Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule To Adopt a Tiered-Pricing Structure for Certain Connectivity Fees; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change, 9659-9676 [2022-03653]
Download as PDF
<![CDATA[
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
Dated: February 15, 2022.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03645 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–135, OMB Control No.
3235–0175]
Submission for OMB Review;
Comment Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
lotter on DSK11XQN23PROD with NOTICES1
Extension:
Form N–8A
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for extension of the
previously approved collection of
information discussed below.
The Investment Company Act of 1940
(‘‘Investment Company Act’’) (15 U.S.C.
80a–1 et seq.) requires investment
companies to register with the
Commission before they conduct any
business in interstate commerce.
Section 8(a) of the Investment Company
Act provides that an investment
company shall be deemed to be
registered upon receipt by the
Commission of a notification of
registration in such form as the
Commission prescribes. Form N–8A (17
CFR 274.10) is the form for notification
of registration that the Commission has
adopted under section 8(a). The purpose
of such notification of registration
provided on Form N–8A is to notify the
Commission of the existence of
investment companies required to be
registered under the Investment
Company Act and to enable the
Commission to administer the
provisions of the Investment Company
Act with respect to those companies.
After an investment company has filed
its notification of registration under
section 8(a), the company is then subject
to the provisions of the Investment
Company Act which govern certain
aspects of its organization and activities,
such as the composition of its board of
directors and the issuance of senior
securities. Form N–8A requires an
investment company to provide its
name, state of organization, form of
organization, classification, the name
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
and address of each investment adviser
of the investment company, the current
value of its total assets, and certain
other information readily available to
the investment company. If the
investment company is filing a
registration statement as required by
Section 8(b) of the Investment Company
Act concurrently with its notification of
registration, Form N–8A requires only
that the registrant file the cover page
(giving its name, address, and agent for
service of process) and sign the form in
order to effect registration.
Based on recent filings of notifications
of registration on Form N–8A, we
estimate that about 101 investment
companies file such notifications each
year. An investment company must only
file a notification of registration on
Form N–8A once. The currently
approved average hour burden per
investment company of preparing and
filing a notification of registration on
Form N–8A is one hour. Based on the
Commission staff’s experience with the
requirements of Form N–8A and with
disclosure documents generally—and
considering that investment companies
that are filing notifications of
registration on Form N–8A
simultaneously with the registration
statement under the Investment
Company Act are only required by Form
N–8A to file a signed cover page—we
continue to believe that this estimate is
appropriate. Therefore, we estimate that
the total annual hour burden to prepare
and file notifications of registration on
Form N–8A is 101 hours. The currently
approved cost burden of Form N–8A is
$449. We are updating the estimated
costs burden to $496 to account for the
effects of inflation. Therefore, we
estimate that the total annual cost
burden associated with preparing and
filing notifications of registration on
Form N–8A is about $50,096.
Estimates of average burden hours
and costs are made solely for the
purposes of the Paperwork Reduction
Act, and are not derived from a
comprehensive or even representative
survey or study of the costs of
Commission rules and forms.
Compliance with the collection of
information requirements of Form N–8A
is mandatory. Responses to the
collection of information will not be
kept confidential. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.
The public may view the background
documentation for this information
collection at the following website,
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
9659
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to:
Lindsay.M.Abate@omb.eop.gov; and (ii)
David Bottom, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o John R.
Pezzullo, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov. Written comments
and recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice to www.reginfo.gov/public/do/
PRAMain. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function.
Dated: February 15, 2022.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03622 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94258; File No. SR–
PEARL–2022–03]
Self-Regulatory Organizations; MIAX
PEARL LLC; Notice of Filing of a
Proposed Rule Change To Amend the
MIAX PEARL Options Fee Schedule To
Adopt a Tiered-Pricing Structure for
Certain Connectivity Fees; Suspension
of and Order Instituting Proceedings
To Determine Whether To Approve or
Disapprove the Proposed Rule Change
February 15, 2022.
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 February
1, 2022, MIAX PEARL, LLC (‘‘MIAX
Pearl’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I and II 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 and is, pursuant
to Section 19(b)(3)(C) of the Act, hereby:
(i) Temporarily suspending the rule
change; and (ii) instituting proceedings
to determine whether to approve or
disapprove the proposed rule change.
1 15
2 17
E:\FR\FM\22FEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
22FEN1
9660
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
amend certain connectivity fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV [sic] 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
lotter on DSK11XQN23PROD with NOTICES1
1. Purpose
The Exchange proposes to amend the
Fee Schedule to adopt a tiered-pricing
structure for the 10 gigabit (‘‘Gb’’) ultralow latency (‘‘ULL’’) fiber connection
available to Members 3 and nonMembers. The Exchange initially filed
this proposal on July 30, 2021, with the
proposed fee changes effective
beginning August 1, 2021 (‘‘First
Proposed Rule Change’’).4 The First
Proposed Rule Change was published
for comment in the Federal Register on
August 17, 2021.5 The Commission
received one comment letter on the First
Proposed Rule Change.6 The Exchange
withdrew the First Proposed Rule
Change on September 24, 2021 and resubmitted the proposal on September
24, 2021, with the proposed fee changes
3 The term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of these Rules for purposes
of trading on the Exchange as an ‘‘Electronic
Exchange Member’’ or ‘‘Market Maker.’’ Members
are deemed ‘‘members’’ under the Exchange Act.
See Exchange Rule 100.
4 See Securities Exchange Act Release No. 92644
(August 11, 2021), 86 FR 46055 (August 17, 2021)
(SR–PEARL–2021–36).
5 Id.
6 See Letter from Richard J. McDonald,
Susquehanna International Group, LLC (‘‘SIG’’), to
Vanessa Countryman, Secretary, Commission, dated
September 7, 2021 (‘‘SIG Letter 1’’).
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
being immediately effective (‘‘Second
Proposed Rule Change’’).7 The Second
Proposed Rule Change was published
for comment in the Federal Register on
October 4, 2021.8 The Second Proposed
Rule Change provided additional
justification for the proposed fee
changes and addressed certain points
raised in the single comment letter that
was submitted on the First Proposed
Rule Change. The Commission received
four comment letters from three separate
commenters on the Second Proposed
Rule Change.9 The Commission
suspended the Second Proposed Rule
Change on November 22, 2021.10 The
Exchange withdrew the Second
Proposed Rule Change on December 1,
2021 and submitted a revised proposal
for immediate effectiveness (‘‘Third
Proposed Rule Change’’).11 The Third
Proposed Rule Change meaningfully
attempted to address issues or questions
that have been raised by providing
additional justification and explanation
for the proposed fee changes and
directly respond to the points raised in
SIG Letters 1, 2, and 3, as well as the
SIFMA Letter submitted on the First and
Second Proposed Rule Changes,12 and
7 See Securities Exchange Act Release No. 93162
(September 28, 2021), 86 FR 54739 (October 4,
2021) (SR–PEARL–2021–45).
8 Id.
9 See letters from Richard J. McDonald, SIG, to
Vanessa Countryman, Secretary, Commission, dated
October 1, 2021 (‘‘SIG Letter 2’’) and October 26,
2021 (‘‘SIG Letter 3’’). See also letter from Tyler
Gellasch, Executive Director, Healthy Markets
Association (‘‘HMA’’), to Hon. Gary Gensler, Chair,
Commission, dated October 29, 2021 (commenting
on SR–CboeEDGA–2021–017, SR–CboeBYX–2021–
020, SR–Cboe–BZX–2021–047, SR–CboeEDGX–
2021–030, SR–MIAX–2021–41, SR–PEARL–2021–
45, and SR–EMERALD–2021–29 and stating that
‘‘MIAX has repeatedly filed to change its
connectivity fees in a way that will materially lower
costs for many users, while increasing the costs for
some of its heaviest of users. These filings have
been withdrawn and repeatedly refiled. Each time,
however, the filings contain significantly greater
information about who is impacted and how than
other filings that have been permitted to take effect
without suspension’’) (emphasis added) (‘‘HMA
Letter’’); and Ellen Green, Managing Director,
Equity and Options Market Structure, Securities
Industry and Financial Markets Association
(‘‘SIFMA’’), to Vanessa Countryman, Secretary,
Commission, dated November 26, 2021 (‘‘SIFMA
Letter’’).
10 See Securities Exchange Act Release No. 93639
(November 22, 2021), 86 FR 67758 (November 29,
2021).
11 See Securities Exchange Act Release No. 93774
(December 14, 2021), 86 FR 71952 (December 20,
2021) (SR–PEARL–2021–57).
12 The Exchange notes that while the HMA Letter
applauds the level of disclosure the Exchange
included in the First and Second Proposed Rule
Changes, the HMA Letter does not raise specific
issues with the First or Second Proposed Rule
Changes. Rather, it references the Exchange’s
proposals by way of comparison to show the
varying levels of transparency in exchange fees
filings and recommends changes to the
Commission’s review process of exchange fee
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
feedback provided by Commission Staff
during a telephone conversation on
November 18, 2021 relating to the
Second Proposed Rule Change. The
Third Proposed Rule Change was
published for comment in the Federal
Register on December 20, 2021.13 The
Exchange receive no comment letters on
the Third Proposed Rule Change. The
Commission suspended the Third
Proposed Rule Change on January 27,
2022.14 The Exchange withdrew the
Third Proposed Rule Change on
February 1, 2022 and now submits this
proposal for immediate effectiveness
(‘‘Fourth Proposed Rule Change’’). This
Fourth Proposed Rule Change provides
additional justification and explanation
for the proposed fee changes.
10Gb ULL Tiered-Pricing Structure
The Exchange proposes to amend
Sections 5)a)–b) of the Fee Schedule to
provide for a tiered-pricing structure for
10Gb ULL connections for Members and
non-Members. Prior to the First
Proposed Rule Change, the Exchange
assessed Members and non-Members a
flat monthly fee of $10,000 per 10Gb
ULL connection for access to the
Exchange’s primary and secondary
facilities.
The Exchange now proposes to move
from a flat monthly fee per connection
to a tiered-pricing structure under
which the monthly fee would vary
depending on the number of 10Gb ULL
connections each Member or nonMember elects to purchase per
exchange. Specifically, the Exchange
proposes to decrease the fee for the first
and second 10Gb ULL connections for
each Member and non-Member from the
current flat monthly fee of $10,000 to
$9,000 per connection. To encourage
more efficient connectivity usage, the
Exchange proposes to increase the per
connection fee for Members and nonMembers that purchase more than two
10Gb ULL connections. In particular, (i)
the third and fourth 10Gb ULL
connections for each Member or nonMember will increase from the current
flat monthly fee of $10,000 to $11,000
per connection; and (ii) for the fifth
10Gb ULL connection, and each 10Gb
ULL connection purchased by Members
and non-Members thereafter, the fee
will increase from the flat monthly fee
filings generally. Therefore, the Exchange does not
feel it is necessary to address the issues raised in
the HMA Letter.
13 See supra note 11.
14 See Securities Exchange Act Release No. 94088
(January 27, 2022) (Suspension of and Order
Instituting Proceedings to Determine Whether to
Approve or Disapprove Proposed Rule Changes to
Amend the Fee Schedules to Adopt a Tiered-Pricing
Structure for Certain Connectivity Fees).
E:\FR\FM\22FEN1.SGM
22FEN1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
of $10,000 to $13,000 per connection.
The proposed 10Gb ULL tiered-pricing
structure and fees are collectively
referred to herein as the ‘‘Proposed
Access Fees.’’
The Exchange believes the other
exchanges’ connectivity fees are a useful
example of alternative approaches to
providing and charging for connectivity
and provides the below table for
comparison purposes only to show how
its proposed fees compare to fees
currently charged by other options
9661
exchanges for similar connectivity. As
shown by the below table, the
Exchange’s proposed highest tier is still
less than fees charged for similar
connectivity provided by other options
exchanges.
Exchange
Type of port
MIAX Pearl Options (as proposed) ....................
10Gb ULL .........................................................
The NASDAQ Stock Market LLC
(‘‘NASDAQ’’) 15.
Nasdaq ISE LLC (‘‘ISE’’) 16 ................................
Nasdaq PHLX LLC (‘‘PHLX’’) 17 .........................
NYSE American LLC (‘‘Amex’’) 18 ......................
10Gb Ultra fiber ...............................................
1–2 connection. $9,000.00 3–4 connections.
$11,000.00 5 or more. $13,000.00.
$15,000.00.
10Gb Ultra fiber ...............................................
10Gb Ultra Fiber ..............................................
10Gb LX LCN ..................................................
$15,000.00.
$15,000.00.
$22,000.00.
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange proposes to
pro-rate the fees when a Member or nonMember makes a change to the
connectivity (by adding or deleting
connections) with such pro-rated fees
based on the number of trading days
that the Member or non-Member has
been credentialed to utilize any of the
Exchange APIs or market data feeds in
the production environment through
such connection, divided by the total
number of trading days in such month
multiplied by the applicable monthly
rate. The Exchange will continue to
assess monthly Member and nonMember network connectivity fees for
connectivity to the disaster recovery
facility in each month during which the
Member or non-Member has established
connectivity with the disaster recovery
facility.
The Exchange’s MIAX Express
Network Interconnect (‘‘MENI’’) can be
configured to provide Members and
non-Members of the Exchange network
connectivity to the trading platforms,
market data systems, test systems, and
disaster recovery facilities of both the
Exchange and its affiliate, Miami
International Securities Exchange, LLC
(‘‘MIAX’’), via a single, shared
connection. Members and non-Members
utilizing the MENI to connect to the
trading platforms, market data systems,
test systems, and disaster recovery
facilities of the Exchange and MIAX via
15 See NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
16 See PHLX Rules, General 8: Connectivity.
17 See ISE Rules, General 8: Connectivity.
18 See NYSE American Options Fee Schedule,
Section IV.
VerDate Sep<11>2014
21:41 Feb 18, 2022
Jkt 256001
Monthly fee
a single, shared connection will
continue to only be assessed one
monthly connectivity fee per
connection, regardless of the trading
platforms, market data systems, test
systems, and disaster recovery facilities
accessed via such connection.
2. Statutory Basis
The Exchange believes that the
Proposed Access Fees are consistent
with Section 6(b) of the Act 19 in
general, and furthers the objectives of
Section 6(b)(4) of the Act 20 in
particular, in that they provide for the
equitable allocation of reasonable dues,
fees and other charges among Members
and other persons using any facility or
system which the Exchange operates or
controls. The Exchange also believes the
Proposed Access Fees further the
objectives of Section 6(b)(5) of the Act 21
in that they are designed to promote just
and equitable principles of trade,
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
interest and are not designed to permit
unfair discrimination between
customers, issuers, brokers and dealers.
On March 29, 2019, the Commission
issued an Order disapproving a
proposed fee change by the BOX Market
LLC Options Facility to establish
connectivity fees for its BOX Network
(the ‘‘BOX Order’’).22 On May 21, 2019,
the Commission Staff issued guidance
‘‘to assist the national securities
exchanges and FINRA . . . in preparing
19 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
21 15 U.S.C. 78f(b)(5).
22 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) (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 NonParticipants Who Connect to the BOX Network).
20 15
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
Fee Filings that meet their burden to
demonstrate that proposed fees are
consistent with the requirements of the
Securities Exchange Act.’’ 23 Based on
both the BOX Order and the Guidance,
the Exchange believes that the Proposed
Access Fees are consistent with the Act
because they (i) are reasonable,
equitably allocated, not unfairly
discriminatory, and not an undue
burden on competition; (ii) comply with
the BOX Order and the Guidance; (iii)
are supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange, and
its affiliates MIAX Emerald, LLC
(‘‘MIAX Emerald’’) and MIAX, to amend
other non-transaction fees.24
The Proposed Access Fees Will Not
Result in a Supra-Competitive Profit
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 amendment 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
23 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’’).
24 See Securities Exchange Act Release Nos.
91460 (April 2, 2021), 86 FR 18349 (SR–EMERALD–
2021–11) (proposal to adopt port fees, increase
connectivity fees, and increase additional limited
service ports); 91033 (February 1, 2021), 86 FR 8455
(February 5, 2021) (SR–EMERALD–2021–03)
(proposal to adopt trading permit fees); 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02) (proposal to increase
connectivity fees).
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
9662
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
important when an exchange imposes
various access fees for market
participants to access an exchange’s
marketplace. The Exchange deems
connectivity to be access fees. It records
these fees as part of its ‘‘Access Fees’’
revenue in its financial statements.
In the Guidance, the Commission
Staff stated that, ‘‘[a]s an initial step in
assessing the reasonableness of a fee,
staff considers whether the fee is
constrained by significant competitive
forces.’’ 25 The Guidance further states
that, ‘‘. . . even where an SRO cannot
demonstrate, or does not assert, that
significant competitive forces constrain
the fee at issue, a cost-based discussion
may be an alternative basis upon which
to show consistency with the Exchange
Act.’’ 26 In its Guidance, the
Commission Staff further states that,
‘‘[i]f an SRO seeks to support its claims
that a proposed fee is fair and
reasonable because it will permit
recovery of the SRO’s costs, or will not
result in excessive pricing or
supracompetitive profit, specific
information, including quantitative
information, should be provided to
support that argument.’’ 27 The
Exchange does not assert that the
Proposed Access Fees are constrained
by competitive forces. Rather, the
Exchange asserts that the Proposed
Access Fees are reasonable because they
will permit recovery of the Exchange’s
costs in providing access services to
supply 10Gb ULL connectivity and will
not result in the Exchange generating a
supra-competitive profit.
The Guidance defines ‘‘supracompetitive profit’’ as ‘‘profits that
exceed the profits that can be obtained
in a competitive market.’’ 28 The
Commission Staff further states in the
Guidance that ‘‘the SRO should provide
an analysis of the SRO’s baseline
revenues, costs, and profitability (before
the proposed fee change) and the SRO’s
expected revenues, costs, and
profitability (following the proposed fee
change) for the product or service in
question.’’ 29 The Exchange provides
this analysis below.
Based on this analysis, the Exchange
believes the Proposed Access Fees are
reasonable and do not result in a
‘‘supra-competitive’’ 30 profit. The
Exchange believes that it is important to
demonstrate that the Proposed Access
Fees are based on its costs and
reasonable business needs. The
25 See
31 For example, the Exchange only included the
costs associated with providing and supporting
connectivity and excluded from its connectivity
cost calculations any cost not directly associated
with providing and maintaining such connectivity.
Thus, the Exchange notes that this methodology
underestimates the total costs of providing and
maintaining connectivity.
Guidance, supra note 23.
26 Id.
27 Id.
28 Id.
29 Id.
30 Id.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Exchange believes the Proposed Access
Fees will allow the Exchange to offset
expenses the Exchange has and will
incur, and that the Exchange provides
sufficient transparency (described
below) into the costs and revenue
underlying the Proposed Access Fees.
Accordingly, the Exchange provides an
analysis of its revenues, costs, and
profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
and revenues associated with the
Proposed Access Fees. As a result of this
analysis, the Exchange believes the
Proposed Access Fees are fair and
reasonable as a form of cost recovery
plus present the possibility of a
reasonable return for the Exchange’s
aggregate costs of offering connectivity
to the Exchange and MIAX.
The Proposed Access Fees are based
on a cost-plus model. In determining the
appropriate fees to charge, the Exchange
considered its costs and MIAX’s costs to
provide connectivity, using what it
believes to be a conservative
methodology (i.e., that strictly considers
only those costs that are most clearly
directly related to the provision and
maintenance of 10Gb ULL connectivity)
to estimate such costs,31 as well as the
relative costs of providing and
maintaining 10Gb ULL connectivity,
and set fees that are designed to cover
its costs with a limited return in excess
of such costs. However, as discussed
more fully below, such fees may also
result in the Exchange recouping less
than all of its costs of providing and
maintaining 10Gb ULL connectivity
because of the uncertainty of forecasting
subscriber decision making with respect
to firms’ connectivity needs and the
likely potential for increased costs to
procure the third-party services
described below.
To determine the Exchange’s costs to
provide 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 access services associated with
the Proposed Access Fees.
Jkt 256001
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
The Exchange also provides 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. The
Exchange conducted a thorough internal
analysis to determine the portion (or
percentage) of each expense to allocate
to the support of access services
associated with the Proposed Access
Fees. This analysis 32 included
discussions with each Exchange
department head to determine the
expenses that support access services
associated with the Proposed Access
Fees. This included numerous meetings
between the Exchange’s Chief
Information Officer, Chief Financial
Officer, Head of Strategic Planning and
Operations, Chief Technology Officer,
various members of the Legal
Department, and other group leaders.
The Exchange reviewed each individual
expense to determine if such expense
was related to the Proposed Access
Fees. Once the expenses were
identified, the Exchange department
heads, with the assistance of our
internal finance department, reviewed
such expenses holistically on an
Exchange-wide level to determine what
portion of that expense supports
providing access services for the
Proposed Access Fees. The sum of all
such portions of expenses represents the
total cost to the Exchange to provide
access services associated with the
Proposed Access Fees. For the
avoidance of doubt, no expense amount
was allocated twice.
The internal cost analysis conducted
by the Exchange is a proprietary process
that is designed to make a fair and
reasonable assessment of costs and
resources allocated to support the
provision of access services associated
with the Proposed Access Fees. The
Exchange acknowledges that this
assessment can only capture a moment
in time and that costs and resource
allocations may change. That is why the
Exchange has historically, and on an
ongoing basis, periodically revisits its
costs and resource allocations to ensure
it is appropriately allocating resources
to properly provide services to the
Exchange’s constituents. Any
requirement that an exchange should
32 A description of the Exchange’s methodology
for determining the portion (or percentage) of each
expense to allocate to the Proposed Access Fees is
being provided in response to comments from SIG
and SIFMA. See SIG Letter 3 and SIFMA Letter,
supra note 9.
E:\FR\FM\22FEN1.SGM
22FEN1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
conduct a periodic re-evaluation on a
set timeline of its cost justification and
amend its fees accordingly should be
established by the Commission
holistically, applied to all exchanges
and not just through pending fee
proposals, such as this filing. In order to
be fairly applied, such a mandate
should be applied to existing access fees
as well.
In accordance with the Guidance, the
Exchange has provided sufficient detail
to support a finding that the proposed
fees are consistent with the Exchange
Act. The proposal includes a detailed
description of the Exchange’s costs and
how the Exchange determined to
allocate those costs related to the
proposed fees. In fact, the detail and
analysis provided in this proposed rule
change far exceed the level of disclosure
provided in other exchange fee filings
that have not been suspended by the
Commission during its 60-day
suspension period. A finding that this
proposed rule change is inconsistent
with the Exchange Act would run
contrary to the Commission Staff’s
treatment of other recent exchange fee
proposals that have not been suspended
and remain in effect today.33 For
example, a proposed fee filing that
closely resembles the Exchange’s
current filing was submitted in 2020 by
the Cboe Exchange, Inc. (‘‘Cboe’’) and
increased fees for Cboe’s 10Gb
connections.34 This filing was
submitted on September 2, 2020, nearly
15 months after the Staff’s Guidance
was issued. In that filing, the Cboe
stated that the ‘‘proposed changes were
not designed with the objective to
generate an overall increase in access
fee revenue.’’ 35 This filing provided no
cost based data to support its assertion
that the proposal was intended to be
revenue neutral. Among other things,
Cboe did not provide a description of
the costs underlying its provision of
33 See, e.g., Securities Exchange Act Release Nos.
91339 (March 17, 2021), 86 FR 15524 (March 23,
2021) (SR–CboeBZX–2021–020) (increasing fees for
a market data product while not providing a cost
based justification for the increase); 93293 (October
21, 2021), 86 FR 57716 (October 18, 2021) (SR–
PHLX–2021–058) (increasing fees for historical
market data while not providing a cost based
justification for the increase); 92970 (September 14,
2021), 86 FR 52261 (September 20, 2021) (SR–
CboeBZX–2021–047) (adopting fees for a market
data related product while not providing a cost
based justification for the fees); and 89826
(September 10, 2021), 85 FR 57900 (September 16,
2021) (SR–CBOE–2020–086) (increasing
connectivity fees without including a cost based
justification).
34 See Securities Exchange Act Release No. 89826
(September 10, 2020), 85 FR 57900 (September 16,
2020) (SR–CBOE–2020–086) (increasing
connectivity fees without including a cost based
justification).
35 See id. at 57909.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
10Gb connections to show that this
particular fee did not generate a supracompetitive profit or describe how any
potential profit may be offset by
increased costs associated with another
fee included in its proposal. This filing,
nonetheless, was not suspended by the
Commission and remains in effect
today.
The Exchange believes exchanges,
like all businesses, should be provided
flexibility when allocating costs and
resources they deem necessary to
operate their business, including
providing market data and access
services. The Exchange notes that costs
and resource allocations may vary from
business to business and, likewise, costs
and resource allocations may differ from
exchange to exchange when it comes to
providing market data and access
services. It is a business decision that
must be evaluated by each exchange as
to how to allocate internal resources and
what costs to incur internally or via
third parties that it may deem necessary
to support its business and its provision
of market data and access services to
market participants. An exchange’s
costs may also vary based on fees
charged by third parties and periodic
increases to those fees that may be
outside of the control of an exchange.36
To determine the Exchange’s
projected revenue associated with the
Proposed Access Fees, the Exchange
analyzed the number of Members and
non-Members currently utilizing the
10Gb ULL fiber connection and used a
recent monthly billing cycle
representative of 2021 monthly revenue.
The Exchange also provided its baseline
by analyzing July 2021, the monthly
billing cycle prior to the Proposed
Access Fees going into effect, and
compared it to its expenses for that
month.37 As discussed below, 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 and potential increase in
internal and third party expenses. 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
36 See
supra note 32.
37 Id.
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
9663
expense associated with the Proposed
Access Fees were not in place in 2020
or for the first seven months of 2021, the
Exchange believes its 2020 Audited
Unconsolidated Financial Statement is
not representative of its current total
annualized revenue and costs associated
with the Proposed Access Fees.
Accordingly, the Exchange believes it is
more appropriate to analyze the
Proposed Access Fees utilizing its 2021
revenue and costs, as described herein,
which utilize the same presentation
methodology as set forth in the
Exchange’s previously-issued Audited
Unconsolidated Financial Statements.
Based on this analysis, the Exchange
believes that the Proposed Access Fees
are reasonable because they will allow
the Exchange to recover its costs
associated with providing access
services related to the Proposed Access
Fees and not result in excessive pricing
or supra-competitive profit.
As outlined in more detail below, the
Exchange and MIAX project that the
final annualized expense for 2021 to
provide all network connectivity
services (that is, the shared network
connectivity of all connectivity
alternatives of the Exchange and MIAX,
but excluding MIAX Emerald) to be
approximately $15.9 million per annum
or an average of $1,325,000 per month.
The Exchange implemented the
Proposed Access Fees on August 1, 2021
in the First Proposed Rule Change. For
July 2021, prior to the Proposed Access
Fees, the Exchange and MIAX Members
and non-Members purchased a total of
156 10Gb ULL connections for which
the Exchange and MIAX charged a total
of approximately $1,547,620 (this
includes MIAX Pearl Options and MIAX
Members and non-Members dropping or
adding connections mid-month,
resulting a pro-rated charge at times).
This resulted in a profit of $222,620 for
that month (a profit margin of 14.4%).
For the month of October 2021, which
includes the tiered rates for 10Gb ULL
connectivity for the Proposed Access
Fees, MIAX Pearl Options and MIAX
Exchange Members and non-Members
purchased a total of 154 10Gb ULL
connections for which the Exchange and
MIAX charged a total of approximately
$1,684,000 for that month (also
including pro-rated connection charges).
This resulted in a profit of $359,000 for
that month for a profit margin of 21.3%
(a modest 6.9% profit margin increase
from July 2021 to October 2021 from
14.4% to 21.3%). The Exchange believes
that the Proposed Access Fees are
reasonable because they only generate
an additional 6.9% of profit margin permonth (reflecting a 21.3% profit
E:\FR\FM\22FEN1.SGM
22FEN1
9664
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
margin).38 The Exchange cautions that
this profit margin is likely to fluctuate
from month to month based on the
uncertainty of predicting how many
connections may be purchased from
month to month as Members and nonMembers are able to add and drop
connections at any time based on their
own business decisions. This profit
margin may also decrease due to the
significant inflationary pressure on
capital items that the Exchange needs to
purchase to maintain the Exchange’s
technology and systems.39
The Exchange and MIAX have been
subject to price increases upwards of
30% during the past year 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.
As mentioned above, the Exchange
and MIAX project that the annualized
expense for 2021 to provide network
connectivity services (all connectivity
alternatives) to be approximately $15.9
million per annum or an average of
$1,325,000 per month and that these
costs are expected to increase not only
due to anticipated significant
inflationary pressure, but also periodic
fee increases by third parties.40 The
Exchange notes that there are material
costs associated with providing the
infrastructure and headcount to fullysupport access to the Exchange. The
38 The Exchange notes that this profit margin
differs from the First and Second Proposed Rule
Changes because the Exchange now has the benefit
of using a more recent billing cycle under the
Proposed Access Fees (October 2021) and
comparing it to a baseline month (July 2021) from
before the Proposed Access Fees were in effect.
39 See ‘‘Supply chain chaos is already hitting
global growth. And it’s about to get worse’’, by
Holly Ellyatt, CNBC, available at https://
www.cnbc.com/2021/10/18/supply-chain-chaos-ishitting-global-growth-and-could-get-worse.html
(October 18, 2021); and ‘‘There will be things that
people can’t get, at Christmas, White House warns’’
by Jarrett Renshaw and Trevor Hunnicutt, Reuters,
available at https://www.reuters.com/world/us/
americans-may-not-get-some-christmas-treatswhite-house-officials-warn-2021-10-12/ (October 12,
2021).
40 For example, 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. The Exchange further 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.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
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 the cost
to the Exchange to provide access
services associated with the Proposed
Access Fees. For example, new
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number Members
increases, the Exchange and its affiliates
may need to increase their data center
footprint and consume more power,
resulting in increased costs charged by
their third-party data center provider.
Accordingly, the cost to the Exchange
and its affiliates to provide access to its
Members is not fixed. The Exchange
believes the Proposed Access Fees are a
reasonable attempt to offset a portion of
the costs to the Exchange associated
with providing access to its network
infrastructure.
The Exchange only has four primary
sources of revenue and cost recovery
mechanisms to fund all of its
operations: 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 and cost
recovery mechanisms. Until recently,
the Exchange has operated at a
cumulative net annual loss since it
launched operations in 2017.41 This is
a result of providing a low cost
alternative to attract order flow and
encourage market participants to
experience the high determinism and
resiliency of the Exchange’s trading
Systems.42 To do so, the Exchange chose
to waive the fees for some nontransaction related services or provide
them at a very marginal cost, which was
not profitable to the Exchange. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing higher fees.
41 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 28, 2021,
available at https://www.sec.gov/Archives/edgar/
vprr/2100/21000461.pdf.
42 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
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. As
mentioned above, for 2021,43 the total
annual expense for MIAX Pearl Options
and MIAX for providing the access
services associated with the Proposed
Access Fees is projected to be
approximately $15.9 million, or
approximately $1,325,000 per month.
This 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.44 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.45 The $15.9 million
projected total annual expense is
directly related to the access services
associated with the Proposed Access
Fees, and not any other product or
service offered by the Exchange or
MIAX. It does not include general costs
of operating matching engines and other
trading technology. No expense amount
was allocated twice. Further, the
Exchange notes that, with respect to the
MIAX Pearl Options’ expenses included
43 The Exchange has not yet finalized its 2021
year end results.
44 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.
45 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.
E:\FR\FM\22FEN1.SGM
22FEN1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
herein, those expenses only cover the
MIAX Pearl options market; expenses
associated with MIAX Pearl Equities are
accounted for separately and are not
included within the scope of this filing.
As discussed above, 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. In
performing this calculation, the
Exchange considered other services and
to which the expense may be applied
and how much of the expense is directly
and/or indirectly utilized in providing
those other 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.
lotter on DSK11XQN23PROD with NOTICES1
External Expense Allocations
For 2021, expenses relating to fees
paid by the Exchange and MIAX to
third-parties for products and services
necessary to provide the access services
associated with the Proposed Access
Fees is projected to be $3.9 million. This
includes, but is not limited to, a portion
of the fees paid to: (1) Equinix for data
center services, including for the
primary, secondary, and disaster
recovery locations of the Exchange’s
trading system infrastructure; (2) Zayo
Group Holdings, Inc. (‘‘Zayo’’) for
network services (fiber and bandwidth
products and services) linking the
Exchange’s and its affiliates’ office
locations in Princeton, New Jersey and
Miami, Florida, to all data center
locations; (3) Secure Financial
Transaction Infrastructure (‘‘SFTI’’),46
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.).
46 See
supra note 40.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
For clarity, the Exchange took a
conservative approach in determining
the expense and the percentage of that
expense to be allocated to providing
access services in connection with the
Proposed Access Fees. Only a portion of
all fees paid to such third-parties is
included in the third-party expenses
described 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. This may result in the
Exchange under allocating an expense
to the provision of access services in
connection with the Proposed Access
Fees and such expenses may actually be
higher or increase above what the
Exchange utilizes within this proposal.
Further, the Exchange notes that
expenses associated with its affiliate,
MIAX Emerald, are accounted for
separately and are not included within
the scope of this filing. Further, as part
its ongoing assessment of costs and
expenses (described above), the
Exchange recently conducted a periodic
thorough review of its expenses and
resource allocations which, in turn,
resulted in revised percentage
allocations in this filing. Therefore, 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.
The Exchange believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange and MIAX 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
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
9665
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. According to the
Exchange’s calculations, it allocated
approximately 62% of the total
applicable Equinix expense to providing
the access services associated with the
Proposed Access Fees. 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.47
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.
According to the Exchange’s
calculations, it allocated approximately
62% of the total applicable Zayo
expense to providing the access services
associated with the Proposed Access
Fees. 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 believes it is reasonable
to allocate the identified portions of the
47 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.
48 Id.
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
9666
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
SFTI expense and various other service
providers’ (including Thompson
Reuters, NYSE, Nasdaq, and Internap)
expense because those entities provide
connectivity and feeds for the entire
U.S. options industry, as well as the
content, connectivity services, and
infrastructure services for critical
components of the network. Without
these services from SFTI and various
other service providers, the Exchange
would not be able to operate and
support the network and provide access
to its Members and their customers. The
Exchange did not allocate all of the SFTI
and other service providers’ expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees. According to the
Exchange’s calculations, it allocated
approximately 75% of the total
applicable SFTI and other service
providers’ expense to providing the
access services associated with the
Proposed Access Fees. 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.49
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.
According to the Exchange’s
calculations, it allocated approximately
51% of the total applicable hardware
and software provider expense to
providing the access services associated
with the Proposed Access Fees. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
49 Id. See also supra note 40 (regarding SFTI’s
announced fee increases).
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
access services associated with the
Proposed Access Fees.50
Internal Expense Allocations
For 2021, total projected internal
expenses relating to the Exchange and
MIAX providing the access services
associated with the Proposed Access
Fees are projected to be approximately
$12 million. This includes, but is not
limited to, costs associated with: (1)
Employee compensation and benefits
for full-time employees that support the
access services associated with the
Proposed Access Fees, including staff in
network operations, trading operations,
development, system operations,
business, as well as staff in general
corporate departments (such as legal,
regulatory, and finance) that support
those employees and functions
(including an increase as a result of the
higher determinism project); (2)
depreciation and amortization of
hardware and software used to provide
the access services associated with the
Proposed Access Fees, including
equipment, servers, cabling, purchased
software and internally developed
software used in the production
environment to support the network for
trading; and (3) occupancy costs for
leased office space for staff that provide
the access services associated with the
Proposed Access Fees. The breakdown
of these costs is more fully-described
below.
For clarity, and as stated above, the
Exchange took a conservative approach
in determining the expense and the
percentage of that expense to be
allocated to providing access services in
connection with the Proposed Access
Fees. 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. This may result
in the Exchange under allocating an
expense to the provision of access
services in connection with the
Proposed Access Fees and such
expenses may actually be higher or
increase above what the Exchange
utilizes within this proposal. Further, as
part its ongoing assessment of costs and
expenses (described above), 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 internal expense
50 See
PO 00000
supra note 47.
Frm 00104
Fmt 4703
described above towards the total cost to
the Exchange and MIAX to provide the
access services associated with the
Proposed Access Fees. In particular, the
Exchange’s and MIAX’s combined
employee compensation and benefits
expense relating to providing the access
services associated with the Proposed
Access Fees is projected to be $6.1
million, which is only a portion of the
approximately $12.6 million (for MIAX)
and $9.2 million (for MIAX Pearl
Options) 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 employees
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. According to the
Exchange’s calculations, it allocated
approximately 28% of the total
applicable employee compensation and
benefits expense to providing the access
services associated with the Proposed
Access Fees. 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.51
The Exchange’s and MIAX’s
depreciation and amortization expense
relating to providing the services
associated with the Proposed Access
51 Id.
Sfmt 4703
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
Fees is projected to be $5.3 million,
which is only a portion of the $4.8
million (for MIAX) and $2.9 million (for
MIAX Pearl Options) 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. According to the
Exchange’s calculations, it allocated
approximately 70% of the total
applicable depreciation and
amortization expense to providing the
access services associated with the
Proposed Access Fees, as these access
services would not be possible without
relying on such. The Exchange believes
this allocation is reasonable because it
represents the Exchange’s actual cost to
provide the access services associated
with the Proposed Access Fees, and not
any other service, as supported by its
cost review.52
The Exchange’s and MIAX’s
occupancy expense relating to providing
the services associated with the
Proposed Access Fees is projected to be
approximately $0.6 million, which is
only a portion of the $0.6 million (for
MIAX) and $0.5 million (for MIAX Pearl
Options) 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
52 Id.
VerDate Sep<11>2014
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
200 employees. Approximately twothirds of the Exchange’s staff are in the
Technology department, and the
majority of those staff have some role in
the operation and performance of the
access services associated with the
Proposed Access Fees. 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. According to
the Exchange’s calculations, it allocated
approximately 53% of the total
applicable occupancy expense to
providing the access services associated
with the Proposed Access Fees. 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.53
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 more
deterministic and resilient 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 and MIAX have only four
primary sources of fees to recover their
costs; thus, the Exchange believes it is
reasonable to allocate a material portion
of its total overall expense towards
access fees.
53 Id.
19:42 Feb 18, 2022
Jkt 256001
PO 00000
Frm 00105
Based on the above, the Exchange
believes that its provision of access
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. As
discussed above, the Exchange projects
that its annualized expense for 2021 to
provide network connectivity services
(all connectivity alternatives) to be
approximately $15.9 million per annum
or an average of $1,325,000 per month.
The Exchange implemented the
Proposed Access Fees on August 1,
2021. For July 2021, prior to the
Proposed Access Fees, Exchange
Members and non-Members purchased a
total of 156 10Gb ULL connections for
which the Exchange and MIAX charged
approximately $1,547,620. This resulted
in a profit of $222,620 (a profit margin
of 14.4%) for that month (including prorated charges). For the month of October
2021, which includes the tiered 10Gb
ULL connectivity fees pursuant to the
Proposed Access Fees, the Exchange
and MIAX had Members and nonMembers purchasing a total of 154 10Gb
ULL connections for which the
Exchange and MIAX charged a total of
approximately $1,684,000 (including
pro-rated charges). This resulted in a
profit of $359,000 for that month for a
profit margin of 21.3% (a modest 6.9%
profit margin increase from July 2021 to
October 2021 from 14.4% to 21.3%).
The Exchange believes that the
Proposed Access Fees are reasonable
because they only generate an
additional 6.9% of profit margin per
month (reflecting a 21.3% profit
margin).54 The Exchange believes this
modest increase in profit margin will
allow it to continue to recoup its
expenses and continue to invest in its
technology infrastructure. Therefore, the
Exchange also believes that this
proposed profit margin increase is
reasonable because it represents a
reasonable rate of return.
Again, the Exchange cautions that this
profit margin may fluctuate from month
to month based in the uncertainty of
predicting how many connections may
be purchased from month to month as
Members and non-Members are free to
add and drop connections at any time
based on their own business decisions.
Notwithstanding that the revenue (and
profit margin) may vary from month to
month due to changes in connections
and to changes to the Exchange’s
expenses, the number of connections
has not materially changed over the
prior months. Consequently, the
Exchange believes that the months it has
used as a baseline to perform its
assessment are representative of
54 See
Fmt 4703
Sfmt 4703
9667
E:\FR\FM\22FEN1.SGM
supra note 31.
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
9668
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
reasonably anticipated costs and
expenses. This profit margin may also
decrease due to the significant
inflationary pressure on capital items
that it needs to purchase to maintain the
Exchange’s technology and systems.55
Accordingly, 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.
The Exchange believes that
conducting the above analysis on a per
month basis is reasonable as the revenue
generated from access services subject to
the proposed fee generally remains
static from month to month. The
Exchange also conducted the above
analysis on a per month basis to comply
with the Commission Staff’s Guidance,
which requires a baseline analysis to
assist in determining whether the
proposal generates a supra-competitive
profit. This monthly analysis was also
provided in response to comment
received on prior submissions of this
proposed rule change.
The Exchange reiterates that it only
has four primary sources of revenue and
cost recovery mechanisms: 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 and cost recovery mechanisms.
As a result, each of these fees cannot be
‘‘flat’’ and cover only the expenses
directly related to the fee that is
charged. The above revenue and
associated profit margin therefore are
not solely intended to cover the costs
associated with providing access
services subject to the Proposed Access
Fees.
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 expense 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
55 See
supra note 39.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
expense items, including physical
hardware, software, employee
compensation and benefits, occupancy
costs, and the depreciation and
amortization of equipment, have been
identified through a line-by-line item
analysis to be integral to providing
access services. The Proposed Access
Fees are intended to recover the costs of
providing access to the Exchange’s
System. Accordingly, the Exchange
believes that the Proposed Access Fees
are fair and reasonable because they do
not result in excessive pricing or supracompetitive profit, when comparing the
actual costs to the Exchange versus the
projected annual revenue from the
Proposed Access Fees.
The Proposed Tiered-Pricing Structure
Is Not Unfairly Discriminatory and
Provides for the Equitable Allocation of
Fees, Dues, and Other Charges
The Exchange believes the proposed
tiered-pricing structure is reasonable,
fair, equitable, and not unfairly
discriminatory because it will apply to
all Members and non-Members in the
same manner based on the amount of
10Gb ULL connectivity they require
based on their own business decisions
and usage of Exchange resources. All
similarly situated Members and nonMembers would be subject to the same
fees. The fees do not depend on any
distinction between Members and nonMembers because they are solely
determined by the individual Members’
or non-Members’ business needs and its
impact on Exchange resources.
The proposed tiered-pricing structure
is not unfairly discriminatory and
provides for the equitable allocation of
fees, dues, and other charges because it
is designed to encourage Members and
non-Members to be more efficient and
economical when determining how to
connect to the Exchange and the amount
of the fees are based on the number of
connections a Member or non-Member
utilizes. Charging an incrementally
higher fee to a Member or non-Member
that utilizes numerous connections is
directly related to the increased costs
the Exchange incurs in providing and
maintaining those additional
connections. The proposed tiered
pricing structure should also enable the
Exchange to better monitor and provide
access to the Exchange’s network to
ensure sufficient capacity and headroom
in the System.
The Exchange believes that the
proposal to move to a tiered-pricing
structure for its 10Gb ULL connections
is reasonable, equitably allocated and
not unfairly discriminatory because the
majority of Members and non-Members
that purchase 10Gb ULL connections
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
will either save money or pay the same
amount after the tiered-pricing structure
is implemented. After the effective date
of the First Proposed Rule Change on
August 1, 2021, approximately 80% of
the firms that purchased at least one
10Gb ULL connection experienced a
decrease in their monthly connectivity
fees while only approximately 20% of
firms experienced an increase in their
monthly connectivity fees as a result of
the proposed tiered-pricing structure
when compared to the flat monthly fee
structure. To illustrate, firms that
purchase only one 10Gb ULL
connection per month used to pay the
flat rate of $10,000 per month for that
one 10Gb ULL connection. Pursuant to
the proposed tiered-pricing structure,
these firms now pay $9,000 per month
for that same one 10Gb ULL connection,
saving $1,000 per month or $12,000
annually. Further, firms that purchase
two 10Gb ULL connections per month
previously paid a flat rate of $20,000 per
month ($10,000 × 2) for those two 10Gb
ULL connections. Pursuant to the
proposed tiered-pricing structure, these
firms now pay $18,000 per month
($9,000 × 2) for those two 10Gb ULL
connections, saving $2,000 per month or
$24,000 annually.
To achieve a consistent, premium
network performance, the Exchange
must build out and continue to maintain
a network that has the capacity to
handle the message rate requirements of
not only firms that consume minimal
Exchange connectivity resources, but
also those firms that most heavily
consume Exchange connectivity
resources, network consumers, and
purchasers of 10Gb ULL connectivity.
10Gb ULL connectivity is not an
unlimited resource as the Exchange
needs to purchase additional equipment
to satisfy requests for additional
connections. The Exchange also needs
to provide personnel to set up new
connections, service requests related to
adding new and/or deleting existing
connections, respond to performance
queries from, and to maintain those
connections on behalf of Members and
non-Members. Also, those firms that
utilize 10Gb ULL connectivity typically
generate a disproportionate amount of
messages and order traffic, usually
billions per day across the Exchange.
These billions of messages per day
consume the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities. The Exchange also has to
purchase additional storage capacity on
an ongoing basis to ensure it has
sufficient capacity to store these
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.56 Thus, as the number of
connections an entity has increases,
certain other costs incurred by the
Exchange that are correlated to, though
not directly affected by, connection
costs (e.g., storage costs, surveillance
costs, service expenses) also increase.
The Exchange sought to design the
proposed tiered-pricing structure to set
the amount of the fees to relate to the
number of connections a firm
purchases. The more connections
purchased by a firm likely results in
greater expenditure of Exchange
resources and increased cost to the
Exchange. With this in mind, the
Exchange proposes to decrease the
monthly fees for those firms who
connect to the Exchange as part of their
best execution obligations and generally
tend to send the least amount of orders
and messages over those connections.
The Exchange notes that firms that
primarily route orders seeking best
execution generally only purchase a
limited number of connections. Those
firms also generally send fewer orders
and messages over those connections,
resulting in less strain on Exchange
resources. Therefore, the connectivity
costs will likely be lower for these firms
based on the proposed tiered-pricing
structure.
On a similar note, the Exchange
proposes to increase the fee for those
firms that purchase more connections
resulting in greater expenditure of
Exchange resources and increased cost
to the Exchange. The Exchange notes
that these firms that purchase more than
two to four 10Gb ULL connections
essentially do so for competitive reasons
amongst themselves and choose to
utilize numerous connections based on
their business needs and desire to
attempt to access the market quicker by
using the connection with the least
amount of latency. These firms are
generally engaged in sending liquidity
removing orders to the Exchange and
seek to add more connections so they
can access resting liquidity ahead of
their competitors. For instance, a
Member may have just sent numerous
messages and/or orders over one of their
10Gb ULL connections 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 one or more of their other
56 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
10Gb ULL connections with less
message and/or order traffic to ensure
that their liquidity taking order accesses
the Exchange quicker because that
connection’s queue is shorter. These
firms also tend to frequently add and
drop connections mid-month to
determine which connections have the
least latency, which results in increased
costs to the Exchange to frequently
make changes in the data center and
provide the additional technical and
personnel support necessary to satisfy
these requests.
The firms that engage in the abovedescribed liquidity removing and
advanced trading strategies typically
require multiple connections and,
therefore, generate higher costs by
utilizing more of the Exchange’s
resources. Those firms may also conduct
other latency measurements over their
connections and drop and
simultaneously add connections midmonth based on their own assessment of
their performance. This results in
Exchange staff processing such requests,
potentially purchasing additional
equipment, and performing the
necessary network engineering to
replace those connections in the data
center. Therefore, the Exchange believes
it is equitable for these firms to
experience increased connectivity costs
based on their disproportionate pull on
Exchange resources to provide the
additional connectivity.
In addition, the proposed tieredpricing structure is equitable because it
is designed to encourage Members and
non-Members to be more efficient and
economical when determining how to
connect to the Exchange. Section 6(b)(5)
of the Exchange Act requires the
Exchange to provide access on terms
that are not unfairly discriminatory.57
As stated above, 10Gb ULL connectivity
is not an unlimited resource and the
Exchange’s network is limited in the
amount of connections it can provide.
However, the Exchange must
accommodate requests for additional
connectivity and access to the
Exchange’s System to ensure that the
Exchange is able to provide access on
non-discriminatory terms and ensure
sufficient capacity and headroom in the
System. To accommodate requests for
additional connectivity on top of
current network capacity constraints,
requires that the Exchange purchase
additional equipment to satisfy these
requests. The Exchange also needs to
provide personnel to set up new
connections and to maintain those
connections on behalf of Members and
non-Members. The proposed tiered57 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00107
Fmt 4703
Sfmt 4703
9669
pricing structure is equitable because it
is designed to encourage Members and
non-Members to be more efficient and
economical in selecting the amount of
connectivity they request while
balancing that against the Exchange’s
increased expenses when expanding its
network to accommodate additional
connectivity.
The Proposed Fees Are Reasonable
When Compared to the Fees of Other
Options Exchanges With Similar Market
Share
The Exchange does not have visibility
into other equities exchanges’ costs to
provide connectivity or their fee markup
over those costs, and therefore cannot
use other exchange’s connectivity fees
as a benchmark to determine a
reasonable markup over the costs of
providing connectivity. Nevertheless,
the Exchange believes the other
exchanges’ connectivity fees are a useful
example of alternative approaches to
providing and charging for connectivity.
To that end, the Exchange believes the
proposed tiered-pricing structure for
10Gb ULL connections is reasonable
because the proposed highest tier is still
less than fees charged for similar
connectivity provided by other options
exchanges with comparable market
shares. For example, NASDAQ (equity
options market share of 8.88% as of
November 26, 2021 for the month of
November) 58 charges a monthly fee of
$10,000 per 10Gb fiber connection and
$15,000 per 10Gb Ultra fiber
connection.59 The highest tier of the
Exchange’s proposed fee structure for a
10Gb ULL connection is $13,000 for the
fifth and subsequent connections, which
is $2,000 per month less than NASDAQ
and, unlike NASDAQ, the Exchange
does not charge installation fees. For
market participants with fewer
connections, the difference is even more
stark. For a market participant with two
connections to the Exchange and two
connections to NASDAQ, the difference
in connection fees would be $12,000 per
month. The Exchange notes that the
same connectivity fees described above
for NASDAQ also apply to its affiliates,
ISE 60 (equity options market share of
7.96% as of November 26, 2021 for the
month of November) 61 and PHLX
(equity options market share of 9.31%
as of November 26, 2021 for the month
58 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited
November 26, 2021).
59 See NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
60 See ISE Rules, General 8: Connectivity.
61 See supra note 58.
E:\FR\FM\22FEN1.SGM
22FEN1
9670
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
of November).62 Amex (equity options
market share of 5.05% as of November
26, 2021 for the month of November) 63
charges $15,000 per connection initially
plus $22,000 monthly per 10Gb LX LCN
circuit connection.64 Again, the highest
tier of the Exchange’s proposed fee
structure for a 10Gb ULL connection is
$9,000 per month lower than the Amex
connectivity fee after the first month.
In the each of the above cases, the
Exchange’s highest tier in the proposed
tiered-pricing structure only applies to
the fifth and additional connections and
is still significantly lower than that of
competing options exchanges with
similar market share. Despite proposing
lower or similar fees to that of
competing options exchanges with
similar market share, the Exchange
believes that it provides a premium
network 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 connectivity alternatives.
Each of the connectivity rates in place
at competing options exchanges were
filed with the Commission for
immediate effectiveness and remain in
place today.
The Exchange further believes that the
Proposed Access Fees are reasonable,
equitably allocated and not unfairly
discriminatory because, for one 10Gb
ULL connection, the Exchange provides
each Member or non-Member access to
all twelve (12) matching engines on
MIAX Pearl and a vast majority choose
to connect to all twelve (12) matching
engines. The Exchange believes that
other exchanges require firms to connect
to multiple matching engines.65
lotter on DSK11XQN23PROD with NOTICES1
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
62 See id. See also PHLX Rules, General 8:
Connectivity.
63 See supra note 58.
64 See Amex Fee Schedule, Section IV.
65 See Specialized Quote Interface Specification,
Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX
Options, Version 6.5a, Section 2, Architecture
(revised August 16, 2019), available at https://
www.nasdaqtrader.com/content/technicalsupport/
specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear
whether the NASDAQ exchanges include
connectivity to each matching engine for the single
fee or charge per connection, per matching engine.
See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020). The
Exchange notes that NYSE provides a link to an
Excel file detailing the number of matching engines
per options exchange, with Arca and Amex having
19 and 17 matching engines, respectively.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
necessary or appropriate in furtherance
of the purposes of the Act.
With respect to intra-market
competition, the Exchange does not
believe that the proposed rule change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As
stated above, the Exchange does not
believe its proposed pricing will impose
a barrier to entry to smaller participants
and notes that its proposed connectivity
pricing structure for its 10Gb ULL
connections is associated with relative
usage of the various market participants.
Further, the majority of firms that
purchase 10Gb ULL connections may
either save money or pay the same
amount after the tiered-pricing structure
is implemented. While total cost may be
increased for market participants with
larger capacity needs or for business/
technical preferences, such options
provide far more capacity and are
purchased by those that consume more
resources from the network.
Accordingly, the proposed tieredpricing structure does not favor certain
categories of market participants in a
manner that would impose an undue
burden on competition; rather, the
allocation reflects the network resources
consumed by the various usage of
market participants—lowest bandwidth
consuming members pay the least, and
highest bandwidth consuming members
pay the most, particularly since higher
bandwidth consumption translates to
higher costs to the Exchange.
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, options market participants are
not forced to connect to all options
exchanges. The Exchange operates in a
highly competitive environment, and as
discussed above, its ability to price
access and connectivity is constrained
by competition among exchanges and
third parties. There are other options
markets of which market participants
may connect to trade options. There is
also a possible range of alternative
strategies, including routing to the
exchange through another participant or
market center or accessing the Exchange
indirectly. For example, there are 15
other U.S. options exchanges, which the
Exchange must consider in its pricing
discipline in order to compete for
market participants. In this competitive
environment, market participants are
free to choose which competing
exchange or reseller to use to satisfy
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
their business needs. As a result, the
Exchange believes this proposed rule
change permits fair competition among
national securities exchanges.
Accordingly, the Exchange does not
believe its proposed fee changes impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Regrettably, the Exchange believes
that the application of the Guidance to
date has adversely affected inter-market
competition by impeding the ability of
smaller, low cost exchanges to adopt or
increase fees for their market data and
access services (including connectivity
and port products and services). Since
the adoption of the Guidance, and even
more so recently, it has become harder,
particularly for smaller, low cost
exchanges, to adopt or increase fees to
generate revenue necessary to invest in
systems, provide innovative trading
products and solutions, and improve
competitive standing to the benefit of
the affected exchanges’ market
participants. Although the Staff
Guidance has served an important
policy goal of improving disclosures
and requiring exchanges to justify that
their market data and access fee
proposals are fair and reasonable, it has
also negatively impacted exchanges, and
particularly many smaller, low cost
exchanges, that seek to adopt or increase
fees despite providing enhanced
disclosures and rationale to support
their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
As described above, the Exchange
received one comment letter on the First
Proposed Rule Change and four
comment letters on the Second
Proposed Rule Change.66 The Exchange
responded to the comment letters in the
Third Proposed Rule Change and
repeats its response in is filing. No
comment letters were received in
response to the Third Proposed Rule
Change.
HMA Letter
The HMA Letter does not raise
specific issues with the First or Second
Proposed Rule Changes. Instead the
HMA Letter is generally critical of the
exchange fee filing process contained in
Section 19(b)(3)(A)(ii) of the Act,67 and
Rule 19b–4(f)(2) thereunder,68 and other
exchanges’ fee filings in recent years.
The HMA Letter, however, applauds the
66 See
supra note 9.
U.S.C. 78s(b)(3)(A)(ii).
68 17 CFR 240.19b–4.
67 15
E:\FR\FM\22FEN1.SGM
22FEN1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
level of disclosure the Exchange
included in the First and Second
Proposed Rule Changes and was
supportive of the efforts made by the
Exchange and its affiliates to provide
transparency and justify their proposed
fees. The HMA Letter specifically notes
that:
‘‘MIAX has repeatedly filed to change its
connectivity fees in a way that will
materially lower costs for many users, while
increasing the costs for some of its heaviest
of users. These filings have been withdrawn
and repeatedly refiled. Each time, however,
the filings contain significantly greater
information about who is impacted and how
than other filings that have been permitted to
take effect without suspension. For example,
MIAX detailed the associated projected
revenues generated from the connectivity
fees by user class, again in a clear attempt to
comply with the SRO Fee Filing
Guidance.’’ 69
lotter on DSK11XQN23PROD with NOTICES1
As the HMA Letter notes, the
Exchange refiled its same fee proposals
to include significantly greater
information about who is impacted and
how, primarily at the request of the
Commission Staff and in response to
comments. The Exchange is again
refiling its proposal to include more
information surrounding the proposed
fees and to respond to commenters.
SIG Letter 2
SIG Letter 2 argues that the Exchange,
in withdrawing the First Proposed Rule
Change and refiling the Second
Proposed Rule Change, ‘‘improperly
circumvent[ed] the procedural
protections embedded in Exchange Act
Section 19(b)(3)(C), and subvert[ed] the
balance of interests upheld therein.’’ 70
SIG’s assertion that the Exchange’s
entire reason for withdrawing and
refiling was to subvert the protections of
the Exchange Act are entirely without
merit. The Exchange withdrew the First
Proposed Rule Change and replaced it
with the Second Proposed Rule Change
in good faith to provide additional
justification and explanation for the
proposed fee changes and did so in
compliance with the Exchange Act. The
same is true in this filing, where the
Exchange withdrew the Second
Proposed Rule Change and submitted
this filing to provide additional
justification and explanation for the
proposed fee changes and directly
responds to certain points raised in SIG
Letters 1, 2, and 3, as well as the SIFMA
Letter submitted on the First and
Second Proposed Rule Changes.
As SIG well knows, exchanges are
able withdraw and refile various
proposals (including fee changes and
69 See
70 See
HMA Letter, supra note 9.
SIG Letter 2, supra note 9.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
other rule changes) with the
Commission for a multitude of reasons,
not the least of which is to address
feedback and comments from market
participants and Commission Staff. The
Exchange is well within the bounds of
the Act and the rules and regulations
thereunder to withdraw a proposed rule
change and replace it with a new
proposed rule change in good faith and
to enhance the filing to ensure it
complies with the requirements of the
Act.
SIG Letters 1 and 3
As an initial matter, SIG Letter 1 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.’’ 71
SIG Letter 1’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 First and Second
Proposed Rule Changes and this filing.
Until recently, the Exchange operated
at a net annual loss since it launched
operations in 2017.72 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 in the First Proposed
Rule Change, Second Proposed Rule
Change. Similar justifications for the
proposed fee change included in the
First and Second Proposed Rule
Changes, 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.73 Those filings
71 17
CFR 201.700(b)(3).
supra note 41.
73 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
72 See
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
9671
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 support an assertion that those fee
changes are consistent with the Act.74
The Exchange leveraged its past work
with Commission Staff to ensure the
justification provided herein and in the
First and Second Proposed Rule
Changes include 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
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).
74 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. On April 22,
2021, the Exchange withdrew SR–PEARL–2021–17
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. On May 3, 2021, the Exchange
withdrew SR–PEARL–2021–20 and refiled that
proposal to further clarify its cost methodology. See
SR–PEARL–2021–22. On May 10, 2021, the
Exchange withdrew SR–PEARL–2021–22 and
refiled that proposal as SR–PEARL–2021–23. See
Securities Exchange Act Release No. 91858 (May
12, 2021), 86 FR 26967 (May 18, 2021) (SR–PEARL–
2021–23).
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
9672
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
that have been permitted to take effect
without suspension.’’ 75 That same
commenter also noted their ‘‘worry that
the Commission’s process for reviewing
and evaluating exchange filings may be
inconsistently applied.’’ 76
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
filings should satisfy, and is not
warranted here.
In addition, the arguments in SIG
Letter 1 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 First Proposed Rule
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 First Proposed Rule
Change to address their concerns and
instead chose to submit three comment
letters. One could argue that SIG is
using the comment letter process not to
raise legitimate regulatory concerns
regarding the proposal, but to inhibit or
delay proposed fee changes by the
Exchange.
Nonetheless, the Exchange has
enhanced its cost and revenue analysis
and data in this Third [sic] Proposed
Rule Change to further justify that the
Proposed Access Fees are reasonable in
accordance with the Commission Staff’s
Guidance. Among other things, these
enhancements include providing
baseline information in the form of data
from the month before the Proposed
Access Fees became effective.
The Exchange now responds to SIG
remaining claims below. SIG Letter 3
first summarizes its arguments made in
SIG Letters 1 and 2 and incorporates
those arguments by reference. The
Exchange responded to the arguments in
SIG Letter 2 above. SIG Letter 3
incorporates the following arguments
from SIG Letter 1, which the Exchange
will first respond to in turn, below:
75 See
HMA Letter, supra note 9.
(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).
76 Id.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
‘‘(1) The prospect that a member may
withdraw from the Exchanges if a fee is too
costly is not a basis for asserting that the fee
is reasonable; (2) profit margin comparisons
do not support the Exchanges’ claims that
they will not realize a supracompetitive
profit, the Exchanges’ respective profit
margins of 30% (for MIAX and Pearl) and
51% (for Emerald) in relation to connectivity
fees are high in any event, and comparisons
to competing exchanges’ overall operating
profit margins are an inapt ‘‘apples-tooranges’’ comparison; (3) the Exchanges
provide no support for their claim that their
proposed tiered pricing structure is needed to
encourage efficiency in connectivity usage;
(4) the Exchanges provided no support for
their claim that the tiered pricing structure
allows them to better monitor connectivity
usage, nor that this is an appropriate basis for
the pricing structure in any event; (5) the
Exchanges’ claim that firms who purchase
more 10Gb ULL lines generate ‘‘higher’’ costs
is misleading, and they offered no support for
this claim in any event; (6) no other exchange
has tiered connectivity pricing; (7) the
recoupment of investment for exchange
infrastructure has no supporting nexus with
the claim that the proposed fees are
reasonable, equitably allocated, and not
unfairly discriminatory; and (8) the
recoupment of investment claim belies the
Exchanges’ claim of encouraging efficiency in
connectivity usage.’’ 77
The Exchange’s Examples of Members
Terminating Their Exchange Access
Shows That Members Have Choice
Whether To Connect to an Exchange
Based on Fees
SIG asserts that ‘‘the prospect that a
member may withdraw from the
Exchanges if a fee is too costly is not a
basis for asserting that the fee is
reasonable.’’ 78 SIG misinterprets the
Exchange’s argument here. The
Exchange provided the examples of
firms terminating access to certain
markets due to fees to support its
assertion that firms, including market
makers, are not required to connect to
all markets and may drop access if fees
become too costly for their business
models and alternative or substitute
forms of connectivity are available to
those firms who choose to terminate
access. The Commission Staff Guidance
also provides that ‘‘[a] statement that
substitute products or services are
available to market participants in the
relevant market (e.g., equities or
options) can demonstrate competitive
forces if supported by evidence that
substitute products or services exist.’’ 79
Nonetheless, the Third [sic] Proposed
Rule Change no longer makes this
assertion as a basis for the proposed fee
change and, therefore, the Exchange
77 See
SIG Letter 3, supra note 9.
78 Id.
79 See
PO 00000
Guidance, supra note 23.
Frm 00110
Fmt 4703
Sfmt 4703
believes it is not necessary to respond
to this portion of SIG Letters 1 and 3.
The Proposed Fees Will Not Result in
Excessive Pricing or Supra-Competitive
Profit
Next, SIG asserts that the Exchange’s
‘‘profit margin comparisons do not
support the Exchange’s claims that they
will not realize a supracompetitive
profit,’’ that ‘‘the Exchanges’ respective
profit margins of 30% (for MIAX and
Pearl) and 51% (for Emerald) in relation
to connectivity fees are high in any
event,’’ and ‘‘comparisons to competing
exchanges’ overall operating profit
margins are an inapt ‘apples-to-oranges’
comparison.’’
The Exchange has provided ample
data that the proposed fees would not
result in excessive pricing or a supracompetitive profit. In this Third [sic]
Proposed Rule Change, the Exchange no
longer utilizes a comparison of its profit
margin to that of other options
exchanges as a basis that the Proposed
Access Fees are reasonable. Rather, the
Exchange has enhanced its cost and
revenue analysis and data in this Third
[sic] Proposed Rule Change to further
justify that the Proposed Access Fees are
reasonable in accordance with the
Commission Staff’s Guidance.
Therefore, the Exchange believes it is no
longer necessary to respond to this
portion of SIG Letters 1 and 3.
The Proposed Tiered Pricing Structure
Is Not Unfairly Discriminatory
SIG challenges the proposed fees by
arguing that ‘‘the Exchange[ ] provide[s]
no support for [its] claim that [the]
proposed tiered pricing structure is
needed to encourage efficiency in
connectivity usage and the Exchange[ ]
provided no support for [the] claim that
the tiered pricing structure allows them
to better monitor connectivity usage, nor
that this is an appropriate basis for the
pricing structure in any event.’’ The
Exchange provided additional
justification to support that the
Proposed Access Fees are equitable and
not unfairly discriminatory above in
response to SIG’s assertions.
Firms That Purchase More 10Gb ULL
Generate Higher Exchange Costs
SIG argues that ‘‘the Exchanges’ claim
that firms who purchase more 10Gb
ULL lines generate ‘higher’ costs is
misleading,’’ and that the Exchange has
‘‘offered no support for this claim in any
event.’’ As described above, the
Exchange sought to design the proposed
tiered-pricing structure to set the
amount of the fees to relate to the
number of connections a firm purchases
and the Exchange believes it provided
E:\FR\FM\22FEN1.SGM
22FEN1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
ample justification for the proposed
tiered-pricing structure in the First and
Second Proposed Rule Changes.
Nonetheless, the Exchange provides
additional justification to support that
the Proposed Access Fees are equitable
and not unfairly discriminatory above in
response to SIG’s assertions.
The Proposed Tiered-Pricing Structure
for 10Gb ULL Connectivity Will Provide
Cost Savings for the Majority of
Exchange Members
The SIG Letter incorrectly asserts that
no other exchange has tiered
connectivity pricing. Numerous other
exchanges provide tiered fee structures
for various other types of access to their
platforms, including trading permits
and ports.80 The Exchange provided
adequate evidence that most firms
would incur cost savings under the
Proposed Access Fees in the First and
Second Proposed Rule Changes and this
filing. Nonetheless, the Exchange
believes it provided additional
justification to support that the
Proposed Access Fees are equitable and
not unfairly discriminatory above in
response to SIG’s assertions.
Recoupment of Exchange Infrastructure
Costs
lotter on DSK11XQN23PROD with NOTICES1
Nowhere in this proposal or in the
First Proposed Rule 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.’’ The Exchange
no longer makes this assertion in this
filing and, therefore, does not believe is
it necessary to respond to SIG’s
assertion here.
80 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. Options Fee Schedule, Options
Logical Port Fees, 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); 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); NYSE American
Options Fee Schedule, Section V.A., Port Fees and
NYSE Arca Options Fee Schedule, Port Fees (both
charging $450 per port for order/quote entry ports
1–40 and $150 per port for ports 41 and greater).
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
SIFMA Letter
In sum, the SIFMA Letter asserts that
the Exchange has failed to demonstrate
that the Proposed Access Fees are
reasonable for three reasons:
(i) ‘‘The Exchanges’ ‘‘platform
competition’’ argument that competition for
order flow constrains pricing for market data
or other products and services exclusively
offered by an exchange does not demonstrate
that the fees are reasonable.’’
(ii) ‘‘. . . order flow competition alone
between exchanges does not demonstrate that
the fees for the products and services subject
to the Proposal are reasonable.’’
(iii) ‘‘the Exchanges’ argument that the
products and services subject to the
Proposals are optional does not reflect
marketplace reality, nor does it demonstrate
that the proposed fees are reasonable.’’
The Exchange responds to each of
SIFMA’s challenges in turn below.
The Exchange Never Set Forth a
‘‘Platform Competition’’ Argument
The SIFMA Letter asserts that the
Exchange’s ‘‘platform competition’’
argument that competition for order
flow constrains pricing for market data
or other products and services
exclusively offered by an exchange does
not demonstrate that the fees are
reasonable.’’ 81 The Exchange does not
believe it is necessary to respond to this
assertion because it has never set forth
a ‘‘platform competition’’ 82 argument to
justify the Proposed Access Fees in the
First or Second Proposed Rule Change
nor does it do so in this filing.
The Exchange Is Not Arguing That
Order Flow Competition Alone
Demonstrates That the Proposed Fees
Are Reasonable
The SIFMA Letter asserts that ‘‘order
flow competition alone between
exchanges does not demonstrate that the
fees for the products and services
subject to the Proposal are
reasonable.’’ 83 The Exchange never
directly asserted in the First or Second
Proposed Rule Changes, nor does it do
so in this filing, that order flow
competition, alone, demonstrated that
the Proposed Access Fees are reasonable
and has removed any language that
could imply this argument from this
filing.
SIFMA Letter, supra note 9.
to the Guidance, ‘‘platform theory
generally asserts that when a business offers
facilities that bring together two or more distinct
types of customers, it is the overall return of the
platform, rather than the return of any particular
fees charged to a type of customer, that should be
used to assess the competitiveness of the platform’s
market.’’ See Guidance, supra note 23.
83 See SIFMA Letter, supra note 9.
9673
Other SIFMA Assertions
SIFMA also challenges or asserts: (i)
The substitutability or optionality of
10Gb ULL connections, (ii) whether the
Exchange has shown that the fees are
equitable and non-discriminatory; (iii)
that a tiered pricing structure will
impose higher cost on all market
participants; (iv) that a tiered pricing
structure will encourage market
participants to be more economical with
the usage; (v) greater number of
connections use greater Exchange
resources; and (vi) that the Exchange
has not provided extensive information
regarding its cost data and how it
determined it cost analysis. The
Exchange believes that these assertions
by SIFMA basically echo assertions
made in SIG Letters 1 and 3 and that it
provided a response to these assertions
under its response to SIG above or in
provided enhanced transparency and
justification in this filing.
III. Suspension of the Proposed Rule
Change
Pursuant to Section 19(b)(3)(C) of the
Act,84 at any time within 60 days of the
date of filing of a proposed rule change
pursuant to Section 19(b)(1) of the
Act,85 the Commission summarily may
temporarily suspend the change in the
rules of a self-regulatory organization
(‘‘SRO’’) 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. As discussed below, the
Commission believes a temporary
suspension of the proposed rule change
is necessary and appropriate to allow for
additional analysis of the proposed rule
change’s consistency with the Act and
the rules thereunder.
As the Exchange further details above,
the Exchange first filed a proposed rule
change proposing fee changes as
proposed herein on July 30, 2021, with
the proposed fee changes effective
beginning August 1, 2021. That
proposal, SR–PEARL–2021–36, was
published for comment in the Federal
Register on August 17, 2021.86 On
September 24, 2021 the Exchange
withdrew SR–PEARL–2021–36 and filed
a proposed rule change proposing fee
changes as proposed herein. That
proposal, SR–PEARL–2021–45, was
81 See
82 Pursuant
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
84 15
U.S.C. 78s(b)(3)(C).
U.S.C. 78s(b)(1).
86 See Securities Exchange Act Release No. 92644
(August 11, 2021), 86 FR 46055 (August 17, 2021)
(SR–PEARL–2021–36). The Commission received
one comment letter on that proposal. Comment for
SR–PEARL–2021–36 can be found at: https://
www.sec.gov/comments/sr-pearl-2021-36/srpearl
202136.htm.
85 15
E:\FR\FM\22FEN1.SGM
22FEN1
9674
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
published for comment in the Federal
Register on October 4, 2021.87 The
Commission received four comment
letters from three separate commenters
on SR–PEARL–2021–45.88 On
November 22, 2021, pursuant to Section
19(b)(3)(C) of the Act, the Commission:
(1) Temporarily suspended the
proposed rule change; and (2) instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change.89 On December 1, 2021, the
Exchange withdrew SR–PEARL–2021–
45 and filed a proposed rule change
proposing fee changes as proposed
herein. That filing, SR–PEARL–2021–
57,90 was published for comment in the
Federal Register on December 20,
2021.91 On January 27, 2022, pursuant
to Section 19(b)(3)(C) of the Act, the
Commission: (1) Temporarily
suspended the proposed rule change
(SR–PEARL–2021–57) and (2) instituted
proceedings to determine whether to
approve or disapprove the proposal.92
On February 1, 2022, the Exchange
withdrew SR–PEARL–2021–57 and filed
the instant filing, which is substantially
similar.
When exchanges file their proposed
rule changes with the Commission,
including fee filings like the Exchange’s
present proposal, they are required to
provide a statement supporting the
proposal’s basis under the Act and the
rules and regulations thereunder
applicable to the exchange.93 The
instructions to Form 19b–4, on which
exchanges file their proposed rule
changes, specify that such statement
‘‘should be sufficiently detailed and
specific to support a finding that the
proposed rule change is consistent with
[those] requirements.’’ 94
Among other things, exchange
proposed rule changes are subject to
Section 6 of the Act, including Sections
6(b)(4), (5), and (8), which requires the
rules of an exchange to: (1) Provide for
the equitable allocation of reasonable
fees among members, issuers, and other
87 See Securities Exchange Act Release No. 93162
(September 28, 2021), 86 FR 54739 (October 4,
2021) (SR–PEARL–2021–45).
88 Comment on SR–PEARL–2021–45 can be found
at: https://www.sec.gov/comments/sr-pearl-202145/srpearl202145.htm.
89 See Securities Exchange Act Release No. 93639
(November 22, 2021), 86 FR 67758 (November 29,
2021).
90 See text accompanying supra note 12.
91 See Securities Exchange Act Release No. 93774
(December 14, 2021), 86 FR 71952 (December 20,
2021).
92 See Securities Exchange Act Release No. 94088
(January 27, 2022), 87 FR 5901 (February 2, 2022).
93 See 17 CFR 240.19b–4 (Item 3 entitled ‘‘SelfRegulatory Organization’s Statement of the Purpose
of, and Statutory Basis for, the Proposed Rule
Change’’).
94 Id.
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
persons using the exchange’s
facilities; 95 (2) perfect the mechanism of
a free and open market and a national
market system, protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or
dealers; 96 and (3) not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.97
In temporarily suspending the
Exchange’s fee change, the Commission
intends to further consider whether the
proposal to modify fees for certain
connectivity options and implement a
tiered pricing fee structure is consistent
with the statutory requirements
applicable to a national securities
exchange under the Act. In particular,
the Commission will consider whether
the proposed rule change satisfies the
standards under the Act and the rules
thereunder requiring, among other
things, that an exchange’s rules provide
for the equitable allocation of reasonable
fees among members, issuers, and other
persons using its facilities; not permit
unfair discrimination between
customers, issuers, brokers or dealers;
and do not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.98
Therefore, the Commission finds that
it is appropriate in the public interest,
for the protection of investors, and
otherwise in furtherance of the purposes
of the Act, to temporarily suspend the
proposed rule change.99
IV. Proceedings To Determine Whether
To Approve or Disapprove the
Proposed Rule Change
The Commission is instituting
proceedings pursuant to Sections
19(b)(3)(C) 100 and 19(b)(2)(B) 101 of the
Act to determine whether the
Exchange’s proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
95 15
U.S.C. 78f(b)(4).
U.S.C. 78f(b)(5).
97 15 U.S.C. 78f(b)(8).
98 See 15 U.S.C. 78f(b)(4), (5), and (8),
respectively.
99 For purposes of temporarily suspending the
proposed rule change, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
100 15 U.S.C. 78s(b)(3)(C). Once the Commission
temporarily suspends a proposed rule change,
Section 19(b)(3)(C) of the Act requires that the
Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule
change should be approved or disapproved.
101 15 U.S.C. 78s(b)(2)(B).
96 15
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change to inform the Commission’s
analysis of whether to approve or
disapprove the proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,102 the Commission is providing
notice of the grounds for possible
disapproval under consideration. The
Commission is instituting proceedings
to allow for additional analysis of
whether the Exchange has sufficiently
demonstrated how the proposed rule
change is consistent with Sections
6(b)(4),103 6(b)(5),104 and 6(b)(8) 105 of
the Act. Section 6(b)(4) of the Act
requires that the rules of a national
securities exchange provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
members and issuers and other persons
using its facilities. Section 6(b)(5) of the
Act requires that the rules of a national
securities exchange be designed, among
other things, 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 not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Section 6(b)(8) of the Act requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, in addition to any other
comments they may wish to submit
about the proposed rule change. In
particular, the Commission seeks
comment on the following aspects of the
proposal and asks commenters to
submit data where appropriate to
support their views:
102 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of
the Act also provides that proceedings to determine
whether to disapprove a proposed rule change must
be concluded within 180 days of the date of
publication of notice of the filing of the proposed
rule change. See id. The time for conclusion of the
proceedings may be extended for up to 60 days if
the Commission finds good cause for such
extension and publishes its reasons for so finding,
or if the exchange consents to the longer period. See
id.
103 15 U.S.C. 78f(b)(4).
104 15 U.S.C. 78f(b)(5).
105 15 U.S.C. 78f(b)(8).
E:\FR\FM\22FEN1.SGM
22FEN1
lotter on DSK11XQN23PROD with NOTICES1
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
1. Cost Estimates and Allocation. The
Exchange states that it is not asserting that
the Proposed Access Fees are constrained by
competitive forces, but rather set forth a
‘‘cost-plus model,’’ employing a
‘‘conservative methodology’’ that ‘‘strictly
considers only those costs that are most
clearly directly related to the provision and
maintenance of 10Gb ULL connectivity to
estimate such costs.’’ 106 Setting forth its
costs in providing 10Gb ULL connectivity,
and as summarized in greater detail above,
the Exchange projects $15.9 million in
aggregate (between the Exchange and MIAX)
annual estimated costs for 2021 as the sum
of: (1) $3.9 million in third-party expenses
paid in total to Equinix (62% of the total
applicable expense) for data center services;
Zayo Group Holdings, for network services
(62% of the total applicable expense); SFTI
for connectivity support, Thompson Reuters,
NYSE, Nasdaq, and Internap and others (75%
of the total applicable expense) for content,
connectivity services, and infrastructure
services; and various other hardware and
software providers (51% of the total
applicable expense) supporting the
production environment, and (2) $12 million
in internal expenses, allocated to (a)
employee compensation and benefit costs
($6.1 million, approximately 28% of the
Exchange’s and MIAX’s total applicable
employee compensation and benefits
expense); (b) depreciation and amortization
($5.3 million, approximately 70% of the
Exchange’s and MIAX’s total applicable
depreciation and amortization expense); and
(c) occupancy costs ($0.6 million,
approximately 53% of the Exchange’s and
MIAX’s total applicable occupancy expense).
Do commenters believe that the Exchange has
provided sufficient detail about how it
determined which costs are most clearly
directly associated with providing and
maintaining 10Gb ULL connectivity? The
Exchange describes a ‘‘proprietary’’ process
involving all Exchange department heads,
including the finance department and
numerous meetings between the Exchange’s
Chief Information Officer, Chief Financial
Officer, Head of Strategic Planning and
Operations, Chief Technology Officer,
various members of the Legal Department,
and other group leaders, but do not specify
further what principles were applied in
making these determinations or arriving at
particular allocations. Do commenters
believe further explanation is necessary? For
employee compensation and benefit costs, for
example, the Exchange calculated an
allocation of employee time in several
departments, including Technology, Back
Office, Systems Operations, Networking,
Business Strategy Development, Trade
Operations, Finance, and Legal, but do not
provide the job titles and salaries of persons
whose time was accounted for, or explain the
methodology used to determine how much of
an employee’s time is devoted to that specific
activity. What are commenters’ views on
whether the Exchange has provided
sufficient detail on the identity and nature of
services provided by third parties? Across all
of the Exchange’s projected costs, what are
commenters’ views on whether the Exchange
has provided sufficient detail on the
elements that go into connectivity costs,
including how shared costs are allocated and
attributed to connectivity expenses, to permit
an independent review and assessment of the
reasonableness of purported cost-based fees
and the corresponding profit margin thereon?
Should the Exchange be required to identify
for what services or fees the remaining
percentage of un-allocated expenses are
attributable to (e.g., what services or fees are
associated with the 30% of applicable
depreciation and amortization expenses the
Exchange does not allocate to the Proposed
Access Fees)? Do commenters believe that
the costs projected for 2021 are generally
representative of expected costs going
forward (to the extent commenters consider
2021 to be a typical or atypical year), or
should an exchange present an estimated
range of costs with an explanation of how
profit margins could vary along the range of
estimated costs? Should the Exchange use
cost projections or actual costs estimated for
2021 in a filing made in 2022, or make cost
projections for 2022?
2. Revenue Estimates and Profit Margin
Range. The Exchange provides a single
monthly revenue figure as the basis for
calculating the profit margin of 21.3%. Do
commenters believe this is reasonable? If not,
why not? The Exchange states that their
proposed fee structure is ‘‘designed to cover
its costs with a limited return in excess of
such costs,’’ and that ‘‘revenue and
associated profit margin [ ] are not solely
intended to cover the costs associated with
providing access services subject to the
Proposed Access Fees,’’ and believes that a
21.3% margin is a limited return over such
costs.107 The profit margin is also dependent
on the accuracy of the cost projections
which, if inflated (intentionally or
unintentionally), may render the projected
profit margin meaningless. The Exchange
acknowledges that this margin may fluctuate
from month to month due to changes in the
number of connections purchased, and that
costs may increase. They also state that the
number of connections has not materially
changed over the prior months and so the
months that the Exchange has used as a
baseline to perform its assessment are
representative of reasonably anticipated costs
and expenses.108 The Exchange does not
account for the possibility of cost decreases,
however. What are commenters’ views on the
extent to which actual costs (or revenues)
deviate from projected costs (or revenues)?
Do commenters believe that the Exchange’s
methodology for estimating the profit margin
is reasonable? Should the Exchange provide
a range of profit margins that they believe are
reasonably possible, and the reasons
therefor?
3. Reasonable Rate of Return. Do
commenters agree with the Exchange that its
expected 21.3% profit margin would
constitute a reasonable rate of return over
cost for 10GB ULL connectivity? If not, what
would commenters consider to be a
reasonable rate of return and/or what
107 See
106 See
supra Section II.A.2.
VerDate Sep<11>2014
19:42 Feb 18, 2022
108 See
Jkt 256001
PO 00000
supra Section II.A.2.
id.
Frm 00113
Fmt 4703
Sfmt 4703
9675
methodology would they consider to be
appropriate for determining a reasonable rate
of return? What are commenters’ views
regarding what factors should be considered
in determining what constitutes a reasonable
rate of return for 10Gb ULL connectivity fees?
Do commenters believe it relevant to an
assessment of reasonableness that the
Exchange’s proposed fees for 10Gb ULL
connections, even at the highest tier, are
lower than those of other options exchanges
to which the Exchange has compared the
Proposed Access Fees? Should an assessment
of reasonable rate of return include
consideration of factors other than costs; and
if so, what factors should be considered, and
why?
4. Periodic Reevaluation. The Exchange
has addressed whether it believes a material
deviation from the anticipated profit margin
would warrant the need to make a rule filing
pursuant to Section 19(b) of the Act to
increase or decrease the fees accordingly,
stating that ‘‘[a]ny requirement that an
exchange should conduct a periodic reevaluation on a set timeline of its cost
justification and amend its fees accordingly
should be established by the Commission
holistically, applied to all exchanges and not
just through pending fee proposals, such as
this filing,’’ and that ‘‘[i]n order to be fairly
applied, such a mandate should be applied
to existing access fees as well.’’ 109 In light of
the impact that the number of subscribers has
on connectivity profit margins, and the
potential for costs to decrease (or increase)
over time, what are commenters’ views on
the need for exchanges to commit to
reevaluate, on an ongoing and periodic basis,
their cost-based connectivity fees to ensure
that they stay in line with their stated
profitability target and do not become
unreasonable over time, for example, by
failing to adjust for efficiency gains, cost
increases or decreases, and changes in
subscribers? How formal should that process
be, how often should that reevaluation occur,
and what metrics and thresholds should be
considered? How soon after a new
connectivity fee change is implemented
should an exchange assess whether its
subscriber estimates were accurate and at
what threshold should an exchange commit
to file a fee change if its estimates were
inaccurate? Should an initial review take
place within the first 30 days after a
connectivity fee is implemented? 60 days? 90
days? Some other period?
5. Tiered Structure for 10Gb ULL
Connections. The Exchange states that the
proposed tiered fee structure is designed to
decrease the monthly fees for those firms that
connect to the Exchange as part of their best
execution obligations and generally tend to
send the least amount of orders and messages
over those connections, because such firms
generally only purchase a limited number of
connections, and also ‘‘generally send fewer
orders and messages over those connections,
resulting in less strain on Exchange
resources.’’ 110 According to the Exchange,
80% of firms have not experienced a fee
increase as a result of the tiered structure.
109 See
110 See
E:\FR\FM\22FEN1.SGM
supra Section II.A.2.
id.
22FEN1
9676
Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
However, firms that purchase five or more
connections will see a 30% increase in their
fees for each connection above the fourth.
Regarding these firms, the Exchange has not
asserted that it is 30% more costly for the
Exchange to offer such connections to these
firms, but instead argues generally that these
firms are ‘‘likely’’ to result in greater
expenditure of Exchange resources and
increased cost to the Exchange and that as
the number of connections an entity has
increases, certain other costs incurred by the
Exchange that are correlated to, though not
directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service
expenses) also increase.111 Do commenters
believe that the price differences between the
tiers are supported by the Exchange’s
assertions that it set the level of its proposed
fees in a manner that it is equitable and not
unfairly discriminatory? Do commenters
believes the Exchange should demonstrate
how the proposed tiered fee levels correlate
with tiered costs (e.g., by providing cost
information broken down by tier, messaging
and order volumes through the additional
10Gb ULL connections by tier, and/or midmonth add/drop of connection rates by tier)?
Do commenters believe that the Exchange
should provide more detail about the costs
that firms purchasing three or more or five
or more 10Gb ULL connections impose on
the Exchange, to permit an assessment of the
Exchange’s statement that the Proposed
Access Fees ‘‘do not depend on any
distinction between Members and nonMembers because they are solely determined
by the individual Members’ or non-Members’
business needs and its impact on Exchange
resources?’’ 112
lotter on DSK11XQN23PROD with NOTICES1
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the Exchange Act and
the rules and regulations issued
thereunder . . . is on the [SRO] that
proposed the rule change.’’ 113 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,114 and any failure of an SRO to
provide this information may result in
the Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Act and the applicable rules
and regulations.115 Moreover,
‘‘unquestioning reliance’’ on an SRO’s
representations in a proposed rule
change would not be sufficient to justify
Commission approval of a proposed rule
change.116
111 See
id.
id.
113 17 CFR 201.700(b)(3).
114 See id.
115 See id.
116 See Susquehanna Int’l Group, LLP v.
Securities and Exchange Commission, 866 F.3d
112 See
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
The Commission believes it is
appropriate to institute proceedings to
allow for additional consideration and
comment on the issues raised herein,
including as to whether the proposal is
consistent with the Act, any potential
comments or supplemental information
provided by the Exchange, and any
additional independent analysis by the
Commission.
Paper Comments
The Commission requests written
views, data, and arguments with respect
to the concerns identified above as well
as any other relevant concerns. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposal is
consistent with Sections 6(b)(4), 6(b)(5),
and 6(b)(8), or any other provision of the
Act, or the rules and regulations
thereunder. The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal, in addition to
any other comments they may wish to
submit about the proposed rule change.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b–4, any
request for an opportunity to make an
oral presentation.117
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by March 15, 2022. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by March 29, 2022.
Comments may be submitted by any
of the following methods:
• 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–2022–03. 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–2022–03 and
should be submitted on or before March
15, 2022. Rebuttal comments should be
submitted by March 29, 2022.
Electronic Comments
VI. Conclusion
• 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 No. SR–
PEARL–2022–03 on the subject line.
It is therefore ordered, pursuant to
Section 19(b)(3)(C) of the Act,118 that
File Numbers SR–PEARL–2022–03 be,
and hereby is, temporarily suspended.
In addition, the Commission is
instituting proceedings to determine
whether the proposed rule change
should be approved or disapproved.
V. Commission’s Solicitation of
Comments
442, 446–47 (D.C. Cir. 2017) (rejecting the
Commission’s reliance on an SRO’s own
determinations without sufficient evidence of the
basis for such determinations).
117 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act
grants the Commission flexibility to determine what
type of proceeding—either oral or notice and
opportunity for written comments—is appropriate
for consideration of a particular proposal by an
SRO. See Securities Acts Amendments of 1975,
Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
PO 00000
Frm 00114
Fmt 4703
Sfmt 9990
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.119
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03653 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
118 15
119 17
E:\FR\FM\22FEN1.SGM
U.S.C. 78s(b)(3)(C).
CFR 200.30–3(a)(12), (57) and (58).
22FEN1
]]>Agencies
[Federal Register Volume 87, Number 35 (Tuesday, February 22, 2022)]
[Notices]
[Pages 9659-9676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03653]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94258; File No. SR-PEARL-2022-03]
Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing
of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule
To Adopt a Tiered-Pricing Structure for Certain Connectivity Fees;
Suspension of and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove the Proposed Rule Change
February 15, 2022.
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 February 1, 2022, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I and II 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 and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i)
Temporarily suspending the rule change; and (ii) instituting
proceedings to determine whether to approve or disapprove the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 9660]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings, at MIAX's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV [sic] below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for the 10 gigabit (``Gb'') ultra-low latency
(``ULL'') fiber connection available to Members \3\ and non-Members.
The Exchange initially filed this proposal on July 30, 2021, with the
proposed fee changes effective beginning August 1, 2021 (``First
Proposed Rule Change'').\4\ The First Proposed Rule Change was
published for comment in the Federal Register on August 17, 2021.\5\
The Commission received one comment letter on the First Proposed Rule
Change.\6\ The Exchange withdrew the First Proposed Rule Change on
September 24, 2021 and re-submitted the proposal on September 24, 2021,
with the proposed fee changes being immediately effective (``Second
Proposed Rule Change'').\7\ The Second Proposed Rule Change was
published for comment in the Federal Register on October 4, 2021.\8\
The Second Proposed Rule Change provided additional justification for
the proposed fee changes and addressed certain points raised in the
single comment letter that was submitted on the First Proposed Rule
Change. The Commission received four comment letters from three
separate commenters on the Second Proposed Rule Change.\9\ The
Commission suspended the Second Proposed Rule Change on November 22,
2021.\10\ The Exchange withdrew the Second Proposed Rule Change on
December 1, 2021 and submitted a revised proposal for immediate
effectiveness (``Third Proposed Rule Change'').\11\ The Third Proposed
Rule Change meaningfully attempted to address issues or questions that
have been raised by providing additional justification and explanation
for the proposed fee changes and directly respond to the points raised
in SIG Letters 1, 2, and 3, as well as the SIFMA Letter submitted on
the First and Second Proposed Rule Changes,\12\ and feedback provided
by Commission Staff during a telephone conversation on November 18,
2021 relating to the Second Proposed Rule Change. The Third Proposed
Rule Change was published for comment in the Federal Register on
December 20, 2021.\13\ The Exchange receive no comment letters on the
Third Proposed Rule Change. The Commission suspended the Third Proposed
Rule Change on January 27, 2022.\14\ The Exchange withdrew the Third
Proposed Rule Change on February 1, 2022 and now submits this proposal
for immediate effectiveness (``Fourth Proposed Rule Change''). This
Fourth Proposed Rule Change provides additional justification and
explanation for the proposed fee changes.
---------------------------------------------------------------------------
\3\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of these
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See Exchange Rule 100.
\4\ See Securities Exchange Act Release No. 92644 (August 11,
2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36).
\5\ Id.
\6\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\7\ See Securities Exchange Act Release No. 93162 (September 28,
2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-2021-45).
\8\ Id.
\9\ See letters from Richard J. McDonald, SIG, to Vanessa
Countryman, Secretary, Commission, dated October 1, 2021 (``SIG
Letter 2'') and October 26, 2021 (``SIG Letter 3''). See also letter
from Tyler Gellasch, Executive Director, Healthy Markets Association
(``HMA''), to Hon. Gary Gensler, Chair, Commission, dated October
29, 2021 (commenting on SR-CboeEDGA-2021-017, SR-CboeBYX-2021-020,
SR-Cboe-BZX-2021-047, SR-CboeEDGX-2021-030, SR-MIAX-2021-41, SR-
PEARL-2021-45, and SR-EMERALD-2021-29 and stating that ``MIAX has
repeatedly filed to change its connectivity fees in a way that will
materially lower costs for many users, while increasing the costs
for some of its heaviest of users. These filings have been withdrawn
and repeatedly refiled. Each time, however, the filings contain
significantly greater information about who is impacted and how than
other filings that have been permitted to take effect without
suspension'') (emphasis added) (``HMA Letter''); and Ellen Green,
Managing Director, Equity and Options Market Structure, Securities
Industry and Financial Markets Association (``SIFMA''), to Vanessa
Countryman, Secretary, Commission, dated November 26, 2021 (``SIFMA
Letter'').
\10\ See Securities Exchange Act Release No. 93639 (November 22,
2021), 86 FR 67758 (November 29, 2021).
\11\ See Securities Exchange Act Release No. 93774 (December 14,
2021), 86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57).
\12\ The Exchange notes that while the HMA Letter applauds the
level of disclosure the Exchange included in the First and Second
Proposed Rule Changes, the HMA Letter does not raise specific issues
with the First or Second Proposed Rule Changes. Rather, it
references the Exchange's proposals by way of comparison to show the
varying levels of transparency in exchange fees filings and
recommends changes to the Commission's review process of exchange
fee filings generally. Therefore, the Exchange does not feel it is
necessary to address the issues raised in the HMA Letter.
\13\ See supra note 11.
\14\ See Securities Exchange Act Release No. 94088 (January 27,
2022) (Suspension of and Order Instituting Proceedings to Determine
Whether to Approve or Disapprove Proposed Rule Changes to Amend the
Fee Schedules to Adopt a Tiered-Pricing Structure for Certain
Connectivity Fees).
---------------------------------------------------------------------------
10Gb ULL Tiered-Pricing Structure
The Exchange proposes to amend Sections 5)a)-b) of the Fee Schedule
to provide for a tiered-pricing structure for 10Gb ULL connections for
Members and non-Members. Prior to the First Proposed Rule Change, the
Exchange assessed Members and non-Members a flat monthly fee of $10,000
per 10Gb ULL connection for access to the Exchange's primary and
secondary facilities.
The Exchange now proposes to move from a flat monthly fee per
connection to a tiered-pricing structure under which the monthly fee
would vary depending on the number of 10Gb ULL connections each Member
or non-Member elects to purchase per exchange. Specifically, the
Exchange proposes to decrease the fee for the first and second 10Gb ULL
connections for each Member and non-Member from the current flat
monthly fee of $10,000 to $9,000 per connection. To encourage more
efficient connectivity usage, the Exchange proposes to increase the per
connection fee for Members and non-Members that purchase more than two
10Gb ULL connections. In particular, (i) the third and fourth 10Gb ULL
connections for each Member or non-Member will increase from the
current flat monthly fee of $10,000 to $11,000 per connection; and (ii)
for the fifth 10Gb ULL connection, and each 10Gb ULL connection
purchased by Members and non-Members thereafter, the fee will increase
from the flat monthly fee
[[Page 9661]]
of $10,000 to $13,000 per connection. The proposed 10Gb ULL tiered-
pricing structure and fees are collectively referred to herein as the
``Proposed Access Fees.''
The Exchange believes the other exchanges' connectivity fees are a
useful example of alternative approaches to providing and charging for
connectivity and provides the below table for comparison purposes only
to show how its proposed fees compare to fees currently charged by
other options exchanges for similar connectivity. As shown by the below
table, the Exchange's proposed highest tier is still less than fees
charged for similar connectivity provided by other options exchanges.
------------------------------------------------------------------------
Exchange Type of port Monthly fee
------------------------------------------------------------------------
MIAX Pearl Options (as 10Gb ULL............ 1-2 connection.
proposed). $9,000.00 3-4
connections.
$11,000.00 5 or
more. $13,000.00.
The NASDAQ Stock Market LLC 10Gb Ultra fiber.... $15,000.00.
(``NASDAQ'') \15\.
Nasdaq ISE LLC (``ISE'') 10Gb Ultra fiber.... $15,000.00.
\16\.
Nasdaq PHLX LLC (``PHLX'') 10Gb Ultra Fiber.... $15,000.00.
\17\.
NYSE American LLC (``Amex'') 10Gb LX LCN......... $22,000.00.
\18\.
------------------------------------------------------------------------
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange proposes to pro-rate the fees when a Member
or non-Member makes a change to the connectivity (by adding or deleting
connections) with such pro-rated fees based on the number of trading
days that the Member or non-Member has been credentialed to utilize any
of the Exchange APIs or market data feeds in the production environment
through such connection, divided by the total number of trading days in
such month multiplied by the applicable monthly rate. The Exchange will
continue to assess monthly Member and non-Member network connectivity
fees for connectivity to the disaster recovery facility in each month
during which the Member or non-Member has established connectivity with
the disaster recovery facility.
---------------------------------------------------------------------------
\15\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\16\ See PHLX Rules, General 8: Connectivity.
\17\ See ISE Rules, General 8: Connectivity.
\18\ See NYSE American Options Fee Schedule, Section IV.
---------------------------------------------------------------------------
The Exchange's MIAX Express Network Interconnect (``MENI'') can be
configured to provide Members and non-Members of the Exchange network
connectivity to the trading platforms, market data systems, test
systems, and disaster recovery facilities of both the Exchange and its
affiliate, Miami International Securities Exchange, LLC (``MIAX''), via
a single, shared connection. Members and non-Members utilizing the MENI
to connect to the trading platforms, market data systems, test systems,
and disaster recovery facilities of the Exchange and MIAX via a single,
shared connection will continue to only be assessed one monthly
connectivity fee per connection, regardless of the trading platforms,
market data systems, test systems, and disaster recovery facilities
accessed via such connection.
2. Statutory Basis
The Exchange believes that the Proposed Access Fees are consistent
with Section 6(b) of the Act \19\ in general, and furthers the
objectives of Section 6(b)(4) of the Act \20\ in particular, in that
they provide for the equitable allocation of reasonable dues, fees and
other charges among Members and other persons using any facility or
system which the Exchange operates or controls. The Exchange also
believes the Proposed Access Fees further the objectives of Section
6(b)(5) of the Act \21\ in that they are designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general protect investors and the public interest and are not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(4).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
On March 29, 2019, the Commission issued an Order disapproving a
proposed fee change by the BOX Market LLC Options Facility to establish
connectivity fees for its BOX Network (the ``BOX Order'').\22\ On May
21, 2019, the Commission Staff issued guidance ``to assist the national
securities exchanges and FINRA . . . in preparing Fee Filings that meet
their burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \23\ Based on both the
BOX Order and the Guidance, 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 Emerald, LLC (``MIAX Emerald'') and MIAX, to
amend other non-transaction fees.\24\
---------------------------------------------------------------------------
\22\ 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) (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).
\23\ 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'').
\24\ See Securities Exchange Act Release Nos. 91460 (April 2,
2021), 86 FR 18349 (SR-EMERALD-2021-11) (proposal to adopt port
fees, increase connectivity fees, and increase additional limited
service ports); 91033 (February 1, 2021), 86 FR 8455 (February 5,
2021) (SR-EMERALD-2021-03) (proposal to adopt trading permit fees);
90980 (January 25, 2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-
2021-02) (proposal to increase connectivity fees).
---------------------------------------------------------------------------
The Proposed Access Fees Will Not Result in a Supra-Competitive Profit
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 amendment 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
[[Page 9662]]
important when an exchange imposes various access fees for market
participants to access an exchange's marketplace. The Exchange deems
connectivity to be access fees. It records these fees as part of its
``Access Fees'' revenue in its financial statements.
In the Guidance, the Commission Staff stated that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\25\ The Guidance further states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \26\ In its Guidance, the Commission Staff further states that,
``[i]f an SRO seeks to support its claims that a proposed fee is fair
and reasonable because it will permit recovery of the SRO's costs, or
will not result in excessive pricing or supracompetitive profit,
specific information, including quantitative information, should be
provided to support that argument.'' \27\ The Exchange does not assert
that the Proposed Access Fees are constrained by competitive forces.
Rather, the Exchange asserts that the Proposed Access Fees are
reasonable because they will permit recovery of the Exchange's costs in
providing access services to supply 10Gb ULL connectivity and will not
result in the Exchange generating a supra-competitive profit.
---------------------------------------------------------------------------
\25\ See Guidance, supra note 23.
\26\ Id.
\27\ Id.
---------------------------------------------------------------------------
The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \28\
The Commission Staff further states in the Guidance that ``the SRO
should provide an analysis of the SRO's baseline revenues, costs, and
profitability (before the proposed fee change) and the SRO's expected
revenues, costs, and profitability (following the proposed fee change)
for the product or service in question.'' \29\ The Exchange provides
this analysis below.
---------------------------------------------------------------------------
\28\ Id.
\29\ Id.
---------------------------------------------------------------------------
Based on this analysis, the Exchange believes the Proposed Access
Fees are reasonable and do not result in a ``supra-competitive'' \30\
profit. The Exchange believes that it is important to demonstrate that
the Proposed Access Fees are based on its costs and reasonable business
needs. The Exchange believes the Proposed Access Fees will allow the
Exchange to offset expenses the Exchange has and will incur, and that
the Exchange provides sufficient transparency (described below) into
the costs and revenue underlying the Proposed Access Fees. Accordingly,
the Exchange provides an analysis of its revenues, costs, and
profitability associated with the Proposed Access Fees. This analysis
includes information regarding its methodology for determining the
costs and revenues associated with the Proposed Access Fees. As a
result of this analysis, the Exchange believes the Proposed Access Fees
are fair and reasonable as a form of cost recovery plus present the
possibility of a reasonable return for the Exchange's aggregate costs
of offering connectivity to the Exchange and MIAX.
---------------------------------------------------------------------------
\30\ Id.
---------------------------------------------------------------------------
The Proposed Access Fees are based on a cost-plus model. In
determining the appropriate fees to charge, the Exchange considered its
costs and MIAX's costs to provide connectivity, using what it believes
to be a conservative methodology (i.e., that strictly considers only
those costs that are most clearly directly related to the provision and
maintenance of 10Gb ULL connectivity) to estimate such costs,\31\ as
well as the relative costs of providing and maintaining 10Gb ULL
connectivity, and set fees that are designed to cover its costs with a
limited return in excess of such costs. However, as discussed more
fully below, such fees may also result in the Exchange recouping less
than all of its costs of providing and maintaining 10Gb ULL
connectivity because of the uncertainty of forecasting subscriber
decision making with respect to firms' connectivity needs and the
likely potential for increased costs to procure the third-party
services described below.
---------------------------------------------------------------------------
\31\ For example, the Exchange only included the costs
associated with providing and supporting connectivity and excluded
from its connectivity cost calculations any cost not directly
associated with providing and maintaining such connectivity. Thus,
the Exchange notes that this methodology underestimates the total
costs of providing and maintaining connectivity.
---------------------------------------------------------------------------
To determine the Exchange's costs to provide 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 access services associated with the Proposed
Access Fees.
The Exchange also provides 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. The Exchange conducted a
thorough internal analysis to determine the portion (or percentage) of
each expense to allocate to the support of access services associated
with the Proposed Access Fees. This analysis \32\ included discussions
with each Exchange department head to determine the expenses that
support access services associated with the Proposed Access Fees. This
included numerous meetings between the Exchange's Chief Information
Officer, Chief Financial Officer, Head of Strategic Planning and
Operations, Chief Technology Officer, various members of the Legal
Department, and other group leaders. The Exchange reviewed each
individual expense to determine if such expense was related to the
Proposed Access Fees. Once the expenses were identified, the Exchange
department heads, with the assistance of our internal finance
department, reviewed such expenses holistically on an Exchange-wide
level to determine what portion of that expense supports providing
access services for the Proposed Access Fees. The sum of all such
portions of expenses represents the total cost to the Exchange to
provide access services associated with the Proposed Access Fees. For
the avoidance of doubt, no expense amount was allocated twice.
---------------------------------------------------------------------------
\32\ A description of the Exchange's methodology for determining
the portion (or percentage) of each expense to allocate to the
Proposed Access Fees is being provided in response to comments from
SIG and SIFMA. See SIG Letter 3 and SIFMA Letter, supra note 9.
---------------------------------------------------------------------------
The internal cost analysis conducted by the Exchange is a
proprietary process that is designed to make a fair and reasonable
assessment of costs and resources allocated to support the provision of
access services associated with the Proposed Access Fees. The Exchange
acknowledges that this assessment can only capture a moment in time and
that costs and resource allocations may change. That is why the
Exchange has historically, and on an ongoing basis, periodically
revisits its costs and resource allocations to ensure it is
appropriately allocating resources to properly provide services to the
Exchange's constituents. Any requirement that an exchange should
[[Page 9663]]
conduct a periodic re-evaluation on a set timeline of its cost
justification and amend its fees accordingly should be established by
the Commission holistically, applied to all exchanges and not just
through pending fee proposals, such as this filing. In order to be
fairly applied, such a mandate should be applied to existing access
fees as well.
In accordance with the Guidance, the Exchange has provided
sufficient detail to support a finding that the proposed fees are
consistent with the Exchange Act. The proposal includes a detailed
description of the Exchange's costs and how the Exchange determined to
allocate those costs related to the proposed fees. In fact, the detail
and analysis provided in this proposed rule change far exceed the level
of disclosure provided in other exchange fee filings that have not been
suspended by the Commission during its 60-day suspension period. A
finding that this proposed rule change is inconsistent with the
Exchange Act would run contrary to the Commission Staff's treatment of
other recent exchange fee proposals that have not been suspended and
remain in effect today.\33\ For example, a proposed fee filing that
closely resembles the Exchange's current filing was submitted in 2020
by the Cboe Exchange, Inc. (``Cboe'') and increased fees for Cboe's
10Gb connections.\34\ This filing was submitted on September 2, 2020,
nearly 15 months after the Staff's Guidance was issued. In that filing,
the Cboe stated that the ``proposed changes were not designed with the
objective to generate an overall increase in access fee revenue.'' \35\
This filing provided no cost based data to support its assertion that
the proposal was intended to be revenue neutral. Among other things,
Cboe did not provide a description of the costs underlying its
provision of 10Gb connections to show that this particular fee did not
generate a supra-competitive profit or describe how any potential
profit may be offset by increased costs associated with another fee
included in its proposal. This filing, nonetheless, was not suspended
by the Commission and remains in effect today.
---------------------------------------------------------------------------
\33\ See, e.g., Securities Exchange Act Release Nos. 91339
(March 17, 2021), 86 FR 15524 (March 23, 2021) (SR-CboeBZX-2021-020)
(increasing fees for a market data product while not providing a
cost based justification for the increase); 93293 (October 21,
2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-058) (increasing
fees for historical market data while not providing a cost based
justification for the increase); 92970 (September 14, 2021), 86 FR
52261 (September 20, 2021) (SR-CboeBZX-2021-047) (adopting fees for
a market data related product while not providing a cost based
justification for the fees); and 89826 (September 10, 2021), 85 FR
57900 (September 16, 2021) (SR-CBOE-2020-086) (increasing
connectivity fees without including a cost based justification).
\34\ See Securities Exchange Act Release No. 89826 (September
10, 2020), 85 FR 57900 (September 16, 2020) (SR-CBOE-2020-086)
(increasing connectivity fees without including a cost based
justification).
\35\ See id. at 57909.
---------------------------------------------------------------------------
The Exchange believes exchanges, like all businesses, should be
provided flexibility when allocating costs and resources they deem
necessary to operate their business, including providing market data
and access services. The Exchange notes that costs and resource
allocations may vary from business to business and, likewise, costs and
resource allocations may differ from exchange to exchange when it comes
to providing market data and access services. It is a business decision
that must be evaluated by each exchange as to how to allocate internal
resources and what costs to incur internally or via third parties that
it may deem necessary to support its business and its provision of
market data and access services to market participants. An exchange's
costs may also vary based on fees charged by third parties and periodic
increases to those fees that may be outside of the control of an
exchange.\36\
---------------------------------------------------------------------------
\36\ See supra note 32.
---------------------------------------------------------------------------
To determine the Exchange's projected revenue associated with the
Proposed Access Fees, the Exchange analyzed the number of Members and
non-Members currently utilizing the 10Gb ULL fiber connection and used
a recent monthly billing cycle representative of 2021 monthly revenue.
The Exchange also provided its baseline by analyzing July 2021, the
monthly billing cycle prior to the Proposed Access Fees going into
effect, and compared it to its expenses for that month.\37\ As
discussed below, 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 and potential increase in internal and third party
expenses. The Exchange is presenting its revenue and expense associated
with the Proposed Access Fees in this filing in a manner that is
consistent with how the Exchange presents its revenue and expense in
its Audited Unconsolidated Financial Statements. The Exchange's most
recent Audited Unconsolidated Financial Statement is for 2020. However,
since the revenue and expense associated with the Proposed Access Fees
were not in place in 2020 or for the first seven months of 2021, the
Exchange believes its 2020 Audited Unconsolidated Financial Statement
is not representative of its current total annualized revenue and costs
associated with the Proposed Access Fees. Accordingly, the Exchange
believes it is more appropriate to analyze the Proposed Access Fees
utilizing its 2021 revenue and costs, as described herein, which
utilize the same presentation methodology as set forth in the
Exchange's previously-issued Audited Unconsolidated Financial
Statements. Based on this analysis, the Exchange believes that the
Proposed Access Fees are reasonable because they will allow the
Exchange to recover its costs associated with providing access services
related to the Proposed Access Fees and not result in excessive pricing
or supra-competitive profit.
---------------------------------------------------------------------------
\37\ Id.
---------------------------------------------------------------------------
As outlined in more detail below, the Exchange and MIAX project
that the final annualized expense for 2021 to provide all network
connectivity services (that is, the shared network connectivity of all
connectivity alternatives of the Exchange and MIAX, but excluding MIAX
Emerald) to be approximately $15.9 million per annum or an average of
$1,325,000 per month. The Exchange implemented the Proposed Access Fees
on August 1, 2021 in the First Proposed Rule Change. For July 2021,
prior to the Proposed Access Fees, the Exchange and MIAX Members and
non-Members purchased a total of 156 10Gb ULL connections for which the
Exchange and MIAX charged a total of approximately $1,547,620 (this
includes MIAX Pearl Options and MIAX Members and non-Members dropping
or adding connections mid-month, resulting a pro-rated charge at
times). This resulted in a profit of $222,620 for that month (a profit
margin of 14.4%). For the month of October 2021, which includes the
tiered rates for 10Gb ULL connectivity for the Proposed Access Fees,
MIAX Pearl Options and MIAX Exchange Members and non-Members purchased
a total of 154 10Gb ULL connections for which the Exchange and MIAX
charged a total of approximately $1,684,000 for that month (also
including pro-rated connection charges). This resulted in a profit of
$359,000 for that month for a profit margin of 21.3% (a modest 6.9%
profit margin increase from July 2021 to October 2021 from 14.4% to
21.3%). The Exchange believes that the Proposed Access Fees are
reasonable because they only generate an additional 6.9% of profit
margin per-month (reflecting a 21.3% profit
[[Page 9664]]
margin).\38\ The Exchange cautions that this profit margin is likely to
fluctuate from month to month based on the uncertainty of predicting
how many connections may be purchased from month to month as Members
and non-Members are able to add and drop connections at any time based
on their own business decisions. This profit margin may also decrease
due to the significant inflationary pressure on capital items that the
Exchange needs to purchase to maintain the Exchange's technology and
systems.\39\
---------------------------------------------------------------------------
\38\ The Exchange notes that this profit margin differs from the
First and Second Proposed Rule Changes because the Exchange now has
the benefit of using a more recent billing cycle under the Proposed
Access Fees (October 2021) and comparing it to a baseline month
(July 2021) from before the Proposed Access Fees were in effect.
\39\ 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 Exchange and MIAX have been subject to price increases upwards
of 30% during the past year 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.
As mentioned above, the Exchange and MIAX project that the
annualized expense for 2021 to provide network connectivity services
(all connectivity alternatives) to be approximately $15.9 million per
annum or an average of $1,325,000 per month and that these costs are
expected to increase not only due to anticipated significant
inflationary pressure, but also periodic fee increases by third
parties.\40\ 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 the cost to the Exchange to provide
access services associated with the Proposed Access Fees. For example,
new Members to the Exchange may require the purchase of additional
hardware to support those Members as well as enhanced monitoring and
reporting of customer performance that the Exchange and its affiliates
provide. Further, as the total number Members increases, the Exchange
and its affiliates may need to increase their data center footprint and
consume more power, resulting in increased costs charged by their
third-party data center provider. Accordingly, the cost to the Exchange
and its affiliates to provide access to its Members is not fixed. The
Exchange believes the Proposed Access Fees are a reasonable attempt to
offset a portion of the costs to the Exchange associated with providing
access to its network infrastructure.
---------------------------------------------------------------------------
\40\ For example, 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. The Exchange
further 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.
---------------------------------------------------------------------------
The Exchange only has four primary sources of revenue and cost
recovery mechanisms to fund all of its operations: 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 and cost recovery
mechanisms. Until recently, the Exchange has operated at a cumulative
net annual loss since it launched operations in 2017.\41\ This is a
result of providing a low cost alternative to attract order flow and
encourage market participants to experience the high determinism and
resiliency of the Exchange's trading Systems.\42\ To do so, the
Exchange chose to waive the fees for some non-transaction related
services or provide them at a very marginal cost, which was not
profitable to the Exchange. This resulted in the Exchange forgoing
revenue it could have generated from assessing higher fees.
---------------------------------------------------------------------------
\41\ 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 28, 2021, available at
https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
\42\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
---------------------------------------------------------------------------
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. As mentioned above, for 2021,\43\ the total annual expense for
MIAX Pearl Options and MIAX for providing the access services
associated with the Proposed Access Fees is projected to be
approximately $15.9 million, or approximately $1,325,000 per month.
This 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.\44\ 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.\45\ The $15.9 million projected total annual
expense is directly related to the access services associated with the
Proposed Access Fees, and not any other product or service offered by
the Exchange or MIAX. It does not include general costs of operating
matching engines and other trading technology. No expense amount was
allocated twice. Further, the Exchange notes that, with respect to the
MIAX Pearl Options' expenses included
[[Page 9665]]
herein, those expenses only cover the MIAX Pearl options market;
expenses associated with MIAX Pearl Equities are accounted for
separately and are not included within the scope of this filing.
---------------------------------------------------------------------------
\43\ The Exchange has not yet finalized its 2021 year end
results.
\44\ 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.
\45\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020)
(SR-PEARL-2019-36). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
---------------------------------------------------------------------------
As discussed above, 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. In performing this calculation, the Exchange considered other
services and to which the expense may be applied and how much of the
expense is directly and/or indirectly utilized in providing those other
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.
External Expense Allocations
For 2021, expenses relating to fees paid by the Exchange and MIAX
to third-parties for products and services necessary to provide the
access services associated with the Proposed Access Fees is projected
to be $3.9 million. This includes, but is not limited to, a portion of
the fees paid to: (1) Equinix for data center services, including for
the primary, secondary, and disaster recovery locations of the
Exchange's trading system infrastructure; (2) Zayo Group Holdings, Inc.
(``Zayo'') for network services (fiber and bandwidth products and
services) linking the Exchange's and its affiliates' office locations
in Princeton, New Jersey and Miami, Florida, to all data center
locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\46\ 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.).
---------------------------------------------------------------------------
\46\ See supra note 40.
---------------------------------------------------------------------------
For clarity, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to providing access services in connection with the Proposed
Access Fees. Only a portion of all fees paid to such third-parties is
included in the third-party expenses described 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. This may result in
the Exchange under allocating an expense to the provision of access
services in connection with the Proposed Access Fees and such expenses
may actually be higher or increase above what the Exchange utilizes
within this proposal. Further, the Exchange notes that expenses
associated with its affiliate, MIAX Emerald, are accounted for
separately and are not included within the scope of this filing.
Further, as part its ongoing assessment of costs and expenses
(described above), the Exchange recently conducted a periodic thorough
review of its expenses and resource allocations which, in turn,
resulted in revised percentage allocations in this filing. Therefore,
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.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange and MIAX
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. According to the
Exchange's calculations, it allocated approximately 62% of the total
applicable Equinix expense to providing the access services associated
with the Proposed Access Fees. 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.\47\
---------------------------------------------------------------------------
\47\ As noted above, the percentage allocations used in this
proposed rule change may differ from past filings from the Exchange
or its affiliates due to, among other things, changes in expenses
charged by third-parties, adjustments to internal resource
allocations, and different system architecture of the Exchange as
compared to its affiliates. Again, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking the
Exchange with its affiliates, MIAX and MIAX Emerald, as well as the
data center and disaster recovery locations. As such, all of the trade
data, including the billions of messages each day per exchange, flow
through Zayo's infrastructure over the Exchange's network. Without
these services from Zayo, the Exchange would not be able to operate and
support the network and provide the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to providing the Proposed
Access Fees. According to the Exchange's calculations, it allocated
approximately 62% of the total applicable Zayo expense to providing the
access services associated with the Proposed Access Fees. 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\
---------------------------------------------------------------------------
\48\ Id.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portions of the
[[Page 9666]]
SFTI expense and various other service providers' (including Thompson
Reuters, NYSE, Nasdaq, and Internap) expense because those entities
provide connectivity and feeds for the entire U.S. options industry, as
well as the content, connectivity services, and infrastructure services
for critical components of the network. Without these services from
SFTI and various other service providers, the Exchange would not be
able to operate and support the network and provide access to its
Members and their customers. The Exchange did not allocate all of the
SFTI and other service providers' expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portions which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees.
According to the Exchange's calculations, it allocated approximately
75% of the total applicable SFTI and other service providers' expense
to providing the access services associated with the Proposed Access
Fees. 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.\49\
---------------------------------------------------------------------------
\49\ Id. See also supra note 40 (regarding SFTI's announced fee
increases).
---------------------------------------------------------------------------
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. According to the Exchange's calculations, it
allocated approximately 51% of the total applicable hardware and
software provider expense to providing the access services associated
with the Proposed Access Fees. 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.\50\
---------------------------------------------------------------------------
\50\ See supra note 47.
---------------------------------------------------------------------------
Internal Expense Allocations
For 2021, total projected internal expenses relating to the
Exchange and MIAX providing the access services associated with the
Proposed Access Fees are projected to be approximately $12 million.
This includes, but is not limited to, costs associated with: (1)
Employee compensation and benefits for full-time employees that support
the access services associated with the Proposed Access Fees, including
staff in network operations, trading operations, development, system
operations, business, as well as staff in general corporate departments
(such as legal, regulatory, and finance) that support those employees
and functions (including an increase as a result of the higher
determinism project); (2) depreciation and amortization of hardware and
software used to provide the access services associated with the
Proposed Access Fees, including equipment, servers, cabling, purchased
software and internally developed software used in the production
environment to support the network for trading; and (3) occupancy costs
for leased office space for staff that provide the access services
associated with the Proposed Access Fees. The breakdown of these costs
is more fully-described below.
For clarity, and as stated above, the Exchange took a conservative
approach in determining the expense and the percentage of that expense
to be allocated to providing access services in connection with the
Proposed Access Fees. 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. This may result in the Exchange under
allocating an expense to the provision of access services in connection
with the Proposed Access Fees and such expenses may actually be higher
or increase above what the Exchange utilizes within this proposal.
Further, as part its ongoing assessment of costs and expenses
(described above), 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 internal
expense described above towards the total cost to the Exchange and MIAX
to provide the access services associated with the Proposed Access
Fees. In particular, the Exchange's and MIAX's combined employee
compensation and benefits expense relating to providing the access
services associated with the Proposed Access Fees is projected to be
$6.1 million, which is only a portion of the approximately $12.6
million (for MIAX) and $9.2 million (for MIAX Pearl Options) 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 employees 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.
According to the Exchange's calculations, it allocated approximately
28% of the total applicable employee compensation and benefits expense
to providing the access services associated with the Proposed Access
Fees. 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.\51\
---------------------------------------------------------------------------
\51\ Id.
---------------------------------------------------------------------------
The Exchange's and MIAX's depreciation and amortization expense
relating to providing the services associated with the Proposed Access
[[Page 9667]]
Fees is projected to be $5.3 million, which is only a portion of the
$4.8 million (for MIAX) and $2.9 million (for MIAX Pearl Options) 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.
According to the Exchange's calculations, it allocated approximately
70% of the total applicable depreciation and amortization expense to
providing the access services associated with the Proposed Access Fees,
as these access services would not be possible without relying on such.
The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the access services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
The Exchange's and MIAX's occupancy expense relating to providing
the services associated with the Proposed Access Fees is projected to
be approximately $0.6 million, which is only a portion of the $0.6
million (for MIAX) and $0.5 million (for MIAX Pearl Options) 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 200 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. 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. According
to the Exchange's calculations, it allocated approximately 53% of the
total applicable occupancy expense to providing the access services
associated with the Proposed Access Fees. 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.\53\
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
The Exchange notes that a material portion of its total overall
expense is allocated to the provision of access services (including
connectivity, ports, and trading permits). The Exchange believes this
is reasonable and in line, as the Exchange operates a technology-based
business that differentiates itself from its competitors based on its
more deterministic and resilient 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 and MIAX have only four primary
sources of fees to recover their costs; thus, the Exchange believes it
is reasonable to allocate a material portion of its total overall
expense towards access fees.
Based on the above, the Exchange believes that its provision of
access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit. As discussed
above, the Exchange projects that its annualized expense for 2021 to
provide network connectivity services (all connectivity alternatives)
to be approximately $15.9 million per annum or an average of $1,325,000
per month. The Exchange implemented the Proposed Access Fees on August
1, 2021. For July 2021, prior to the Proposed Access Fees, Exchange
Members and non-Members purchased a total of 156 10Gb ULL connections
for which the Exchange and MIAX charged approximately $1,547,620. This
resulted in a profit of $222,620 (a profit margin of 14.4%) for that
month (including pro-rated charges). For the month of October 2021,
which includes the tiered 10Gb ULL connectivity fees pursuant to the
Proposed Access Fees, the Exchange and MIAX had Members and non-Members
purchasing a total of 154 10Gb ULL connections for which the Exchange
and MIAX charged a total of approximately $1,684,000 (including pro-
rated charges). This resulted in a profit of $359,000 for that month
for a profit margin of 21.3% (a modest 6.9% profit margin increase from
July 2021 to October 2021 from 14.4% to 21.3%). The Exchange believes
that the Proposed Access Fees are reasonable because they only generate
an additional 6.9% of profit margin per month (reflecting a 21.3%
profit margin).\54\ The Exchange believes this modest increase in
profit margin will allow it to continue to recoup its expenses and
continue to invest in its technology infrastructure. Therefore, the
Exchange also believes that this proposed profit margin increase is
reasonable because it represents a reasonable rate of return.
---------------------------------------------------------------------------
\54\ See supra note 31.
---------------------------------------------------------------------------
Again, the Exchange cautions that this profit margin may fluctuate
from month to month based in the uncertainty of predicting how many
connections may be purchased from month to month as Members and non-
Members are free to add and drop connections at any time based on their
own business decisions. Notwithstanding that the revenue (and profit
margin) may vary from month to month due to changes in connections and
to changes to the Exchange's expenses, the number of connections has
not materially changed over the prior months. Consequently, the
Exchange believes that the months it has used as a baseline to perform
its assessment are representative of
[[Page 9668]]
reasonably anticipated costs and expenses. This profit margin may also
decrease due to the significant inflationary pressure on capital items
that it needs to purchase to maintain the Exchange's technology and
systems.\55\ Accordingly, 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.
---------------------------------------------------------------------------
\55\ See supra note 39.
---------------------------------------------------------------------------
The Exchange believes that conducting the above analysis on a per
month basis is reasonable as the revenue generated from access services
subject to the proposed fee generally remains static from month to
month. The Exchange also conducted the above analysis on a per month
basis to comply with the Commission Staff's Guidance, which requires a
baseline analysis to assist in determining whether the proposal
generates a supra-competitive profit. This monthly analysis was also
provided in response to comment received on prior submissions of this
proposed rule change.
The Exchange reiterates that it only has four primary sources of
revenue and cost recovery mechanisms: 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 and cost recovery
mechanisms. As a result, each of these fees cannot be ``flat'' and
cover only the expenses directly related to the fee that is charged.
The above revenue and associated profit margin therefore are not solely
intended to cover the costs associated with providing access services
subject to the Proposed Access Fees.
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 expense items listed
above, the Exchange would not be able to provide the access services
associated with the Proposed Access Fees to its Members and their
customers. Each of these expense items, including physical hardware,
software, employee compensation and benefits, occupancy costs, and the
depreciation and amortization of equipment, have been identified
through a line-by-line item analysis to be integral to providing access
services. The Proposed Access Fees are intended to recover the costs of
providing access to the Exchange's System. Accordingly, the Exchange
believes that the Proposed Access Fees are fair and reasonable because
they do not result in excessive pricing or supra-competitive profit,
when comparing the actual costs to the Exchange versus the projected
annual revenue from the Proposed Access Fees.
The Proposed Tiered-Pricing Structure Is Not Unfairly Discriminatory
and Provides for the Equitable Allocation of Fees, Dues, and Other
Charges
The Exchange believes the proposed tiered-pricing structure is
reasonable, fair, equitable, and not unfairly discriminatory because it
will apply to all Members and non-Members in the same manner based on
the amount of 10Gb ULL connectivity they require based on their own
business decisions and usage of Exchange resources. All similarly
situated Members and non-Members would be subject to the same fees. The
fees do not depend on any distinction between Members and non-Members
because they are solely determined by the individual Members' or non-
Members' business needs and its impact on Exchange resources.
The proposed tiered-pricing structure is not unfairly
discriminatory and provides for the equitable allocation of fees, dues,
and other charges because it is designed to encourage Members and non-
Members to be more efficient and economical when determining how to
connect to the Exchange and the amount of the fees are based on the
number of connections a Member or non-Member utilizes. Charging an
incrementally higher fee to a Member or non-Member that utilizes
numerous connections is directly related to the increased costs the
Exchange incurs in providing and maintaining those additional
connections. The proposed tiered pricing structure should also enable
the Exchange to better monitor and provide access to the Exchange's
network to ensure sufficient capacity and headroom in the System.
The Exchange believes that the proposal to move to a tiered-pricing
structure for its 10Gb ULL connections is reasonable, equitably
allocated and not unfairly discriminatory because the majority of
Members and non-Members that purchase 10Gb ULL connections will either
save money or pay the same amount after the tiered-pricing structure is
implemented. After the effective date of the First Proposed Rule Change
on August 1, 2021, approximately 80% of the firms that purchased at
least one 10Gb ULL connection experienced a decrease in their monthly
connectivity fees while only approximately 20% of firms experienced an
increase in their monthly connectivity fees as a result of the proposed
tiered-pricing structure when compared to the flat monthly fee
structure. To illustrate, firms that purchase only one 10Gb ULL
connection per month used to pay the flat rate of $10,000 per month for
that one 10Gb ULL connection. Pursuant to the proposed tiered-pricing
structure, these firms now pay $9,000 per month for that same one 10Gb
ULL connection, saving $1,000 per month or $12,000 annually. Further,
firms that purchase two 10Gb ULL connections per month previously paid
a flat rate of $20,000 per month ($10,000 x 2) for those two 10Gb ULL
connections. Pursuant to the proposed tiered-pricing structure, these
firms now pay $18,000 per month ($9,000 x 2) for those two 10Gb ULL
connections, saving $2,000 per month or $24,000 annually.
To achieve a consistent, premium network performance, the Exchange
must build out and continue to maintain a network that has the capacity
to handle the message rate requirements of not only firms that consume
minimal Exchange connectivity resources, but also those firms that most
heavily consume Exchange connectivity resources, network consumers, and
purchasers of 10Gb ULL connectivity. 10Gb ULL connectivity is not an
unlimited resource as the Exchange needs to purchase additional
equipment to satisfy requests for additional connections. The Exchange
also needs to provide personnel to set up new connections, service
requests related to adding new and/or deleting existing connections,
respond to performance queries from, and to maintain those connections
on behalf of Members and non-Members. Also, those firms that utilize
10Gb ULL connectivity typically generate a disproportionate amount of
messages and order traffic, usually billions per day across the
Exchange. These billions of messages per day consume the Exchange's
resources and significantly contribute to the overall network
connectivity expense for storage and network transport capabilities.
The Exchange also has to purchase additional storage capacity on an
ongoing basis to ensure it has sufficient capacity to store these
[[Page 9669]]
messages as part of it surveillance program and to satisfy its record
keeping requirements under the Exchange Act.\56\ Thus, as the number of
connections an entity has increases, certain other costs incurred by
the Exchange that are correlated to, though not directly affected by,
connection costs (e.g., storage costs, surveillance costs, service
expenses) also increase.
---------------------------------------------------------------------------
\56\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange sought to design the proposed tiered-pricing structure
to set the amount of the fees to relate to the number of connections a
firm purchases. The more connections purchased by a firm likely results
in greater expenditure of Exchange resources and increased cost to the
Exchange. With this in mind, the Exchange proposes to decrease the
monthly fees for those firms who connect to the Exchange as part of
their best execution obligations and generally tend to send the least
amount of orders and messages over those connections. The Exchange
notes that firms that primarily route orders seeking best execution
generally only purchase a limited number of connections. Those firms
also generally send fewer orders and messages over those connections,
resulting in less strain on Exchange resources. Therefore, the
connectivity costs will likely be lower for these firms based on the
proposed tiered-pricing structure.
On a similar note, the Exchange proposes to increase the fee for
those firms that purchase more connections resulting in greater
expenditure of Exchange resources and increased cost to the Exchange.
The Exchange notes that these firms that purchase more than two to four
10Gb ULL connections essentially do so for competitive reasons amongst
themselves and choose to utilize numerous connections based on their
business needs and desire to attempt to access the market quicker by
using the connection with the least amount of latency. These firms are
generally engaged in sending liquidity removing orders to the Exchange
and seek to add more connections so they can access resting liquidity
ahead of their competitors. For instance, a Member may have just sent
numerous messages and/or orders over one of their 10Gb ULL connections
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 one or more of their other 10Gb ULL
connections with less message and/or order traffic to ensure that their
liquidity taking order accesses the Exchange quicker because that
connection's queue is shorter. These firms also tend to frequently add
and drop connections mid-month to determine which connections have the
least latency, which results in increased costs to the Exchange to
frequently make changes in the data center and provide the additional
technical and personnel support necessary to satisfy these requests.
The firms that engage in the above-described liquidity removing and
advanced trading strategies typically require multiple connections and,
therefore, generate higher costs by utilizing more of the Exchange's
resources. Those firms may also conduct other latency measurements over
their connections and drop and simultaneously add connections mid-month
based on their own assessment of their performance. This results in
Exchange staff processing such requests, potentially purchasing
additional equipment, and performing the necessary network engineering
to replace those connections in the data center. Therefore, the
Exchange believes it is equitable for these firms to experience
increased connectivity costs based on their disproportionate pull on
Exchange resources to provide the additional connectivity.
In addition, the proposed tiered-pricing structure is equitable
because it is designed to encourage Members and non-Members to be more
efficient and economical when determining how to connect to the
Exchange. Section 6(b)(5) of the Exchange Act requires the Exchange to
provide access on terms that are not unfairly discriminatory.\57\ As
stated above, 10Gb ULL connectivity is not an unlimited resource and
the Exchange's network is limited in the amount of connections it can
provide. However, the Exchange must accommodate requests for additional
connectivity and access to the Exchange's System to ensure that the
Exchange is able to provide access on non-discriminatory terms and
ensure sufficient capacity and headroom in the System. To accommodate
requests for additional connectivity on top of current network capacity
constraints, requires that the Exchange purchase additional equipment
to satisfy these requests. The Exchange also needs to provide personnel
to set up new connections and to maintain those connections on behalf
of Members and non-Members. The proposed tiered-pricing structure is
equitable because it is designed to encourage Members and non-Members
to be more efficient and economical in selecting the amount of
connectivity they request while balancing that against the Exchange's
increased expenses when expanding its network to accommodate additional
connectivity.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Proposed Fees Are Reasonable When Compared to the Fees of Other
Options Exchanges With Similar Market Share
The Exchange does not have visibility into other equities
exchanges' costs to provide connectivity or their fee markup over those
costs, and therefore cannot use other exchange's connectivity fees as a
benchmark to determine a reasonable markup over the costs of providing
connectivity. Nevertheless, the Exchange believes the other exchanges'
connectivity fees are a useful example of alternative approaches to
providing and charging for connectivity. To that end, the Exchange
believes the proposed tiered-pricing structure for 10Gb ULL connections
is reasonable because the proposed highest tier is still less than fees
charged for similar connectivity provided by other options exchanges
with comparable market shares. For example, NASDAQ (equity options
market share of 8.88% as of November 26, 2021 for the month of
November) \58\ charges a monthly fee of $10,000 per 10Gb fiber
connection and $15,000 per 10Gb Ultra fiber connection.\59\ The highest
tier of the Exchange's proposed fee structure for a 10Gb ULL connection
is $13,000 for the fifth and subsequent connections, which is $2,000
per month less than NASDAQ and, unlike NASDAQ, the Exchange does not
charge installation fees. For market participants with fewer
connections, the difference is even more stark. For a market
participant with two connections to the Exchange and two connections to
NASDAQ, the difference in connection fees would be $12,000 per month.
The Exchange notes that the same connectivity fees described above for
NASDAQ also apply to its affiliates, ISE \60\ (equity options market
share of 7.96% as of November 26, 2021 for the month of November) \61\
and PHLX (equity options market share of 9.31% as of November 26, 2021
for the month
[[Page 9670]]
of November).\62\ Amex (equity options market share of 5.05% as of
November 26, 2021 for the month of November) \63\ charges $15,000 per
connection initially plus $22,000 monthly per 10Gb LX LCN circuit
connection.\64\ Again, the highest tier of the Exchange's proposed fee
structure for a 10Gb ULL connection is $9,000 per month lower than the
Amex connectivity fee after the first month.
---------------------------------------------------------------------------
\58\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited November 26, 2021).
\59\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
\60\ See ISE Rules, General 8: Connectivity.
\61\ See supra note 58.
\62\ See id. See also PHLX Rules, General 8: Connectivity.
\63\ See supra note 58.
\64\ See Amex Fee Schedule, Section IV.
---------------------------------------------------------------------------
In the each of the above cases, the Exchange's highest tier in the
proposed tiered-pricing structure only applies to the fifth and
additional connections and is still significantly lower than that of
competing options exchanges with similar market share. Despite
proposing lower or similar fees to that of competing options exchanges
with similar market share, the Exchange believes that it provides a
premium network 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 connectivity alternatives. Each
of the connectivity rates in place at competing options exchanges were
filed with the Commission for immediate effectiveness and remain in
place today.
The Exchange further believes that the Proposed Access Fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for one 10Gb ULL connection, the Exchange provides each Member
or non-Member access to all twelve (12) matching engines on MIAX Pearl
and a vast majority choose to connect to all twelve (12) matching
engines. The Exchange believes that other exchanges require firms to
connect to multiple matching engines.\65\
---------------------------------------------------------------------------
\65\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
With respect to intra-market competition, the Exchange does not
believe that the proposed rule change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As stated above, the Exchange does not believe
its proposed pricing will impose a barrier to entry to smaller
participants and notes that its proposed connectivity pricing structure
for its 10Gb ULL connections is associated with relative usage of the
various market participants. Further, the majority of firms that
purchase 10Gb ULL connections may either save money or pay the same
amount after the tiered-pricing structure is implemented. While total
cost may be increased for market participants with larger capacity
needs or for business/technical preferences, such options provide far
more capacity and are purchased by those that consume more resources
from the network. Accordingly, the proposed tiered-pricing structure
does not favor certain categories of market participants in a manner
that would impose an undue burden on competition; rather, the
allocation reflects the network resources consumed by the various usage
of market participants--lowest bandwidth consuming members pay the
least, and highest bandwidth consuming members pay the most,
particularly since higher bandwidth consumption translates to higher
costs to the Exchange.
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. The Exchange operates in a highly competitive
environment, and as discussed above, its ability to price access and
connectivity is constrained by competition among exchanges and third
parties. There are other options markets of which market participants
may connect to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. For example, there are 15 other U.S. options exchanges,
which the Exchange must consider in its pricing discipline in order to
compete for market participants. In this competitive environment,
market participants are free to choose which competing exchange or
reseller to use to satisfy their business needs. As a result, the
Exchange believes this proposed rule change permits fair competition
among national securities exchanges. Accordingly, the Exchange does not
believe its proposed fee changes impose any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.
Regrettably, the Exchange believes that the application of the
Guidance to date has adversely affected inter-market competition by
impeding the ability of smaller, low cost exchanges to adopt or
increase fees for their market data and access services (including
connectivity and port products and services). Since the adoption of the
Guidance, and even more so recently, it has become harder, particularly
for smaller, low cost exchanges, to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of the affected exchanges' market participants. Although the Staff
Guidance has served an important policy goal of improving disclosures
and requiring exchanges to justify that their market data and access
fee proposals are fair and reasonable, it has also negatively impacted
exchanges, and particularly many smaller, low cost exchanges, that seek
to adopt or increase fees despite providing enhanced disclosures and
rationale to support their proposed fee changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
As described above, the Exchange received one comment letter on the
First Proposed Rule Change and four comment letters on the Second
Proposed Rule Change.\66\ The Exchange responded to the comment letters
in the Third Proposed Rule Change and repeats its response in is
filing. No comment letters were received in response to the Third
Proposed Rule Change.
---------------------------------------------------------------------------
\66\ See supra note 9.
---------------------------------------------------------------------------
HMA Letter
The HMA Letter does not raise specific issues with the First or
Second Proposed Rule Changes. Instead the HMA Letter is generally
critical of the exchange fee filing process contained in Section
19(b)(3)(A)(ii) of the Act,\67\ and Rule 19b-4(f)(2) thereunder,\68\
and other exchanges' fee filings in recent years. The HMA Letter,
however, applauds the
[[Page 9671]]
level of disclosure the Exchange included in the First and Second
Proposed Rule Changes and was supportive of the efforts made by the
Exchange and its affiliates to provide transparency and justify their
proposed fees. The HMA Letter specifically notes that:
---------------------------------------------------------------------------
\67\ 15 U.S.C. 78s(b)(3)(A)(ii).
\68\ 17 CFR 240.19b-4.
``MIAX has repeatedly filed to change its connectivity fees in a
way that will materially lower costs for many users, while
increasing the costs for some of its heaviest of users. These
filings have been withdrawn and repeatedly refiled. Each time,
however, the filings contain significantly greater information about
who is impacted and how than other filings that have been permitted
to take effect without suspension. For example, MIAX detailed the
associated projected revenues generated from the connectivity fees
by user class, again in a clear attempt to comply with the SRO Fee
Filing Guidance.'' \69\
---------------------------------------------------------------------------
\69\ See HMA Letter, supra note 9.
As the HMA Letter notes, the Exchange refiled its same fee
proposals to include significantly greater information about who is
impacted and how, primarily at the request of the Commission Staff and
in response to comments. The Exchange is again refiling its proposal to
include more information surrounding the proposed fees and to respond
to commenters.
SIG Letter 2
SIG Letter 2 argues that the Exchange, in withdrawing the First
Proposed Rule Change and refiling the Second Proposed Rule Change,
``improperly circumvent[ed] the procedural protections embedded in
Exchange Act Section 19(b)(3)(C), and subvert[ed] the balance of
interests upheld therein.'' \70\ SIG's assertion that the Exchange's
entire reason for withdrawing and refiling was to subvert the
protections of the Exchange Act are entirely without merit. The
Exchange withdrew the First Proposed Rule Change and replaced it with
the Second Proposed Rule Change in good faith to provide additional
justification and explanation for the proposed fee changes and did so
in compliance with the Exchange Act. The same is true in this filing,
where the Exchange withdrew the Second Proposed Rule Change and
submitted this filing to provide additional justification and
explanation for the proposed fee changes and directly responds to
certain points raised in SIG Letters 1, 2, and 3, as well as the SIFMA
Letter submitted on the First and Second Proposed Rule Changes.
---------------------------------------------------------------------------
\70\ See SIG Letter 2, supra note 9.
---------------------------------------------------------------------------
As SIG well knows, exchanges are able withdraw and refile various
proposals (including fee changes and other rule changes) with the
Commission for a multitude of reasons, not the least of which is to
address feedback and comments from market participants and Commission
Staff. The Exchange is well within the bounds of the Act and the rules
and regulations thereunder to withdraw a proposed rule change and
replace it with a new proposed rule change in good faith and to enhance
the filing to ensure it complies with the requirements of the Act.
SIG Letters 1 and 3
As an initial matter, SIG Letter 1 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.'' \71\ SIG
Letter 1'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 First and
Second Proposed Rule Changes and this filing.
---------------------------------------------------------------------------
\71\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
Until recently, the Exchange operated at a net annual loss since it
launched operations in 2017.\72\ 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 in the First Proposed Rule Change, Second
Proposed Rule Change. Similar justifications for the proposed fee
change included in the First and Second Proposed Rule Changes, 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.\73\ 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 support
an assertion that those fee changes are consistent with the Act.\74\
The Exchange leveraged its past work with Commission Staff to ensure
the justification provided herein and in the First and Second Proposed
Rule Changes include 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
[[Page 9672]]
that have been permitted to take effect without suspension.'' \75\ That
same commenter also noted their ``worry that the Commission's process
for reviewing and evaluating exchange filings may be inconsistently
applied.'' \76\
---------------------------------------------------------------------------
\72\ See supra note 41.
\73\ 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).
\74\ 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. On April 22, 2021, the Exchange withdrew SR-PEARL-
2021-17 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. On
May 3, 2021, the Exchange withdrew SR-PEARL-2021-20 and refiled that
proposal to further clarify its cost methodology. See SR-PEARL-2021-
22. On May 10, 2021, the Exchange withdrew SR-PEARL-2021-22 and
refiled that proposal as SR-PEARL-2021-23. See Securities Exchange
Act Release No. 91858 (May 12, 2021), 86 FR 26967 (May 18, 2021)
(SR-PEARL-2021-23).
\75\ See HMA Letter, supra note 9.
\76\ 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).
---------------------------------------------------------------------------
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 filings should satisfy, and is not warranted here.
In addition, the arguments in SIG Letter 1 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 First Proposed Rule 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 First
Proposed Rule Change to address their concerns and instead chose to
submit three comment letters. One could argue that SIG is using the
comment letter process not to raise legitimate regulatory concerns
regarding the proposal, but to inhibit or delay proposed fee changes by
the Exchange.
Nonetheless, the Exchange has enhanced its cost and revenue
analysis and data in this Third [sic] Proposed Rule Change to further
justify that the Proposed Access Fees are reasonable in accordance with
the Commission Staff's Guidance. Among other things, these enhancements
include providing baseline information in the form of data from the
month before the Proposed Access Fees became effective.
The Exchange now responds to SIG remaining claims below. SIG Letter
3 first summarizes its arguments made in SIG Letters 1 and 2 and
incorporates those arguments by reference. The Exchange responded to
the arguments in SIG Letter 2 above. SIG Letter 3 incorporates the
following arguments from SIG Letter 1, which the Exchange will first
respond to in turn, below:
``(1) The prospect that a member may withdraw from the Exchanges
if a fee is too costly is not a basis for asserting that the fee is
reasonable; (2) profit margin comparisons do not support the
Exchanges' claims that they will not realize a supracompetitive
profit, the Exchanges' respective profit margins of 30% (for MIAX
and Pearl) and 51% (for Emerald) in relation to connectivity fees
are high in any event, and comparisons to competing exchanges'
overall operating profit margins are an inapt ``apples-to-oranges''
comparison; (3) the Exchanges provide no support for their claim
that their proposed tiered pricing structure is needed to encourage
efficiency in connectivity usage; (4) the Exchanges provided no
support for their claim that the tiered pricing structure allows
them to better monitor connectivity usage, nor that this is an
appropriate basis for the pricing structure in any event; (5) the
Exchanges' claim that firms who purchase more 10Gb ULL lines
generate ``higher'' costs is misleading, and they offered no support
for this claim in any event; (6) no other exchange has tiered
connectivity pricing; (7) the recoupment of investment for exchange
infrastructure has no supporting nexus with the claim that the
proposed fees are reasonable, equitably allocated, and not unfairly
discriminatory; and (8) the recoupment of investment claim belies
the Exchanges' claim of encouraging efficiency in connectivity
usage.'' \77\
---------------------------------------------------------------------------
\77\ See SIG Letter 3, supra note 9.
The Exchange's Examples of Members Terminating Their Exchange Access
Shows That Members Have Choice Whether To Connect to an Exchange Based
on Fees
SIG asserts that ``the prospect that a member may withdraw from the
Exchanges if a fee is too costly is not a basis for asserting that the
fee is reasonable.'' \78\ SIG misinterprets the Exchange's argument
here. The Exchange provided the examples of firms terminating access to
certain markets due to fees to support its assertion that firms,
including market makers, are not required to connect to all markets and
may drop access if fees become too costly for their business models and
alternative or substitute forms of connectivity are available to those
firms who choose to terminate access. The Commission Staff Guidance
also provides that ``[a] statement that substitute products or services
are available to market participants in the relevant market (e.g.,
equities or options) can demonstrate competitive forces if supported by
evidence that substitute products or services exist.'' \79\
Nonetheless, the Third [sic] Proposed Rule Change no longer makes this
assertion as a basis for the proposed fee change and, therefore, the
Exchange believes it is not necessary to respond to this portion of SIG
Letters 1 and 3.
---------------------------------------------------------------------------
\78\ Id.
\79\ See Guidance, supra note 23.
---------------------------------------------------------------------------
The Proposed Fees Will Not Result in Excessive Pricing or Supra-
Competitive Profit
Next, SIG asserts that the Exchange's ``profit margin comparisons
do not support the Exchange's claims that they will not realize a
supracompetitive profit,'' that ``the Exchanges' respective profit
margins of 30% (for MIAX and Pearl) and 51% (for Emerald) in relation
to connectivity fees are high in any event,'' and ``comparisons to
competing exchanges' overall operating profit margins are an inapt
`apples-to-oranges' comparison.''
The Exchange has provided ample data that the proposed fees would
not result in excessive pricing or a supra-competitive profit. In this
Third [sic] Proposed Rule Change, the Exchange no longer utilizes a
comparison of its profit margin to that of other options exchanges as a
basis that the Proposed Access Fees are reasonable. Rather, the
Exchange has enhanced its cost and revenue analysis and data in this
Third [sic] Proposed Rule Change to further justify that the Proposed
Access Fees are reasonable in accordance with the Commission Staff's
Guidance. Therefore, the Exchange believes it is no longer necessary to
respond to this portion of SIG Letters 1 and 3.
The Proposed Tiered Pricing Structure Is Not Unfairly Discriminatory
SIG challenges the proposed fees by arguing that ``the Exchange[ ]
provide[s] no support for [its] claim that [the] proposed tiered
pricing structure is needed to encourage efficiency in connectivity
usage and the Exchange[ ] provided no support for [the] claim that the
tiered pricing structure allows them to better monitor connectivity
usage, nor that this is an appropriate basis for the pricing structure
in any event.'' The Exchange provided additional justification to
support that the Proposed Access Fees are equitable and not unfairly
discriminatory above in response to SIG's assertions.
Firms That Purchase More 10Gb ULL Generate Higher Exchange Costs
SIG argues that ``the Exchanges' claim that firms who purchase more
10Gb ULL lines generate `higher' costs is misleading,'' and that the
Exchange has ``offered no support for this claim in any event.'' As
described above, the Exchange sought to design the proposed tiered-
pricing structure to set the amount of the fees to relate to the number
of connections a firm purchases and the Exchange believes it provided
[[Page 9673]]
ample justification for the proposed tiered-pricing structure in the
First and Second Proposed Rule Changes. Nonetheless, the Exchange
provides additional justification to support that the Proposed Access
Fees are equitable and not unfairly discriminatory above in response to
SIG's assertions.
The Proposed Tiered-Pricing Structure for 10Gb ULL Connectivity Will
Provide Cost Savings for the Majority of Exchange Members
The SIG Letter incorrectly asserts that no other exchange has
tiered connectivity pricing. Numerous other exchanges provide tiered
fee structures for various other types of access to their platforms,
including trading permits and ports.\80\ The Exchange provided adequate
evidence that most firms would incur cost savings under the Proposed
Access Fees in the First and Second Proposed Rule Changes and this
filing. Nonetheless, the Exchange believes it provided additional
justification to support that the Proposed Access Fees are equitable
and not unfairly discriminatory above in response to SIG's assertions.
---------------------------------------------------------------------------
\80\ 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. Options Fee Schedule, Options
Logical Port Fees, 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); 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); NYSE American Options
Fee Schedule, Section V.A., Port Fees and NYSE Arca Options Fee
Schedule, Port Fees (both charging $450 per port for order/quote
entry ports 1-40 and $150 per port for ports 41 and greater).
---------------------------------------------------------------------------
Recoupment of Exchange Infrastructure Costs
Nowhere in this proposal or in the First Proposed Rule 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.'' The Exchange no longer
makes this assertion in this filing and, therefore, does not believe is
it necessary to respond to SIG's assertion here.
SIFMA Letter
In sum, the SIFMA Letter asserts that the Exchange has failed to
demonstrate that the Proposed Access Fees are reasonable for three
reasons:
(i) ``The Exchanges' ``platform competition'' argument that
competition for order flow constrains pricing for market data or
other products and services exclusively offered by an exchange does
not demonstrate that the fees are reasonable.''
(ii) ``. . . order flow competition alone between exchanges does
not demonstrate that the fees for the products and services subject
to the Proposal are reasonable.''
(iii) ``the Exchanges' argument that the products and services
subject to the Proposals are optional does not reflect marketplace
reality, nor does it demonstrate that the proposed fees are
reasonable.''
The Exchange responds to each of SIFMA's challenges in turn below.
The Exchange Never Set Forth a ``Platform Competition'' Argument
The SIFMA Letter asserts that the Exchange's ``platform
competition'' argument that competition for order flow constrains
pricing for market data or other products and services exclusively
offered by an exchange does not demonstrate that the fees are
reasonable.'' \81\ The Exchange does not believe it is necessary to
respond to this assertion because it has never set forth a ``platform
competition'' \82\ argument to justify the Proposed Access Fees in the
First or Second Proposed Rule Change nor does it do so in this filing.
---------------------------------------------------------------------------
\81\ See SIFMA Letter, supra note 9.
\82\ Pursuant to the Guidance, ``platform theory generally
asserts that when a business offers facilities that bring together
two or more distinct types of customers, it is the overall return of
the platform, rather than the return of any particular fees charged
to a type of customer, that should be used to assess the
competitiveness of the platform's market.'' See Guidance, supra note
23.
---------------------------------------------------------------------------
The Exchange Is Not Arguing That Order Flow Competition Alone
Demonstrates That the Proposed Fees Are Reasonable
The SIFMA Letter asserts that ``order flow competition alone
between exchanges does not demonstrate that the fees for the products
and services subject to the Proposal are reasonable.'' \83\ The
Exchange never directly asserted in the First or Second Proposed Rule
Changes, nor does it do so in this filing, that order flow competition,
alone, demonstrated that the Proposed Access Fees are reasonable and
has removed any language that could imply this argument from this
filing.
---------------------------------------------------------------------------
\83\ See SIFMA Letter, supra note 9.
---------------------------------------------------------------------------
Other SIFMA Assertions
SIFMA also challenges or asserts: (i) The substitutability or
optionality of 10Gb ULL connections, (ii) whether the Exchange has
shown that the fees are equitable and non-discriminatory; (iii) that a
tiered pricing structure will impose higher cost on all market
participants; (iv) that a tiered pricing structure will encourage
market participants to be more economical with the usage; (v) greater
number of connections use greater Exchange resources; and (vi) that the
Exchange has not provided extensive information regarding its cost data
and how it determined it cost analysis. The Exchange believes that
these assertions by SIFMA basically echo assertions made in SIG Letters
1 and 3 and that it provided a response to these assertions under its
response to SIG above or in provided enhanced transparency and
justification in this filing.
III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\84\ at any time within
60 days of the date of filing of a proposed rule change pursuant to
Section 19(b)(1) of the Act,\85\ the Commission summarily may
temporarily suspend the change in the rules of a self-regulatory
organization (``SRO'') 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.
As discussed below, the Commission believes a temporary suspension of
the proposed rule change is necessary and appropriate to allow for
additional analysis of the proposed rule change's consistency with the
Act and the rules thereunder.
---------------------------------------------------------------------------
\84\ 15 U.S.C. 78s(b)(3)(C).
\85\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on July
30, 2021, with the proposed fee changes effective beginning August 1,
2021. That proposal, SR-PEARL-2021-36, was published for comment in the
Federal Register on August 17, 2021.\86\ On September 24, 2021 the
Exchange withdrew SR-PEARL-2021-36 and filed a proposed rule change
proposing fee changes as proposed herein. That proposal, SR-PEARL-2021-
45, was
[[Page 9674]]
published for comment in the Federal Register on October 4, 2021.\87\
The Commission received four comment letters from three separate
commenters on SR-PEARL-2021-45.\88\ On November 22, 2021, pursuant to
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily
suspended the proposed rule change; and (2) instituted proceedings to
determine whether to approve or disapprove the proposed rule
change.\89\ On December 1, 2021, the Exchange withdrew SR-PEARL-2021-45
and filed a proposed rule change proposing fee changes as proposed
herein. That filing, SR-PEARL-2021-57,\90\ was published for comment in
the Federal Register on December 20, 2021.\91\ On January 27, 2022,
pursuant to Section 19(b)(3)(C) of the Act, the Commission: (1)
Temporarily suspended the proposed rule change (SR-PEARL-2021-57) and
(2) instituted proceedings to determine whether to approve or
disapprove the proposal.\92\ On February 1, 2022, the Exchange withdrew
SR-PEARL-2021-57 and filed the instant filing, which is substantially
similar.
---------------------------------------------------------------------------
\86\ See Securities Exchange Act Release No. 92644 (August 11,
2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36). The
Commission received one comment letter on that proposal. Comment for
SR-PEARL-2021-36 can be found at: https://www.sec.gov/comments/sr-pearl-2021-36/srpearl202136.htm.
\87\ See Securities Exchange Act Release No. 93162 (September
28, 2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-2021-45).
\88\ Comment on SR-PEARL-2021-45 can be found at: https://www.sec.gov/comments/sr-pearl-2021-45/srpearl202145.htm.
\89\ See Securities Exchange Act Release No. 93639 (November 22,
2021), 86 FR 67758 (November 29, 2021).
\90\ See text accompanying supra note 12.
\91\ See Securities Exchange Act Release No. 93774 (December 14,
2021), 86 FR 71952 (December 20, 2021).
\92\ See Securities Exchange Act Release No. 94088 (January 27,
2022), 87 FR 5901 (February 2, 2022).
---------------------------------------------------------------------------
When exchanges file their proposed rule changes with the
Commission, including fee filings like the Exchange's present proposal,
they are required to provide a statement supporting the proposal's
basis under the Act and the rules and regulations thereunder applicable
to the exchange.\93\ The instructions to Form 19b-4, on which exchanges
file their proposed rule changes, specify that such statement ``should
be sufficiently detailed and specific to support a finding that the
proposed rule change is consistent with [those] requirements.'' \94\
---------------------------------------------------------------------------
\93\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory
Organization's Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change'').
\94\ Id.
---------------------------------------------------------------------------
Among other things, exchange proposed rule changes are subject to
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which
requires the rules of an exchange to: (1) Provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \95\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \96\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\97\
---------------------------------------------------------------------------
\95\ 15 U.S.C. 78f(b)(4).
\96\ 15 U.S.C. 78f(b)(5).
\97\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposal to modify fees for
certain connectivity options and implement a tiered pricing fee
structure is consistent with the statutory requirements applicable to a
national securities exchange under the Act. In particular, the
Commission will consider whether the proposed rule change satisfies the
standards under the Act and the rules thereunder requiring, among other
things, that an exchange's rules provide for the equitable allocation
of reasonable fees among members, issuers, and other persons using its
facilities; not permit unfair discrimination between customers,
issuers, brokers or dealers; and do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\98\
---------------------------------------------------------------------------
\98\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------
Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule change.\99\
---------------------------------------------------------------------------
\99\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change
The Commission is instituting proceedings pursuant to Sections
19(b)(3)(C) \100\ and 19(b)(2)(B) \101\ of the Act to determine whether
the Exchange's proposed rule change should be approved or disapproved.
Institution of such proceedings is appropriate at this time in view of
the legal and policy issues raised by the proposed rule change.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide comments on the proposed rule change to
inform the Commission's analysis of whether to approve or disapprove
the proposed rule change.
---------------------------------------------------------------------------
\100\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\101\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\102\ the Commission is
providing notice of the grounds for possible disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of whether the Exchange has sufficiently
demonstrated how the proposed rule change is consistent with Sections
6(b)(4),\103\ 6(b)(5),\104\ and 6(b)(8) \105\ of the Act. Section
6(b)(4) of the Act requires that the rules of a national securities
exchange provide for the equitable allocation of reasonable dues, fees,
and other charges among its members and issuers and other persons using
its facilities. Section 6(b)(5) of the Act requires that the rules of a
national securities exchange be designed, among other things, 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 not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act
requires that the rules of a national securities exchange not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\102\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act
also provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
See id. The time for conclusion of the proceedings may be extended
for up to 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding, or if the
exchange consents to the longer period. See id.
\103\ 15 U.S.C. 78f(b)(4).
\104\ 15 U.S.C. 78f(b)(5).
\105\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, in addition to any
other comments they may wish to submit about the proposed rule change.
In particular, the Commission seeks comment on the following aspects of
the proposal and asks commenters to submit data where appropriate to
support their views:
[[Page 9675]]
1. Cost Estimates and Allocation. The Exchange states that it is
not asserting that the Proposed Access Fees are constrained by
competitive forces, but rather set forth a ``cost-plus model,''
employing a ``conservative methodology'' that ``strictly considers
only those costs that are most clearly directly related to the
provision and maintenance of 10Gb ULL connectivity to estimate such
costs.'' \106\ Setting forth its costs in providing 10Gb ULL
connectivity, and as summarized in greater detail above, the
Exchange projects $15.9 million in aggregate (between the Exchange
and MIAX) annual estimated costs for 2021 as the sum of: (1) $3.9
million in third-party expenses paid in total to Equinix (62% of the
total applicable expense) for data center services; Zayo Group
Holdings, for network services (62% of the total applicable
expense); SFTI for connectivity support, Thompson Reuters, NYSE,
Nasdaq, and Internap and others (75% of the total applicable
expense) for content, connectivity services, and infrastructure
services; and various other hardware and software providers (51% of
the total applicable expense) supporting the production environment,
and (2) $12 million in internal expenses, allocated to (a) employee
compensation and benefit costs ($6.1 million, approximately 28% of
the Exchange's and MIAX's total applicable employee compensation and
benefits expense); (b) depreciation and amortization ($5.3 million,
approximately 70% of the Exchange's and MIAX's total applicable
depreciation and amortization expense); and (c) occupancy costs
($0.6 million, approximately 53% of the Exchange's and MIAX's total
applicable occupancy expense). Do commenters believe that the
Exchange has provided sufficient detail about how it determined
which costs are most clearly directly associated with providing and
maintaining 10Gb ULL connectivity? The Exchange describes a
``proprietary'' process involving all Exchange department heads,
including the finance department and numerous meetings between the
Exchange's Chief Information Officer, Chief Financial Officer, Head
of Strategic Planning and Operations, Chief Technology Officer,
various members of the Legal Department, and other group leaders,
but do not specify further what principles were applied in making
these determinations or arriving at particular allocations. Do
commenters believe further explanation is necessary? For employee
compensation and benefit costs, for example, the Exchange calculated
an allocation of employee time in several departments, including
Technology, Back Office, Systems Operations, Networking, Business
Strategy Development, Trade Operations, Finance, and Legal, but do
not provide the job titles and salaries of persons whose time was
accounted for, or explain the methodology used to determine how much
of an employee's time is devoted to that specific activity. What are
commenters' views on whether the Exchange has provided sufficient
detail on the identity and nature of services provided by third
parties? Across all of the Exchange's projected costs, what are
commenters' views on whether the Exchange has provided sufficient
detail on the elements that go into connectivity costs, including
how shared costs are allocated and attributed to connectivity
expenses, to permit an independent review and assessment of the
reasonableness of purported cost-based fees and the corresponding
profit margin thereon? Should the Exchange be required to identify
for what services or fees the remaining percentage of un-allocated
expenses are attributable to (e.g., what services or fees are
associated with the 30% of applicable depreciation and amortization
expenses the Exchange does not allocate to the Proposed Access
Fees)? Do commenters believe that the costs projected for 2021 are
generally representative of expected costs going forward (to the
extent commenters consider 2021 to be a typical or atypical year),
or should an exchange present an estimated range of costs with an
explanation of how profit margins could vary along the range of
estimated costs? Should the Exchange use cost projections or actual
costs estimated for 2021 in a filing made in 2022, or make cost
projections for 2022?
---------------------------------------------------------------------------
\106\ See supra Section II.A.2.
---------------------------------------------------------------------------
2. Revenue Estimates and Profit Margin Range. The Exchange
provides a single monthly revenue figure as the basis for
calculating the profit margin of 21.3%. Do commenters believe this
is reasonable? If not, why not? The Exchange states that their
proposed fee structure is ``designed to cover its costs with a
limited return in excess of such costs,'' and that ``revenue and
associated profit margin [ ] are not solely intended to cover the
costs associated with providing access services subject to the
Proposed Access Fees,'' and believes that a 21.3% margin is a
limited return over such costs.\107\ The profit margin is also
dependent on the accuracy of the cost projections which, if inflated
(intentionally or unintentionally), may render the projected profit
margin meaningless. The Exchange acknowledges that this margin may
fluctuate from month to month due to changes in the number of
connections purchased, and that costs may increase. They also state
that the number of connections has not materially changed over the
prior months and so the months that the Exchange has used as a
baseline to perform its assessment are representative of reasonably
anticipated costs and expenses.\108\ The Exchange does not account
for the possibility of cost decreases, however. What are commenters'
views on the extent to which actual costs (or revenues) deviate from
projected costs (or revenues)? Do commenters believe that the
Exchange's methodology for estimating the profit margin is
reasonable? Should the Exchange provide a range of profit margins
that they believe are reasonably possible, and the reasons therefor?
---------------------------------------------------------------------------
\107\ See supra Section II.A.2.
\108\ See id.
---------------------------------------------------------------------------
3. Reasonable Rate of Return. Do commenters agree with the
Exchange that its expected 21.3% profit margin would constitute a
reasonable rate of return over cost for 10GB ULL connectivity? If
not, what would commenters consider to be a reasonable rate of
return and/or what methodology would they consider to be appropriate
for determining a reasonable rate of return? What are commenters'
views regarding what factors should be considered in determining
what constitutes a reasonable rate of return for 10Gb ULL
connectivity fees? Do commenters believe it relevant to an
assessment of reasonableness that the Exchange's proposed fees for
10Gb ULL connections, even at the highest tier, are lower than those
of other options exchanges to which the Exchange has compared the
Proposed Access Fees? Should an assessment of reasonable rate of
return include consideration of factors other than costs; and if so,
what factors should be considered, and why?
4. Periodic Reevaluation. The Exchange has addressed whether it
believes a material deviation from the anticipated profit margin
would warrant the need to make a rule filing pursuant to Section
19(b) of the Act to increase or decrease the fees accordingly,
stating that ``[a]ny requirement that an exchange should conduct a
periodic re-evaluation on a set timeline of its cost justification
and amend its fees accordingly should be established by the
Commission holistically, applied to all exchanges and not just
through pending fee proposals, such as this filing,'' and that
``[i]n order to be fairly applied, such a mandate should be applied
to existing access fees as well.'' \109\ In light of the impact that
the number of subscribers has on connectivity profit margins, and
the potential for costs to decrease (or increase) over time, what
are commenters' views on the need for exchanges to commit to
reevaluate, on an ongoing and periodic basis, their cost-based
connectivity fees to ensure that they stay in line with their stated
profitability target and do not become unreasonable over time, for
example, by failing to adjust for efficiency gains, cost increases
or decreases, and changes in subscribers? How formal should that
process be, how often should that reevaluation occur, and what
metrics and thresholds should be considered? How soon after a new
connectivity fee change is implemented should an exchange assess
whether its subscriber estimates were accurate and at what threshold
should an exchange commit to file a fee change if its estimates were
inaccurate? Should an initial review take place within the first 30
days after a connectivity fee is implemented? 60 days? 90 days? Some
other period?
---------------------------------------------------------------------------
\109\ See supra Section II.A.2.
---------------------------------------------------------------------------
5. Tiered Structure for 10Gb ULL Connections. The Exchange
states that the proposed tiered fee structure is designed to
decrease the monthly fees for those firms that connect to the
Exchange as part of their best execution obligations and generally
tend to send the least amount of orders and messages over those
connections, because such firms generally only purchase a limited
number of connections, and also ``generally send fewer orders and
messages over those connections, resulting in less strain on
Exchange resources.'' \110\ According to the Exchange, 80% of firms
have not experienced a fee increase as a result of the tiered
structure.
[[Page 9676]]
However, firms that purchase five or more connections will see a 30%
increase in their fees for each connection above the fourth.
Regarding these firms, the Exchange has not asserted that it is 30%
more costly for the Exchange to offer such connections to these
firms, but instead argues generally that these firms are ``likely''
to result in greater expenditure of Exchange resources and increased
cost to the Exchange and that as the number of connections an entity
has increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs
(e.g., storage costs, surveillance costs, service expenses) also
increase.\111\ Do commenters believe that the price differences
between the tiers are supported by the Exchange's assertions that it
set the level of its proposed fees in a manner that it is equitable
and not unfairly discriminatory? Do commenters believes the Exchange
should demonstrate how the proposed tiered fee levels correlate with
tiered costs (e.g., by providing cost information broken down by
tier, messaging and order volumes through the additional 10Gb ULL
connections by tier, and/or mid-month add/drop of connection rates
by tier)? Do commenters believe that the Exchange should provide
more detail about the costs that firms purchasing three or more or
five or more 10Gb ULL connections impose on the Exchange, to permit
an assessment of the Exchange's statement that the Proposed Access
Fees ``do not depend on any distinction between Members and non-
Members because they are solely determined by the individual
Members' or non-Members' business needs and its impact on Exchange
resources?'' \112\
---------------------------------------------------------------------------
\110\ See id.
\111\ See id.
\112\ See id.
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
[SRO] that proposed the rule change.'' \113\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding,\114\ and any failure of an SRO to provide this
information may result in the Commission not having a sufficient basis
to make an affirmative finding that a proposed rule change is
consistent with the Act and the applicable rules and regulations.\115\
Moreover, ``unquestioning reliance'' on an SRO's representations in a
proposed rule change would not be sufficient to justify Commission
approval of a proposed rule change.\116\
---------------------------------------------------------------------------
\113\ 17 CFR 201.700(b)(3).
\114\ See id.
\115\ See id.
\116\ See Susquehanna Int'l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017)
(rejecting the Commission's reliance on an SRO's own determinations
without sufficient evidence of the basis for such determinations).
---------------------------------------------------------------------------
The Commission believes it is appropriate to institute proceedings
to allow for additional consideration and comment on the issues raised
herein, including as to whether the proposal is consistent with the
Act, any potential comments or supplemental information provided by the
Exchange, and any additional independent analysis by the Commission.
V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. In particular, the Commission invites the written views of
interested persons concerning whether the proposal is consistent with
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the
Act, or the rules and regulations thereunder. The Commission asks that
commenters address the sufficiency and merit of the Exchange's
statements in support of the proposal, in addition to any other
comments they may wish to submit about the proposed rule change.
Although there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral
presentation.\117\
---------------------------------------------------------------------------
\117\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by an SRO.
See Securities Acts Amendments of 1975, Report of the Senate
Committee on Banking, Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by March 15, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by March 29,
2022.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-PEARL-2022-03 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-2022-03. 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-2022-03 and should be submitted on
or before March 15, 2022. Rebuttal comments should be submitted by
March 29, 2022.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\118\ that File Numbers SR-PEARL-2022-03 be, and hereby is,
temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule change should be
approved or disapproved.
---------------------------------------------------------------------------
\118\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\119\
---------------------------------------------------------------------------
\119\ 17 CFR 200.30-3(a)(12), (57) and (58).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03653 Filed 2-18-22; 8:45 am]
BILLING CODE 8011-01-P
