management
Services'' revenue for 2019.\60\ The Exchange notes it is unable to
compare ``access fee'' revenues with Nasdaq Phlx (or other affiliated
NASDAQ exchanges) because after 2019, the ``Trade Management Services''
line item was bundled into a much larger line item in Nasdaq Phlx's
Form 1, simply titled ``Market services.'' \61\
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\56\ 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.
\57\ See id.
\58\ See id.
\59\ See id.
\60\ According to Nasdaq 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
[Nasdaq Phlx's] published fee schedules.'' See Form 1 Amendment, at
https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\61\ 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, Nasdaq ISE, LLC's (``Nasdaq ISE'') operating profit
margin for 2020 was approximately 85%; Nasdaq Phlx's operating profit
margin for 2020 was approximately 49%; NASDAQ's operating profit margin
for 2020 was approximately 62%; NYSE 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%. Nasdaq ISE's operating profit margin, for all of
2019, was 83%.\62\ Nasdaq ISE's equity options market share for all of
2019 was 8.99% \63\ 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.\64\
Nasdaq Phlx's operating profit margin, for all of 2019, was 67%.\65\
Nasdaq Phlx's equity options market share for all of 2019 was 15.85%
\66\ 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.\67\
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\62\ See Nasdaq Phlx Form 1, Exhibit D, filed June 30, 2020
available at https://sec.report/Document/9999999997-20-003902/.
\63\ See https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Exchange.
\64\ See Nasdaq ISE LLC Options 7 Pricing Schedule, Section 8.A.
Access Services, at https://listingcenter.nasdaq.com/rulebook/ise/rules/ISE%20Options%207.
\65\ See Nasdaq ISE Form 1, filed June 29, 2020 available at
Form 1--ISE--Final (1).pdf (sec.gov).
\66\ See supra note 31.
\67\ 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 Exchange's Initial Proposed Fee Change,\68\ the Exchange
compared projected profit margins to the 2019 operating profit margin
of Nasdaq ISE and Nasdaq Phlx, which were 83% and 67% respectively. The
SIG Letter \69\ contained the opinion that using the overall operating
profit margins of Nasdaq ISE and Nasdaq Phlx was an ``apple to
oranges'' comparison because 2019 was a ``record setting year.'' \70\
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
39% 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
[[Page 64244]]
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.
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\68\ See Securities Exchange Act Release No. 92365 (July 9,
2021), 86 FR 37347 (SR-PEARL-2021-33) (``Initial Proposed Fee
Change'').
\69\ See letter from Richard J. McDonald, Susquehanna
International Group, LLP (``SIG'') to Vanessa Countryman, Secretary,
Commission, dated September 7, 2021 (``SIG Letter'').
\70\ 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 fees are reasonable,
equitably allocated and not unfairly discriminatory because, for the
flat fee, the Exchange provides each Member two (2) Full Service MEO
Ports for each matching engine to which that Member is connected.
Unlike other options exchanges that provide similar port functionality
and charge fees on a per port basis,\71\ the Exchange offers Full
Service MEO Ports as a package and provides Members with the option to
receive up to two Full Service MEO Ports per matching engine to which
it connects. The Exchange currently has twelve (12) matching engines,
which means Members may receive up to twenty-four (24) Full Service MEO
Ports for a single monthly fee, that can vary based on certain volume
percentages. The Exchange currently assesses Members a fee of $5,000
per month in the highest Full Service MEO Port--Bulk Tier, regardless
of the number of Full Service MEO Ports allocated to the Member.
Assuming a Member connects to all twelve (12) matching engines during a
month, with two Full Service MEO Ports per matching engine, this
results in a cost of $208.33 per Full Service MEO Port--Bulk ($5,000
divided by 24) for the month. This fee has been unchanged since the
Exchange adopted Full Service MEO Port fees in 2018.\72\ The Exchange
now proposes to increase the Full Service MEO Port fees, with the
highest Tier fee for a Full Service MEO Port--Bulk of $10,000 per
month. Members will continue to receive two (2) Full Service MEO Ports
to each matching engine to which they are connected for the single flat
monthly fee. Assuming a Member connects to all twelve (12) matching
engines during the month, and achieves the highest Tier for that month,
with two Full Service MEO Ports--Bulk per matching engine, this would
result in a cost of $416.67 per Full Service MEO Port ($10,000 divided
by 24).
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\71\ See supra notes 19 and 21.
\72\ See supra note 10.
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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.\73\ 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.\74\ 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.\75\
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\73\ 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.
\74\ 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.
\75\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete.
Intra-Market Competition
The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the Proposed Access Fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation of the Proposed Access
Fees reflects the network resources consumed by the various size of
market participants--lowest bandwidth consuming members pay the least,
and highest bandwidth consuming members pays the most, particularly
since higher bandwidth consumption translates to higher costs to the
Exchange.
Inter-Market Competition
The Exchange believes the Proposed Access Fees do not place an
undue burden on competition on other options exchanges that is not
necessary or appropriate. In particular, options market participants
are not forced to connect to (and purchase MEO Ports from) all options
exchanges. The Exchange also notes that it has far less Members as
compared to the much greater number of members at other options
exchanges. Not only does MIAX Pearl have less than half the number of
members as certain other options exchanges, but there are also a number
of the Exchange's Members that do not connect directly to MIAX Pearl.
There are a number of large users of the MEO Interface and broker-
dealers that are members of other options exchange but not Members of
MIAX Pearl. The Exchange is also unaware of any assertion that its
existing fee levels or the Proposed Access Fees would somehow unduly
impair its competition with other options exchanges. To the contrary,
if the fees charged are deemed too high by market participants, they
can simply disconnect.
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
[[Page 64245]]
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.\76\ 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. The Exchange believes that the ever-shifting market share
among exchanges from month to month demonstrates that market
participants can discontinue or reduce use of certain categories of
products, or shift order flow, in response to fee changes. In such an
environment, the Exchange must continually adjust its fees and fee
waivers to remain competitive with other exchanges and to attract order
flow to the Exchange.
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\76\ See supra note 31.
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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 initially filed this proposed fee change on July 1,
2021 and that proposal was published in the Federal Register on July
15, 2021.\77\ The Commission received one comment letter on the Initial
Proposed Fee Change.\78\ The Exchange withdrew Initial Proposed Fee
Change on October 12, 2021.\79\ The Exchange now responds to the SIG
Letter in this filing.
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\77\ See supra note 68.
\78\ See supra note 69.
\79\ See Securities Exchange Act Release No. 93347 (October 15,
2021), 86 FR 58341 (October 21, 2021) (SR-PEARL-2021-33) (Notice of
Withdrawal of a Proposed Rule Change to Amend the MIAX Pearl Options
Fee Schedule to Increase the Monthly Fees for MIAX Express Network
Full Service Ports).
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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.'' \80\ 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.
---------------------------------------------------------------------------
\80\ 17 CFR 201.700(b)(3).
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Until recently, the Exchange has operated at a net annual loss
since it launched operations in 2017.\81\ 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.
Similar justifications for the proposed fee change included in the
Initial Proposed Fee Change, but also in this filing, were previously
included in similar fee changes filed by the Exchange and its
affiliates, MIAX Emerald and MIAX, and SIG did not submit a comment
letter on those filings.\82\ Those filings were not suspended by the
Commission and continue to remain in effect. The justification included
in each of the prior filings was the result of numerous withdrawals and
re-filings of the proposals to address comments received from
Commission Staff over many months. 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.\83\ 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 the prior fee changes
that survived Commission scrutiny. 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.'' \84\ That same
commenter also noted their ``worry that the Commission's process for
reviewing and evaluating exchange filings may be inconsistently
applied.'' \85\
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\81\ 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/.
\82\ See Securities Exchange Act Release Nos. 91858 (May 12,
2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Amend the MIAX Pearl Fee Schedule to Remove the Cap on the Number of
Additional Limited Service Ports Available to Market Makers); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt Port Fees, Increase
Certain Network Connectivity Fees, and Increase the Number of
Additional Limited Service MIAX Emerald Express Interface Ports
Available to Market Makers); and 91857 (May 12, 2021), 86 FR 26973
(May 18, 2021) (SR-MIAX-2021-19) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To
Remove the Cap on the Number of Additional Limited Service Ports
Available to Market Makers).
\83\ 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) (SR-PEARL-2021-23).
\84\ See letter from Tyler Gellasch, Executive Director, Healthy
Markets Association, to Hon. Gary Gensler, Chair, Commission, dated
October 29, 2021.
\85\ 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).
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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.
[[Page 64246]]
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.
The SIG Letter was submitted in response to six (6) filings submitted
by the Exchange and its affiliates, MIAX and MIAX Emerald, and is
primarily focused on proposed fee changes concerning 10Gb ULL
connectivity.\86\ With regards to the Initial Proposed Fee Change, the
SIG Letter does not directly address the proposed fees or lay out
specific arguments as to why the proposal is not consistent with
Section 6(b)(4) of the Act. Rather, it simply describes the proposed
fee change and flippantly states that its claims concerning the 10Gb
ULL fee change proposals by the Exchange, and its affiliates, apply to
the Initial Proposed Fee Change. Nonetheless, the Exchange submits the
below response to the SIG Letter concerning the Initial Proposed Fee
Change.
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\86\ See Securities Exchange Act Release Nos. 92643 (August 11,
2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-2021-35); 92661
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37);
92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-
2021-36); 92645 (August 11, 2021), 86 FR 46048 (August 17, 2021)
(SR-EMERALD-2021-23); and 92662 (August 13, 2021), 86 FR 46726
(August 19, 2021) (SR-EMERALD-2021-25).
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General
First, the SIG Letter states that 10Gb ULL ``lines are critical to
Exchange members to be competitive and to provide essential protection
from adverse market events'' (emphasis added).\87\ The Exchange notes
that this statement is generally not true for Full Service MEO Ports as
those ports are used primarily for order entry and not risk protection
activities like purging quotes resting on the MIAX Pearl Options Book.
Full Service MEO Ports are essentially used for competitive reasons and
Members may choose to utilize one or two Full Service MEO Ports \88\
based on their business needs and desire to attempt to access the
market quicker by using one port that may have less latency. For
instance, a Member may have just sent numerous messages and/or orders
over one of their Full Service MEO Ports that are in queue to be
processed. That same Member then seeks to enter an order to remove
liquidity from the Exchange's Book. That Member may choose to send that
order over another of their other Full Service MEO Ports with less
message and/or order traffic or any of their optional additional Limit
Service MEO Ports \89\ to ensure that their liquidity taking order
accesses the Exchange quicker because that port's queue is shorter.
---------------------------------------------------------------------------
\87\ See SIG Letter at page 2, supra note 69.
\88\ The rates set forth for Full Service MEO Ports under
Section 5(d) of the Exchange's Fee Schedule entitle a Member to two
(2) such Ports for each Matching Engine for a single port fee.
\89\ Members may be allocated two (2) Full-Service MEO Ports per
Matching Engine and may request Limited Service MEO Ports for which
the Exchange will assess no fee for the first two Limited Service
MEO Ports requested by the Member. See Section 5(d) of the
Exchange's Fee Schedule.
---------------------------------------------------------------------------
The Tiered Pricing Structure for Full Service MEO Ports Provides for
the Equitable Allocation of Reasonable Dues, Fees, and Other Charges
The SIG Letter challenges the below two bases the Exchange set
forth in its Initial Proposed Fee Change and herein to support the
assertion that the proposal provides for the equitable allocation of
reasonable dues, fees, and other charges:
``If the Exchanges were to attempt to establish
unreasonable pricing, then no market participant would join or connect
to the Exchanges, and existing market participants would disconnect.
The fees will not result in excessive pricing or supra-
competitive profit.'' \90\
---------------------------------------------------------------------------
\90\ See SIG Letter at page 3, supra note 69.
---------------------------------------------------------------------------
The Exchange responds to each of SIG's challenges in turn below.
If the Exchanges Were To Attempt To Establish Unreasonable Pricing,
Then No Market Participant Would Join or Connect to the Exchange, and
Existing Market Participants Would Disconnect
The SIG Letter asserts that the prospect that a market participant
may withdraw from the Exchange ``if the participant determines that any
of their fees are too high is in no way a basis for claiming that a fee
increase is reasonable.'' \91\ The SIG Letter further asserts that the
Exchange's ``claim that a market participant would leave the Exchanges,
or any of them, if a given fee was felt to be too high is an
unsupported claim.'' \92\ The Exchange, in fact, did support its claim
by providing two examples where members chose to depart the Exchange,
or a competing exchange, directly due to the specific fee increases.
SIG attempts to dismiss the examples provided by the Exchange by
implying that the members may have chosen to depart the Exchange, or
the competing exchange, for other reasons. In the first example, R2G
explicitly stated in their comment letter ``[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.'' There is no other way to interpret R2G's
statement other than that R2G terminated their access to that
particular exchange because of that particular non-transaction fee
increase. In the second example, MIAX Emerald, not SIG, is uniquely
positioned to know why this Member chose to depart MIAX Emerald as it
discussed the issues with the Member at the time of their departure and
that Member stated it was related to the imposition of non-transaction
fees. The SIG Letter correctly asserts that ``[t]here are many reasons
a market participant may join, remain at, or leave an exchange. . . .''
\93\ However, the members discussed in the examples above terminated
their exchange access because of fees alone.
---------------------------------------------------------------------------
\91\ Id.
\92\ Id.
\93\ Id.
---------------------------------------------------------------------------
Further, the argument that a Member's ability to terminate access
to an exchange based on fees has been used not only in this proposal,
but also in other fee filings submitted by the Exchange and its
affiliates to justify certain non-transaction fees.\94\ The Exchange
discussed this basis with Commission Staff as it shows that market
participants may choose not to pay a fee where they view that fee as
excessive. The ability to terminate access to an exchange shows 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. A Member's ability to
terminate access to the Exchange where it deems a fee increase too
excessive is not the only basis, but one of many, used to support the
[[Page 64247]]
Exchange's justification that the proposal is consistent with the Act.
---------------------------------------------------------------------------
\94\ See supra note 82.
---------------------------------------------------------------------------
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 39% profit margin. The Exchange then compared its projected
profit margin to the 2019 operating profit margin of Nasdaq ISE and
Nasdaq Phlx, which were 83% and 67%, respectively. SIG opined that a
using the overall operating profit margins of Nasdaq ISE and Nasdaq
Phlx is an ``apple-to-oranges'' comparison because 2019 was ``record
setting year.'' \95\ SIG assumes that because 2019 was a record setting
year for options volumes, that each options exchange generated above
average profits without providing 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.\96\ The Exchange also included
in this proposal additional data from its own 2021 Audited Financial
Statements and projections of future revenues and costs from the
proposed fee change.
---------------------------------------------------------------------------
\95\ See SIG Letter at page 6, supra note 69.
\96\ See supra notes 60, 61, 62, and 65 and accompanying text.
---------------------------------------------------------------------------
The Exchange sought to provide additional data to support a 39%
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
exchanges' profit margins. SIG has access to the same public data as
the Exchange used in making the above projections regarding Nasdaq ISE
and Nasdaq Phlx and is free to generate its own assumptions on that
data if it believes the Exchange's calculations are wrong or misguided.
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\ 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.
---------------------------------------------------------------------------
\97\ See supra note 83.
---------------------------------------------------------------------------
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.\98\ The Exchange has
seen price 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.
---------------------------------------------------------------------------
\98\ 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 Tiered Pricing Structure Is Not Part of a Discriminatory
Fee Structure and Tiered Fee Structures Are Commonplace Amongst
Exchanges
The SIG Letter challenges the below three bases the Exchange set
forth in its Initial Proposed Fee Change and herein to support that the
proposed tiered pricing structure provides for the equitable allocation
of reasonable dues, fees, and other charges:
``The Exchanges contend that the proposed structure would
encourage firms to be more economical and efficient in the number of
connections they purchase. The Exchanges assert that this will enable
them to better monitor and provide access to their networks to ensure
sufficient capacity and headroom in the System.
The Exchanges claim that the majority of members and non-
members that purchase 10Gb ULL connections will either save money or
pay the same amount after the tiered-pricing structure is implemented.
The Exchanges contend that it benefits overall competition
in the marketplace to allow relatively new entrants like the Exchanges
to propose fees that may help these new entrants recoup their
infrastructure investments.'' \99\
---------------------------------------------------------------------------
\99\ See SIG Letter at page 4, supra note 69.
---------------------------------------------------------------------------
The SIG Letter's challenges to the first two assertions above are
not applicable here as a tiered pricing structure for Full Service MEO
Ports is not a new proposal, but was previously in place prior to this
proposal and the Initial Proposed Fee Change. The Exchange is therefore
only responding to the SIG Letter's challenge to the Exchange's third
assertion.
SIG Incorrectly Claims That the Exchange Contends That It Benefits
Overall Competition in the Marketplace To Allow Relatively New Entrants
Like the Exchange To Propose Fees That May Help These New Entrants
Recoup Their Infrastructure Investments
Nowhere in this proposal or in the Initial Proposed Fee change did
the Exchange assert that it benefits competition to allow a new
exchange entrant to recoup their infrastructure costs. Rather, 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.'' 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.\100\ 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
[[Page 64248]]
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.
---------------------------------------------------------------------------
\100\ See supra note 83.
---------------------------------------------------------------------------
As stated above, until recently, the Exchange has operated at a net
annual loss since it launched operations in 2017.\101\ 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 little to no 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
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 chose 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.
---------------------------------------------------------------------------
\101\ See supra note 81.
---------------------------------------------------------------------------
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,\102\ and Rule 19b-4(f)(2) \103\ 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.
---------------------------------------------------------------------------
\102\ 15 U.S.C. 78s(b)(3)(A)(ii).
\103\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to sec.gov">[email protected]sec.gov. Please include
File Number SR-PEARL-2021-53 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-2021-53. 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-2021-53 and should be submitted on
or before December 8, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\104\
---------------------------------------------------------------------------
\104\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25020 Filed 11-16-21; 8:45 am]
BILLING CODE 8011-01-P
