Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing of a Proposed Rule Change To Establish Fees for the Exchange's cToM Market Data Product; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change, 9766-9780 [2022-03657]
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
of the remote manner in which
inspections for the calendar year 2022
may be conducted. Additionally, and as
stated above, FINRA has recently
submitted a filing to extend its
substantively identical temporary
remote relief rule for its trading permit
holders and members in the same
manner.19
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to 19(b)(3)(A)
of the Act 20 and Rule 19b–4(f)(6) 21
thereunder.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MIAX–2022–09 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2022–09. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly.
All submissions should refer to File
Number SR–MIAX–2022–09 and should
be submitted on or before March 15,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03648 Filed 2–18–22; 8:45 am]
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19 See
supra note 14.
20 15 U.S.C. 78s(b)(3)(A).
21 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94263; File No. SR–
EMERALD–2022–06]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing of a
Proposed Rule Change To Establish
Fees for the Exchange’s cToM Market
Data Product; 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
7, 2022, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Item II below, which
Item has been prepared by the
Exchange. The Exchange filed the
proposed rule change pursuant to
Section 19(b)(3)(A)(ii) of the Act,3 and
Rule 19b–4(f)(2) thereunder.4 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 proposed rule change; and (ii)
instituting proceedings to determine
whether to approve or disapprove the
proposed rule change.
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 Exchange’s Fee Schedule
(‘‘Fee Schedule’’) to establish fees for
the market data product known as
MIAX Emerald Complex Top of Market
(‘‘cToM’’). The fees became operative on
February 7, 2022. The text of the
proposed rule change is available on the
Exchange’s website at https://
www.miaxoptions.com/rule-filings/
emerald, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Description of 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
22 17
PO 00000
CFR 200.30–3(a)(12).
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
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
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1. Purpose
The Exchange proposes to amend
Section 6)a) of the Fee Schedule to
establish fees for the cToM data
product. The Exchange initially filed
this proposal on June 30, 2021 with the
proposed fees to be effective beginning
July 1, 2021 (‘‘First Proposed Rule
Change’’).5 The First Proposed Rule
Change was published for comment in
the Federal Register on July 15, 2021.6
Although the Commission did not
receive any comment letters on the First
Proposed Rule Change, on August 27,
2021, the Commission issued its
Suspension of and Order Instituting
Proceedings to Determine Whether to
Approve or Disapprove Proposed Rule
Changes to Establish Fees for the
Exchanges’ cToM Market Data Products
(relating to the First Proposed Rule
Change and a similar filing by the
Exchange’s affiliate, Miami International
Securities Exchange, LLC (‘‘MIAX’’), to
also adopt cToM fees).7 The Exchange
withdrew the First Proposed Rule
Change on September 30, 2021 8 and resubmitted the proposal, with the
proposed fee changes being immediately
effective (‘‘Second Proposed Rule
Change’’).9 The Second Proposed Rule
Change provided additional justification
for the proposed fee changes and
addressed comments provided by the
Commission Staff. On October 14, 2021,
the Exchange withdrew the Second
Proposed Rule Change and submitted its
proposal to adopt cToM fees to again
provide additional justification for the
proposed fee changes and address
comments provided by the Commission
Staff (‘‘Third Proposed Rule Change’’).10
The Third Proposed Rule Change was
5 See Securities Exchange Act Release No. 92358
(July 9, 2021), 86 FR 37361 (July 15, 2021) (SR–
EMERALD–2021–21).
6 Id.
7 See Securities Exchange Act Release No. 92789
(August 27, 2021), 86 FR 49364 (September 2, 2021)
(SR–MIAX–2021–28, SR–EMERALD–2021–21) (the
‘‘Suspension Order’’).
8 See Securities Exchange Act Release No. 93471
(October 29, 2021), 86 FR 60947 (November 4,
2021).
9 See SR–EMERALD–2021–32.
10 Securities Exchange Act Release No. 93427
(October 26, 2021), 86 FR 60310 (November 1, 2021)
(SR–EMERALD–2021–34).
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published for comment in the Federal
Register on November 1, 2021.11
Although the Commission did not again
receive any comment letters on the
Third Proposed Rule Change, the
Exchange withdrew the Third Proposed
Rule Change on December 10, 2021
submitted a revised proposal for
immediate effectiveness (‘‘Fourth
Proposed Rule Change’’).12 The Fourth
Proposed Rule Change was published
for comment in the Federal Register on
December 23, 2021.13 The Fourth
Proposed Rule Change meaningfully
attempted to provide additional
justification and explanation for the
proposed fee change in response to a
telephone conversation with
Commission Staff on December 7, 2021
relating to the Third Proposed Rule
Change. Although the Commission
again did not receive any comment
letters on the Fourth Proposed Rule
Change, the Exchange withdrew the
Fourth Proposed Rule Change on
February 7, 2022 and now submits this
revised proposal for immediate
effectiveness (‘‘Fifth Proposed Rule
Change’’). This Fifth Proposed Rule
Change provides additional justification
and explanation for the proposed fee
changes.
Background
The Exchange previously adopted
rules governing the trading of Complex
Orders 14 on the MIAX Emerald
System 15 in 2018,16 ahead of the
Exchange’s planned launch, which took
place on March 1, 2019. Shortly
thereafter, the Exchange adopted the
market data product cToM and
expressly waived fees for cToM to
provide an incentive to prospective
market participants to subscribe to that
market data feed.17 Prior to the First
Proposed Rule Change, the Exchange
did not charge fees to cToM subscribers
11 Id.
12 Securities Exchange Act Release No. 93811
(December 17, 2021), 86 FR 73051 (December 23,
2021) (SR–EMERALD–2021–44).
13 Id.
14 See Exchange Rule 518(a)(5) for the definition
of Complex Orders.
15 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
16 See Securities Exchange Act Release Nos.
84891 (December 20, 2018), 83 FR 67421 (December
28, 2018) (In the Matter of the Application of MIAX
EMERALD, LLC for Registration as a National
Securities Exchange; Findings, Opinion, and Order
of the Commission); and 85345 (March 18, 2019),
84 FR 10848 (March 22, 2019) (SR–EMERALD–
2019–13) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend
Exchange Rule 518, Complex Orders).
17 See Securities Exchange Act Release No. 85207
(February 27, 2019), 84 FR 7963 (March 5, 2019)
(SR–EMERALD–2019–09) (providing a complete
description of the cToM data feed).
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9767
during the nearly three years since it
was first available for subscription.
In summary, cToM provides
subscribers with the same information
as the MIAX Emerald Top of Market
(‘‘ToM’’) data product as it relates to the
Strategy Book,18 i.e., the Exchange’s best
bid and offer for a complex strategy,
with aggregate size, based on
displayable order and quoting interest
in the complex strategy on the
Exchange. However, cToM provides
subscribers with the following
additional information that is not
included in ToM: (i) The identification
of the complex strategies currently
trading on the Exchange; (ii) complex
strategy last sale information; and (iii)
the status of securities underlying the
complex strategy (e.g., halted, open, or
resumed). cToM is therefore a distinct
market data product from ToM in that
it includes additional information that
is not available to subscribers that
receive only the ToM data feed. ToM
subscribers are not required to subscribe
to cToM, and cToM subscribers are not
required to subscribe to ToM.19
Proposal
The Exchange now proposes to amend
Section 6)a) of the Fee Schedule to
charge monthly fees to Distributors 20 of
cToM. Specifically, the Exchange
proposes to assess Internal Distributors
$1,250 per month and External
Distributors $1,750 per month for the
cToM data feed.21 The Exchange notes
that the proposed monthly cToM fees
for Internal and External Distributors are
the same prices that the Exchange
charges for its ToM data product and are
identical to the prices the Exchange’s
affiliate, MIAX, proposes to charge for
its cToM product.
As it does today for ToM, the
Exchange proposes to assess cToM fees
on Internal and External Distributors in
each month the Distributor is
credentialed to use cToM in the
production environment. Also, as the
Exchange does today for ToM, market
data fees for cToM will be reduced for
new Distributors for the first month
during which they subscribe to cToM,
18 The ‘‘Strategy Book’’ is the Exchange’s
electronic book of complex orders and complex
quotes. See Exchange Rule 518(a)(17).
19 See supra note 15.
20 A ‘‘Distributor’’ of MIAX Emerald data is any
entity that receives a feed or file of data either
directly from MIAX Emerald or indirectly through
another entity and then distributes it either
internally (within that entity) or externally (outside
that entity). All Distributors are required to execute
a MIAX Emerald Distributor Agreement. See
Section 6)a) of the Fee Schedule.
21 The Exchange also proposes to make a minor
related change to remove ‘‘(as applicable)’’ from the
explanatory paragraph in Section 6)a) as it will not
change fees for both the ToM and cToM data feeds.
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
based on the number of trading days
that have been held during the month
prior to the date on which that
subscriber has been credentialed to use
cToM in the production environment.
Such new Distributors will be assessed
a pro-rata percentage of the fees in the
table in Section 6)a) of the Fee
Schedule, which is the percentage of the
number of trading days remaining in the
affected calendar month as of the date
on which they have been credentialed to
use cToM in the production
environment, divided by the total
number of trading days in the affected
calendar month.
The Exchange believes that other
exchanges’ fees for complex market data
are useful examples and provides the
below table for comparison purposes
Exchange
Monthly fee
MIAX Emerald (as proposed) ...................................................................
NYSE American, LLC (‘‘Amex’’) 22 ...........................................................
NYSE Arca, Inc. (‘‘Arca’’) 23 ......................................................................
NASDAQ PHLX LLC (‘‘PHLX’’) 24 ............................................................
The Exchange also proposes to amend
the paragraph below the table of fees for
ToM and cToM in Section 6)a) of the
Fee Schedule to make a minor, nonsubstantive corrective edit. In particular,
the Exchange proposes to delete the
phrase ‘‘(as applicable)’’ in the first
sentence following the table of fees for
ToM and cToM. The purpose of this
proposed change is to remove
unnecessary text from the Fee Schedule.
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cToM Content Is Available From
Alternative Sources
$1,250—Internal Distributor. $1,750—External Distributor
$1,500 Access Fee. $1,000 Redistribution Fee.
$1,500 Access Fee. $1,000 Redistribution Fee.
$3,000—Internal Distributor. $3,500—External Distributor.
the status of securities underlying the
complex strategy (e.g., halted, open, or
resumed). In addition to the cToM
information contained in MOR, complex
strategy last sale information can be
derived from the Exchange’s ToM data
feed. Specifically, market participants
may deduce that last sale information
for multiple trades in related options
series that are disseminated via the ToM
data feed with the same timestamp are
likely part of a Complex Order
transaction and last sale.
Implementation
cToM is also not the exclusive source
for Complex Order information from the
Exchange and market participants may
choose to subscribe to the Exchange’s
other data products to receive such
information. It is a business decision of
market participants whether to
subscribe to the cToM data product or
not. Market participants that choose not
to subscribe to cToM can derive much,
if not all, of the same information
provided in the cToM feed from other
Exchange sources, including, for
example, the MIAX Emerald Order Feed
(‘‘MOR’’).25 The following cToM
information is provided to subscribers
of MOR: The Exchange’s best bid and
offer for a complex strategy, with
aggregate size, based on displayable
order and quoting interest in the
complex strategy on the Exchange; the
identification of the complex strategies
currently trading on the Exchange; and
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 26
in general, and furthers the objectives of
Section 6(b)(4) of the Act 27 in
particular, in that it is an equitable
allocation of reasonable dues, fees and
other charges among its members and
issuers and other persons using its
facilities. The Exchange also believes
the proposal furthers the objectives of
Section 6(b)(5) of the Act in that it is
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
22 See NYSE American Options Proprietary
Market Data Fees, American Options Complex Fees,
at https://www.nyse.com/publicdocs/nyse/data/
NYSE_American_Options_Market_Data_Fee_
Schedule.pdf.
23 See NYSE Arca Options Proprietary Market
Data Fees, Arca Options Complex Fees, at https://
www.nyse.com/publicdocs/nyse/data/NYSE_Arca_
Options_Proprietary_Data_Fee_Schedule.pdf.
24 See PHLX Price List—U.S. Derivatives Data,
PHLX Orders Fees, at https://
www.nasdaqtrader.com/Trader.aspx?id=
DPPriceListOptions#PHLX.
25 See MIAX website, Market Data & Offerings, at
https://www.miaxoptions.com/market-dataofferings (last visited December 10, 2021). In
general, MOR provides real-time ulta-low latency
updates on the following information: New Simple
Orders added to the MIAX Emerald Order Book;
updates to Simple Orders resting on the MIAX
Emerald Order Book; new Complex Orders added
to the Strategy Book (i.e., the book of Complex
Orders); updates to Complex Orders resting on the
Strategy Book; MIAX Emerald listed series updates;
MIAX Emerald Complex Strategy definitions; the
state of the MIAX Emerald System; and MIAX
Emerald’s underlying trading state.
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only to show how the Exchange’s
proposed fees compare to fees currently
charged by other options exchanges for
similar complex market data. As shown
by the below table, the Exchange’s
proposed fees for cToM are similar to or
less than fees charged for similar data
products provided by other options
exchanges.
The proposed rule change is
immediately effective.
2. Statutory Basis
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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’’).28 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.’’ 29 Based on
both the BOX Order and the Guidance,
the Exchange believes that it has clearly
met its burden to demonstrate that the
proposed fees are consistent with the
Act because they (i) are reasonable,
equitably allocated, not unfairly
discriminatory, and not an undue
burden on competition; (ii) comply with
the BOX Order and the Guidance; (iii)
are supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange, and
its affiliates MIAX and MIAX PEARL,
26 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4) and (5).
28 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).
29 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’’).
27 15
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Federal Register / Vol. 87, No. 35 / Tuesday, February 22, 2022 / Notices
LLC (‘‘MIAX Pearl’’), to adopt or amend
market data and non-transaction fees.30
The Proposed Fees Will Not Result in a
Supra-Competitive Profit
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The Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee 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 sets
certain non-transaction fees, including
market data fees. The Exchange believes
that it is important to demonstrate that
these fees are based on its costs to
provide these products and reasonable
business needs.
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.’’ 31 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.’’ 32 In the 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.’’ 33 The Exchange does not
assert that the proposed fees are
constrained by competitive forces.
Rather, the Exchange asserts that the
proposed fees are reasonable because
they will permit recovery of the
Exchange’s costs in providing services
to supply cToM data and will not result
30 See Securities Exchange Act Release Nos.
91145 (February 17, 2021), 86 FR 11033 (February
23, 2021) (SR–EMERALD–2021–05) (proposal to
establish market data fees for MIAX Emerald ToM,
Administrative Information Subscriber feed, and
MIAX Emerald Order Feed); 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR–PEARL–
2021–01) (proposal to increase connectivity fees);
91460 (April 2, 2021), 86 FR 18349 (SR–EMERALD–
2021–11) (proposal to adopt port fees, increase
connectivity fees, and increase additional limited
service ports); 91033 (February 1, 2021), 86 FR 8455
(February 5, 2021) (SR–EMERALD–2021–03)
(proposal to adopt trading permit fees).
31 See Guidance, supra note 27.
32 Id.
33 Id.
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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.’’ 34 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.’’ 35 The Exchange provides
this analysis below.
Based on this analysis, the Exchange
believes the proposed fees are
reasonable and do not result in a
‘‘supra-competitive’’ 36 profit. The
Exchange believes that it is important to
demonstrate that the proposed fees are
based on its costs and reasonable
business needs. The Exchange believes
the proposed 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 fees. Accordingly, the
Exchange provides an analysis of its
revenues, costs, and profitability
associated with the proposed fees. This
analysis includes information regarding
its methodology for determining the
costs and revenues associated with the
proposed fees. As a result of this
analysis, the Exchange believes the
proposed 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
cToM data, which has been offered for
free for nearly three years.
The proposed fees are based on a costplus model. In determining the
appropriate fees to charge, the Exchange
considered its costs to provide cToM
data, 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 cToM
data) to estimate such costs,37 as well as
the relative costs of providing and
maintaining cToM data feeds, and set
fees that are designed to cover its costs
34 Id.
35 Id.
36 Id.
37 For example, the Exchange only included the
costs associated with providing and supporting
cToM data feeds and excluded from its cost
calculations any cost not directly associated with
providing and maintaining such cToM data feeds.
Thus, the Exchange notes that this methodology
underestimates the total costs of providing and
maintaining cToM data feeds.
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9769
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
cToM data feeds because of the
uncertainty of forecasting subscriber
decision making with respect to firms’
needs for cToM data and the likely
potential for increased costs to procure
the third-party services described
below.
To determine the Exchange’s costs to
provide cToM data associated with the
proposed fees, the Exchange conducted
an extensive cost review in which the
Exchange analyzed nearly every
expense item in the Exchange’s general
expense ledger to determine whether
each such expense relates to the
proposed fees, and, if such expense did
so relate, what portion (or percentage) of
such expense actually supports the
cToM data product associated with the
proposed 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 services associated with the
proposed fees. The Exchange conducted
a thorough internal analysis to
determine the portion (or percentage) of
each expense to allocate to the support
of services associated with the proposed
fees. This analysis included discussions
with each Exchange department head to
determine the expenses that support
services associated with the proposed
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 fees. Once
the expenses were identified, the
Exchange department heads, with the
assistance of the Exchange’s internal
finance department, reviewed such
expenses holistically on an Exchangewide level to determine what portion of
that expense supports providing
services for the proposed fees. The sum
of all such portions of expenses
represents the total cost to the Exchange
to provide services associated with the
proposed fees. For the avoidance of
doubt, no expense amount was allocated
twice.
The internal cost analysis conducted
by the Exchange is a proprietary process
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that is designed to make a fair and
reasonable assessment of costs and
resources allocated to support the
provision of services associated with the
proposed 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 market data 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 Commission
determination that it is unable to make
a finding that this proposed rule change
is consistent 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
38 See, e.g., Securities Exchange Act Release Nos.
93293 (October 12, 2021), 86 FR 57716 (October 18,
2021) (SR–PHLX–2021–58) (increasing several
market data fees and adopting new market data fee
without providing a cost based justification); 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) (SRCboeBZX–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).
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in 2021 by Nasdaq PHLX LLC
(‘‘PHLX’’), which increased fees for
PHLX’s end of day, intra-day and
historical market data, and adopted fees
for external distribution of PHLX’s
derived data.39 This filing was
submitted on September 30, 2021, over
two years after the Staff’s Guidance was
issued. In that filing, PHLX argued that
the proposed fees were subject to
competing products’ fees at other
exchanges and that there were available
substitutes. This filing provided no cost
based data or revenue analysis to
support the amount of the proposed
fees. Among other things, PHLX did not
provide a description of the costs
underlying its market data feeds to show
that these particular fees did not
generate supra-competitive profits 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 notes that the Investors
Exchange, Inc. (‘‘IEX’’) recently
submitted a proposed rule change to
adopt fees for two real-time proprietary
market data feeds, TOPS and DEEP
(‘‘IEX Fee Proposal’’). Like the Exchange
proposes herein, IEX previously
provided its TOP and DEEP market data
feeds for free and proposed to adopt
modest, below market fees. Also like in
this proposal, the IEX Fee Proposal
included a detailed subscriber data and
cost-based analysis in compliance with
the Guidance. Nonetheless, on
December 30, 2021, the Commission
suspended the IEX Fee Proposal and
instituted proceedings to determine
whether to approve or disapprove the
IEX Fee Proposal.40
The Commission received three
comment letters on the IEX Order.41 The
Virtu Letter and HMA Letter 2
specifically applaud the amount of
detail included in the IEX Fee Proposal.
Specifically, the Virtu Letter states that
‘‘[i]n significant detail, IEX provides
data about three cost components: (1)
Direct costs, such as servers,
39 See Securities Exchange Act Release No. 93293
(October 12, 2021), 86 FR 57716 (October 18, 2021)
(SR–PHLX–2021–58) (increasing several market
data fees and adopting new market data fee without
providing a cost based justification).
40 See Securities Exchange Act Release No. 93883
(December 30, 2021), 87 FR 523 (January 5, 2021)
(SR–IEX–2021–14) (the ‘‘IEX Order’’).
41 See letters to Ms. Venessa A. Countryman,
Secretary, Commission, from Douglas A. Cifu, Chief
Executive Officer, Virtu Financial, Inc., dated
January 26, 2022 (the ‘‘Virtu Letter’’), Tyler
Gellasch, Executive Director, Healthy Markets
Association (‘‘HMA’’), dated January 26, 2022 (the
‘‘HMA Letter 2’’), and Erika Moore, Vice President
and Corporate Secretary, The Nasdaq Stock Market
LLC, dated January 27, 2022 (the ‘‘Nasdaq Letter’’).
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infrastructure, and monitoring; (2)
enhancement initiative costs (e.g., new
functionality for IEX Data and increased
capacity for the proprietary market data
feeds . . .); and (3) personnel costs.’ ’’ 42
HMA Letter 2 similarly commends the
level of detail included in the IEX Fee
Proposal and also highlights the
disparate treatment by Commission Staff
of exchange fee filings.43 HMA Letter 2
provides three examples to support this
assertion.44 The Nasdaq Letter urges the
Commission to approve the IEX Fee
Proposal promptly and raises concern
the questions asked by the Commission
in the IEX Order imply that they are
exercising rate making authority that
they clearly do not possess. The Nasdaq
Letter states that ‘‘[i]f the Commission
believes it has authority to conduct costplus ratemaking, the Administrative
Procedure Act dictates that it must
propose a rule for notice and comment
and that its final rule must be prepared
to withstand judicial scrutiny.’’ 45 The
Exchange agrees.
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
42 See
Virtu Letter at page 3, id.
previously expressed their ‘‘worry that
the Commission’s process for reviewing and
evaluating exchange filings may be inconsistently
applied.’’ See letter from Tyler Gellasch, Executive
Director, 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 1’’).
44 See HMA Letter 2 at 2–3. The Exchange has
provided further examples to support HMA’s
assertion above. See supra note 39 and
accompanying text.
45 See Nasdaq Letter at page 13, id.
43 HMA
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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 fees in the instant filing, the
Exchange analyzed the number of
Members and non-Members currently
subscribing to the cToM data feeds and
used a recent monthly billing cycle
representative of 2021 monthly revenue.
The Exchange also provided its baseline
by analyzing June 2021, the monthly
billing cycle prior to the proposed fees
going into effect, and compared it to its
expenses for that month. As discussed
below, the Exchange does not believe it
is appropriate to factor into its analysis
projected or estimated future revenue
growth or decline for purposes of these
calculations, given the uncertainty of
such projections due to the continually
changing market data 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
fees in this filing in a manner that is
consistent with how the Exchange
presents its revenue and expense in its
Audited Unconsolidated Financial
Statements. The Exchange’s most recent
Audited Unconsolidated Financial
Statement is for 2020. However, since
the revenue and expense associated
with the proposed fees were not in place
in 2020 or for the first six 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 fees.
Accordingly, the Exchange believes it is
more appropriate to analyze the
proposed 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 fees are
reasonable because they will allow the
Exchange to recover its costs associated
with providing services related to the
proposed fees and not result in
excessive pricing or supra-competitive
profit. Since 2019, when the Exchange
launched operations with Complex
Order functionality, the Exchange has
spent time and resources building out
various Complex Order functionality in
its System to provide better trading
strategies and risk functionality for
market participants in order to better
compete with other exchanges’ complex
functionality and similar data products
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focused on complex orders.46 The cToM
data product allows market participants
to better utilize the Exchange’s Complex
Order functionality by providing
insights into the Exchange’s Complex
Order flow. The Exchange notes that no
market participant ceased subscribing to
the cToM feed since July 1, 2021, the
date on which the fees became effective
pursuant to the First Proposed Rule
Change.
As outlined in more detail below, the
Exchange projects that the final
annualized expense for 2021 to provide
cToM data to be $202,657 per annum or
an average of $16,888 per month. The
Exchange implemented the proposed
fees on July 1, 2021 in the First
Proposed Rule Change. For June 2021,
prior to the proposed fees, Exchange
Members and non-Members subscribed
to a total of 14 cToM data feeds for
which the Exchange charged $0, as it
has for the past three years. This
resulted in a loss of approximately
$16,888 for that month. For the month
of November 2021, which includes the
proposed fees, Exchange Members and
non-Members purchased 14 cToM data
feeds, for which the Exchange charged
approximately $17,500 for that month.
This resulted in a profit of $612 for that
month (a margin of approximately
3.5%). The Exchange cautions that this
margin is likely to fluctuate from month
to month based on the uncertainty of
predicting how many cToM data feeds
may be purchased from month to month
as Members and non-Members are able
to add and drop subscriptions at any
time based on their own business
decisions. This 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.47 The Exchange has been
46 See Securities Exchange Act Release Nos.
79405 (November 28, 2016), 81 FR 87086
(December 2, 2016) (SR–MIAX–2016–44)
(amendment to clarify the manner in which the
System allocates contracts at the end of a Complex
Auction); 80089 (February 22, 2017), 82 FR 12153
(February 28, 2017) (SR–MIAX–2017–06) (adopting
the Complex MIAX Options Price Collar, an
additional price protection feature); 81229 (July 27,
2017), 82 FR 36023 (August 2, 2017) (SR–MIAX–
2017–34) (amendment to ensure price and trade
protections apply to Complex Orders); 89085 (June
17, 2020), 85 FR 37719 (June 23, 2020) (SR–MIAX–
2020–16) (adopting new order type, Complex
Attributable Order).
47 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-treats-
PO 00000
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9771
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 cToM data for free for the past
three years to attract order flow and
encourage market participants to
experience the determinism and
resiliency of the Exchange’s trading
systems and market data products. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing any fees. The Exchange could
have sought to charge fees at the outset
for the cToM data feed, but that could
have served to discourage participation
on the Exchange. Instead, the Exchange
chose to provide a free exchange data
product to the options industry, which
resulted in no revenues for providing
this service for three years. The
Exchange now proposes 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, complete
with robust market data products,
including cToM.
As mentioned above, the Exchange
projects that the final annualized
expense for 2021 to provide cToM data
to be approximately $202,657 per
annum or an average of $16,888 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.48 The Exchange notes that there
are material costs associated with
providing the infrastructure and
headcount to fully-support access to the
Exchange and various Exchange
products. The Exchange incurs
technology expense related to
white-house-officials-warn-2021-10-12/ (October 12,
2021).
48 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 Secure
Financial Transaction Infrastructure (‘‘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.
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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 services
associated with the proposed 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 services and
products to its Members is not fixed and
indeed is likely to increase rather than
decrease over time. The Exchange
believes the proposed fees are a
reasonable attempt to offset a portion of
the costs to the Exchange associated
with providing certain Exchange
products.
The Exchange only has four primary
sources of revenue and cost recovery
mechanisms to fund all of its
operations: Transaction fees, 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 2019.49 This is
a result of providing a low cost
alternative to attract order flow and
encourage market participants to
experience the high determinism and
resiliency of the Exchange’s trading
Systems. To do so, the Exchange chose
to waive the fees for some nontransaction related services and market
data products or provide them at a very
marginal cost, which has not been
profitable to the Exchange, but
beneficial to the overall options
industry. This resulted in the Exchange
forgoing revenue it could have
generated from assessing any amount of
fees.
49 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 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 services versus the total annual
revenue that the Exchange projects to
collect in connection with services
associated with the proposed fees. As
mentioned above, for 2021,50 the total
annual expense for providing the
services associated with the proposed
fees is projected to be approximately
$202,657, or approximately $16,888 per
month. This projected total annual
expense is comprised of the following,
all of which are directly related to the
services associated with the proposed
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 fees.51 As noted above, the
Exchange believes it is more appropriate
to analyze the proposed fees utilizing its
2021 revenue and costs, which utilize
the same presentation methodology as
set forth in the Exchange’s previouslyissued Audited Unconsolidated
Financial Statements.52 The $202,657
projected total annual expense is
directly related to the services
associated with the proposed 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.
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
50 The Exchange has not yet finalized its 2021
year end results.
51 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.
52 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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expense relates to the services
associated with the proposed 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 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 services associated with the
proposed 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 services associated with the
proposed fees, is projected to be $4,160.
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; and (3) 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, the Exchange took a
conservative approach in determining
the expense and the percentage of that
expense to be allocated to providing the
services associated with the proposed
fees. Only a portion of all fees paid to
such third-parties is included in the
third-party expense described herein,
and no expense amount is allocated
twice. Accordingly, the Exchange does
not allocate its entire information
technology and communication costs to
the services associated with the
proposed fees. Further, the Exchange
notes that, with respect to the expenses
included herein, those expenses only
cover the MIAX 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,
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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 services
associated with the proposed fees. In
particular, the Exchange believes it is
reasonable to allocate the identified
portion of the Equinix expense because
Equinix operates the data centers
(primary, secondary, and disaster
recovery) that host the Exchange’s
network infrastructure. This includes,
among other things, the necessary
storage space, which continues to
expand and increase in cost, power to
operate the network infrastructure, and
cooling apparatuses to ensure the
Exchange’s network infrastructure
maintains stability. Without these
services from Equinix, the Exchange
would not be able to operate and
support the network and provide the
cToM product associated with the
proposed fees to its Members, nonMembers and their customers. The
Exchange did not allocate all of the
Equinix expense toward the cost of
providing the cToM product associated
with the proposed fees, only that
portion which the Exchange identified
as being specifically mapped to
providing the cToM product associated
with the proposed fees. According to the
Exchange’s calculations, it allocated
approximately 0.20% of the total
applicable Equinix expense to providing
the services associated with the
proposed fees. The Exchange believes
this allocation is reasonable because it
represents the Exchange’s actual cost to
provide the cToM product associated
with the proposed fees, and not any
other service, as supported by its cost
review.53
The Exchange believes it is reasonable
to allocate the identified portion of the
Zayo expense because Zayo provides
the internet, fiber and bandwidth
53 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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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 cToM data
associated with the proposed fees. The
Exchange did not allocate all of the
Zayo expense toward the cost of
providing the cToM data associated
with the proposed fees, only the portion
which the Exchange identified as being
specifically mapped to providing the
cToM data associated with the proposed
fees. According to the Exchange’s
calculations, it allocated approximately
0.20% of the total applicable Zayo
expense to providing the services
associated with the proposed fees. The
Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
cToM data associated with the proposed
fees, and not any other service, as
supported by its cost review.54
The Exchange did not allocate any
expense associated with the proposed
fees towards SFTI and various other
service providers’ (including Thompson
Reuters, NYSE, Nasdaq, and Internap)
because the MIAX Emerald architecture
takes advantage of an advance in design
to eliminate the need for a market data
distribution gateway layer. The
computation and dissemination via an
API is done solely within the match
engine environment and is then
delivered via the Member and nonMember connectivity infrastructure.
This architecture delivers a market data
system that is more efficient both in cost
and performance. Accordingly, the
Exchange determined not to allocate any
expense associated with SFTI and
various other service providers.
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 cToM data to its Members,
non-Members and their customers. The
Exchange did not allocate all of the
hardware and software provider
expense toward the cost of providing
54 Id.
PO 00000
Frm 00211
the cToM data associated with the
proposed fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
cToM data associated with the proposed
fees. According to the Exchange’s
calculations, it allocated approximately
0.20% of the total applicable hardware
and software provider expense to
providing the services associated with
the proposed fees. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the cToM data
associated with the proposed fees.55
Internal Expense Allocations
For 2021, total projected internal
expenses relating to the Exchange
providing the cToM data associated
with the proposed fees, is projected to
be $198,497. This includes, but is not
limited to, costs associated with: (1)
Employee compensation and benefits
for full-time employees that support the
cToM data product associated with the
proposed fees, including staff in
network operations, trading operations,
development, system operations, and
business that support those employees
and functions; (2) depreciation and
amortization of hardware and software
used to provide the cToM data product
associated with the proposed 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 cToM data associated with
the proposed 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 services in
connection with the proposed 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
cToM data associated with the proposed
fees. This may result in the Exchange
under allocating an expense to the
provision of access services in
connection with the proposed 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
55 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 cToM data
associated with the proposed fees. In
particular, the Exchange’s employee
compensation and benefits expense
relating to providing the cToM data
associated with the proposed fees is
projected to be approximately $185,002,
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, products 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 nearly every
employee on matters relating to cToM.
Without these employees, the Exchange
would not be able to provide the cToM
product to its Members, non-Members
and their customers. The Exchange did
not allocate all of the employee
compensation and benefits expense
toward the cost of the cToM product,
only the portion which the Exchange
identified as being specifically mapped
to providing the cToM product
associated with the proposed fees.
According to the Exchange’s
calculations, it allocated approximately
2.0% of the total applicable employee
compensation and benefits expense to
providing the services associated with
the proposed fees. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
actual cost to provide the cToM data
associated with the proposed fees, and
not any other service, as supported by
its cost review.56
The Exchange’s depreciation and
amortization expense relating to
providing the cToM data associated
with the proposed fees is projected to be
$3,635, which is only a portion of the
$1.9 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
56 Id.
VerDate Sep<11>2014
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 cToM product. Without this
equipment, the Exchange would not be
able to operate the network and provide
the cToM product to its Members, nonMembers and their customers. The
Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing the cToM
product, only the portion which the
Exchange identified as being
specifically mapped to providing the
cToM product. According to the
Exchange’s calculations, it allocated
approximately 0.20% of the total
applicable depreciation and
amortization expense to providing the
services associated with the proposed
fees, as this product 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
cToM product associated with the
proposed fees, and not any other
service, as supported by its cost
review.57
The Exchange’s occupancy expense
relating to providing the cToM product
associated with the proposed fees is
projected to be $9,860, which is only a
portion of the $0.60 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 cToM product.
This amount consists primarily of rent
for the Exchange’s Princeton, New
Jersey office, as well as various related
costs, such as physical security,
property management fees, property
taxes, and utilities. The Exchange
operates its Network Operations Center
(‘‘NOC’’) and Security Operations
Center (‘‘SOC’’) from its Princeton, New
Jersey office location. A centralized
office space is required to house the
staff that operates and supports the
network and Exchange products. The
Exchange currently has approximately
200 employees. Approximately twothirds of the Exchange’s staff are in the
Technology department, and the
majority of those staff have some role in
the operation and performance of the
services associated with the proposed
57 Id.
19:42 Feb 18, 2022
Jkt 256001
PO 00000
Frm 00212
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 market data
services associated with the proposed
fees. The Exchange did not allocate all
of the occupancy expense toward the
cost of providing the market data
services associated with the proposed
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 2.0% of the total
applicable occupancy expense to
providing the services associated with
the proposed fees. The Exchange
believes this allocation is reasonable
because it represents the Exchange’s
cost to provide the market data services
associated with the proposed fees, and
not any other service, as supported by
its cost review.58
Based on the above, the Exchange
believes that its provision of market data
services associated with the proposed
fees will not result in excessive pricing
or supra-competitive profit. As
discussed above, the Exchange projects
that its annualized expense for 2021 to
provide the cToM data associated with
the proposed fees is projected to be
approximately $202,657, or
approximately $16,888 per month on
average. The Exchange implemented the
proposed fees on July 1, 2021 in the
First Proposed Rule Change. For June
2021, prior to the proposed fees,
Members and non-Members subscribed
to a total of 14 cToM data feeds, for
which the Exchange charged $0, for the
past three years. This resulted in a
month over month loss of $16,888. For
the month of November 2021, which
includes the proposed fees, Members
and non-Members subscribed to 14
cToM data feeds, for which the
Exchange charged approximately
$17,500 for that month. This resulted in
a profit of $612 for that month (a margin
of approximately 3.5%). The Exchange
believes this 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 margin
is reasonable because it represents a
reasonable rate of return.
Again, the Exchange cautions that this
margin is likely to fluctuate from month
to month based in the uncertainty of
predicting how many market data feeds
58 Id.
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may be purchased from month to month
as Members and non-Members are free
to add and drop subscriptions 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
subscriptions and to changes to the
Exchange’s expenses, the number of
subscriptions has not materially
changed over 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 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.
Accordingly, the Exchange believes its
total projected revenue for the providing
the market data services associated with
the proposed 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 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, 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 services
subject to the proposed fees. Moreover,
as noted above, because the Exchange
was previously offering the cToM data
feed at no cost, the provision of the feed
during the time in which it generated no
revenue was being subsidized by other
fees charged by the Exchange. The
Exchange believes establishing a
separate fee for the cToM feed is
therefore reasonable and equitable so
that the provision of the cToM data feed
is no longer subsidized by other fees
VerDate Sep<11>2014
19:42 Feb 18, 2022
Jkt 256001
less directly related to providing cToM.
Instead, the cToM feed will be
supported primarily through fees
charged only to users who choose to
subscribe to cToM.
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 market data services
associated with the proposed fees
because the Exchange performed a lineby-line item analysis of nearly every
expense of the Exchange, and has
determined the expenses that directly
relate to providing market data services
to the Exchange. Further, the Exchange
notes that, without the specific thirdparty and internal expense items listed
above, the Exchange would not be able
to provide the market data services
associated with the proposed fees to its
Members, non-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
market data services. The proposed fees
are intended to recover the costs of
providing cToM data. Accordingly, the
Exchange believes that the proposed
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 fees.
No market participant is required by
any rule or regulation to utilize the
Exchange’s Complex Order functionality
or subscribe to the cToM data feed.
Further, unlike orders on the Exchange’s
Simple Order Book, Complex Orders are
not protected and will never trade
through Priority Customer 59 orders,
thus protecting the priority that is
established in the Simple Order Book.60
Additionally, unlike the continuous
quoting requirements of Market Makers
in the simple order market, there are no
continuous quoting requirements
respecting Complex Orders. It is a
business decision whether market
59 The term ‘‘Priority Customer’’ means a person
or entity that (i) is not a broker or dealer in
securities and (ii) does not place more than 390
orders in listed options per day on average during
a calendar month for its own beneficial accounts(s).
The term ‘‘Priority Customer Order’’ means an order
for the account of a Priority Customer. See
Exchange Rule 100.
60 The ‘‘Simple Order Book’’ is the Exchange’s
regular electronic book of orders and quotes. See
Exchange Rule 518(a)(5).
PO 00000
Frm 00213
Fmt 4703
Sfmt 4703
9775
participants utilize Complex Order
strategies on the Exchange and whether
to purchase cToM data to help effect
those strategies.
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 options exchanges’ costs to
provide market data or their fee markup
over those costs, and therefore cannot
use other exchange’s market data fees as
a benchmark to determine a reasonable
markup over the costs of providing
market data. Nevertheless, the Exchange
believes the other exchanges’ market
data fees are useful examples of
alternative approaches to providing and
charging for market data. To that end,
the Exchange believes the proposed
pricing is reasonable because the
proposed rates are similar to or less than
the fees charged by other options
exchanges for similar data products.61
Until recently, the Exchange has
operated at a cumulative net annual loss
since it launched operations in 2019.62
This is a result of providing a low cost
alternative to attract order flow and
encourage market participants to
experience the high determinism and
resiliency of the Exchange’s trading
Systems. To do so, the Exchange chose
to waive the fees for some nontransaction related services and
Exchange products (including the cToM
data feed) 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 any fees or
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. An example of this is cToM,
for which the Exchange only now seeks
to adopt fees at a level similar to or
lower than those of other options
exchanges.
Since the Exchange initially
established the cToM data product
when it launched trading operations on
March 1, 2019, all Exchange Members
and non-Members have had the ability
to receive the Exchange’s cToM data
free of charge for the past three years.63
Since 2019, when the Exchange
launched operations with Complex
61 See
supra notes 20, 21 and 22.
supra note 47.
63 See supra note 15.
62 See
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Order functionality, the Exchange has
spent time and resources building out
various Complex Order functionality in
its System to provide better trading
strategies and risk functionality for
market participants in order to better
compete with other exchanges’ complex
functionality and similar data products
focused on complex orders.64 The cToM
data product allows market participants
to better utilize the Exchange’s Complex
Order functionality by providing
insights into the Exchange’s Complex
Order flow. The Exchange currently has
14 subscribers (12 Members and 2 nonMembers) for its cToM data product.
None of these subscribers has paid a
specific fee to receive cToM data (other
than the five months in which the First,
Second and Third Proposed Rule
Changes were in effect) but has received
the benefit of the Exchange building out
its Complex Order functionality to
better compete with other exchanges
complex functionality. The Exchange
notes that no market participant ceased
subscribing to the cToM feed since July
1, 2021, the date on which the fees
became effective when established in
the First Proposed Rule Change.
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The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that it is
reasonable, equitable and not unfairly
discriminatory to assess Internal
Distributors fees that are less than the
fees assessed for External Distributors
for subscriptions to the cToM data feed
because Internal Distributors have
limited, restricted usage rights to the
market data, as compared to External
Distributors, which have more
expansive usage rights. All Members
and non-Members that determine to
receive any market data feed of the
Exchange (or its affiliates, MIAX Pearl
and MIAX), must first execute, among
other things, the MIAX Exchange Group
Exchange Data Agreement (the
‘‘Exchange Data Agreement’’).65
Pursuant to the Exchange Data
Agreement, Internal Distributors are
restricted to the ‘‘internal use’’ of any
market data they receive. This means
64 See Securities Exchange Act Release Nos.
85345 (March 18, 2019), 84 FR 10848 (March 22,
2019) (SR–EMERALD–2019–13) (adopting complex
stock-option order functionality); 85346 (March 18,
2019), 84 FR 10854 (March 22, 2019) (SR–
EMERALD–2019–14) (adopting additional price
protection during a Complex Auction and the
Complex Liquidity Exposure Process to provide
additional price discovery).
65 See Exchange Data Agreement, available at
https://miaxweb2.pairsite.com/sites/default/files/
page-files/MIAX_Exchange_Group_Data_
Agreement_09032020.pdf.
VerDate Sep<11>2014
19:42 Feb 18, 2022
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that Internal Distributors may only
distribute the Exchange’s market data to
the recipient’s officers and employees
and its affiliates.66 External Distributors
may distribute the Exchange’s market
data to persons who are not officers,
employees or affiliates of the External
Distributor,67 and may charge their own
fees for the redistribution of such
market data. Accordingly, the Exchange
believes it is fair, reasonable and not
unfairly discriminatory to assess
External Distributors a higher fee for the
Exchange’s market data products as
External Distributors have greater usage
rights to commercialize such market
data and can adjust their own fee
structures if necessary. The Exchange
also utilizes more resources to support
External Distributors versus Internal
Distributors, as External Distributors
have reporting and monitoring
obligations that Internal Distributors do
not have, thus requiring additional time
and effort of Exchange staff. The
Exchange believes the proposed cToM
fees are equitable and not unfairly
discriminatory because the fee level
results in a reasonable and equitable
allocation of fees amongst subscribers
for similar services, depending on
whether the subscriber is an Internal or
External Distributor. Moreover, the
decision as to whether or not to
purchase market data is entirely
optional to all market participants.
Potential purchasers are not required to
purchase the market data, and the
Exchange is not required to make the
market data available. Purchasers may
request the data at any time or may
decline to purchase such data. The
allocation of fees among users is fair and
reasonable because, if market
participants determine not to subscribe
to the data feed, firms can discontinue
their use of the cToM data.
Further, the Exchange believes that
the proposal is equitable and not
unfairly discriminatory because the
proposed cToM fees will apply to all
market participants of the Exchange on
a uniform basis. The Exchange also
notes that the proposed monthly cToM
fees for Internal and External
Distributors are the same prices that the
Exchange charges for its ToM data
product.
The Exchange believes the proposed
change to delete certain text from
Section (6)(a) of the Fee Schedule
promotes just and equitable principles
of trade and removes impediments to
and perfects the mechanism of a free
and open market and a national market
system because the proposed change is
66 See
67 See
PO 00000
id.
id.
Frm 00214
a non-substantive edit to the Fee
Schedule to remove unnecessary text.
The Exchange believes that this
proposed change will provide greater
clarity to Members and the public
regarding the Exchange’s Fee Schedule
and that it is in the public interest for
the Fee Schedule to be accurate and
concise so as to eliminate the potential
for confusion.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
cToM to market participants. As
described above, the Exchange has
operated at a cumulative net annual loss
since it launched operations in 2019 68
due to providing a low cost alternative
to attract order flow and encourage
market participants to experience the
high determinism and resiliency of the
Exchange’s trading Systems. To do so,
the Exchange chose to waive the fees for
some non-transaction related services
and Exchange products 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 any
fees or 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. An example of this is cToM,
for which the Exchange only now seeks
to adopt fees at a level similar to or
lower than those of other options
exchanges.
Since the Exchange initially launched
operations with the cToM data product
in 2019, all Exchange Members and
non-Members have had the ability to
receive the Exchange’s cToM data free
of charge for the past three years.69
Since 2019, when the Exchange adopted
Complex Order functionality, the
Exchange has spent time and resources
building out various Complex Order
68 See
69 See
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supra note 15.
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functionality in its System to provide
better trading strategies and risk
functionality for market participants in
order to better compete with other
exchanges’ complex functionality and
similar data products focused on
complex orders.70 The Exchange now
seeks to recoup its costs for providing
cToM to market participants and
believes the proposed fees will not
result in excessive pricing or supracompetitive profit.
Inter-Market Competition
The Exchange also does not believe
the proposed fees would cause any
unnecessary or in appropriate burden
on intermarket competition as other
exchanges are free to introduce their
own comparable data product and lower
their prices to better compete with the
Exchange’s offering. The Exchange does
not believe the proposed rule change
would cause any unnecessary or
inappropriate burden on inter-market
competition. Particularly, the proposed
product and fees apply uniformly to any
purchaser, in that it does not
differentiate between subscribers that
purchase cToM. The proposed fees are
set at a modest level that would allow
any interested Member or non-Member
to purchase such data based on their
business needs.
The Exchange does not believe that
the proposed rule change to make a
minor, non-substantive edit to Section
(6)(a) of the Fee Schedule by deleting
unnecessary text will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. This
proposed rule change is not being made
for competitive reasons, but rather is
designed to remedy a minor nonsubstantive issue and will provide
added clarity to the Fee Schedule. The
Exchange believes that it is in the public
interest for the Fee Schedule to be
accurate and concise so as to eliminate
the potential for confusion on the part
of market participants. In addition, the
Exchange does not believe the proposal
will impose any burden on inter-market
competition as the proposal does not
address any competitive issues and is
intended to protect investors by
providing further transparency
regarding the Exchange’s Fee Schedule.
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 Guidance has
served an important policy goal of
improving disclosures in proposed rule
changes and requiring exchanges to
more clearly justify that their market
data and access fee proposals are fair
and reasonable, it has also been
inconsistently applied and therefore
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
Written comments were neither
solicited nor received.
III. Suspension of the Proposed Rule
Change
Pursuant to Section 19(b)(3)(C) of the
Act,71 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,72 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 June 30, 2021, with
the proposed fee changes effective
beginning July 1, 2021. That proposal,
EMERALD–2021–21, was published for
comment in the Federal Register on July
15, 2021.73 On August 27, 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
71 15
U.S.C. 78s(b)(3)(C).
U.S.C. 78s(b)(1).
73 See supra note 5, and accompanying text.
72 15
70 See
supra note 62.
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9777
determine whether to approve or
disapprove the proposal.74 On
September 30, 2021, the Exchange
withdrew the proposed rule change,75
and filed two other proposed rule
changes proposing fee changes as
proposed herein,76 which were each
also subsequently withdrawn. The
instant filing is substantially similar.77
When exchanges file their proposed
rule changes with the Commission,
including fee filings like the Exchange’s
present proposal, they are required to
provide a statement supporting the
proposal’s basis under the Act and the
rules and regulations thereunder
applicable to the exchange.78 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.’’ 79
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; 80 (2) perfect the mechanism of
a free and open market and a national
market system, protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or
dealers; 81 and (3) not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.82
In temporarily suspending the
Exchange’s fee change, the Commission
intends to further consider whether the
proposed fees for the cToM market data
feed 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
74 See Securities Exchange Act Release No. 92789,
86 FR 49364 (September 2, 2021) (‘‘OIP’’).
75 See Securities Exchange Act Release No. 93471
(October 29, 2021), 86 FR 60947 (November 4,
2021).
76 See Securities Exchange Act Release Nos.
93427 (October 26, 2021), 86 FR 60310 (November
1, 2021); 93811 (December 17, 2021), 86 FR 73051
(December 23, 2021).
77 See OIP, supra note 74.
78 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’’).
79 Id.
80 15 U.S.C. 78f(b)(4).
81 15 U.S.C. 78f(b)(5).
82 15 U.S.C. 78f(b)(8).
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Act and the rules thereunder requiring,
among other things, that an exchange’s
rules provide for the equitable
allocation of reasonable fees among
members, issuers, and other persons
using its facilities; not permit unfair
discrimination between customers,
issuers, brokers or dealers; and do not
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.83
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.84
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IV. Proceedings To Determine Whether
To Approve or Disapprove the
Proposed Rule Change
In addition to temporarily suspending
the proposal, the Commission also
hereby institutes proceedings pursuant
to Sections 19(b)(3)(C) 85 and 19(b)(2)(B)
of the Act 86 to determine whether the
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, the
Commission seeks and encourages
interested persons to provide additional
comment on the proposed rule change
to inform the Commission’s analysis of
whether to disapprove the proposed
rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,87 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),88 6(b)(5),89 and 6(b)(8) 90 of the
Act. Section 6(b)(4) of the Act requires
that the rules of a national securities
83 See 15 U.S.C. 78f(b)(4), (5), and (8),
respectively.
84 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).
85 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.
86 15 U.S.C. 78s(b)(2)(B).
87 Id.
88 15 U.S.C. 78f(b)(4).
89 15 U.S.C. 78f(b)(5).
90 15 U.S.C. 78f(b)(8).
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exchange provide for the equitable
allocation of reasonable dues, fees, and
other charges among its members and
issuers and other persons using its
facilities. Section 6(b)(5) of the Act
requires that the rules of a national
securities exchange be designed, among
other things, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Section 6(b)(8) of the Act requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, which are set forth above,
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 fees are constrained
by competitive forces, but rather sets
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 cToM
data . . . .’’ 91 Setting forth its costs in
providing the cToM data product, and
as summarized in greater detail above,
MIAX Emerald projects $202,657 in
aggregate annual estimated costs for
2021 as the sum of: (1) $4,160 in thirdparty expenses paid in total to Equinix
(0.20% of the total applicable expense)
for data center services; Zayo Group
Holdings for network services (0.20% of
the total applicable expense); and
various other hardware and software
providers (0.20% of the total applicable
expense) supporting the production
environment, and (2) $198,497 in
internal expenses, allocated to (a)
employee compensation and benefit
costs ($185,002, approximately 2.0% of
the Exchange’s total applicable
employee compensation and benefits
expense); (b) depreciation and
amortization ($3,635, approximately
0.20% of the Exchange’s and total
applicable depreciation and
amortization expense); and (c)
91 See
PO 00000
supra note 37 and accompanying text.
Frm 00216
Fmt 4703
Sfmt 4703
occupancy costs ($9,860, approximately
2.0% of the Exchange’s total applicable
occupancy expense). Do commenters
believe that the Exchange has provided
sufficient detail about how it
determined which costs are most clearly
directly associated with providing and
maintaining the cToM data product?
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, nor explain the
methodology used to determine how
much of an employee’s time is devoted
to that specific activity. What are
commenters’ views on whether the
Exchange has provided sufficient detail
on the identity and nature of services
provided by third parties? Across all of
the Exchange’s projected costs, what are
commenters’ views on whether the
Exchange has provided sufficient detail
on the elements that go into market data
costs, including how shared costs are
allocated and attributed to market data
expenses, to permit an independent
review and assessment of the
reasonableness of purported cost-based
fees and the corresponding profit
margin thereon? Should the Exchange
be required to identify what Exchange
products or services the remaining
percentage of un-allocated expenses are
attributable to (e.g., what products or
services are associated with the
approximately 99.80% of applicable
depreciation and amortization expenses
that MIAX Emerald does not allocate to
the proposed 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
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estimated costs? Should the Exchange
use cost projections or actual costs
estimated for 2021 in a filing made in
2022, or make cost projections for 2022?
2. Revenue Estimates and Profit
Margin Range. The Exchange provides a
single monthly revenue figure as the
basis for calculating the profit margin of
3.5%. Do commenters believe this is
reasonable? If not, why not? The
Exchange states that the proposed fees
are ‘‘designed to cover its costs with a
limited return in excess of such costs,’’
and that ‘‘revenue and associated profit
margin . . . are not solely intended to
cover the costs associated with
providing services subject to the
proposed fees.’’ 92 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 as
Members and non-Members add and
drop subscriptions,93 and that costs may
increase. The Exchange also states that
the number of subscriptions has not
materially changed over previous
months and so the months that the
Exchange has used as a baseline to
perform its assessment are
representative of reasonably anticipated
costs and expenses.94 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. Do
commenters agree with the Exchange
that its expected 3.5% profit margin
would constitute a reasonable rate of
return over costs for providing the cToM
data product? 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? Further, the Exchange states that
it chose to initially provide the cToM
data product for free and to forego
revenue that they otherwise could have
generated from assessing any fees.95
What are commenters’ views regarding
what factors should be considered in
determining what constitutes a
92 See
supra Section II.A.2.
text accompanying supra note 47.
94 See supra Section II.A.2.
95 See text accompanying supra notes 69–70.
93 See
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reasonable rate of return for the cToM
market data product? Do commenters
believe it relevant to an assessment of
reasonableness that, according to the
Exchange, the Exchange’s proposed 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 addresses whether it believes
a material deviation from the
anticipated profit margin would warrant
the need to make a rule filing pursuant
to Section 19(b) of the Act to increase
or decrease the fees accordingly, stating
that ‘‘[a]ny requirement that an
exchange should conduct a periodic reevaluation on a set timeline of its cost
justification and amend its fees
accordingly should be established by
the Commission holistically, applied to
all exchanges and not just through
pending fee proposals, such as this
filing,’’ and that ‘‘[i]n order to be fairly
applied, such a mandate should be
applied to existing access fees as
well.’’ 96 In light of the impact that the
number of subscriptions 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 data 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
data 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 data fee is implemented?
60 days? 90 days? Some other period?
5. Fees for Internal Distributors versus
External Distributors. The Exchange
argues that it is reasonable, equitable,
and not unfairly discriminatory to
assess Internal Distributors fees that are
lower than the fees assessed for External
Distributors for subscriptions to the
cToM data feed ($1,250 per month for
Internal Distributors versus $1,750 per
month for External Distributors), since
96 See
PO 00000
supra Section II.A.2.
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Fmt 4703
Sfmt 4703
9779
Internal Distributors have limited,
restricted usage rights to the market
data, as compared to External
Distributors, which have more
expansive usage rights, including rights
to commercialize such market data.97 In
addition, the Exchange states that it
‘‘utilizes more resources’’ to support
External Distributors as compared to
Internal Distributors, as External
Distributors have reporting and
monitoring obligations that Internal
Distributors do not have, thus requiring
‘‘additional time and effort’’ of the
Exchange’s staff.98 What are
commenters’ views on the adequacy of
the information the Exchange provides
regarding the differential between the
Internal Distributor and External
Distributor fees? Do commenters believe
that the fees for Internal Distributors
and External Distributors, as well as the
fee differences between Distributors, are
supported by the Exchange’s assertions
that it sets the differentiated pricing
structure in a manner that is equitable
and not unfairly discriminatory? Do
commenters believe that the Exchange
should demonstrate how the proposed
Distributor fee levels correlate with
different costs to better substantiate how
the Exchange ‘‘utilizes more resources’’
to support External Distributors versus
Internal Distributors and permit an
assessment of the Exchange’s statement
that ‘‘External Distributors have
reporting and monitoring obligations
that Internal Distributors do not have,
thus requiring additional time and effort
of Exchange staff’’? 99
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] and the rules
and regulations issued thereunder . . .
is on the [SRO] that proposed the rule
change.’’ 100 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,101 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.102 Moreover,
‘‘unquestioning reliance’’ on an SRO’s
97 See
text accompanying supra notes 65–67.
id.
99 See id.
100 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
101 See id.
102 See id.
98 See
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representations in a proposed rule
change would not be sufficient to justify
Commission approval of a proposed rule
change.103
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. Request for Written 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.104
Interested persons are invited to
submit written data, views, and
arguments concerning the proposed rule
change, including whether the proposed
rule change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
lotter on DSK11XQN23PROD with NOTICES1
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
EMERALD–2022–06 on the subject line.
103 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).
104 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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19:42 Feb 18, 2022
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–EMERALD–2022–06. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–EMERALD–2022–06 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,105 that
File Number SR–EMERALD–2022–06 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.106
J. Matthew DeLesDernier,
Assistant Secretary.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94252; File No. SR–
CboeBZX–2022–008]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule
February 15, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
7, 2022, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’ or ‘‘BZX
Equities’’) proposes to amend its Fee
Schedule. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
[FR Doc. 2022–03657 Filed 2–18–22; 8:45 am]
BILLING CODE 8011–01–P
105 15
106 17
PO 00000
U.S.C. 78s(b)(3)(C).
CFR 200.30–3(a)(12), (57), and (58).
Frm 00218
Fmt 4703
Sfmt 4703
1 15
2 17
E:\FR\FM\22FEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
22FEN1
]]>Agencies
[Federal Register Volume 87, Number 35 (Tuesday, February 22, 2022)]
[Notices]
[Pages 9766-9780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03657]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94263; File No. SR-EMERALD-2022-06]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing of a Proposed Rule Change To Establish Fees for the Exchange's
cToM Market Data Product; 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 7, 2022, MIAX Emerald, LLC (``MIAX Emerald'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Item II below,
which Item has been prepared by the Exchange. The Exchange filed the
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\
and Rule 19b-4(f)(2) thereunder.\4\ 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 proposed 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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 Exchange's Fee
Schedule (``Fee Schedule'') to establish fees for the market data
product known as MIAX Emerald Complex Top of Market (``cToM''). The
fees became operative on February 7, 2022. The text of the proposed
rule change is available on the Exchange's website at https://www.miaxoptions.com/rule-filings/emerald, at MIAX's principal office,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Description of 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
[[Page 9767]]
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 Section 6)a) of the Fee Schedule to
establish fees for the cToM data product. The Exchange initially filed
this proposal on June 30, 2021 with the proposed fees to be effective
beginning July 1, 2021 (``First Proposed Rule Change'').\5\ The First
Proposed Rule Change was published for comment in the Federal Register
on July 15, 2021.\6\ Although the Commission did not receive any
comment letters on the First Proposed Rule Change, on August 27, 2021,
the Commission issued its Suspension of and Order Instituting
Proceedings to Determine Whether to Approve or Disapprove Proposed Rule
Changes to Establish Fees for the Exchanges' cToM Market Data Products
(relating to the First Proposed Rule Change and a similar filing by the
Exchange's affiliate, Miami International Securities Exchange, LLC
(``MIAX''), to also adopt cToM fees).\7\ The Exchange withdrew the
First Proposed Rule Change on September 30, 2021 \8\ and re-submitted
the proposal, with the proposed fee changes being immediately effective
(``Second Proposed Rule Change'').\9\ The Second Proposed Rule Change
provided additional justification for the proposed fee changes and
addressed comments provided by the Commission Staff. On October 14,
2021, the Exchange withdrew the Second Proposed Rule Change and
submitted its proposal to adopt cToM fees to again provide additional
justification for the proposed fee changes and address comments
provided by the Commission Staff (``Third Proposed Rule Change'').\10\
The Third Proposed Rule Change was published for comment in the Federal
Register on November 1, 2021.\11\ Although the Commission did not again
receive any comment letters on the Third Proposed Rule Change, the
Exchange withdrew the Third Proposed Rule Change on December 10, 2021
submitted a revised proposal for immediate effectiveness (``Fourth
Proposed Rule Change'').\12\ The Fourth Proposed Rule Change was
published for comment in the Federal Register on December 23, 2021.\13\
The Fourth Proposed Rule Change meaningfully attempted to provide
additional justification and explanation for the proposed fee change in
response to a telephone conversation with Commission Staff on December
7, 2021 relating to the Third Proposed Rule Change. Although the
Commission again did not receive any comment letters on the Fourth
Proposed Rule Change, the Exchange withdrew the Fourth Proposed Rule
Change on February 7, 2022 and now submits this revised proposal for
immediate effectiveness (``Fifth Proposed Rule Change''). This Fifth
Proposed Rule Change provides additional justification and explanation
for the proposed fee changes.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 92358 (July 9,
2021), 86 FR 37361 (July 15, 2021) (SR-EMERALD-2021-21).
\6\ Id.
\7\ See Securities Exchange Act Release No. 92789 (August 27,
2021), 86 FR 49364 (September 2, 2021) (SR-MIAX-2021-28, SR-EMERALD-
2021-21) (the ``Suspension Order'').
\8\ See Securities Exchange Act Release No. 93471 (October 29,
2021), 86 FR 60947 (November 4, 2021).
\9\ See SR-EMERALD-2021-32.
\10\ Securities Exchange Act Release No. 93427 (October 26,
2021), 86 FR 60310 (November 1, 2021) (SR-EMERALD-2021-34).
\11\ Id.
\12\ Securities Exchange Act Release No. 93811 (December 17,
2021), 86 FR 73051 (December 23, 2021) (SR-EMERALD-2021-44).
\13\ Id.
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Background
The Exchange previously adopted rules governing the trading of
Complex Orders \14\ on the MIAX Emerald System \15\ in 2018,\16\ ahead
of the Exchange's planned launch, which took place on March 1, 2019.
Shortly thereafter, the Exchange adopted the market data product cToM
and expressly waived fees for cToM to provide an incentive to
prospective market participants to subscribe to that market data
feed.\17\ Prior to the First Proposed Rule Change, the Exchange did not
charge fees to cToM subscribers during the nearly three years since it
was first available for subscription.
---------------------------------------------------------------------------
\14\ See Exchange Rule 518(a)(5) for the definition of Complex
Orders.
\15\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
\16\ See Securities Exchange Act Release Nos. 84891 (December
20, 2018), 83 FR 67421 (December 28, 2018) (In the Matter of the
Application of MIAX EMERALD, LLC for Registration as a National
Securities Exchange; Findings, Opinion, and Order of the
Commission); and 85345 (March 18, 2019), 84 FR 10848 (March 22,
2019) (SR-EMERALD-2019-13) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Exchange Rule 518,
Complex Orders).
\17\ See Securities Exchange Act Release No. 85207 (February 27,
2019), 84 FR 7963 (March 5, 2019) (SR-EMERALD-2019-09) (providing a
complete description of the cToM data feed).
---------------------------------------------------------------------------
In summary, cToM provides subscribers with the same information as
the MIAX Emerald Top of Market (``ToM'') data product as it relates to
the Strategy Book,\18\ i.e., the Exchange's best bid and offer for a
complex strategy, with aggregate size, based on displayable order and
quoting interest in the complex strategy on the Exchange. However, cToM
provides subscribers with the following additional information that is
not included in ToM: (i) The identification of the complex strategies
currently trading on the Exchange; (ii) complex strategy last sale
information; and (iii) the status of securities underlying the complex
strategy (e.g., halted, open, or resumed). cToM is therefore a distinct
market data product from ToM in that it includes additional information
that is not available to subscribers that receive only the ToM data
feed. ToM subscribers are not required to subscribe to cToM, and cToM
subscribers are not required to subscribe to ToM.\19\
---------------------------------------------------------------------------
\18\ The ``Strategy Book'' is the Exchange's electronic book of
complex orders and complex quotes. See Exchange Rule 518(a)(17).
\19\ See supra note 15.
---------------------------------------------------------------------------
Proposal
The Exchange now proposes to amend Section 6)a) of the Fee Schedule
to charge monthly fees to Distributors \20\ of cToM. Specifically, the
Exchange proposes to assess Internal Distributors $1,250 per month and
External Distributors $1,750 per month for the cToM data feed.\21\ The
Exchange notes that the proposed monthly cToM fees for Internal and
External Distributors are the same prices that the Exchange charges for
its ToM data product and are identical to the prices the Exchange's
affiliate, MIAX, proposes to charge for its cToM product.
---------------------------------------------------------------------------
\20\ A ``Distributor'' of MIAX Emerald data is any entity that
receives a feed or file of data either directly from MIAX Emerald or
indirectly through another entity and then distributes it either
internally (within that entity) or externally (outside that entity).
All Distributors are required to execute a MIAX Emerald Distributor
Agreement. See Section 6)a) of the Fee Schedule.
\21\ The Exchange also proposes to make a minor related change
to remove ``(as applicable)'' from the explanatory paragraph in
Section 6)a) as it will not change fees for both the ToM and cToM
data feeds.
---------------------------------------------------------------------------
As it does today for ToM, the Exchange proposes to assess cToM fees
on Internal and External Distributors in each month the Distributor is
credentialed to use cToM in the production environment. Also, as the
Exchange does today for ToM, market data fees for cToM will be reduced
for new Distributors for the first month during which they subscribe to
cToM,
[[Page 9768]]
based on the number of trading days that have been held during the
month prior to the date on which that subscriber has been credentialed
to use cToM in the production environment. Such new Distributors will
be assessed a pro-rata percentage of the fees in the table in Section
6)a) of the Fee Schedule, which is the percentage of the number of
trading days remaining in the affected calendar month as of the date on
which they have been credentialed to use cToM in the production
environment, divided by the total number of trading days in the
affected calendar month.
The Exchange believes that other exchanges' fees for complex market
data are useful examples and provides the below table for comparison
purposes only to show how the Exchange's proposed fees compare to fees
currently charged by other options exchanges for similar complex market
data. As shown by the below table, the Exchange's proposed fees for
cToM are similar to or less than fees charged for similar data products
provided by other options exchanges.
---------------------------------------------------------------------------
\22\ See NYSE American Options Proprietary Market Data Fees,
American Options Complex Fees, at https://www.nyse.com/publicdocs/nyse/data/NYSE_American_Options_Market_Data_Fee_Schedule.pdf.
\23\ See NYSE Arca Options Proprietary Market Data Fees, Arca
Options Complex Fees, at https://www.nyse.com/publicdocs/nyse/data/NYSE_Arca_Options_Proprietary_Data_Fee_Schedule.pdf.
\24\ See PHLX Price List--U.S. Derivatives Data, PHLX Orders
Fees, at https://www.nasdaqtrader.com/Trader.aspx?id=DPPriceListOptions#PHLX.
------------------------------------------------------------------------
Exchange Monthly fee
------------------------------------------------------------------------
MIAX Emerald (as proposed)............. $1,250--Internal Distributor.
$1,750--External Distributor
NYSE American, LLC (``Amex'') \22\..... $1,500 Access Fee. $1,000
Redistribution Fee.
NYSE Arca, Inc. (``Arca'') \23\........ $1,500 Access Fee. $1,000
Redistribution Fee.
NASDAQ PHLX LLC (``PHLX'') \24\........ $3,000--Internal Distributor.
$3,500--External Distributor.
------------------------------------------------------------------------
The Exchange also proposes to amend the paragraph below the table
of fees for ToM and cToM in Section 6)a) of the Fee Schedule to make a
minor, non-substantive corrective edit. In particular, the Exchange
proposes to delete the phrase ``(as applicable)'' in the first sentence
following the table of fees for ToM and cToM. The purpose of this
proposed change is to remove unnecessary text from the Fee Schedule.
cToM Content Is Available From Alternative Sources
cToM is also not the exclusive source for Complex Order information
from the Exchange and market participants may choose to subscribe to
the Exchange's other data products to receive such information. It is a
business decision of market participants whether to subscribe to the
cToM data product or not. Market participants that choose not to
subscribe to cToM can derive much, if not all, of the same information
provided in the cToM feed from other Exchange sources, including, for
example, the MIAX Emerald Order Feed (``MOR'').\25\ The following cToM
information is provided to subscribers of MOR: The Exchange's best bid
and offer for a complex strategy, with aggregate size, based on
displayable order and quoting interest in the complex strategy on the
Exchange; the identification of the complex strategies currently
trading on the Exchange; and the status of securities underlying the
complex strategy (e.g., halted, open, or resumed). In addition to the
cToM information contained in MOR, complex strategy last sale
information can be derived from the Exchange's ToM data feed.
Specifically, market participants may deduce that last sale information
for multiple trades in related options series that are disseminated via
the ToM data feed with the same timestamp are likely part of a Complex
Order transaction and last sale.
---------------------------------------------------------------------------
\25\ See MIAX website, Market Data & Offerings, at https://www.miaxoptions.com/market-data-offerings (last visited December 10,
2021). In general, MOR provides real-time ulta-low latency updates
on the following information: New Simple Orders added to the MIAX
Emerald Order Book; updates to Simple Orders resting on the MIAX
Emerald Order Book; new Complex Orders added to the Strategy Book
(i.e., the book of Complex Orders); updates to Complex Orders
resting on the Strategy Book; MIAX Emerald listed series updates;
MIAX Emerald Complex Strategy definitions; the state of the MIAX
Emerald System; and MIAX Emerald's underlying trading state.
---------------------------------------------------------------------------
Implementation
The proposed rule change is immediately effective.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \26\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \27\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act in that it is designed to
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general protect investors and the public
interest and is not designed to permit unfair discrimination between
customers, issuers, brokers and dealers.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(4) and (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'').\28\ 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.'' \29\ Based on both the
BOX Order and the Guidance, the Exchange believes that it has clearly
met its burden to demonstrate that the proposed fees are consistent
with the Act because they (i) are reasonable, equitably allocated, not
unfairly discriminatory, and not an undue burden on competition; (ii)
comply with the BOX Order and the Guidance; (iii) are supported by
evidence (including comprehensive revenue and cost data and analysis)
that they are fair and reasonable because they will not result in
excessive pricing or supra-competitive profit; and (iv) utilize a cost-
based justification framework that is substantially similar to a
framework previously used by the Exchange, and its affiliates MIAX and
MIAX PEARL,
[[Page 9769]]
LLC (``MIAX Pearl''), to adopt or amend market data and non-transaction
fees.\30\
---------------------------------------------------------------------------
\28\ 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).
\29\ 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'').
\30\ See Securities Exchange Act Release Nos. 91145 (February
17, 2021), 86 FR 11033 (February 23, 2021) (SR-EMERALD-2021-05)
(proposal to establish market data fees for MIAX Emerald ToM,
Administrative Information Subscriber feed, and MIAX Emerald Order
Feed); 90981 (January 25, 2021), 86 FR 7582 (January 29, 2021) (SR-
PEARL-2021-01) (proposal to increase connectivity fees); 91460
(April 2, 2021), 86 FR 18349 (SR-EMERALD-2021-11) (proposal to adopt
port fees, increase connectivity fees, and increase additional
limited service ports); 91033 (February 1, 2021), 86 FR 8455
(February 5, 2021) (SR-EMERALD-2021-03) (proposal to adopt trading
permit fees).
---------------------------------------------------------------------------
The Proposed 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 sets certain non-transaction fees, including market data fees.
The Exchange believes that it is important to demonstrate that these
fees are based on its costs to provide these products and reasonable
business needs.
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.''
\31\ 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.'' \32\ In the 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 supra-competitive profit,
specific information, including quantitative information, should be
provided to support that argument.'' \33\ The Exchange does not assert
that the proposed fees are constrained by competitive forces. Rather,
the Exchange asserts that the proposed fees are reasonable because they
will permit recovery of the Exchange's costs in providing services to
supply cToM data and will not result in the Exchange generating a
supra-competitive profit.
---------------------------------------------------------------------------
\31\ See Guidance, supra note 27.
\32\ Id.
\33\ Id.
---------------------------------------------------------------------------
The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \34\
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.'' \35\ The Exchange provides
this analysis below.
---------------------------------------------------------------------------
\34\ Id.
\35\ Id.
---------------------------------------------------------------------------
Based on this analysis, the Exchange believes the proposed fees are
reasonable and do not result in a ``supra-competitive'' \36\ profit.
The Exchange believes that it is important to demonstrate that the
proposed fees are based on its costs and reasonable business needs. The
Exchange believes the proposed 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 fees. Accordingly, the Exchange
provides an analysis of its revenues, costs, and profitability
associated with the proposed fees. This analysis includes information
regarding its methodology for determining the costs and revenues
associated with the proposed fees. As a result of this analysis, the
Exchange believes the proposed 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 cToM data, which has
been offered for free for nearly three years.
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
The proposed fees are based on a cost-plus model. In determining
the appropriate fees to charge, the Exchange considered its costs to
provide cToM data, 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 cToM
data) to estimate such costs,\37\ as well as the relative costs of
providing and maintaining cToM data feeds, 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 cToM data feeds because of the uncertainty of
forecasting subscriber decision making with respect to firms' needs for
cToM data and the likely potential for increased costs to procure the
third-party services described below.
---------------------------------------------------------------------------
\37\ For example, the Exchange only included the costs
associated with providing and supporting cToM data feeds and
excluded from its cost calculations any cost not directly associated
with providing and maintaining such cToM data feeds. Thus, the
Exchange notes that this methodology underestimates the total costs
of providing and maintaining cToM data feeds.
---------------------------------------------------------------------------
To determine the Exchange's costs to provide cToM data associated
with the proposed fees, the Exchange conducted an extensive cost review
in which the Exchange analyzed nearly every expense item in the
Exchange's general expense ledger to determine whether each such
expense relates to the proposed fees, and, if such expense did so
relate, what portion (or percentage) of such expense actually supports
the cToM data product associated with the proposed 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 services associated
with the proposed fees. The Exchange conducted a thorough internal
analysis to determine the portion (or percentage) of each expense to
allocate to the support of services associated with the proposed fees.
This analysis included discussions with each Exchange department head
to determine the expenses that support services associated with the
proposed 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 fees. Once the expenses were identified, the Exchange
department heads, with the assistance of the Exchange's internal
finance department, reviewed such expenses holistically on an Exchange-
wide level to determine what portion of that expense supports providing
services for the proposed fees. The sum of all such portions of
expenses represents the total cost to the Exchange to provide services
associated with the proposed fees. For the avoidance of doubt, no
expense amount was allocated twice.
The internal cost analysis conducted by the Exchange is a
proprietary process
[[Page 9770]]
that is designed to make a fair and reasonable assessment of costs and
resources allocated to support the provision of services associated
with the proposed 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 market data 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
Commission determination that it is unable to make a finding that this
proposed rule change is consistent 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 2021 by Nasdaq PHLX LLC
(``PHLX''), which increased fees for PHLX's end of day, intra-day and
historical market data, and adopted fees for external distribution of
PHLX's derived data.\39\ This filing was submitted on September 30,
2021, over two years after the Staff's Guidance was issued. In that
filing, PHLX argued that the proposed fees were subject to competing
products' fees at other exchanges and that there were available
substitutes. This filing provided no cost based data or revenue
analysis to support the amount of the proposed fees. Among other
things, PHLX did not provide a description of the costs underlying its
market data feeds to show that these particular fees did not generate
supra-competitive profits 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.
---------------------------------------------------------------------------
\38\ See, e.g., Securities Exchange Act Release Nos. 93293
(October 12, 2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-58)
(increasing several market data fees and adopting new market data
fee without providing a cost based justification); 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. 93293 (October 12,
2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-58) (increasing
several market data fees and adopting new market data fee without
providing a cost based justification).
---------------------------------------------------------------------------
The Exchange notes that the Investors Exchange, Inc. (``IEX'')
recently submitted a proposed rule change to adopt fees for two real-
time proprietary market data feeds, TOPS and DEEP (``IEX Fee
Proposal''). Like the Exchange proposes herein, IEX previously provided
its TOP and DEEP market data feeds for free and proposed to adopt
modest, below market fees. Also like in this proposal, the IEX Fee
Proposal included a detailed subscriber data and cost-based analysis in
compliance with the Guidance. Nonetheless, on December 30, 2021, the
Commission suspended the IEX Fee Proposal and instituted proceedings to
determine whether to approve or disapprove the IEX Fee Proposal.\40\
---------------------------------------------------------------------------
\40\ See Securities Exchange Act Release No. 93883 (December 30,
2021), 87 FR 523 (January 5, 2021) (SR-IEX-2021-14) (the ``IEX
Order'').
---------------------------------------------------------------------------
The Commission received three comment letters on the IEX Order.\41\
The Virtu Letter and HMA Letter 2 specifically applaud the amount of
detail included in the IEX Fee Proposal. Specifically, the Virtu Letter
states that ``[i]n significant detail, IEX provides data about three
cost components: (1) Direct costs, such as servers, infrastructure, and
monitoring; (2) enhancement initiative costs (e.g., new functionality
for IEX Data and increased capacity for the proprietary market data
feeds . . .); and (3) personnel costs.' '' \42\ HMA Letter 2 similarly
commends the level of detail included in the IEX Fee Proposal and also
highlights the disparate treatment by Commission Staff of exchange fee
filings.\43\ HMA Letter 2 provides three examples to support this
assertion.\44\ The Nasdaq Letter urges the Commission to approve the
IEX Fee Proposal promptly and raises concern the questions asked by the
Commission in the IEX Order imply that they are exercising rate making
authority that they clearly do not possess. The Nasdaq Letter states
that ``[i]f the Commission believes it has authority to conduct cost-
plus ratemaking, the Administrative Procedure Act dictates that it must
propose a rule for notice and comment and that its final rule must be
prepared to withstand judicial scrutiny.'' \45\ The Exchange agrees.
---------------------------------------------------------------------------
\41\ See letters to Ms. Venessa A. Countryman, Secretary,
Commission, from Douglas A. Cifu, Chief Executive Officer, Virtu
Financial, Inc., dated January 26, 2022 (the ``Virtu Letter''),
Tyler Gellasch, Executive Director, Healthy Markets Association
(``HMA''), dated January 26, 2022 (the ``HMA Letter 2''), and Erika
Moore, Vice President and Corporate Secretary, The Nasdaq Stock
Market LLC, dated January 27, 2022 (the ``Nasdaq Letter'').
\42\ See Virtu Letter at page 3, id.
\43\ HMA previously expressed their ``worry that the
Commission's process for reviewing and evaluating exchange filings
may be inconsistently applied.'' See letter from Tyler Gellasch,
Executive Director, 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
1'').
\44\ See HMA Letter 2 at 2-3. The Exchange has provided further
examples to support HMA's assertion above. See supra note 39 and
accompanying text.
\45\ See Nasdaq Letter at page 13, id.
---------------------------------------------------------------------------
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
[[Page 9771]]
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 fees in the instant filing, the Exchange analyzed the number
of Members and non-Members currently subscribing to the cToM data feeds
and used a recent monthly billing cycle representative of 2021 monthly
revenue. The Exchange also provided its baseline by analyzing June
2021, the monthly billing cycle prior to the proposed fees going into
effect, and compared it to its expenses for that month. As discussed
below, the Exchange does not believe it is appropriate to factor into
its analysis projected or estimated future revenue growth or decline
for purposes of these calculations, given the uncertainty of such
projections due to the continually changing market data 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 fees in this filing in a manner that is consistent
with how the Exchange presents its revenue and expense in its Audited
Unconsolidated Financial Statements. The Exchange's most recent Audited
Unconsolidated Financial Statement is for 2020. However, since the
revenue and expense associated with the proposed fees were not in place
in 2020 or for the first six 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 fees. Accordingly, the Exchange believes it is more
appropriate to analyze the proposed 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 fees are reasonable because they
will allow the Exchange to recover its costs associated with providing
services related to the proposed fees and not result in excessive
pricing or supra-competitive profit. Since 2019, when the Exchange
launched operations with Complex Order functionality, the Exchange has
spent time and resources building out various Complex Order
functionality in its System to provide better trading strategies and
risk functionality for market participants in order to better compete
with other exchanges' complex functionality and similar data products
focused on complex orders.\46\ The cToM data product allows market
participants to better utilize the Exchange's Complex Order
functionality by providing insights into the Exchange's Complex Order
flow. The Exchange notes that no market participant ceased subscribing
to the cToM feed since July 1, 2021, the date on which the fees became
effective pursuant to the First Proposed Rule Change.
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\46\ See Securities Exchange Act Release Nos. 79405 (November
28, 2016), 81 FR 87086 (December 2, 2016) (SR-MIAX-2016-44)
(amendment to clarify the manner in which the System allocates
contracts at the end of a Complex Auction); 80089 (February 22,
2017), 82 FR 12153 (February 28, 2017) (SR-MIAX-2017-06) (adopting
the Complex MIAX Options Price Collar, an additional price
protection feature); 81229 (July 27, 2017), 82 FR 36023 (August 2,
2017) (SR-MIAX-2017-34) (amendment to ensure price and trade
protections apply to Complex Orders); 89085 (June 17, 2020), 85 FR
37719 (June 23, 2020) (SR-MIAX-2020-16) (adopting new order type,
Complex Attributable Order).
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As outlined in more detail below, the Exchange projects that the
final annualized expense for 2021 to provide cToM data to be $202,657
per annum or an average of $16,888 per month. The Exchange implemented
the proposed fees on July 1, 2021 in the First Proposed Rule Change.
For June 2021, prior to the proposed fees, Exchange Members and non-
Members subscribed to a total of 14 cToM data feeds for which the
Exchange charged $0, as it has for the past three years. This resulted
in a loss of approximately $16,888 for that month. For the month of
November 2021, which includes the proposed fees, Exchange Members and
non-Members purchased 14 cToM data feeds, for which the Exchange
charged approximately $17,500 for that month. This resulted in a profit
of $612 for that month (a margin of approximately 3.5%). The Exchange
cautions that this margin is likely to fluctuate from month to month
based on the uncertainty of predicting how many cToM data feeds may be
purchased from month to month as Members and non-Members are able to
add and drop subscriptions at any time based on their own business
decisions. This 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.\47\ 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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\47\ 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).
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Further, the Exchange chose to provide cToM data for free for the
past three years to attract order flow and encourage market
participants to experience the determinism and resiliency of the
Exchange's trading systems and market data products. This resulted in
the Exchange forgoing revenue it could have generated from assessing
any fees. The Exchange could have sought to charge fees at the outset
for the cToM data feed, but that could have served to discourage
participation on the Exchange. Instead, the Exchange chose to provide a
free exchange data product to the options industry, which resulted in
no revenues for providing this service for three years. The Exchange
now proposes 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, complete with robust market data products, including cToM.
As mentioned above, the Exchange projects that the final annualized
expense for 2021 to provide cToM data to be approximately $202,657 per
annum or an average of $16,888 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.\48\ The Exchange notes that there are material costs
associated with providing the infrastructure and headcount to fully-
support access to the Exchange and various Exchange products. The
Exchange incurs technology expense related to
[[Page 9772]]
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 services associated with
the proposed 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
services and products to its Members is not fixed and indeed is likely
to increase rather than decrease over time. The Exchange believes the
proposed fees are a reasonable attempt to offset a portion of the costs
to the Exchange associated with providing certain Exchange products.
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\48\ 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
Secure Financial Transaction Infrastructure (``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.
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The Exchange only has four primary sources of revenue and cost
recovery mechanisms to fund all of its operations: Transaction fees,
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.\49\ This is a result of providing a low cost
alternative to attract order flow and encourage market participants to
experience the high determinism and resiliency of the Exchange's
trading Systems. To do so, the Exchange chose to waive the fees for
some non-transaction related services and market data products or
provide them at a very marginal cost, which has not been profitable to
the Exchange, but beneficial to the overall options industry. This
resulted in the Exchange forgoing revenue it could have generated from
assessing any amount of fees.
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\49\ 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 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 services
versus the total annual revenue that the Exchange projects to collect
in connection with services associated with the proposed fees. As
mentioned above, for 2021,\50\ the total annual expense for providing
the services associated with the proposed fees is projected to be
approximately $202,657, or approximately $16,888 per month. This
projected total annual expense is comprised of the following, all of
which are directly related to the services associated with the proposed
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 fees.\51\ As noted above, the
Exchange believes it is more appropriate to analyze the proposed 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.\52\ The $202,657
projected total annual expense is directly related to the services
associated with the proposed 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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\50\ The Exchange has not yet finalized its 2021 year end
results.
\51\ 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.
\52\ 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 services associated with the proposed 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 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 services associated with the proposed 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 services associated with the
proposed fees, is projected to be $4,160. 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;
and (3) 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, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to providing the services associated with the proposed fees.
Only a portion of all fees paid to such third-parties is included in
the third-party expense described herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
information technology and communication costs to the services
associated with the proposed fees. Further, the Exchange notes that,
with respect to the expenses included herein, those expenses only cover
the MIAX 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,
[[Page 9773]]
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 services associated with the proposed fees. In particular,
the Exchange believes it is reasonable to allocate the identified
portion of the Equinix expense because Equinix operates the data
centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the cToM product
associated with the proposed fees to its Members, non-Members and their
customers. The Exchange did not allocate all of the Equinix expense
toward the cost of providing the cToM product associated with the
proposed fees, only that portion which the Exchange identified as being
specifically mapped to providing the cToM product associated with the
proposed fees. According to the Exchange's calculations, it allocated
approximately 0.20% of the total applicable Equinix expense to
providing the services associated with the proposed fees. The Exchange
believes this allocation is reasonable because it represents the
Exchange's actual cost to provide the cToM product associated with the
proposed fees, and not any other service, as supported by its cost
review.\53\
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\53\ As noted above, the percentage allocations used in this
proposed rule change may differ from past filings from the Exchange
or its affiliates due to, among other things, changes in expenses
charged by third-parties, adjustments to internal resource
allocations, and different system architecture of the Exchange as
compared to its affiliates. Again, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking the
Exchange with its affiliates, MIAX Pearl and MIAX, as well as the data
center and disaster recovery locations. As such, all of the trade data,
including the billions of messages each day per exchange, flow through
Zayo's infrastructure over the Exchange's network. Without these
services from Zayo, the Exchange would not be able to operate and
support the network and provide the cToM data associated with the
proposed fees. The Exchange did not allocate all of the Zayo expense
toward the cost of providing the cToM data associated with the proposed
fees, only the portion which the Exchange identified as being
specifically mapped to providing the cToM data associated with the
proposed fees. According to the Exchange's calculations, it allocated
approximately 0.20% of the total applicable Zayo expense to providing
the services associated with the proposed fees. The Exchange believes
this allocation is reasonable because it represents the Exchange's
actual cost to provide the cToM data associated with the proposed fees,
and not any other service, as supported by its cost review.\54\
---------------------------------------------------------------------------
\54\ Id.
---------------------------------------------------------------------------
The Exchange did not allocate any expense associated with the
proposed fees towards SFTI and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) because the
MIAX Emerald architecture takes advantage of an advance in design to
eliminate the need for a market data distribution gateway layer. The
computation and dissemination via an API is done solely within the
match engine environment and is then delivered via the Member and non-
Member connectivity infrastructure. This architecture delivers a market
data system that is more efficient both in cost and performance.
Accordingly, the Exchange determined not to allocate any expense
associated with SFTI and various other service providers.
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 cToM data to its Members, non-Members and their customers. The
Exchange did not allocate all of the hardware and software provider
expense toward the cost of providing the cToM data associated with the
proposed fees, only the portions which the Exchange identified as being
specifically mapped to providing the cToM data associated with the
proposed fees. According to the Exchange's calculations, it allocated
approximately 0.20% of the total applicable hardware and software
provider expense to providing the services associated with the proposed
fees. The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the cToM data
associated with the proposed fees.\55\
---------------------------------------------------------------------------
\55\ Id.
---------------------------------------------------------------------------
Internal Expense Allocations
For 2021, total projected internal expenses relating to the
Exchange providing the cToM data associated with the proposed fees, is
projected to be $198,497. This includes, but is not limited to, costs
associated with: (1) Employee compensation and benefits for full-time
employees that support the cToM data product associated with the
proposed fees, including staff in network operations, trading
operations, development, system operations, and business that support
those employees and functions; (2) depreciation and amortization of
hardware and software used to provide the cToM data product associated
with the proposed 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 cToM
data associated with the proposed 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 services in connection with the proposed
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 cToM data associated with the proposed fees. This
may result in the Exchange under allocating an expense to the provision
of access services in connection with the proposed 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 9774]]
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 cToM data associated with the proposed fees. In particular,
the Exchange's employee compensation and benefits expense relating to
providing the cToM data associated with the proposed fees is projected
to be approximately $185,002, 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, products 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 nearly
every employee on matters relating to cToM. Without these employees,
the Exchange would not be able to provide the cToM product to its
Members, non-Members and their customers. The Exchange did not allocate
all of the employee compensation and benefits expense toward the cost
of the cToM product, only the portion which the Exchange identified as
being specifically mapped to providing the cToM product associated with
the proposed fees. According to the Exchange's calculations, it
allocated approximately 2.0% of the total applicable employee
compensation and benefits expense to providing the services associated
with the proposed fees. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the cToM data associated with the proposed fees, and not any other
service, as supported by its cost review.\56\
---------------------------------------------------------------------------
\56\ Id.
---------------------------------------------------------------------------
The Exchange's depreciation and amortization expense relating to
providing the cToM data associated with the proposed fees is projected
to be $3,635, which is only a portion of the $1.9 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 cToM
product. Without this equipment, the Exchange would not be able to
operate the network and provide the cToM product to its Members, non-
Members and their customers. The Exchange did not allocate all of the
depreciation and amortization expense toward the cost of providing the
cToM product, only the portion which the Exchange identified as being
specifically mapped to providing the cToM product. According to the
Exchange's calculations, it allocated approximately 0.20% of the total
applicable depreciation and amortization expense to providing the
services associated with the proposed fees, as this product 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 cToM product associated with the proposed fees, and
not any other service, as supported by its cost review.\57\
---------------------------------------------------------------------------
\57\ Id.
---------------------------------------------------------------------------
The Exchange's occupancy expense relating to providing the cToM
product associated with the proposed fees is projected to be $9,860,
which is only a portion of the $0.60 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 cToM product. This amount consists primarily of rent for
the Exchange's Princeton, New Jersey office, as well as various related
costs, such as physical security, property management fees, property
taxes, and utilities. The Exchange operates its Network Operations
Center (``NOC'') and Security Operations Center (``SOC'') from its
Princeton, New Jersey office location. A centralized office space is
required to house the staff that operates and supports the network and
Exchange products. 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 services associated with the
proposed 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 market data services associated with the proposed fees. The
Exchange did not allocate all of the occupancy expense toward the cost
of providing the market data services associated with the proposed
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 2.0% of the
total applicable occupancy expense to providing the services associated
with the proposed fees. The Exchange believes this allocation is
reasonable because it represents the Exchange's cost to provide the
market data services associated with the proposed fees, and not any
other service, as supported by its cost review.\58\
---------------------------------------------------------------------------
\58\ Id.
---------------------------------------------------------------------------
Based on the above, the Exchange believes that its provision of
market data services associated with the proposed fees will not result
in excessive pricing or supra-competitive profit. As discussed above,
the Exchange projects that its annualized expense for 2021 to provide
the cToM data associated with the proposed fees is projected to be
approximately $202,657, or approximately $16,888 per month on average.
The Exchange implemented the proposed fees on July 1, 2021 in the First
Proposed Rule Change. For June 2021, prior to the proposed fees,
Members and non-Members subscribed to a total of 14 cToM data feeds,
for which the Exchange charged $0, for the past three years. This
resulted in a month over month loss of $16,888. For the month of
November 2021, which includes the proposed fees, Members and non-
Members subscribed to 14 cToM data feeds, for which the Exchange
charged approximately $17,500 for that month. This resulted in a profit
of $612 for that month (a margin of approximately 3.5%). The Exchange
believes this 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 margin is reasonable because
it represents a reasonable rate of return.
Again, the Exchange cautions that this margin is likely to
fluctuate from month to month based in the uncertainty of predicting
how many market data feeds
[[Page 9775]]
may be purchased from month to month as Members and non-Members are
free to add and drop subscriptions 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 subscriptions
and to changes to the Exchange's expenses, the number of subscriptions
has not materially changed over 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 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. Accordingly, the
Exchange believes its total projected revenue for the providing the
market data services associated with the proposed 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 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,
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
services subject to the proposed fees. Moreover, as noted above,
because the Exchange was previously offering the cToM data feed at no
cost, the provision of the feed during the time in which it generated
no revenue was being subsidized by other fees charged by the Exchange.
The Exchange believes establishing a separate fee for the cToM feed is
therefore reasonable and equitable so that the provision of the cToM
data feed is no longer subsidized by other fees less directly related
to providing cToM. Instead, the cToM feed will be supported primarily
through fees charged only to users who choose to subscribe to cToM.
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 market
data services associated with the proposed 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 market data services 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 market data
services associated with the proposed fees to its Members, non-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 market data services. The proposed fees are intended to
recover the costs of providing cToM data. Accordingly, the Exchange
believes that the proposed 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 fees.
No market participant is required by any rule or regulation to
utilize the Exchange's Complex Order functionality or subscribe to the
cToM data feed. Further, unlike orders on the Exchange's Simple Order
Book, Complex Orders are not protected and will never trade through
Priority Customer \59\ orders, thus protecting the priority that is
established in the Simple Order Book.\60\ Additionally, unlike the
continuous quoting requirements of Market Makers in the simple order
market, there are no continuous quoting requirements respecting Complex
Orders. It is a business decision whether market participants utilize
Complex Order strategies on the Exchange and whether to purchase cToM
data to help effect those strategies.
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\59\ The term ``Priority Customer'' means a person or entity
that (i) is not a broker or dealer in securities and (ii) does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial accounts(s). The term
``Priority Customer Order'' means an order for the account of a
Priority Customer. See Exchange Rule 100.
\60\ The ``Simple Order Book'' is the Exchange's regular
electronic book of orders and quotes. See Exchange Rule 518(a)(5).
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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 options exchanges'
costs to provide market data or their fee markup over those costs, and
therefore cannot use other exchange's market data fees as a benchmark
to determine a reasonable markup over the costs of providing market
data. Nevertheless, the Exchange believes the other exchanges' market
data fees are useful examples of alternative approaches to providing
and charging for market data. To that end, the Exchange believes the
proposed pricing is reasonable because the proposed rates are similar
to or less than the fees charged by other options exchanges for similar
data products.\61\
---------------------------------------------------------------------------
\61\ See supra notes 20, 21 and 22.
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Until recently, the Exchange has operated at a cumulative net
annual loss since it launched operations in 2019.\62\ This is a result
of providing a low cost alternative to attract order flow and encourage
market participants to experience the high determinism and resiliency
of the Exchange's trading Systems. To do so, the Exchange chose to
waive the fees for some non-transaction related services and Exchange
products (including the cToM data feed) 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
any fees or 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. An example of this is cToM, for which the
Exchange only now seeks to adopt fees at a level similar to or lower
than those of other options exchanges.
---------------------------------------------------------------------------
\62\ See supra note 47.
---------------------------------------------------------------------------
Since the Exchange initially established the cToM data product when
it launched trading operations on March 1, 2019, all Exchange Members
and non-Members have had the ability to receive the Exchange's cToM
data free of charge for the past three years.\63\ Since 2019, when the
Exchange launched operations with Complex
[[Page 9776]]
Order functionality, the Exchange has spent time and resources building
out various Complex Order functionality in its System to provide better
trading strategies and risk functionality for market participants in
order to better compete with other exchanges' complex functionality and
similar data products focused on complex orders.\64\ The cToM data
product allows market participants to better utilize the Exchange's
Complex Order functionality by providing insights into the Exchange's
Complex Order flow. The Exchange currently has 14 subscribers (12
Members and 2 non-Members) for its cToM data product. None of these
subscribers has paid a specific fee to receive cToM data (other than
the five months in which the First, Second and Third Proposed Rule
Changes were in effect) but has received the benefit of the Exchange
building out its Complex Order functionality to better compete with
other exchanges complex functionality. The Exchange notes that no
market participant ceased subscribing to the cToM feed since July 1,
2021, the date on which the fees became effective when established in
the First Proposed Rule Change.
---------------------------------------------------------------------------
\63\ See supra note 15.
\64\ See Securities Exchange Act Release Nos. 85345 (March 18,
2019), 84 FR 10848 (March 22, 2019) (SR-EMERALD-2019-13) (adopting
complex stock-option order functionality); 85346 (March 18, 2019),
84 FR 10854 (March 22, 2019) (SR-EMERALD-2019-14) (adopting
additional price protection during a Complex Auction and the Complex
Liquidity Exposure Process to provide additional price discovery).
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The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to assess Internal Distributors fees that are
less than the fees assessed for External Distributors for subscriptions
to the cToM data feed because Internal Distributors have limited,
restricted usage rights to the market data, as compared to External
Distributors, which have more expansive usage rights. All Members and
non-Members that determine to receive any market data feed of the
Exchange (or its affiliates, MIAX Pearl and MIAX), must first execute,
among other things, the MIAX Exchange Group Exchange Data Agreement
(the ``Exchange Data Agreement'').\65\ Pursuant to the Exchange Data
Agreement, Internal Distributors are restricted to the ``internal use''
of any market data they receive. This means that Internal Distributors
may only distribute the Exchange's market data to the recipient's
officers and employees and its affiliates.\66\ External Distributors
may distribute the Exchange's market data to persons who are not
officers, employees or affiliates of the External Distributor,\67\ and
may charge their own fees for the redistribution of such market data.
Accordingly, the Exchange believes it is fair, reasonable and not
unfairly discriminatory to assess External Distributors a higher fee
for the Exchange's market data products as External Distributors have
greater usage rights to commercialize such market data and can adjust
their own fee structures if necessary. The Exchange also utilizes more
resources to support External Distributors versus Internal
Distributors, as External Distributors have reporting and monitoring
obligations that Internal Distributors do not have, thus requiring
additional time and effort of Exchange staff. The Exchange believes the
proposed cToM fees are equitable and not unfairly discriminatory
because the fee level results in a reasonable and equitable allocation
of fees amongst subscribers for similar services, depending on whether
the subscriber is an Internal or External Distributor. Moreover, the
decision as to whether or not to purchase market data is entirely
optional to all market participants. Potential purchasers are not
required to purchase the market data, and the Exchange is not required
to make the market data available. Purchasers may request the data at
any time or may decline to purchase such data. The allocation of fees
among users is fair and reasonable because, if market participants
determine not to subscribe to the data feed, firms can discontinue
their use of the cToM data.
---------------------------------------------------------------------------
\65\ See Exchange Data Agreement, available at https://miaxweb2.pairsite.com/sites/default/files/page-files/MIAX_Exchange_Group_Data_Agreement_09032020.pdf.
\66\ See id.
\67\ See id.
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Further, the Exchange believes that the proposal is equitable and
not unfairly discriminatory because the proposed cToM fees will apply
to all market participants of the Exchange on a uniform basis. The
Exchange also notes that the proposed monthly cToM fees for Internal
and External Distributors are the same prices that the Exchange charges
for its ToM data product.
The Exchange believes the proposed change to delete certain text
from Section (6)(a) of the Fee Schedule promotes just and equitable
principles of trade and removes impediments to and perfects the
mechanism of a free and open market and a national market system
because the proposed change is a non-substantive edit to the Fee
Schedule to remove unnecessary text. The Exchange believes that this
proposed change will provide greater clarity to Members and the public
regarding the Exchange's Fee Schedule and that it is in the public
interest for the Fee Schedule to be accurate and concise so as to
eliminate the potential for confusion.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing cToM
to market participants. As described above, the Exchange has operated
at a cumulative net annual loss since it launched operations in 2019
\68\ due to providing a low cost alternative to attract order flow and
encourage market participants to experience the high determinism and
resiliency of the Exchange's trading Systems. To do so, the Exchange
chose to waive the fees for some non-transaction related services and
Exchange products 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 any fees or 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. An
example of this is cToM, for which the Exchange only now seeks to adopt
fees at a level similar to or lower than those of other options
exchanges.
---------------------------------------------------------------------------
\68\ See supra note 47.
---------------------------------------------------------------------------
Since the Exchange initially launched operations with the cToM data
product in 2019, all Exchange Members and non-Members have had the
ability to receive the Exchange's cToM data free of charge for the past
three years.\69\ Since 2019, when the Exchange adopted Complex Order
functionality, the Exchange has spent time and resources building out
various Complex Order
[[Page 9777]]
functionality in its System to provide better trading strategies and
risk functionality for market participants in order to better compete
with other exchanges' complex functionality and similar data products
focused on complex orders.\70\ The Exchange now seeks to recoup its
costs for providing cToM to market participants and believes the
proposed fees will not result in excessive pricing or supra-competitive
profit.
---------------------------------------------------------------------------
\69\ See supra note 15.
\70\ See supra note 62.
---------------------------------------------------------------------------
Inter-Market Competition
The Exchange also does not believe the proposed fees would cause
any unnecessary or in appropriate burden on intermarket competition as
other exchanges are free to introduce their own comparable data product
and lower their prices to better compete with the Exchange's offering.
The Exchange does not believe the proposed rule change would cause any
unnecessary or inappropriate burden on inter-market competition.
Particularly, the proposed product and fees apply uniformly to any
purchaser, in that it does not differentiate between subscribers that
purchase cToM. The proposed fees are set at a modest level that would
allow any interested Member or non-Member to purchase such data based
on their business needs.
The Exchange does not believe that the proposed rule change to make
a minor, non-substantive edit to Section (6)(a) of the Fee Schedule by
deleting unnecessary text will result in any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act. This proposed rule change is not being made for competitive
reasons, but rather is designed to remedy a minor non-substantive issue
and will provide added clarity to the Fee Schedule. The Exchange
believes that it is in the public interest for the Fee Schedule to be
accurate and concise so as to eliminate the potential for confusion on
the part of market participants. In addition, the Exchange does not
believe the proposal will impose any burden on inter-market competition
as the proposal does not address any competitive issues and is intended
to protect investors by providing further transparency regarding the
Exchange's Fee Schedule.
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 Guidance
has served an important policy goal of improving disclosures in
proposed rule changes and requiring exchanges to more clearly justify
that their market data and access fee proposals are fair and
reasonable, it has also been inconsistently applied and therefore
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
Written comments were neither solicited nor received.
III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\71\ 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,\72\ 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.
---------------------------------------------------------------------------
\71\ 15 U.S.C. 78s(b)(3)(C).
\72\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on June
30, 2021, with the proposed fee changes effective beginning July 1,
2021. That proposal, EMERALD-2021-21, was published for comment in the
Federal Register on July 15, 2021.\73\ On August 27, 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 proposal.\74\ On
September 30, 2021, the Exchange withdrew the proposed rule change,\75\
and filed two other proposed rule changes proposing fee changes as
proposed herein,\76\ which were each also subsequently withdrawn. The
instant filing is substantially similar.\77\
---------------------------------------------------------------------------
\73\ See supra note 5, and accompanying text.
\74\ See Securities Exchange Act Release No. 92789, 86 FR 49364
(September 2, 2021) (``OIP'').
\75\ See Securities Exchange Act Release No. 93471 (October 29,
2021), 86 FR 60947 (November 4, 2021).
\76\ See Securities Exchange Act Release Nos. 93427 (October 26,
2021), 86 FR 60310 (November 1, 2021); 93811 (December 17, 2021), 86
FR 73051 (December 23, 2021).
\77\ See OIP, supra note 74.
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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 applicable
to the exchange.\78\ 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.'' \79\
---------------------------------------------------------------------------
\78\ 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'').
\79\ Id.
---------------------------------------------------------------------------
Among other things, exchange proposed rule changes are subject to
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which
requires the rules of an exchange to (1) provide for the equitable
allocation of reasonable fees among members, issuers, and other persons
using the exchange's facilities; \80\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; \81\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\82\
---------------------------------------------------------------------------
\80\ 15 U.S.C. 78f(b)(4).
\81\ 15 U.S.C. 78f(b)(5).
\82\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposed fees for the cToM
market data feed 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
[[Page 9778]]
Act and the rules thereunder requiring, among other things, that an
exchange's rules provide for the equitable allocation of reasonable
fees among members, issuers, and other persons using its facilities;
not permit unfair discrimination between customers, issuers, brokers or
dealers; and do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\83\
---------------------------------------------------------------------------
\83\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------
Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule change.\84\
---------------------------------------------------------------------------
\84\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change
In addition to temporarily suspending the proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\85\ and 19(b)(2)(B) of the Act \86\ to determine whether the 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, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change to inform the Commission's analysis of whether to
disapprove the proposed rule change.
---------------------------------------------------------------------------
\85\ 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.
\86\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\87\ 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),\88\ 6(b)(5),\89\ and 6(b)(8) \90\ 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.
---------------------------------------------------------------------------
\87\ Id.
\88\ 15 U.S.C. 78f(b)(4).
\89\ 15 U.S.C. 78f(b)(5).
\90\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
above, 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 fees are constrained by competitive
forces, but rather sets 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 cToM data . . . .'' \91\ Setting forth its costs in providing the
cToM data product, and as summarized in greater detail above, MIAX
Emerald projects $202,657 in aggregate annual estimated costs for 2021
as the sum of: (1) $4,160 in third-party expenses paid in total to
Equinix (0.20% of the total applicable expense) for data center
services; Zayo Group Holdings for network services (0.20% of the total
applicable expense); and various other hardware and software providers
(0.20% of the total applicable expense) supporting the production
environment, and (2) $198,497 in internal expenses, allocated to (a)
employee compensation and benefit costs ($185,002, approximately 2.0%
of the Exchange's total applicable employee compensation and benefits
expense); (b) depreciation and amortization ($3,635, approximately
0.20% of the Exchange's and total applicable depreciation and
amortization expense); and (c) occupancy costs ($9,860, approximately
2.0% of the Exchange's total applicable occupancy expense). Do
commenters believe that the Exchange has provided sufficient detail
about how it determined which costs are most clearly directly
associated with providing and maintaining the cToM data product? 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, nor explain the methodology used to determine how much of an
employee's time is devoted to that specific activity. What are
commenters' views on whether the Exchange has provided sufficient
detail on the identity and nature of services provided by third
parties? Across all of the Exchange's projected costs, what are
commenters' views on whether the Exchange has provided sufficient
detail on the elements that go into market data costs, including how
shared costs are allocated and attributed to market data expenses, to
permit an independent review and assessment of the reasonableness of
purported cost-based fees and the corresponding profit margin thereon?
Should the Exchange be required to identify what Exchange products or
services the remaining percentage of un-allocated expenses are
attributable to (e.g., what products or services are associated with
the approximately 99.80% of applicable depreciation and amortization
expenses that MIAX Emerald does not allocate to the proposed 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
[[Page 9779]]
estimated costs? Should the Exchange use cost projections or actual
costs estimated for 2021 in a filing made in 2022, or make cost
projections for 2022?
---------------------------------------------------------------------------
\91\ See supra note 37 and accompanying text.
---------------------------------------------------------------------------
2. Revenue Estimates and Profit Margin Range. The Exchange provides
a single monthly revenue figure as the basis for calculating the profit
margin of 3.5%. Do commenters believe this is reasonable? If not, why
not? The Exchange states that the proposed fees are ``designed to cover
its costs with a limited return in excess of such costs,'' and that
``revenue and associated profit margin . . . are not solely intended to
cover the costs associated with providing services subject to the
proposed fees.'' \92\ 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 as Members and non-Members add and drop subscriptions,\93\ and
that costs may increase. The Exchange also states that the number of
subscriptions has not materially changed over previous months and so
the months that the Exchange has used as a baseline to perform its
assessment are representative of reasonably anticipated costs and
expenses.\94\ 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?
---------------------------------------------------------------------------
\92\ See supra Section II.A.2.
\93\ See text accompanying supra note 47.
\94\ See supra Section II.A.2.
---------------------------------------------------------------------------
3. Reasonable Rate of Return. Do commenters agree with the Exchange
that its expected 3.5% profit margin would constitute a reasonable rate
of return over costs for providing the cToM data product? 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? Further, the Exchange states that it chose
to initially provide the cToM data product for free and to forego
revenue that they otherwise could have generated from assessing any
fees.\95\ What are commenters' views regarding what factors should be
considered in determining what constitutes a reasonable rate of return
for the cToM market data product? Do commenters believe it relevant to
an assessment of reasonableness that, according to the Exchange, the
Exchange's proposed 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?
---------------------------------------------------------------------------
\95\ See text accompanying supra notes 69-70.
---------------------------------------------------------------------------
4. Periodic Reevaluation. The Exchange addresses whether it
believes a material deviation from the anticipated profit margin would
warrant the need to make a rule filing pursuant to Section 19(b) of the
Act to increase or decrease the fees accordingly, stating that ``[a]ny
requirement that an exchange should conduct a periodic re-evaluation on
a set timeline of its cost justification and amend its fees accordingly
should be established by the Commission holistically, applied to all
exchanges and not just through pending fee proposals, such as this
filing,'' and that ``[i]n order to be fairly applied, such a mandate
should be applied to existing access fees as well.'' \96\ In light of
the impact that the number of subscriptions 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 data 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 data 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 data fee is implemented? 60
days? 90 days? Some other period?
---------------------------------------------------------------------------
\96\ See supra Section II.A.2.
---------------------------------------------------------------------------
5. Fees for Internal Distributors versus External Distributors. The
Exchange argues that it is reasonable, equitable, and not unfairly
discriminatory to assess Internal Distributors fees that are lower than
the fees assessed for External Distributors for subscriptions to the
cToM data feed ($1,250 per month for Internal Distributors versus
$1,750 per month for External Distributors), since Internal
Distributors have limited, restricted usage rights to the market data,
as compared to External Distributors, which have more expansive usage
rights, including rights to commercialize such market data.\97\ In
addition, the Exchange states that it ``utilizes more resources'' to
support External Distributors as compared to Internal Distributors, as
External Distributors have reporting and monitoring obligations that
Internal Distributors do not have, thus requiring ``additional time and
effort'' of the Exchange's staff.\98\ What are commenters' views on the
adequacy of the information the Exchange provides regarding the
differential between the Internal Distributor and External Distributor
fees? Do commenters believe that the fees for Internal Distributors and
External Distributors, as well as the fee differences between
Distributors, are supported by the Exchange's assertions that it sets
the differentiated pricing structure in a manner that is equitable and
not unfairly discriminatory? Do commenters believe that the Exchange
should demonstrate how the proposed Distributor fee levels correlate
with different costs to better substantiate how the Exchange ``utilizes
more resources'' to support External Distributors versus Internal
Distributors and permit an assessment of the Exchange's statement that
``External Distributors have reporting and monitoring obligations that
Internal Distributors do not have, thus requiring additional time and
effort of Exchange staff''? \99\
---------------------------------------------------------------------------
\97\ See text accompanying supra notes 65-67.
\98\ See id.
\99\ See id.
---------------------------------------------------------------------------
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the [SRO]
that proposed the rule change.'' \100\ 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,\101\ 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.\102\ Moreover,
``unquestioning reliance'' on an SRO's
[[Page 9780]]
representations in a proposed rule change would not be sufficient to
justify Commission approval of a proposed rule change.\103\
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\100\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\101\ See id.
\102\ See id.
\103\ See Susquehanna Int'l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017)
(rejecting the Commission's reliance on an SRO's own determinations
without sufficient evidence of the basis for such determinations).
---------------------------------------------------------------------------
The Commission believes it is appropriate to institute proceedings
to allow for additional consideration and comment on the issues raised
herein, including as to whether the proposal is consistent with the
Act, any potential comments or supplemental information provided by the
Exchange, and any additional independent analysis by the Commission.
V. Request for Written 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.\104\
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\104\ 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 concerning the proposed rule change, including whether the
proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-EMERALD-2022-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-EMERALD-2022-06. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EMERALD-2022-06 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,\105\ that File Number SR-EMERALD-2022-06 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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\105\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\106\
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\106\ 17 CFR 200.30-3(a)(12), (57), and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03657 Filed 2-18-22; 8:45 am]
BILLING CODE 8011-01-P
