Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX Emerald Express Interface Ports; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change, 9695-9711 [2022-03655]
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.118
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03652 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94260; File No. SR–
EMERALD–2022–05]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing of a
Proposed Rule Change To Amend Its
Fee Schedule To Adopt a TieredPricing Structure for Additional
Limited Service MIAX Emerald Express
Interface Ports; 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 Emerald, LLC (‘‘MIAX
Emerald’’ 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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Emerald Fee Schedule
(the ‘‘Fee Schedule’’) to amend certain
port 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.
118 17
CFR 200.30–3(a)(12), (57) and (58).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV [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 additional Limited Service
MIAX Emerald Express Interface
(‘‘MEI’’) Ports 3 available to Market
Makers.4 The Exchange believes a
tiered-pricing structure will encourage
Market Makers to be more efficient and
economical when determining how to
connect to the Exchange. This should
also enable the Exchange to better
monitor and provide access to the
Exchange’s network to ensure sufficient
capacity and headroom in the System.5
The Exchange initially filed the
proposed fee changes on August 2,
2021, with the changes being
immediately effective.6 The First
Proposed Rule Change was published
for comment in the Federal Register on
August 19, 2021.7 The Commission
received one comment letter on the First
Proposed Rule Change.8 The Exchange
withdrew the First Proposed Rule
Change on September 27, 2021 and
resubmitted its proposal (‘‘Second
3 The MIAX Emerald Express Interface (‘‘MEI’’) is
a connection to the MIAX Emerald System that
enables Market Makers to submit simple and
complex electronic quotes to MIAX Emerald. See
the Definitions Section of the Fee Schedule
4 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
5 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
6 See Securities Exchange Act Release No. 92662
(August 13, 2021), 86 FR 46726 (August 19, 2021)
(SR–EMERALD–2021–25).
7 Id.
8 See Letter from Richard J. McDonald,
Susquehanna International Group, LLC (‘‘SIG’’), to
Vanessa Countryman, Secretary, Commission, dated
September 7, 2021 (‘‘SIG Letter 1’’).
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9695
Proposed Rule Change’’).9 On
September 28, 2021, the Exchange
withdrew the Second Proposed Rule
Change and re-submitted the proposal
on September 28, 2021, with the
proposed fee changes being immediately
effective (‘‘Third Proposed Rule
Change’’).10 The Third Proposed Rule
Change was published for comment in
the Federal Register on October 5,
2021.11 The Third 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 Third Proposed Rule
Change.12 The Commission suspended
the Third Proposed Rule Change on
November 22, 2021.13 The Exchange
withdrew the Third Proposed Rule
Change on December 1, 2021 and
submitted a revised proposal for
immediate effectiveness (‘‘Fourth
Proposed Rule Change’’).14 The Fourth
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
9 See
SR–EMERALD–2021–30.
Securities Exchange Act Release No. 93188
(September 29, 2021), 86 FR 55052 (October 5,
2021) (SR–EMERALD–2021–31).
11 Id.
12 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’’); 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’’).
The Exchange notes that the Healthy Markets
Association (‘‘HMA’’) submitted a comment letter
on a related filing to amend fees for 10Gb ULL
connections, on which SIG Letters 1, 2, and 3 as
well as the SIFMA Letter also commented. See
letter from Tyler Gellasch, Executive Director, HMA
(‘‘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’’).
13 See Securities Exchange Act Release No. 93644
(November 22, 2021), 86 FR 67745 (November 29,
2021).
14 See Securities Exchange Act Release No. 93772
(December 14, 2021), 86 FR 71965 (December 20,
2021) (SR–EMERALD–2021–43).
10 See
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
SIG Letters 1, 2, and 3, as well as the
SIFMA Letter submitted on the First and
Second [sic] Proposed Rule Changes,15
and feedback provided by Commission
Staff during a telephone conversation on
November 18, 2021 relating to the Third
Proposed Rule Change. The Fourth
Proposed Rule Change was published
for comment in the Federal Register on
December 20, 2021.16 The Exchange
receive no comment letters on the
Fourth Proposed Rule Change. The
Commission suspended the Fourth
Proposed Rule Change on January 27,
2022.17 The Exchange withdrew the
Fourth Proposed Rule Change on
February 1, 2022 and now submits this
proposal for immediate effectiveness
(‘‘Fifth Proposed Rule Change’’). This
Fifth Proposed Rule Change provides
additional justification and explanation
for the proposed fee changes.
Additional Limited Service MEI Port
Tiered-Pricing Structure
The Exchange proposes to amend the
fees for additional Limited Service MEI
Ports. Currently, the Exchange allocates
two (2) Full Service MEI Ports 18 and
two (2) Limited Service MEI Ports 19 per
matching engine 20 to which each
that Market Makers receive. The
Exchange now proposes the following
tiered-pricing structure: (i) The third
and fourth additional Limited Service
MEI Ports for each matching engine will
increase from the current flat monthly
fee of $100 to $200 per port; (ii) the fifth
and sixth additional Limited Service
MEI Ports for each matching engine will
increase from the current flat monthly
fee of $100 to $300 per port; and (iii) the
seventh to the twelfth additional
Limited Service MEI Ports will increase
from the current monthly flat fee of
$100 to $400 per port (collectively, the
‘‘Proposed Access Fees’’).
The Exchange believes the other
exchanges’ port fees are a useful
example of alternative approaches to
providing and charging for port access
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 port access. As
shown by the below table, the
Exchange’s proposed highest tier is still
less than fees charged for similar port
access provided by other options
exchanges.
Exchange
Type of port
Monthly fee
(per port)
MIAX Emerald (as proposed) .............................
Additional Limited Service MEI Port ................
NYSE American, LLC (‘‘Amex’’) 21 .....................
NYSE Arca, Inc. (‘‘Arca’’) 22 ...............................
The
NASDAQ
Stock
Market
LLC
(‘‘NASDAQ’’) 23.
Order/Quote Entry Port ....................................
Order/Quote Entry Port ....................................
SQF Port ..........................................................
1–2 ports. FREE (not changed in this proposal), 3–4 ports. $200, 5–6 ports. $300, 7–
12 ports. $400.
$450.
$450.
1–5 ports. $1,500.00, 6–20 ports. $1,000.00,
21 or more ports. $500.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 24
in general, and furthers the objectives of
Section 6(b)(4) of the Act 25 in
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Market Maker connects. Market Makers
may also request additional Limited
Service MEI Ports for each matching
engine to which they connect. The Full
Service MEI Ports, Limited Service MEI
Ports and the additional Limited Service
MEI Ports all include access to the
Exchange’s primary and secondary data
centers and its disaster recovery center.
Market Makers may request additional
Limited Service MEI Ports. Prior to the
First Proposed Rule Change, Market
Makers were assessed a $100 monthly
fee for each additional Limited Service
MEI Port for each matching engine.
The Exchange now proposes to move
from a flat monthly fee per additional
Limited Service MEI Port for each
matching engine to a tiered-pricing
structure for additional Limited Service
MEI Ports for each matching engine
under which the monthly fee would
vary depending on the number of
additional Limited Service MEI Ports
the Market Maker elects to purchase.
Specifically, the Exchange will continue
to provide the first and second
additional Limited Service MEI Ports for
each matching engine free of charge, as
described above, per the initial
allocation of Limited Service MEI Ports
15 The Exchange notes that while the HMA Letter
applauds the level of disclosure the Exchange
included in the First and Second [sic] Proposed
Rule Changes, the HMA Letter does not raise
specific issues with the First or Second [sic]
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.
16 See supra note 14.
17 See Securities Exchange Act Release No. 94087
(January 27, 2022) (Suspension of and Order
Instituting Proceedings to Determine Whether to
Approve or Disapprove Proposed Rule Changes to
Amend Fee Schedules to Adopt Tiered-Pricing
Structures for Additional Limited Service MIAX
and MIAX Emerald Express Interface Ports).
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particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among Exchange
Members and issuers and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposal
furthers the objectives of Section 6(b)(5)
of the Act 26 in that it is designed to
promote just and equitable principles of
trade, remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general protect investors
18 ‘‘Full Service MEI Ports’’ means a port which
provides Market Makers with the ability to send
Market Maker simple and complex quotes, eQuotes,
and quote purge messages to the MIAX Emerald
System. Full Service MEI Ports are also capable of
receiving administrative information. Market
Makers are limited to two Full Service MEI Ports
per Matching Engine. See the Definitions Section of
the Fee Schedule.
19 ‘‘Limited Service MEI Ports’’ means a port
which provides Market Makers with the ability to
send simple and complex eQuotes and quote purge
messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports
are also capable of receiving administrative
information. Market Makers initially receive two
Limited Service MEI Ports per Matching Engine.
See the Definitions Section of the Fee Schedule.
20 ‘‘Matching Engine’’ means a part of the MIAX
Emerald electronic system that processes options
orders and trades on a symbol-by-symbol basis.
Some Matching Engines will process option classes
with multiple root symbols, and other Matching
Engines may be dedicated to one single option root
symbol (for example, options on SPY may be
processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol
may only be assigned to a single designated
Matching Engine. A particular root symbol may not
be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
21 See NYSE American Options Fee Schedule,
Section V.A., Port Fees.
22 See NYSE Arca Options Fee Schedule, Port
Fees.
23 See Nasdaq Stock Market, Nasdaq Options 7
Pricing Schedule, Section 3, Nasdaq Options
Market—Ports and Other Services.
24 15 U.S.C. 78f(b).
25 15 U.S.C. 78f(b)(4).
26 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
and the public interest and is 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’’).27 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.’’ 28 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 Miami International
Securities Exchange, LLC (‘‘MIAX’’) and
MIAX PEARL, LLC (‘‘MIAX Pearl’’), to
amend other non-transaction fees.29
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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
important when an exchange imposes
27 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).
28 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’’).
29 See Securities Exchange Act Release Nos.
90981 (January 25, 2021), 86 FR 7582 (January 29,
2021) (SR–PEARL–2021–01) (proposal to increase
connectivity fees); 90980 (January 25, 2021), 86 FR
7602 (January 29, 2021) (SR–MIAX–2021–02)
(proposal to increase connectivity fees).
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various access fees for market
participants to access an exchange’s
marketplace. The Exchange deems ports
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.’’ 30 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.’’ 31 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.’’ 32 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 additional Limited Service MEI
Ports and will not result in the
Exchange generating a supracompetitive profit.
The Guidance defines ‘‘supracompetitive profit’’ as ‘‘profits that
exceed the profits that can be obtained
in a competitive market.’’ 33 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.’’ 34 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’’ 35 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
30 See
Guidance, supra note 28.
31 Id.
32 Id.
33 Id.
34 Id.
35 Id.
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9697
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 additional
Limited Service MEI Port access to the
Exchange.
The Proposed Access Fees are based
on a cost-plus model. In determining the
appropriate fees to charge, the Exchange
considered its costs to provide port
access, 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
additional Limited Service MEI Ports) to
estimate such costs,36 as well as the
relative costs of providing and
maintaining additional Limited Service
MEI Ports, 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 additional
Limited Service MEI Ports because of
the uncertainty of forecasting subscriber
decision making with respect to firms’
additional Limited Service MEI Port
needs and the likely potential for
increased costs to procure the thirdparty 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
36 For example, the Exchange only included the
costs associated with providing and supporting
additional Limited Service MEI Ports and excluded
from its cost calculations any cost not directly
associated with providing and maintaining such
ports. Thus, the Exchange notes that this
methodology underestimates the total costs of
providing and maintaining additional Limited
Service MEI Ports.
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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 37 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
37 A description of the Exchange’s methodology
for determining the portion (or percentage) of each
expense to allocate to the Proposed Access Fee is
being provide in response to comments from SIG
and SIFMA. See SIG Letter 3 and SIFMA Letter,
supra note 12.
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to properly provide services to the
Exchange’s constituents. Any
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 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.38 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.39 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.’’ 40 This filing provided no
cost based data to support its assertion
that the proposal was intended to be
revenue neutral. Among other things,
38 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).
39 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).
40 See id. at 57909.
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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 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.
To determine the Exchange’s
projected revenue associated with the
Proposed Access Fees, the Exchange
analyzed the number of Market Makers
currently utilizing additional Limited
Service MEI Ports 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.41 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
41 Id.
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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 projects that the final
annualized expense for 2021 to provide
additional Limited Service MEI Ports to
be approximately $880,000 per annum
or an average of $73,333.33 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 Members and nonMembers purchased a total of 625
additional Limited Service MEI Ports for
which the Exchange charged
approximately $62,500. This resulted in
a loss of $10,833.33 for that month (a
loss margin of approximately 17.3%).
For the month of November 2021, which
includes the tiered rates for additional
Limited Service MEI Ports for the
Proposed Access Fees, Exchange
Members and non-Members increased
the number of additional Limited
Service MEI Ports they purchased
resulting in a total of 860 additional
Limited Service MEI Ports for which the
Exchange charged approximately
$216,600 for that month. This resulted
in a profit of $143,266.67 for that month
(a profit margin of approximately 66%,
after experiencing monthly losses prior
to the Proposed Access Fees. The
Exchange believes that the Proposed
Access Fees are reasonable because they
are designed to generate a revenue permonth after experiencing monthly
losses prior to the Proposed Access
Fees. The Exchange cautions that this
profit margin is likely to fluctuate from
month to month based on the
uncertainty of predicting how many
ports may be purchased from month to
month as Members and non-Members
are able to add and drop ports at any
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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.42 The Exchange has 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.
Further, the Exchange chose to
provide additional Limited Service MEI
Ports at a discounted price to attract
order flow and encourage market
participants to experience the
determinism and resiliency of the
Exchange’s trading systems. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing higher fees. The Exchange
could have sought to charge higher fees
at the outset, but that could have served
to discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low cost exchange
alternative to the options industry
which resulted in lower initial
revenues, or in this case, a monthly loss.
The Exchange is now trying to amend
its fee structure to enable it to continue
to maintain and improve its overall
market and systems while also
providing a highly reliable and
deterministic trading system to the
marketplace.
As mentioned above, the Exchange
projects that its annualized expense for
2021 to provide additional Limited
Service MEI Ports to be approximately
$880,000 per annum or an average of
$73,333.33 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.43 The
42 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).
43 For example, on October 20, 2021, ICE Data
Services announced a 3.5% price increase effective
January 1, 2022 for most services. The price
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9699
Exchange notes that there are material
costs associated with providing the
infrastructure and headcount to fullysupport 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.
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 2019.44 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
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.
44 The Exchange has incurred a cumulative loss
of $22 million since its inception in 2019 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://sec.report/Document/
9999999997-21-004557/.
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Systems. 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.
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 2021,45 the total
annual expense for providing the access
services associated with the Proposed
Access Fees is projected to be
approximately $880,000.00, or
approximately $73,333.33 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.46 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.47 The $880,000 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
45 The Exchange has not yet finalized its 2021
year end results.
46 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.
47 For example, the Exchange previously noted
that all third-party expense described in its prior fee
filing was contained in the information technology
and communication costs line item under the
section titled ‘‘Operating Expenses Incurred
Directly or Allocated From Parent,’’ in the
Exchange’s 2019 Form 1 Amendment containing its
financial statements for 2018. See Securities
Exchange Act Release No. 87877 (December 31,
2019), 85 FR 738 (January 7, 2020) (SR–EMERALD–
2019–39). Accordingly, the third-party expense
described in this filing is attributed to the same line
item for the Exchange’s 2021 Form 1 Amendment,
which will be filed in 2022.
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19:42 Feb 18, 2022
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Exchange. It does not include general
costs of operating matching engines and
other trading technology. No expense
amount was allocated twice.
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, total third-party expense,
relating to fees paid by the Exchange to
third-parties for certain products and
services for the Exchange to be able to
provide the access services associated
with the Proposed Access Fees, is
projected to be $0.05 million. This
includes, but is not limited to, a portion
of the fees paid to: (1) Equinix, for data
center services, for the primary,
secondary, and disaster recovery
locations of the Exchange’s trading
system infrastructure; (2) Zayo Group
Holdings, Inc. (‘‘Zayo’’) for network
services (fiber and bandwidth products
and services) linking the Exchange’s
office locations in Princeton, New Jersey
and Miami, Florida, to all data center
locations; (3) Secure Financial
Transaction Infrastructure (‘‘SFTI’’),48
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
48 In fact, on October 22, 2019, the Exchange was
notified by SFTI that it is again raising its fees
charged to the Exchange by approximately 11%,
without having to show that such fee change
complies with the Act by being reasonable,
equitably allocated, and not unfairly
discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure
services provided by SFTI, that its fees are not
required to be rule-filed with the Commission
pursuant to Section 19(b)(1) of the Act and Rule
19b–4 thereunder. See 15 U.S.C. 78s(b)(1) and 17
CFR 240.19b–4, respectively.
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infrastructure services for critical
components of options connectivity and
network services; and (5) various other
hardware and software providers
(including Dell and Cisco, which
support the production environment in
which Members connect to the network
to trade, receive market data, etc.). For
clarity, only a portion of all fees paid to
such third-parties is included in the
third-party expense herein, and no
expense amount is allocated twice.
Accordingly, the Exchange does not
allocate its entire information
technology and communication costs to
the access services associated with the
Proposed Access Fees.
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. Further, the Exchange
notes that, with respect to the expenses
included herein, those expenses only
cover the MIAX Emerald market;
expenses associated with MIAX Pearl
for its options and equities markets and
MIAX, are accounted for separately and
are not included within the scope of this
filing. As noted above, the percentage
allocations used in this proposed rule
change may differ from past filings from
the Exchange or its affiliates due to,
among other things, changes in
expenses charged by third-parties,
adjustments to internal resource
allocations, and different system
architecture of the Exchange as
compared to its affiliates. Further, as
part its ongoing assessment of costs and
expenses, the Exchange recently
conducted a periodic thorough review
of its expenses and resource allocations
which, in turn, resulted in a revised
percentage allocations in this filing.
The Exchange believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange to provide the access
services associated with the Proposed
Access Fees. In particular, the Exchange
believes it is reasonable to allocate the
identified portion of the Equinix
expense because Equinix operates the
data centers (primary, secondary, and
disaster recovery) that host the
Exchange’s network infrastructure. This
includes, among other things, the
necessary storage space, which
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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
2.05% 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.49
The Exchange believes it is reasonable
to allocate the identified portion of the
Zayo expense because Zayo provides
the internet, fiber and bandwidth
connections with respect to the
network, linking the Exchange with its
affiliates, MIAX Pearl and MIAX, as
well as the data center and disaster
recovery locations. As such, all of the
trade data, including the billions of
messages each day per exchange, flow
through Zayo’s infrastructure over the
Exchange’s network. Without these
services from Zayo, the Exchange would
not be able to operate and support the
network and provide the access services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the Zayo expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only the
portion which the Exchange identified
as being specifically mapped to
providing the Proposed Access Fees.
According to the Exchange’s
calculations, it allocated approximately
1.64% of the total applicable Zayo
49 As noted above, the percentage allocations used
in this proposed rule change may differ from past
filings from the Exchange or its affiliates due to,
among other things, changes in expenses charged by
third-parties, adjustments to internal resource
allocations, and different system architecture of the
Exchange as compared to its affiliates. Again, as
part its ongoing assessment of costs and expenses,
the Exchange recently conducted a periodic
thorough review of its expenses and resource
allocations which, in turn, resulted in a revised
percentage allocations in this filing.
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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.50
The Exchange believes it is reasonable
to allocate the identified portions of the
SFTI expense and various other service
providers’ (including Thompson
Reuters, NYSE, Nasdaq, and Internap)
expense because those entities provide
connectivity and feeds for the entire
U.S. options industry, as well as the
content, connectivity services, and
infrastructure services for critical
components of the network. Without
these services from SFTI and various
other service providers, the Exchange
would not be able to operate and
support the network and provide access
to its Members and their customers. The
Exchange did not allocate all of the SFTI
and other service providers’ expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees. According to the
Exchange’s calculations, it allocated
approximately 2.05% 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.51
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
1.23% 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.52
Internal Expense Allocations
For 2021, total projected internal
expense, relating to the Exchange
providing the access services associated
with the Proposed Access Fees, is
projected to be $0.83 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, and
business 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
50 Id.
51 Id.
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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 to provide the access
services associated with the Proposed
Access Fees. In particular, the
Exchange’s employee compensation and
benefits expense relating to providing
the access services associated with the
Proposed Access Fees is projected to be
approximately $0.76 million, which is
only a portion of the $9.74 million total
projected expense for employee
compensation and benefits. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because this includes the time
spent by employees of several
departments, including Technology,
Back Office, Systems Operations,
Networking, Business Strategy
Development (who create the business
requirement documents that the
Technology staff use to develop network
features and enhancements), and Trade
Operations. As part of the extensive cost
review conducted by the Exchange, the
Exchange reviewed the amount of time
spent by each employee on matters
relating to the provision of access
services associated with the Proposed
Access Fees. Without these employees,
the Exchange would not be able to
provide the access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
employee compensation and benefits
expense toward the cost of the access
services associated with the Proposed
Access Fees, only the 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 7.81% 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.53
The Exchange’s depreciation and
amortization expense relating to
providing the services associated with
the Proposed Access Fees is projected to
be $0.06 million, which is only a
portion of the $3.13 million total
53 Id.
VerDate Sep<11>2014
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 1.92% 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.54
The Exchange’s occupancy expense
relating to providing the services
associated with the Proposed Access
Fees is projected to be $0.01 million,
which is only a portion of the $0.52
million total projected expense for
occupancy. The Exchange believes it is
reasonable to allocate the identified
portion of such expense because such
expense represents the portion of the
Exchange’s cost to rent and maintain a
physical location for the Exchange’s
staff who operate and support the
network, including providing the access
services associated with the Proposed
Access Fees. This amount consists
primarily of rent for the Exchange’s
Princeton, NJ office, as well as various
related costs, such as physical security,
property management fees, property
taxes, and utilities. The Exchange
operates its Network Operations Center
(‘‘NOC’’) and Security Operations
Center (‘‘SOC’’) from its Princeton, New
Jersey office location. A centralized
54 Id.
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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 1.93% 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.55
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 has 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
55 Id.
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that its annualized expense for 2021 to
provide the access services associated
with the Proposed Access Fees to be
approximately $880,000 per annum or
an average of $73,333.33 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 Members and nonMembers purchased a total of 625
additional Limited Service MEI Ports for
which the Exchange charged
approximately $62,500. This resulted in
a loss of $10,833.33 for that month (a
loss margin of approximately 17.3%).
For the month of November 2021, which
includes the tiered rates for additional
Limited Service MEI Ports for the
Proposed Access Fees, Exchange
Members and non-Members increased
the number of additional Limited
Service MEI Ports they purchased
resulting in a total of 860 additional
Limited Service MEI Ports for which the
Exchange charged approximately
$216,600 for that month. This resulted
in a profit of $143,266.67 for that month
(a profit margin of approximately 66%),
after experiencing monthly losses prior
to the Proposed Access Fees. The
Exchange believes that the Proposed
Access Fees are reasonable because they
are designed to generate a revenue permonth after experiencing monthly
losses prior to the Proposed Access
Fees. The Exchange believes this profit
margin will allow it to begin 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 ports may be
purchased from month to month as
Members and non-Members are free to
add and drop ports 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 ports and to
changes to the Exchange’s expenses, the
number of ports has not materially
changed over the previous months.
Consequently, the Exchange believes
that the months it has used as a baseline
to perform its assessment are
representative of 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.56
56 See
supra note 42.
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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
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
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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
Limited Service MEI Ports 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
ports a Market Maker utilizes. Charging
an incrementally higher fee to a Market
Maker that utilizes numerous ports is
directly related to the increased costs
the Exchange incurs in providing and
maintaining those additional ports. 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
while still providing the first and
second additional Limited Service MEI
Ports for each matching engine free of
charge.
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 access resources, but also
those firms that most heavily consume
Exchange access resources, network
consumers, and purchasers of Limited
Service MEI Ports. Limited Service MEI
Ports is not an unlimited resource as the
Exchange needs to purchase additional
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equipment to satisfy requests for
additional ports. The Exchange also
needs to provide personnel to set up
new ports, service requests related to
adding new and/or deleting existing
ports, respond to performance queries,
and to maintain those ports on behalf of
Members and non-Members. Also, those
firms that utilize additional Limited
Service MEI Ports 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 access
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
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.57 Thus, as the number of
ports an entity has increases, certain
other costs incurred by the Exchange
that are correlated to, though not
directly affected by, port 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 fee to relate to the
number of ports a firm purchases. The
Exchange notes that Limited Service
MEI Ports are primarily utilized by firms
that engage in advanced trading
strategies and typically request multiple
Limited Service MEI Ports, beyond the
two per matching engine that are
currently provided free of charge.
Accordingly, the firms engaged in
advanced trading strategies generate
higher costs by utilizing more of the
Exchange’s resources. Those firms
purchase higher amounts of Limited
Service MEI Ports tend to have specific
business oriented market making and
trading strategies, as opposed to firms
engaging solely in order routing as part
of their best-execution obligations.
The use of such additional Limited
Service MEI Ports is a voluntary
business decision of each Market Maker.
Additional Limited Service MEI Ports
are primarily used by Market Makers
seeking to remove liquidity and, for
competitive reasons, a Market Maker
may choose to utilize numerous ports in
an attempt to access the market quicker
by using one port that may have less
latency. The more ports purchased by a
Market Maker likely results in greater
57 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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expenditure of Exchange resources and
increased cost to the Exchange. With
this in mind, the Exchange will
continue to provide the first and second
additional Limited Service MEI Ports
free of charge. The Exchange notes that
firms that primarily route orders seeking
best-execution generally do not utilize
additional Limited Service MEI Ports.
Those firms also generally send less
orders and messages over those
connections, resulting in less strain on
Exchange resources.
On a similar note, the Exchange
proposes to increase the fee for those
firms that purchase more ports resulting
in greater expenditure of Exchange
resources and increased cost to the
Exchange. The Exchange notes that
these firms that purchase numerous
additional Limited Service MEI Ports
essentially do so for competitive reasons
amongst themselves and choose to
utilize numerous ports 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 ports 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 or more of their additional Limited
Service MEI Ports that are in queue to
be processed. That same Member then
seeks to enter an order to remove
liquidity from the Exchange’s Book.
That Member may choose to send that
order over one or more of their other
additional Limited Service MEI Ports
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 ports mid-month to determine
which ports have the least latency,
which results in increased costs to the
Exchange to constantly make changes in
the data center.
The firms that engage in the abovedescribed liquidity removing and
advanced trading strategies typically
require multiple ports and, therefore,
generate higher costs by utilizing more
of the Exchange’s resources. Those firms
may also conduct other latency
measurements over their ports and drop
and simultaneously add ports 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 ports in the data center.
Therefore, the Exchange believes it is
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equitable for these firms to experience
increased port costs based on their
disproportionate pull on Exchange
resources to provide the additional port
access.
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.58
As stated above, Additional Limited
Service MEI Ports are not an unlimited
resource and the Exchange’s network is
limited in the amount of ports it can
provide. However, the Exchange must
accommodate requests for additional
Limited Service MEI Ports 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 Limited Service MEI Ports on
top of current network capacity
constraints, requires that the Exchange
to purchase additional equipment to
satisfy these requests. The Exchange
also needs to provide personnel to set
up new ports and to maintain those
ports on behalf of Members and nonMembers. The proposed tiered-pricing
structure is equitable because it is
designed to encourage Market Makers to
be more efficient and economical in
selecting the amount of additional
Limited Service MEI Ports they request
while balancing that against the
Exchange’s increased expenses when
expanding its network to accommodate
additional Limited Service MEI Ports.
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 port access or their fee markup
over those costs, and therefore cannot
use other exchange’s port fees as a
benchmark to determine a reasonable
markup over the costs of providing port
access. Nevertheless, the Exchange
believes the other exchange’s port fees
are a useful example of alternative
approaches to providing and charging
for port access. To that end, the
Exchange believes the proposed tieredpricing structure for Limited Service
MEI Ports is reasonable because the
proposed highest tier is still less than
fees charged for similar port access
provided by other options exchanges
58 15
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with comparable market shares. For
example, Amex (equity options market
share of 5.05% as of November 26, 2021
for the month of November) 59 and Arca
(equity options market share of 14.88%
as of November 26, 2021 for the month
of November) 60 both charge $450 per
port for order/quote entry ports 1–40
and $150 per port for ports 41 and
greater,61 all on a per matching engine
basis, with Amex and Arca having 17
match engines and 19 match engines,
respectively.62 Similarly, NASDAQ
(equity options market share of 8.88%
as of November 23, 2021 for the month
of November) 63 charges $1,500 per port
for SQF ports 1–5, $1,000 per SQF port
for ports 6–20, and $500 per SQF port
for ports 21 and greater,64 all on a per
matching engine basis, with NASDAQ
having multiple matching engines.65
The NASDAQ SQF Interface
Specification provides that PHLX/NOM/
BX Options trading infrastructures may
consist of multiple matching engines
with each matching engine trading only
a range of option underlyings. Further,
the SQF infrastructure is such that the
firms connect to one or more servers
residing directly on the matching engine
infrastructure. Since there may be
multiple matching engines, firms will
need to connect to each engine’s
infrastructure in order to establish the
ability to quote the symbols handled by
that engine.66
In the each of the above cases, the
Exchange’s highest tier in the proposed
tiered-pricing structure is similar to or
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
59 See ‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited
November 26, 2021).
60 See id.
61 See NYSE American Options Fee Schedule,
Section V.A., Port Fees; NYSE Arca Options Fee
Schedule, Port Fees.
62 See NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the
number of matching engines per options exchange).
63 See supra note 59.
64 See NASDAQ Stock Market, NASDAQ Options
7 Pricing Schedule, Section 3, NASDAQ Options
Market—Ports and Other Services.
65 See NASDAQ Specialized Quote Interface
(SQF) Specification, Version 6.4 (October 2017),
Section 2, Architecture (the ‘‘NASDAQ SQF
Interface Specification’’).
66 See id.
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network infrastructure than markets
with higher market shares and more
expensive port alternatives. Each of the
port rates in place at competing options
exchanges were filed with the
Commission for immediate effectiveness
and remain in place today.
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 the proposed pricing
structure is associated with relative
usage of the various market participants.
Firms that are primarily order routers
seeking best-execution do not utilize
Limited Service MEI Ports on MIAX
Emerald and therefore will not pay the
fees associated with the tiered-pricing
structure. Rather, the fees described in
the proposed tiered-pricing structure
will only be allocated to Market Making
firms that engage in advanced trading
strategies and typically request multiple
Limited Service MEI Ports, beyond the
two that are free. Accordingly, the firms
engaged in a Market Making business
generate higher costs by utilizing more
of the Exchange’s resources. Those
Market Making firms that purchase
higher amounts of additional Limited
Service MEI Ports tend to have specific
business oriented market making and
trading strategies, as opposed to firms
engaging solely in best-execution order
routing business. Additionally, the use
of such additional Limited Service MEI
Ports is entirely voluntary.
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 access all options
exchanges. The Exchange operates in a
highly competitive environment, and as
discussed above, its ability to price
access and ports is constrained by
competition among exchanges and third
parties. There are other options markets
of which market participants may access
in order to trade options. There is also
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9705
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 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 67 and three
comment letters on the Second [sic]
Proposed Rule Change.68 The Exchange
responded to the comment letters in the
Fourth Proposed Rule Change and
repeats its response in is filing. No
comment letters were received in
67 See
68 See
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SIG Letter 2
SIG Letter 2 argues that the Exchange,
in withdrawing the First Proposed Rule
Change and refiling the Second [sic]
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.’’ 69
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 [sic] 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 [sic]
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 [sic] Proposed Rule Changes.
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.’’ 70
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
69 See
70 17
SIG Letter 2, supra note 12, at page 1.
CFR 201.700(b)(3).
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included in the First and Second [sic]
Proposed Rule Changes and this filing.
Until recently, the Exchange operated
at a net annual loss since it launched
operations in 2019.71 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 and Second
[sic] Proposed Rule Changes. Similar
justifications for the proposed fee
change included in the First and Second
[sic] Proposed Rule Changes, but also in
this filing, were previously included in
similar fee changes filed by the
Exchange and its affiliates, MIAX and
MIAX Pearl, and SIG did not submit a
comment letter on those filings.72 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.73
71 See
supra note 44.
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).
73 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–
72 See
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Sfmt 4703
The Exchange leveraged its past work
with Commission Staff to ensure the
justification provided herein and in the
First and Second [sic] 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
that have been permitted to take effect
without suspension.’’ 74 That same
commenter also noted their ‘‘worry that
the Commission’s process for reviewing
and evaluating exchange filings may be
inconsistently applied.’’ 75
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
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 SR–PEARL–2021–23. See Securities
Exchange Act Release No. 91858 (May 12, 2021), 86
FR 26967 (May 18, 2021) (SR–PEARL–2021–23).
74 See HMA Letter, supra note 12.
75 Id. (providing examples where non-transaction
fee filings by other exchanges have been permitted
to remain effective and not suspended by the
Commission despite less disclosure and
justification).
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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. With regards to the First and
Second [sic] Proposed Rule Changes, the
SIG Letter does not directly address the
proposed fees or lay out specific
arguments as to why the proposal is not
consistent with Section 6(b)(4) of the
Act. Rather, it simply describes the
proposed fee change and flippantly
states that its claims concerning the
10Gb ULL fee change proposals by the
Exchange, and its affiliates, apply to
these changes. Nonetheless, the
Exchange submits the below response to
the SIG Letter concerning the First
Proposed Rule Change.
Furthermore, the Exchange has
enhanced its cost and revenue analysis
and data in this Fourth [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’s
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
regarding additional Limited Service
MEI Port fees from SIG Letter 1 (while
excluding arguments that pertain solely
to connectivity), 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 . . . and comparisons to competing
exchanges’ overall operating profit margins
are an inapt ‘‘apples-to-oranges’’ comparison
. . . (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 . . . .’’ 76
General
First, the SIG Letter 1 states that
additional Limited Service MEI Ports
‘‘are critical to Exchange members to be
competitive and to provide essential
protection from adverse market events’’
(emphasis added).77 The Exchange
notes that this statement is generally not
true for additional Limited Service MEI
Ports as those ports are completely
voluntary and used primarily for
entering liquidity removing orders and
not risk protection activities like
purging quotes resting on the MIAX
Emerald Book. Additional Limited
Service MEI Ports are essentially used
for competitive reasons and Market
Makers may choose to utilize one or two
Limited Service MEI Ports that are
provided for free, or purchase additional
Limited Service MEI Ports based on
their business needs and desire to
attempt to access the market quicker by
using one port that may have less
latency. For instance, a Market Maker
may have just sent numerous messages
and/or orders over one of their
additional Limited Service MEI Ports
that are in queue to be processed. That
same Market Maker then seeks to enter
an order to remove liquidity from the
Exchange’s Book. That Market Maker
may choose to send that order
simultaneously over all of their Limited
Service MEI Ports that they elected to
purchase to ensure that their liquidity
taking order accesses the Exchange as
quickly as possible.
If the Exchanges Were To Attempt To
Establish Unreasonable Pricing, Then
No Market Participant Would Join or
Connect to the Exchange, and Existing
Market Participants Would Disconnect
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 access 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
77 See
76 See
SIG Letter 3, supra note 12.
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78 Id.
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options) can demonstrate competitive
forces if supported by evidence that
substitute products or services exist.’’ 79
Nonetheless, the Fourth [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.
The Proposed Access Fees Will Not
Result in Excessive Pricing or SupraCompetitive Profit
Next, SIG asserts that the Exchange’s
‘‘profit margin comparisons do not
support the Exchanges’ claims that they
will not realize a supracompetitive
profit,’’ and ‘‘comparisons to competing
exchanges’ overall operating profit
margins are an inapt ‘apples-to-oranges’
comparison.’’ 80
The Exchange has provided ample
data that the Proposed Access Fees
would not result in excessive pricing or
a supra-competitive profit. In this
Fourth [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 Fourth [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.
Recoupment of Exchange Infrastructure
Costs
Nowhere in this proposal or in the
First, Second [sic], or Third [sic]
Proposed Rule Changes 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.
79 See
80 See
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Guidance, supra note 28.
supra note 12.
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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.
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
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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.’’ The Exchange does not
believe it is necessary to respond to this
assertion because it has never set forth
a ‘‘platform competition’’ 81 argument to
justify the Proposed Access Fees in the
First or Second [sic] Proposed Rule
Changes nor does it do so in this filing.
81 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 28.
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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.’’ 82 The Exchange never
directly asserted in the First or Second
[sic] 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.
Other SIFMA Assertions
SIFMA also challenges or asserts: (i)
Whether the Exchange has shown that
the fees are equitable and nondiscriminatory; (ii) that a tiered pricing
structure will encourage market
participants to be more economical with
the usage; (iii) greater number of ports
use greater Exchange resources; and (iv)
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,83 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,84 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 August 2, 2021.
82 See
SIFMA Letter, supra note 12.
U.S.C. 78s(b)(3)(C).
84 15 U.S.C. 78s(b)(1).
83 15
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That proposal, SR–EMERALD–2021–25,
was published for comment in the
Federal Register on August 19, 2021.85
On September 24, 2021 the Exchange
withdrew SR–EMERALD–2021–25 and
re-filed its proposal on September 27,
2021 (SR–EMERALD–2021–30). On
September 28, 2021, the Exchange
withdrew SR–EMERALD–2021–30 and
filed a proposed rule change proposing
fee changes as proposed herein. That
proposal, SR–EMERALD–2021–31, was
published for comment in the Federal
Register on October 5, 2021.86 The
Commission received three comment
letters from two separate commenters on
SR–EMERALD–2021–31.87 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.88 On December 1, 2021, the
Exchange withdrew SR–EMERALD–
2021–31 and filed a proposed rule
change proposing fee changes as
proposed herein. That filing, SR–
EMERALD–2021–43,89 was published
for comment in the Federal Register on
December 20, 2021.90 On January 27,
2022, pursuant to Section 19(b)(3)(C) of
the Act, the Commission: (1)
Temporarily suspended the proposed
rule change (SR–EMERALD–2021–43);
and (2) instituted proceedings to
determine whether to approve or
disapprove the proposal.91 On February
1, 2022, the Exchange withdrew SR–
EMERALD–2021–43 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
85 See Securities Exchange Act Release No. 92662
(August 13, 2021), 86 FR 46726 (August 19, 2021)
(SR–EMERALD–2021–25). The Commission
received one comment letter on that proposal.
Comment on SR–EMERALD–2021–25 can be found
at: https://www.sec.gov/comments/sr-emerald-202125/sremerald202125.htm.
86 See Securities Exchange Act Release No. 93188
(September 29, 2021), 86 FR 55052 (October 5,
2021) (SR–EMERALD–2021–31).
87 Comment on SR–EMERALD–2021–31 can be
found at: https://www.sec.gov/comments/sremerald-2021-31/sremerald202131.htm.
88 See Securities Exchange Act Release No. 93640
(November 22, 2021), 86 FR 67745 (November 29,
2021).
89 See text accompanying supra note 15.
90 See Securities Exchange Act Release No. 93772
(December 14, 2021), 86 FR 71965 (December 20,
2021).
91 See Securities Exchange Act Release No. 94087
(January 27, 2022), 87 FR 5918 (February 2, 2022).
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applicable to the exchange.92 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.’’ 93
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; 94 (2) perfect the mechanism of
a free and open market and a national
market system, protect investors and the
public interest, and not permit unfair
discrimination between customers,
issuers, brokers, or dealers; 95 and (3)
not impose any burden on competition
not necessary or appropriate in
furtherance of the purposes of the Act.96
In temporarily suspending the
Exchange’s fee change, the Commission
intends to further consider whether the
proposed additional Limited Service
MEI Port fees are 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 be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers;
and not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.97
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.98
92 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’’).
93 See id.
94 15 U.S.C. 78f(b)(4).
95 15 U.S.C. 78f(b)(5).
96 15 U.S.C. 78f(b)(8).
97 See 15 U.S.C. 78f(b)(4), (5), and (8),
respectively.
98 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).
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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) 99 and 19(b)(2)(B) 100 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.
Pursuant to Section 19(b)(2)(B) of the
Act,101 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),102 6(b)(5),103 and 6(b)(8) 104 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
99 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.
100 15 U.S.C. 78s(b)(2)(B).
101 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.
102 15 U.S.C. 78f(b)(4).
103 15 U.S.C. 78f(b)(5).
104 15 U.S.C. 78f(b)(8).
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9709
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:
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 additional Limited Service
MEI Ports.’’ 105 As described above by the
Exchange, MIAX Emerald projects $0.88
million in aggregate annual estimated costs
for 2021 for additional Limited Service MEI
Ports. Do commenters believe that the
Exchange has provided sufficient detail about
how it determined (a) which categories and
sub-categories of third-party and internal
expenses are most clearly directly associated
with providing and maintaining additional
Limited Service MEI Ports, (b) the total
annual expenses associated with such
categories/sub-categories, and (c) what
percentage of each such expense should be
allocated as actually supporting the
additional Limited Service MEI Ports (as
opposed to, for example, allocated to the first
two ‘‘free’’ Limited Service MEI Ports or
other types of ports or connectivity services
offered by the Exchange)? 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 does 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, and Trade Operations, but
does 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 providing and maintaining additional
Limited Service MEI Ports. What are
105 See
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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 categories and subcategories of third-party and internal
expenses that the Exchange identified as
being clearly directly associated with
providing and maintaining additional
Limited Service MEI Ports, what are
commenters’ views on whether the Exchange
has provided sufficient detail on how it
selected such categories/sub-categories and
how shared costs within or among such
categories/sub-categories are allocated to
additional Limited Service MEI Ports, 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 the
categories/sub-categories of expenses that it
deemed not to be clearly directly associated
with additional Limited Service MEI Ports,
and/or what Exchange products or services
account for the un-allocated percentage of
those categories/sub-categories of expenses
that were deemed to be associated with
additional Limited Service MEI Ports (e.g.,
what products or services are associated with
the approximately 98 percent of applicable
depreciation and amortization expenses that
MIAX Emerald 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 cost
estimates for 2021 in a filing made in 2022,
or make cost projections for 2022?
2. Revenue Estimates and Profit Margin
Range. The Exchange uses a single monthly
revenue figure (November 2021) as the basis
for calculating its projected profit margin of
66 percent. The Exchange argues that
projecting revenues 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.’’ 106 Yet the Exchange also
acknowledges that ‘‘the revenue . . . may
vary from month to month due to changes in
ports.’’ 107 Similarly, the Exchange states that
‘‘the number of ports has not materially
changed over the previous months,’’ yet also
states that firms ‘‘frequently add and drop
ports mid-month.’’ 108 Do commenters
believe a single month provides a reasonable
basis for a revenue projection? If not, why
not? 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 ports
purchased, and that costs may increase.109
id.
id.
108 See id.
109 See id.
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 it believes are reasonably
possible, and the reasons therefor?
3. Reasonable Rate of Return. The
Exchange states that its Proposed Access Fees
are ‘‘designed to cover its costs with a limited
return in excess of such costs,’’ 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 that a 66 percent
margin is a limited return over such costs.110
Do commenters agree with the Exchange that
its expected 66 percent profit margin would
constitute a reasonable rate of return over
costs for additional Limited Service MEI
Ports? 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? The Exchange
states that it chose to initially provide
additional Limited Service MEI Ports at a
discounted price and to forego revenue that
it otherwise could have generated from
assessing higher fees.111 Do commenters
believe that this should be considered in the
‘‘reasonableness’’ assessment? Do
commenters believe it relevant to an
assessment of reasonableness that, according
to the Exchange, the Proposed Access Fees
are similar to or lower than fees charged by
competing options exchanges with similar
market share? 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 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.’’ 112 In light of
the impact that the number of ports
purchased has on 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 the fees stay in line with their stated
profitability projections and do not become
unreasonable over time, for example, by
failing to adjust for efficiency gains, cost
106 See
113 See
107 See
VerDate Sep<11>2014
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
revenue and/or cost 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 Additional Limited
Service MEI Ports. The Exchange states that
the proposed tiered fee structure is designed
to set the amount of the fees to relate to the
number of ports a firm purchases 113 and that
‘‘[c]harging an incrementally higher fee to a
Market Maker that utilizes numerous ports is
directly related to the increased costs the
Exchange incurs in providing and
maintaining those additional ports.’’ 114
According to the Exchange, firms that
purchase numerous Limited Service MEI
Ports are primarily those that engage in
advanced trading strategies, typically
generate a disproportionate amount of
messages and order traffic, and frequently
add or drop ports mid-month, and thus that
‘‘it is equitable for these firms to experience
increased port costs based on their
disproportionate pull on Exchange resources
to provide the additional port access.’’ 115
The Proposed Access Fees would not just
increase the previous $100 per additional
Limited Service MEI Port fee, but would
progressively increase the fee up to four-fold
(up to $400 per port for seven or more ports).
However, the Exchange has not specifically
asserted that it is, for example, four times
more costly to provide the seventh or more
ports. Instead, the Exchange argues generally
that the more ports purchased by a Market
Maker ‘‘likely’’ results in greater expenditure
of Exchange resources and increased cost to
the Exchange, and that as the number of ports
an entity has increases, certain other costs
incurred by the Exchange that are correlated
to, though not directly affected by, port costs
(e.g., storage costs, surveillance costs, service
expenses) also increase.116 Do commenters
believe that the fees for each tier, as well as
the fee differences between the tiers, are
supported by the Exchange’s assertions that
it set the tiered-pricing structure in a manner
that is equitable and not unfairly
discriminatory? Do commenters believe that
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
volumes through the additional Limited
Service MEI Ports by tier, and/or mid-month
add/drop rates by tier) to better substantiate,
by tier, the ‘‘disproportionate pull’’ on the
Exchange’s resources as a firm increases the
number of additional Limited Service MEI
Ports that it purchases and to permit an
assessment of the Exchange’s statement that
id.
id.
115 See id.
116 See id.
110 See
id.
111 See id.
112 See id.
19:42 Feb 18, 2022
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Frm 00148
114 See
Fmt 4703
Sfmt 4703
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
the Proposed Access Fees ‘‘are solely
determined by the individual Members’ or
non-Members’ business needs and its impact
on Exchange resources’’? 117
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.’’ 118 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,119 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.120 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.121
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
lotter on DSK11XQN23PROD with NOTICES1
117 See
id.
CFR 201.700(b)(3).
119 See id.
120 See id.
121 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).
118 17
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
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.122
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 rule-comments@
sec.gov. Please include File No. SR–
EMERALD–2022–05 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 No.
SR–EMERALD–2022–05. 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
122 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 00149
Fmt 4703
Sfmt 4703
9711
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 No.
SR–EMERALD–2022–05 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,123 that
File No. SR–EMERALD–2022–05 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.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.124
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03655 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94256; File No. SR–MIAX–
2022–07]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing of a Proposed
Rule Change To Amend the MIAX 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, Miami International Securities
Exchange, LLC (‘‘MIAX’’ 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
123 15
U.S.C. 78s(b)(3)(C).
CFR 200.30–3(a)(12), (57) and (58).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
124 17
E:\FR\FM\22FEN1.SGM
22FEN1
]]>Agencies
[Federal Register Volume 87, Number 35 (Tuesday, February 22, 2022)]
[Notices]
[Pages 9695-9711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03655]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94260; File No. SR-EMERALD-2022-05]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a
Tiered-Pricing Structure for Additional Limited Service MIAX Emerald
Express Interface Ports; 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 Emerald, LLC (``MIAX Emerald'' 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Emerald Fee
Schedule (the ``Fee Schedule'') to amend certain port 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 additional Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \3\ available to Market Makers.\4\ The
Exchange believes a tiered-pricing structure will encourage Market
Makers to be more efficient and economical when determining how to
connect to the Exchange. This should also enable the Exchange to better
monitor and provide access to the Exchange's network to ensure
sufficient capacity and headroom in the System.\5\
---------------------------------------------------------------------------
\3\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule
\4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
\5\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
---------------------------------------------------------------------------
The Exchange initially filed the proposed fee changes on August 2,
2021, with the changes being immediately effective.\6\ The First
Proposed Rule Change was published for comment in the Federal Register
on August 19, 2021.\7\ The Commission received one comment letter on
the First Proposed Rule Change.\8\ The Exchange withdrew the First
Proposed Rule Change on September 27, 2021 and resubmitted its proposal
(``Second Proposed Rule Change'').\9\ On September 28, 2021, the
Exchange withdrew the Second Proposed Rule Change and re-submitted the
proposal on September 28, 2021, with the proposed fee changes being
immediately effective (``Third Proposed Rule Change'').\10\ The Third
Proposed Rule Change was published for comment in the Federal Register
on October 5, 2021.\11\ The Third 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 Third Proposed Rule
Change.\12\ The Commission suspended the Third Proposed Rule Change on
November 22, 2021.\13\ The Exchange withdrew the Third Proposed Rule
Change on December 1, 2021 and submitted a revised proposal for
immediate effectiveness (``Fourth Proposed Rule Change'').\14\ The
Fourth 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
[[Page 9696]]
SIG Letters 1, 2, and 3, as well as the SIFMA Letter submitted on the
First and Second [sic] Proposed Rule Changes,\15\ and feedback provided
by Commission Staff during a telephone conversation on November 18,
2021 relating to the Third Proposed Rule Change. The Fourth Proposed
Rule Change was published for comment in the Federal Register on
December 20, 2021.\16\ The Exchange receive no comment letters on the
Fourth Proposed Rule Change. The Commission suspended the Fourth
Proposed Rule Change on January 27, 2022.\17\ The Exchange withdrew the
Fourth Proposed Rule Change on February 1, 2022 and now submits this
proposal for immediate effectiveness (``Fifth Proposed Rule Change'').
This Fifth Proposed Rule Change provides additional justification and
explanation for the proposed fee changes.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 92662 (August 13,
2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-2021-25).
\7\ Id.
\8\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
\9\ See SR-EMERALD-2021-30.
\10\ See Securities Exchange Act Release No. 93188 (September
29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-2021-31).
\11\ Id.
\12\ 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''); 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'').
The Exchange notes that the Healthy Markets Association
(``HMA'') submitted a comment letter on a related filing to amend
fees for 10Gb ULL connections, on which SIG Letters 1, 2, and 3 as
well as the SIFMA Letter also commented. See letter from Tyler
Gellasch, Executive Director, HMA (``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'').
\13\ See Securities Exchange Act Release No. 93644 (November 22,
2021), 86 FR 67745 (November 29, 2021).
\14\ See Securities Exchange Act Release No. 93772 (December 14,
2021), 86 FR 71965 (December 20, 2021) (SR-EMERALD-2021-43).
\15\ The Exchange notes that while the HMA Letter applauds the
level of disclosure the Exchange included in the First and Second
[sic] Proposed Rule Changes, the HMA Letter does not raise specific
issues with the First or Second [sic] 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.
\16\ See supra note 14.
\17\ See Securities Exchange Act Release No. 94087 (January 27,
2022) (Suspension of and Order Instituting Proceedings to Determine
Whether to Approve or Disapprove Proposed Rule Changes to Amend Fee
Schedules to Adopt Tiered-Pricing Structures for Additional Limited
Service MIAX and MIAX Emerald Express Interface Ports).
---------------------------------------------------------------------------
Additional Limited Service MEI Port Tiered-Pricing Structure
The Exchange proposes to amend the fees for additional Limited
Service MEI Ports. Currently, the Exchange allocates two (2) Full
Service MEI Ports \18\ and two (2) Limited Service MEI Ports \19\ per
matching engine \20\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports, Limited
Service MEI Ports and the additional Limited Service MEI Ports all
include access to the Exchange's primary and secondary data centers and
its disaster recovery center. Market Makers may request additional
Limited Service MEI Ports. Prior to the First Proposed Rule Change,
Market Makers were assessed a $100 monthly fee for each additional
Limited Service MEI Port for each matching engine.
---------------------------------------------------------------------------
\18\ ``Full Service MEI Ports'' means a port which provides
Market Makers with the ability to send Market Maker simple and
complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\19\ ``Limited Service MEI Ports'' means a port which provides
Market Makers with the ability to send simple and complex eQuotes
and quote purge messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
\20\ ``Matching Engine'' means a part of the MIAX Emerald
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol (for example, options
on SPY may be processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated Matching Engine. A particular root
symbol may not be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
The Exchange now proposes to move from a flat monthly fee per
additional Limited Service MEI Port for each matching engine to a
tiered-pricing structure for additional Limited Service MEI Ports for
each matching engine under which the monthly fee would vary depending
on the number of additional Limited Service MEI Ports the Market Maker
elects to purchase. Specifically, the Exchange will continue to provide
the first and second additional Limited Service MEI Ports for each
matching engine free of charge, as described above, per the initial
allocation of Limited Service MEI Ports that Market Makers receive. The
Exchange now proposes the following tiered-pricing structure: (i) The
third and fourth additional Limited Service MEI Ports for each matching
engine will increase from the current flat monthly fee of $100 to $200
per port; (ii) the fifth and sixth additional Limited Service MEI Ports
for each matching engine will increase from the current flat monthly
fee of $100 to $300 per port; and (iii) the seventh to the twelfth
additional Limited Service MEI Ports will increase from the current
monthly flat fee of $100 to $400 per port (collectively, the ``Proposed
Access Fees'').
The Exchange believes the other exchanges' port fees are a useful
example of alternative approaches to providing and charging for port
access 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 port access. As shown by the below table,
the Exchange's proposed highest tier is still less than fees charged
for similar port access provided by other options exchanges.
---------------------------------------------------------------------------
\21\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees.
\22\ See NYSE Arca Options Fee Schedule, Port Fees.
\23\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule,
Section 3, Nasdaq Options Market--Ports and Other Services.
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of port port)
------------------------------------------------------------------------
MIAX Emerald (as proposed).. Additional Limited 1-2 ports. FREE (not
Service MEI Port. changed in this
proposal), 3-4
ports. $200, 5-6
ports. $300, 7-12
ports. $400.
NYSE American, LLC Order/Quote Entry $450.
(``Amex'') \21\. Port.
NYSE Arca, Inc. (``Arca'') Order/Quote Entry $450.
\22\. Port.
The NASDAQ Stock Market LLC SQF Port............ 1-5 ports.
(``NASDAQ'') \23\. $1,500.00, 6-20
ports. $1,000.00,
21 or more ports.
$500.
------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \24\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \25\ in
particular, in that it provides for the equitable allocation of
reasonable dues, fees and other charges among Exchange Members and
issuers and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposal
furthers the objectives of Section 6(b)(5) of the Act \26\ in that it
is designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general protect investors
[[Page 9697]]
and the public interest and is not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(4).
\26\ 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'').\27\ 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.'' \28\ 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 Miami International Securities Exchange, LLC
(``MIAX'') and MIAX PEARL, LLC (``MIAX Pearl''), to amend other non-
transaction fees.\29\
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\27\ 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).
\28\ 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'').
\29\ See Securities Exchange Act Release Nos. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase
connectivity fees).
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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 important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. The Exchange deems ports 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.''
\30\ 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.'' \31\ 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.'' \32\ 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 additional Limited Service MEI
Ports and will not result in the Exchange generating a supra-
competitive profit.
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\30\ See Guidance, supra note 28.
\31\ Id.
\32\ Id.
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The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \33\
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.'' \34\ The Exchange provides
this analysis below.
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\33\ Id.
\34\ Id.
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Based on this analysis, the Exchange believes the Proposed Access
Fees are reasonable and do not result in a ``supra-competitive'' \35\
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 additional Limited Service MEI Port access to the Exchange.
---------------------------------------------------------------------------
\35\ Id.
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The Proposed Access Fees are based on a cost-plus model. In
determining the appropriate fees to charge, the Exchange considered its
costs to provide port access, 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 additional Limited Service MEI Ports) to estimate such
costs,\36\ as well as the relative costs of providing and maintaining
additional Limited Service MEI Ports, 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 additional Limited Service MEI Ports because of the
uncertainty of forecasting subscriber decision making with respect to
firms' additional Limited Service MEI Port needs and the likely
potential for increased costs to procure the third-party services
described below.
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\36\ For example, the Exchange only included the costs
associated with providing and supporting additional Limited Service
MEI Ports and excluded from its cost calculations any cost not
directly associated with providing and maintaining such ports. Thus,
the Exchange notes that this methodology underestimates the total
costs of providing and maintaining additional Limited Service MEI
Ports.
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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
[[Page 9698]]
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 \37\ 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.
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\37\ A description of the Exchange's methodology for determining
the portion (or percentage) of each expense to allocate to the
Proposed Access Fee is being provide in response to comments from
SIG and SIFMA. See SIG Letter 3 and SIFMA Letter, supra note 12.
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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
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
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.\38\ 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.\39\ 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.'' \40\
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.
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\38\ 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).
\39\ 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).
\40\ See id. at 57909.
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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.
To determine the Exchange's projected revenue associated with the
Proposed Access Fees, the Exchange analyzed the number of Market Makers
currently utilizing additional Limited Service MEI Ports 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.\41\ 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
[[Page 9699]]
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.
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\41\ Id.
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As outlined in more detail below, the Exchange projects that the
final annualized expense for 2021 to provide additional Limited Service
MEI Ports to be approximately $880,000 per annum or an average of
$73,333.33 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 Members and non-Members
purchased a total of 625 additional Limited Service MEI Ports for which
the Exchange charged approximately $62,500. This resulted in a loss of
$10,833.33 for that month (a loss margin of approximately 17.3%). For
the month of November 2021, which includes the tiered rates for
additional Limited Service MEI Ports for the Proposed Access Fees,
Exchange Members and non-Members increased the number of additional
Limited Service MEI Ports they purchased resulting in a total of 860
additional Limited Service MEI Ports for which the Exchange charged
approximately $216,600 for that month. This resulted in a profit of
$143,266.67 for that month (a profit margin of approximately 66%, after
experiencing monthly losses prior to the Proposed Access Fees. The
Exchange believes that the Proposed Access Fees are reasonable because
they are designed to generate a revenue per-month after experiencing
monthly losses prior to the Proposed Access Fees. The Exchange cautions
that this profit margin is likely to fluctuate from month to month
based on the uncertainty of predicting how many ports may be purchased
from month to month as Members and non-Members are able to add and drop
ports 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.\42\ The Exchange has 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.
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\42\ 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).
---------------------------------------------------------------------------
Further, the Exchange chose to provide additional Limited Service
MEI Ports at a discounted price to attract order flow and encourage
market participants to experience the determinism and resiliency of the
Exchange's trading systems. This resulted in the Exchange forgoing
revenue it could have generated from assessing higher fees. The
Exchange could have sought to charge higher fees at the outset, but
that could have served to discourage participation on the Exchange.
Instead, the Exchange chose to provide a low cost exchange alternative
to the options industry which resulted in lower initial revenues, or in
this case, a monthly loss. The Exchange is now trying to amend its fee
structure to enable it to continue to maintain and improve its overall
market and systems while also providing a highly reliable and
deterministic trading system to the marketplace.
As mentioned above, the Exchange projects that its annualized
expense for 2021 to provide additional Limited Service MEI Ports to be
approximately $880,000 per annum or an average of $73,333.33 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.\43\ 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.
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\43\ 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 2019.\44\ 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
[[Page 9700]]
Systems. 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.
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\44\ The Exchange has incurred a cumulative loss of $22 million
since its inception in 2019 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://sec.report/Document/9999999997-21-004557/.
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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,\45\ the total annual expense for
providing the access services associated with the Proposed Access Fees
is projected to be approximately $880,000.00, or approximately
$73,333.33 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.\46\ 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.\47\ The $880,000
projected total annual expense is directly related to the access
services associated with the Proposed Access Fees, and not any other
product or service offered by the Exchange. It does not include general
costs of operating matching engines and other trading technology. No
expense amount was allocated twice.
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\45\ The Exchange has not yet finalized its 2021 year end
results.
\46\ 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.
\47\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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As discussed 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, total third-party expense, relating to fees paid by the
Exchange to third-parties for certain products and services for the
Exchange to be able to provide the access services associated with the
Proposed Access Fees, is projected to be $0.05 million. This includes,
but is not limited to, a portion of the fees paid to: (1) Equinix, for
data center services, for the primary, secondary, and disaster recovery
locations of the Exchange's trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking the Exchange's office
locations in Princeton, New Jersey and Miami, Florida, to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\48\ which supports connectivity and feeds for the entire
U.S. options industry; (4) various other services providers (including
Thompson Reuters, NYSE, Nasdaq, and Internap), which provide content,
connectivity services, and infrastructure services for critical
components of options connectivity and network services; and (5)
various other hardware and software providers (including Dell and
Cisco, which support the production environment in which Members
connect to the network to trade, receive market data, etc.). For
clarity, only a portion of all fees paid to such third-parties is
included in the third-party expense herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
information technology and communication costs to the access services
associated with the Proposed Access Fees.
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\48\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
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For clarity, 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. Further, the
Exchange notes that, with respect to the expenses included herein,
those expenses only cover the MIAX Emerald market; expenses associated
with MIAX Pearl for its options and equities markets and MIAX, are
accounted for separately and are not included within the scope of this
filing. As noted above, the percentage allocations used in this
proposed rule change may differ from past filings from the Exchange or
its affiliates due to, among other things, changes in expenses charged
by third-parties, adjustments to internal resource allocations, and
different system architecture of the Exchange as compared to its
affiliates. Further, as part its ongoing assessment of costs and
expenses, the Exchange recently conducted a periodic thorough review of
its expenses and resource allocations which, in turn, resulted in a
revised percentage allocations in this filing.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which
[[Page 9701]]
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
2.05% 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.\49\
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\49\ As noted above, the percentage allocations used in this
proposed rule change may differ from past filings from the Exchange
or its affiliates due to, among other things, changes in expenses
charged by third-parties, adjustments to internal resource
allocations, and different system architecture of the Exchange as
compared to its affiliates. Again, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
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The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking the
Exchange with its affiliates, MIAX Pearl and MIAX, as well as the data
center and disaster recovery locations. As such, all of the trade data,
including the billions of messages each day per exchange, flow through
Zayo's infrastructure over the Exchange's network. Without these
services from Zayo, the Exchange would not be able to operate and
support the network and provide the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to providing the Proposed
Access Fees. According to the Exchange's calculations, it allocated
approximately 1.64% 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.\50\
---------------------------------------------------------------------------
\50\ Id.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees. According to the Exchange's calculations, it
allocated approximately 2.05% 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.\51\
---------------------------------------------------------------------------
\51\ Id.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the hardware and software provider expense toward the
cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees. According to the Exchange's calculations, it
allocated approximately 1.23% 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.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
Internal Expense Allocations
For 2021, total projected internal expense, relating to the
Exchange providing the access services associated with the Proposed
Access Fees, is projected to be $0.83 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, and
business 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
[[Page 9702]]
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 to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange's employee compensation and benefits
expense relating to providing the access services associated with the
Proposed Access Fees is projected to be approximately $0.76 million,
which is only a portion of the $9.74 million total projected expense
for employee compensation and benefits. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
this includes the time spent by employees of several departments,
including Technology, Back Office, Systems Operations, Networking,
Business Strategy Development (who create the business requirement
documents that the Technology staff use to develop network features and
enhancements), and Trade Operations. As part of the extensive cost
review conducted by the Exchange, the Exchange reviewed the amount of
time spent by each employee on matters relating to the provision of
access services associated with the Proposed Access Fees. Without these
employees, the Exchange would not be able to provide the access
services associated with the Proposed Access Fees to its Members and
their customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of the access
services associated with the Proposed Access Fees, only the 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 7.81% 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.\53\
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
The Exchange's depreciation and amortization expense relating to
providing the services associated with the Proposed Access Fees is
projected to be $0.06 million, which is only a portion of the $3.13
million total projected expense for depreciation and amortization. The
Exchange believes it is reasonable to allocate the identified portion
of such expense because such expense includes the actual cost of the
computer equipment, such as dedicated servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were purchased to operate and support the network and provide the
access services associated with the Proposed Access Fees. Without this
equipment, the Exchange would not be able to operate the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portion which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees.
According to the Exchange's calculations, it allocated approximately
1.92% 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.\54\
---------------------------------------------------------------------------
\54\ Id.
---------------------------------------------------------------------------
The Exchange's occupancy expense relating to providing the services
associated with the Proposed Access Fees is projected to be $0.01
million, which is only a portion of the $0.52 million total projected
expense for occupancy. The Exchange believes it is reasonable to
allocate the identified portion of such expense because such expense
represents the portion of the Exchange's cost to rent and maintain a
physical location for the Exchange's staff who operate and support the
network, including providing the access services associated with the
Proposed Access Fees. This amount consists primarily of rent for the
Exchange's Princeton, NJ office, as well as various related costs, such
as physical security, property management fees, property taxes, and
utilities. The Exchange operates its Network Operations Center
(``NOC'') and Security Operations Center (``SOC'') from its Princeton,
New Jersey office location. A centralized office space is required to
house the staff that operates and supports the network. The Exchange
currently has approximately 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 1.93% 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.\55\
---------------------------------------------------------------------------
\55\ 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 has 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
[[Page 9703]]
that its annualized expense for 2021 to provide the access services
associated with the Proposed Access Fees to be approximately $880,000
per annum or an average of $73,333.33 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 Members and non-Members purchased a total of 625
additional Limited Service MEI Ports for which the Exchange charged
approximately $62,500. This resulted in a loss of $10,833.33 for that
month (a loss margin of approximately 17.3%). For the month of November
2021, which includes the tiered rates for additional Limited Service
MEI Ports for the Proposed Access Fees, Exchange Members and non-
Members increased the number of additional Limited Service MEI Ports
they purchased resulting in a total of 860 additional Limited Service
MEI Ports for which the Exchange charged approximately $216,600 for
that month. This resulted in a profit of $143,266.67 for that month (a
profit margin of approximately 66%), after experiencing monthly losses
prior to the Proposed Access Fees. The Exchange believes that the
Proposed Access Fees are reasonable because they are designed to
generate a revenue per-month after experiencing monthly losses prior to
the Proposed Access Fees. The Exchange believes this profit margin will
allow it to begin 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
ports may be purchased from month to month as Members and non-Members
are free to add and drop ports 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 ports and to changes to the
Exchange's expenses, the number of ports has not materially changed
over the previous months. Consequently, the Exchange believes that the
months it has used as a baseline to perform its assessment are
representative of 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.\56\ 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.
---------------------------------------------------------------------------
\56\ See supra note 42.
---------------------------------------------------------------------------
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 Limited Service MEI Ports 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 ports a Market Maker utilizes. Charging an incrementally
higher fee to a Market Maker that utilizes numerous ports is directly
related to the increased costs the Exchange incurs in providing and
maintaining those additional ports. 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 while still providing the first and second
additional Limited Service MEI Ports for each matching engine free of
charge.
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 access resources, but also those firms that most
heavily consume Exchange access resources, network consumers, and
purchasers of Limited Service MEI Ports. Limited Service MEI Ports is
not an unlimited resource as the Exchange needs to purchase additional
[[Page 9704]]
equipment to satisfy requests for additional ports. The Exchange also
needs to provide personnel to set up new ports, service requests
related to adding new and/or deleting existing ports, respond to
performance queries, and to maintain those ports on behalf of Members
and non-Members. Also, those firms that utilize additional Limited
Service MEI Ports 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 access
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 messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\57\ Thus, as the number of ports an entity has
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, port costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
---------------------------------------------------------------------------
\57\ 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 fee to relate to the number of ports a firm
purchases. The Exchange notes that Limited Service MEI Ports are
primarily utilized by firms that engage in advanced trading strategies
and typically request multiple Limited Service MEI Ports, beyond the
two per matching engine that are currently provided free of charge.
Accordingly, the firms engaged in advanced trading strategies generate
higher costs by utilizing more of the Exchange's resources. Those firms
purchase higher amounts of Limited Service MEI Ports tend to have
specific business oriented market making and trading strategies, as
opposed to firms engaging solely in order routing as part of their
best-execution obligations.
The use of such additional Limited Service MEI Ports is a voluntary
business decision of each Market Maker. Additional Limited Service MEI
Ports are primarily used by Market Makers seeking to remove liquidity
and, for competitive reasons, a Market Maker may choose to utilize
numerous ports in an attempt to access the market quicker by using one
port that may have less latency. The more ports purchased by a Market
Maker likely results in greater expenditure of Exchange resources and
increased cost to the Exchange. With this in mind, the Exchange will
continue to provide the first and second additional Limited Service MEI
Ports free of charge. The Exchange notes that firms that primarily
route orders seeking best-execution generally do not utilize additional
Limited Service MEI Ports. Those firms also generally send less orders
and messages over those connections, resulting in less strain on
Exchange resources.
On a similar note, the Exchange proposes to increase the fee for
those firms that purchase more ports resulting in greater expenditure
of Exchange resources and increased cost to the Exchange. The Exchange
notes that these firms that purchase numerous additional Limited
Service MEI Ports essentially do so for competitive reasons amongst
themselves and choose to utilize numerous ports 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 ports 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 or more of their additional Limited
Service MEI Ports that are in queue to be processed. That same Member
then seeks to enter an order to remove liquidity from the Exchange's
Book. That Member may choose to send that order over one or more of
their other additional Limited Service MEI Ports 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 ports mid-month to determine
which ports have the least latency, which results in increased costs to
the Exchange to constantly make changes in the data center.
The firms that engage in the above-described liquidity removing and
advanced trading strategies typically require multiple ports and,
therefore, generate higher costs by utilizing more of the Exchange's
resources. Those firms may also conduct other latency measurements over
their ports and drop and simultaneously add ports 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 ports in the data center. Therefore, the Exchange believes it is
equitable for these firms to experience increased port costs based on
their disproportionate pull on Exchange resources to provide the
additional port access.
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.\58\ As
stated above, Additional Limited Service MEI Ports are not an unlimited
resource and the Exchange's network is limited in the amount of ports
it can provide. However, the Exchange must accommodate requests for
additional Limited Service MEI Ports 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 Limited Service MEI
Ports on top of current network capacity constraints, requires that the
Exchange to purchase additional equipment to satisfy these requests.
The Exchange also needs to provide personnel to set up new ports and to
maintain those ports on behalf of Members and non-Members. The proposed
tiered-pricing structure is equitable because it is designed to
encourage Market Makers to be more efficient and economical in
selecting the amount of additional Limited Service MEI Ports they
request while balancing that against the Exchange's increased expenses
when expanding its network to accommodate additional Limited Service
MEI Ports.
---------------------------------------------------------------------------
\58\ 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 port access or their fee markup over those
costs, and therefore cannot use other exchange's port fees as a
benchmark to determine a reasonable markup over the costs of providing
port access. Nevertheless, the Exchange believes the other exchange's
port fees are a useful example of alternative approaches to providing
and charging for port access. To that end, the Exchange believes the
proposed tiered-pricing structure for Limited Service MEI Ports is
reasonable because the proposed highest tier is still less than fees
charged for similar port access provided by other options exchanges
[[Page 9705]]
with comparable market shares. For example, Amex (equity options market
share of 5.05% as of November 26, 2021 for the month of November) \59\
and Arca (equity options market share of 14.88% as of November 26, 2021
for the month of November) \60\ both charge $450 per port for order/
quote entry ports 1-40 and $150 per port for ports 41 and greater,\61\
all on a per matching engine basis, with Amex and Arca having 17 match
engines and 19 match engines, respectively.\62\ Similarly, NASDAQ
(equity options market share of 8.88% as of November 23, 2021 for the
month of November) \63\ charges $1,500 per port for SQF ports 1-5,
$1,000 per SQF port for ports 6-20, and $500 per SQF port for ports 21
and greater,\64\ all on a per matching engine basis, with NASDAQ having
multiple matching engines.\65\ The NASDAQ SQF Interface Specification
provides that PHLX/NOM/BX Options trading infrastructures may consist
of multiple matching engines with each matching engine trading only a
range of option underlyings. Further, the SQF infrastructure is such
that the firms connect to one or more servers residing directly on the
matching engine infrastructure. Since there may be multiple matching
engines, firms will need to connect to each engine's infrastructure in
order to establish the ability to quote the symbols handled by that
engine.\66\
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\59\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited November 26, 2021).
\60\ See id.
\61\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees; NYSE Arca Options Fee Schedule, Port Fees.
\62\ See NYSE Technology FAQ and Best Practices: Options,
Section 5.1 (How many matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file detailing the
number of matching engines per options exchange).
\63\ See supra note 59.
\64\ See NASDAQ Stock Market, NASDAQ Options 7 Pricing Schedule,
Section 3, NASDAQ Options Market--Ports and Other Services.
\65\ See NASDAQ Specialized Quote Interface (SQF) Specification,
Version 6.4 (October 2017), Section 2, Architecture (the ``NASDAQ
SQF Interface Specification'').
\66\ See id.
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In the each of the above cases, the Exchange's highest tier in the
proposed tiered-pricing structure is similar to or 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 port alternatives. Each of
the port rates in place at competing options exchanges were filed with
the Commission for immediate effectiveness and remain in place today.
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 the proposed pricing structure is
associated with relative usage of the various market participants.
Firms that are primarily order routers seeking best-execution do not
utilize Limited Service MEI Ports on MIAX Emerald and therefore will
not pay the fees associated with the tiered-pricing structure. Rather,
the fees described in the proposed tiered-pricing structure will only
be allocated to Market Making firms that engage in advanced trading
strategies and typically request multiple Limited Service MEI Ports,
beyond the two that are free. Accordingly, the firms engaged in a
Market Making business generate higher costs by utilizing more of the
Exchange's resources. Those Market Making firms that purchase higher
amounts of additional Limited Service MEI Ports tend to have specific
business oriented market making and trading strategies, as opposed to
firms engaging solely in best-execution order routing business.
Additionally, the use of such additional Limited Service MEI Ports is
entirely voluntary.
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 access
all options exchanges. The Exchange operates in a highly competitive
environment, and as discussed above, its ability to price access and
ports is constrained by competition among exchanges and third parties.
There are other options markets of which market participants may access
in order 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 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 \67\ and three comment letters on the Second
[sic] Proposed Rule Change.\68\ The Exchange responded to the comment
letters in the Fourth Proposed Rule Change and repeats its response in
is filing. No comment letters were received in
[[Page 9706]]
response to the Fourth Proposed Rule Change.
---------------------------------------------------------------------------
\67\ See supra note 8.
\68\ See supra note 12.
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SIG Letter 2
SIG Letter 2 argues that the Exchange, in withdrawing the First
Proposed Rule Change and refiling the Second [sic] 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.'' \69\ 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 [sic] 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 [sic] 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 [sic] Proposed Rule Changes.
---------------------------------------------------------------------------
\69\ See SIG Letter 2, supra note 12, at page 1.
---------------------------------------------------------------------------
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.'' \70\ 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 [sic] Proposed Rule Changes and this filing.
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\70\ 17 CFR 201.700(b)(3).
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Until recently, the Exchange operated at a net annual loss since it
launched operations in 2019.\71\ 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 and Second [sic] Proposed Rule
Changes. Similar justifications for the proposed fee change included in
the First and Second [sic] Proposed Rule Changes, but also in this
filing, were previously included in similar fee changes filed by the
Exchange and its affiliates, MIAX and MIAX Pearl, and SIG did not
submit a comment letter on those filings.\72\ 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.\73\
The Exchange leveraged its past work with Commission Staff to ensure
the justification provided herein and in the First and Second [sic]
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 that have been permitted to take effect without
suspension.'' \74\ That same commenter also noted their ``worry that
the Commission's process for reviewing and evaluating exchange filings
may be inconsistently applied.'' \75\
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\71\ See supra note 44.
\72\ 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).
\73\ 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 SR-PEARL-2021-23. See Securities Exchange Act Release No.
91858 (May 12, 2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23).
\74\ See HMA Letter, supra note 12.
\75\ Id. (providing examples where non-transaction fee filings
by other exchanges have been permitted to remain effective and not
suspended by the Commission despite less disclosure and
justification).
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Therefore, a finding by the Commission that the Exchange has not
met its burden to show that the proposed fee change is consistent with
the Act would be different than the Commission's treatment of similar
past filings, would create further ambiguity regarding the standards
exchange fee 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
[[Page 9707]]
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. With regards
to the First and Second [sic] Proposed Rule Changes, the SIG Letter
does not directly address the proposed fees or lay out specific
arguments as to why the proposal is not consistent with Section 6(b)(4)
of the Act. Rather, it simply describes the proposed fee change and
flippantly states that its claims concerning the 10Gb ULL fee change
proposals by the Exchange, and its affiliates, apply to these changes.
Nonetheless, the Exchange submits the below response to the SIG Letter
concerning the First Proposed Rule Change.
Furthermore, the Exchange has enhanced its cost and revenue
analysis and data in this Fourth [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's 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 regarding additional Limited Service MEI Port fees
from SIG Letter 1 (while excluding arguments that pertain solely to
connectivity), 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 . . . and comparisons to competing exchanges' overall
operating profit margins are an inapt ``apples-to-oranges''
comparison . . . (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 . . . .'' \76\
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\76\ See SIG Letter 3, supra note 12.
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General
First, the SIG Letter 1 states that additional Limited Service MEI
Ports ``are critical to Exchange members to be competitive and to
provide essential protection from adverse market events'' (emphasis
added).\77\ The Exchange notes that this statement is generally not
true for additional Limited Service MEI Ports as those ports are
completely voluntary and used primarily for entering liquidity removing
orders and not risk protection activities like purging quotes resting
on the MIAX Emerald Book. Additional Limited Service MEI Ports are
essentially used for competitive reasons and Market Makers may choose
to utilize one or two Limited Service MEI Ports that are provided for
free, or purchase additional Limited Service MEI Ports based on their
business needs and desire to attempt to access the market quicker by
using one port that may have less latency. For instance, a Market Maker
may have just sent numerous messages and/or orders over one of their
additional Limited Service MEI Ports that are in queue to be processed.
That same Market Maker then seeks to enter an order to remove liquidity
from the Exchange's Book. That Market Maker may choose to send that
order simultaneously over all of their Limited Service MEI Ports that
they elected to purchase to ensure that their liquidity taking order
accesses the Exchange as quickly as possible.
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\77\ See SIG Letter 1 at page 2, supra note 12.
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If the Exchanges Were To Attempt To Establish Unreasonable Pricing,
Then No Market Participant Would Join or Connect to the Exchange, and
Existing Market Participants Would Disconnect
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 access 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
Fourth [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.
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\78\ Id.
\79\ See Guidance, supra note 28.
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The Proposed Access 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 Exchanges' claims that they will not realize a
supracompetitive profit,'' and ``comparisons to competing exchanges'
overall operating profit margins are an inapt `apples-to-oranges'
comparison.'' \80\
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\80\ See supra note 12.
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The Exchange has provided ample data that the Proposed Access Fees
would not result in excessive pricing or a supra-competitive profit. In
this Fourth [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
Fourth [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.
Recoupment of Exchange Infrastructure Costs
Nowhere in this proposal or in the First, Second [sic], or Third
[sic] Proposed Rule Changes 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.
[[Page 9708]]
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.
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.'' The Exchange does not believe it is necessary to respond
to this assertion because it has never set forth a ``platform
competition'' \81\ argument to justify the Proposed Access Fees in the
First or Second [sic] Proposed Rule Changes nor does it do so in this
filing.
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\81\ 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
28.
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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.'' \82\ The
Exchange never directly asserted in the First or Second [sic] 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.
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\82\ See SIFMA Letter, supra note 12.
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Other SIFMA Assertions
SIFMA also challenges or asserts: (i) Whether the Exchange has
shown that the fees are equitable and non-discriminatory; (ii) that a
tiered pricing structure will encourage market participants to be more
economical with the usage; (iii) greater number of ports use greater
Exchange resources; and (iv) 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,\83\ 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,\84\ 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.
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\83\ 15 U.S.C. 78s(b)(3)(C).
\84\ 15 U.S.C. 78s(b)(1).
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As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on August
2, 2021. That proposal, SR-EMERALD-2021-25, was published for comment
in the Federal Register on August 19, 2021.\85\ On September 24, 2021
the Exchange withdrew SR-EMERALD-2021-25 and re-filed its proposal on
September 27, 2021 (SR-EMERALD-2021-30). On September 28, 2021, the
Exchange withdrew SR-EMERALD-2021-30 and filed a proposed rule change
proposing fee changes as proposed herein. That proposal, SR-EMERALD-
2021-31, was published for comment in the Federal Register on October
5, 2021.\86\ The Commission received three comment letters from two
separate commenters on SR-EMERALD-2021-31.\87\ 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.\88\ On December 1, 2021, the Exchange withdrew SR-EMERALD-
2021-31 and filed a proposed rule change proposing fee changes as
proposed herein. That filing, SR-EMERALD-2021-43,\89\ was published for
comment in the Federal Register on December 20, 2021.\90\ On January
27, 2022, pursuant to Section 19(b)(3)(C) of the Act, the Commission:
(1) Temporarily suspended the proposed rule change (SR-EMERALD-2021-
43); and (2) instituted proceedings to determine whether to approve or
disapprove the proposal.\91\ On February 1, 2022, the Exchange withdrew
SR-EMERALD-2021-43 and filed the instant filing, which is substantially
similar.
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\85\ See Securities Exchange Act Release No. 92662 (August 13,
2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-2021-25). The
Commission received one comment letter on that proposal. Comment on
SR-EMERALD-2021-25 can be found at: https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm.
\86\ See Securities Exchange Act Release No. 93188 (September
29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-2021-31).
\87\ Comment on SR-EMERALD-2021-31 can be found at: https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm.
\88\ See Securities Exchange Act Release No. 93640 (November 22,
2021), 86 FR 67745 (November 29, 2021).
\89\ See text accompanying supra note 15.
\90\ See Securities Exchange Act Release No. 93772 (December 14,
2021), 86 FR 71965 (December 20, 2021).
\91\ See Securities Exchange Act Release No. 94087 (January 27,
2022), 87 FR 5918 (February 2, 2022).
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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
[[Page 9709]]
applicable to the exchange.\92\ 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.'' \93\
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\92\ 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'').
\93\ See id.
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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; \94\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not permit unfair discrimination between
customers, issuers, brokers, or dealers; \95\ and (3) not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\96\
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\94\ 15 U.S.C. 78f(b)(4).
\95\ 15 U.S.C. 78f(b)(5).
\96\ 15 U.S.C. 78f(b)(8).
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In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposed additional Limited
Service MEI Port fees are 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 be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; and not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\97\
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\97\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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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.\98\
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\98\ 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).
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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) \99\ and 19(b)(2)(B) \100\ 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.
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\99\ 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.
\100\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\101\ 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),\102\ 6(b)(5),\103\ and 6(b)(8) \104\ 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.
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\101\ 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.
\102\ 15 U.S.C. 78f(b)(4).
\103\ 15 U.S.C. 78f(b)(5).
\104\ 15 U.S.C. 78f(b)(8).
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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:
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 additional Limited Service MEI Ports.''
\105\ As described above by the Exchange, MIAX Emerald projects
$0.88 million in aggregate annual estimated costs for 2021 for
additional Limited Service MEI Ports. Do commenters believe that the
Exchange has provided sufficient detail about how it determined (a)
which categories and sub-categories of third-party and internal
expenses are most clearly directly associated with providing and
maintaining additional Limited Service MEI Ports, (b) the total
annual expenses associated with such categories/sub-categories, and
(c) what percentage of each such expense should be allocated as
actually supporting the additional Limited Service MEI Ports (as
opposed to, for example, allocated to the first two ``free'' Limited
Service MEI Ports or other types of ports or connectivity services
offered by the Exchange)? 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 does
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, and Trade Operations, but does 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 providing and maintaining additional Limited
Service MEI Ports. What are
[[Page 9710]]
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 categories and sub-categories of third-
party and internal expenses that the Exchange identified as being
clearly directly associated with providing and maintaining
additional Limited Service MEI Ports, what are commenters' views on
whether the Exchange has provided sufficient detail on how it
selected such categories/sub-categories and how shared costs within
or among such categories/sub-categories are allocated to additional
Limited Service MEI Ports, 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 the categories/sub-categories of expenses that
it deemed not to be clearly directly associated with additional
Limited Service MEI Ports, and/or what Exchange products or services
account for the un-allocated percentage of those categories/sub-
categories of expenses that were deemed to be associated with
additional Limited Service MEI Ports (e.g., what products or
services are associated with the approximately 98 percent of
applicable depreciation and amortization expenses that MIAX Emerald
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
cost estimates for 2021 in a filing made in 2022, or make cost
projections for 2022?
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\105\ See supra Section II.A.2.
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2. Revenue Estimates and Profit Margin Range. The Exchange uses
a single monthly revenue figure (November 2021) as the basis for
calculating its projected profit margin of 66 percent. The Exchange
argues that projecting revenues 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.'' \106\
Yet the Exchange also acknowledges that ``the revenue . . . may vary
from month to month due to changes in ports.'' \107\ Similarly, the
Exchange states that ``the number of ports has not materially
changed over the previous months,'' yet also states that firms
``frequently add and drop ports mid-month.'' \108\ Do commenters
believe a single month provides a reasonable basis for a revenue
projection? If not, why not? 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 ports
purchased, and that costs may increase.\109\ 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 it believes are reasonably possible, and the reasons therefor?
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\106\ See id.
\107\ See id.
\108\ See id.
\109\ See id.
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3. Reasonable Rate of Return. The Exchange states that its
Proposed Access Fees are ``designed to cover its costs with a
limited return in excess of such costs,'' 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 that a 66 percent margin is a limited
return over such costs.\110\ Do commenters agree with the Exchange
that its expected 66 percent profit margin would constitute a
reasonable rate of return over costs for additional Limited Service
MEI Ports? 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? The
Exchange states that it chose to initially provide additional
Limited Service MEI Ports at a discounted price and to forego
revenue that it otherwise could have generated from assessing higher
fees.\111\ Do commenters believe that this should be considered in
the ``reasonableness'' assessment? Do commenters believe it relevant
to an assessment of reasonableness that, according to the Exchange,
the Proposed Access Fees are similar to or lower than fees charged
by competing options exchanges with similar market share? 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?
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\110\ See id.
\111\ See id.
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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
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.'' \112\ In light of the impact that the number
of ports purchased has on 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 the fees stay in line with their stated profitability
projections 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 revenue and/or cost 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?
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\112\ See id.
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5. Tiered Structure for Additional Limited Service MEI Ports.
The Exchange states that the proposed tiered fee structure is
designed to set the amount of the fees to relate to the number of
ports a firm purchases \113\ and that ``[c]harging an incrementally
higher fee to a Market Maker that utilizes numerous ports is
directly related to the increased costs the Exchange incurs in
providing and maintaining those additional ports.'' \114\ According
to the Exchange, firms that purchase numerous Limited Service MEI
Ports are primarily those that engage in advanced trading
strategies, typically generate a disproportionate amount of messages
and order traffic, and frequently add or drop ports mid-month, and
thus that ``it is equitable for these firms to experience increased
port costs based on their disproportionate pull on Exchange
resources to provide the additional port access.'' \115\ The
Proposed Access Fees would not just increase the previous $100 per
additional Limited Service MEI Port fee, but would progressively
increase the fee up to four-fold (up to $400 per port for seven or
more ports). However, the Exchange has not specifically asserted
that it is, for example, four times more costly to provide the
seventh or more ports. Instead, the Exchange argues generally that
the more ports purchased by a Market Maker ``likely'' results in
greater expenditure of Exchange resources and increased cost to the
Exchange, and that as the number of ports an entity has increases,
certain other costs incurred by the Exchange that are correlated to,
though not directly affected by, port costs (e.g., storage costs,
surveillance costs, service expenses) also increase.\116\ Do
commenters believe that the fees for each tier, as well as the fee
differences between the tiers, are supported by the Exchange's
assertions that it set the tiered-pricing structure in a manner that
is equitable and not unfairly discriminatory? Do commenters believe
that 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 volumes through the
additional Limited Service MEI Ports by tier, and/or mid-month add/
drop rates by tier) to better substantiate, by tier, the
``disproportionate pull'' on the Exchange's resources as a firm
increases the number of additional Limited Service MEI Ports that it
purchases and to permit an assessment of the Exchange's statement
that
[[Page 9711]]
the Proposed Access Fees ``are solely determined by the individual
Members' or non-Members' business needs and its impact on Exchange
resources''? \117\
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\113\ See id.
\114\ See id.
\115\ See id.
\116\ See id.
\117\ 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.'' \118\ 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,\119\ 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.\120\
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.\121\
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\118\ 17 CFR 201.700(b)(3).
\119\ See id.
\120\ See id.
\121\ 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).
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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.\122\
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\122\ 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).
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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-EMERALD-2022-05 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 No. SR-EMERALD-2022-05. 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 No. SR-EMERALD-2022-05 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,\123\ that File No. SR-EMERALD-2022-05 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.
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\123\ 15 U.S.C. 78s(b)(3)(C).
\124\ 17 CFR 200.30-3(a)(12), (57) and (58).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\124\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03655 Filed 2-18-22; 8:45 am]
BILLING CODE 8011-01-P
