Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule To Increase the Monthly Fees for MIAX Express Network Full Service Port; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change, 10860-10878 [2022-03964]
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10860
Federal Register / Vol. 87, No. 38 / Friday, February 25, 2022 / Notices
Exchange believes increased Priority
Customer Complex Order flow benefits
all market participants by providing
more trading opportunities and tighter
spreads. The Exchange also believes that
increased Priority Customer Complex
Order flow may attract Market Makers
and other liquidity providers, thus,
facilitating price improvement in the
Complex Order Auction process,
signaling additional corresponding
increase in Complex Order flow from
other market participants, and, as a
result, increasing liquidity on the
Exchange.
Inter-Market Competition
The Exchange operates in a highly
competitive market in which market
participants can readily favor competing
venues if they deem fee levels at a
particular venue to be excessive. There
are currently 16 registered options
exchanges competing for order flow.
Based on publicly-available
information, and excluding index-based
options, no single exchange has a
market share of more than
approximately 12–13% of the equity
options market.39 Therefore, no
exchange possesses significant pricing
power. More specifically, as of January
26, 2022, the Exchange had a market
share of approximately 3.96% of
executed volume of multiply-listed
equity and ETF options for the month of
January 2022.40 Therefore, no exchange
possesses significant pricing power in
the execution of multiply-listed equity
and ETF options order flow. In such an
environment, the Exchange must
continually adjust its transaction and
non-transaction fees to remain
competitive with other exchanges and to
attract order flow. The Exchange
believes that the proposed rule changes
reflect this competitive environment
because it modifies the Exchange’s fees
for Complex Order transactions in a
manner that will allow the Exchange to
remain competitive.
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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
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,41 and Rule
39 See
supra note 30.
id.
41 15 U.S.C. 78s(b)(3)(A)(ii).
19b–4(f)(2) 42 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–
EMERALD–2022–07 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–2022–07. 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
40 See
VerDate Sep<11>2014
16:44 Feb 24, 2022
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–2022–07, and
should be submitted on or before March
18, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03963 Filed 2–24–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94286; File No. SR–
PEARL–2022–04]
Self-Regulatory Organizations; MIAX
PEARL LLC; Notice of Filing of a
Proposed Rule Change To Amend the
MIAX PEARL Options Fee Schedule To
Increase the Monthly Fees for MIAX
Express Network Full Service Port;
Suspension of and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove the Proposed
Rule Change
February 18, 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
15, 2022, MIAX PEARL, LLC (‘‘MIAX
Pearl’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I and II below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons and is, pursuant
to Section 19(b)(3)(C) of the Act, hereby:
(i) Temporarily suspending the rule
change; and (ii) instituting proceedings
to determine whether to approve or
disapprove the proposed rule change.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
amend the fees for the Exchange’s MIAX
43 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
42 17
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Federal Register / Vol. 87, No. 38 / Friday, February 25, 2022 / Notices
Express Network Full Service (‘‘MEO’’) 3
Ports.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV [sic] below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule to increase the fees for its
Full Service MEO Ports, Bulk and Single
(the ‘‘Proposed Access Fees’’), which
allow Members 4 to submit electronic
orders in all products to the Exchange.
The Exchange initially filed this
proposal on July 1, 2021, with the
proposed fee changes being immediately
effective (‘‘First Proposed Rule
Change’’).5 The First Proposed Rule
Change was published for comment in
the Federal Register on July 15, 2021.6
The Commission received one comment
letter on the First Proposed Rule
Change 7 and subsequently suspended
the Frist [sic] Proposed Rule Change on
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3 ‘‘MEO
Interface’’ or ‘‘MEO’’ means a binary
order interface for certain order types as set forth
in Rule 516 into the MIAX Pearl System. See the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
4 ‘‘Member’’ means an individual or organization
that is registered with the Exchange pursuant to
Chapter II of Exchange Rules for purposes of trading
on the Exchange as an ‘‘Electronic Exchange
Member’’ or ‘‘Market Maker.’’ Members are deemed
‘‘members’’ under the Exchange Act. See the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
5 See Securities Exchange Act Release No. 92365
(July 9, 2021), 86 FR 37347 (July 15, 2021) (SR–
PEARL–2021–33).
6 See id.
7 See Letter from Richard J. McDonald,
Susquehanna International Group, LLC (‘‘SIG’’), to
Vanessa Countryman, Secretary, Commission, dated
September 7, 2021 (‘‘SIG Letter’’).
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16:44 Feb 24, 2022
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August 27, 2021.8 The Exchange
withdrew First Proposed Rule Change
on October 12, 2021 and re-submitted
the proposal on November 1, 2021, 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 certain
points raised in the single comment
letter that was submitted on the First
Proposed Rule Change. The Second
Proposed Rule Change was published
for comment in the Federal Register on
November 17, 2021.10 The Commission
received no comment letters on the
Second Proposed Rule Change.
Nonetheless, the Exchange withdrew
the Second Proposed Rule Change on
December 20, 2021 and submitted a
revised proposal for immediate
effectiveness (‘‘Third Proposed Rule
Change’’).11 The Third Proposed Rule
Change was published for comment in
the Federal Register on January 10,
2022.12 The Third Proposed Rule
Change meaningfully attempted to
provide additional justification and
explanation for the proposed fee
changes, directly respond to the points
raised in the single comment letter
submitted on the First Proposed Rule
Change, and respond to feedback
provided by Commission Staff during a
telephone conversation on November
18, 2021 relating to the Second
Proposed Rule Change. Although the
Commission again did not receive any
comment letters on the Third Proposed
Rule Change, the Exchange withdrew
the Third Proposed Rule Change on
February 15, 2022 and now submits this
revised proposal for immediate
effectiveness (‘‘Fourth Proposed Rule
Change’’). This Fourth Proposed Rule
Change provides additional justification
and explanation for the proposed fee
changes.
Full Service MEO Port Fee Changes
The Exchange currently offers
different types of MEO Ports depending
on the services required by the Member,
including a Full Service MEO PortBulk,13 a Full Service MEO Port8 See Securities Exchange Act Release No. 92798
(August 27, 2021), 86 FR 49360 (September 2,
2021).
9 See Securities Exchange Act Release No. 93556
(November 10, 2021), 86 FR 64235 (November 17,
2021) (SR–PEARL–2021–53).
10 See id.
11 Securities Exchange Act Release No. 93894
(January 4, 2022), 87 FR 1203 (January 10, 2022)
(SR–PEARL–2021–58).
12 Id.
13 ‘‘Full Service MEO Port—Bulk’’ means an MEO
port that supports all MEO input message types and
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10861
Single,14 and a Limited Service MEO
Port.15 For one monthly price, a Member
may be allocated two (2) Full-Service
MEO Ports of either type per matching
engine 16 and may request Limited
Service MEO Ports for which MIAX
Pearl will assess Members Limited
Service MEO Port fees per matching
engine based on a sliding scale for the
number of Limited Service MEO Ports
utilized each month. The two (2) FullService MEO Ports that may be allocated
per matching engine to a Member may
consist of: (a) Two (2) Full Service MEO
Ports—Bulk; (b) two (2) Full Service
MEO Ports—Single; or (c) one (1) Full
Service MEO Port—Bulk and one (1)
Full Service MEO Port—Single.
Unlike other options exchanges that
provide similar port functionality and
charge fees on a per port basis,17 the
binary bulk order entry. See the Definitions Section
of the Fee Schedule.
14 ‘‘Full Service MEO Port—Single’’ means an
MEO port that supports all MEO input message
types and binary order entry on a single order-byorder basis, but not bulk orders. See the Definitions
Section of the Fee Schedule.
15 ‘‘Limited Service MEO Port’’ means an MEO
port that supports all MEO input message types, but
does not support bulk order entry and only
supports limited order types, as specified by the
Exchange via Regulatory Circular. See the
Definitions Section of the Fee Schedule.
16 A ‘‘Matching Engine’’ is a part of the MIAX
Pearl electronic system that processes options
orders and trades on a symbol-by-symbol basis.
Some Matching Engines will process option classes
with multiple root symbols, and other Matching
Engines may be dedicated to one single option root
symbol. A particular root symbol may only be
assigned to a single designated Matching Engine. A
particular root symbol may not be assigned to
multiple Matching Engines. See the Definitions
Section of the Fee Schedule.
17 See NYSE American Options Fee Schedule,
Section V.A., Port Fees (each port charged on a per
matching engine basis, with NYSE American having
17 match engines). See NYSE Technology FAQ and
Best Practices: Options, Section 5.1 (How many
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange); NYSE Arca Options Fee
Schedule, Port Fees (each port charged on a per
matching engine basis, NYSE Arca having 19 match
engines); and NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange). See NASDAQ Fee Schedule,
Nasdaq Options 7 Pricing Schedule, Section 3,
Nasdaq Options Market—Ports and Other Services
(each port charged on a per matching engine basis,
with Nasdaq having multiple matching engines).
See Nasdaq Specialized Quote Interface (SQF)
Specification, Version 6.5b (updated February 13,
2020), Section 2, Architecture, available at https://
www.nasdaq.com/docs/2020/02/18/SpecializedQuote-Interface-SQI-6.5b.pdf (the ‘‘NASDAQ SQF
Interface Specification’’). The NASDAQ SQF
Interface Specification also provides that
NASDAQ’s affiliates, Nasdaq PHLX LLC (‘‘Nasdaq
Phlx’’) and Nasdaq BX, Inc. (‘‘Nasdaq BX’’), have
trading infrastructures that may consist of multiple
matching engines with each matching engine
trading only a range of option underlyings. Further,
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Federal Register / Vol. 87, No. 38 / Friday, February 25, 2022 / Notices
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Exchange offers Full Service MEO Ports
as a package and provides Members
with the option to receive up to two Full
Service MEO Ports (described above)
per matching engine to which that
Member connects. The Exchange
currently has twelve (12) matching
engines, which means Members may
receive up to twenty-four (24) Full
Service MEO Ports for a single monthly
fee, that can vary based on certain
volume percentages, as described below.
For illustrative purposes and as
described in more detail below, the
Exchange currently assesses a fee of
$5,000 per month for Members that
reach the highest Full Service MEO
Port—Bulk Tier, regardless of the
number of Full Service MEO Ports
allocated to the Member. For example,
assuming a Member connects to all
twelve (12) matching engines during a
month, with two Full Service MEO
Ports per matching engine, this results
in a cost of $208.33 per Full Service
MEO Port ($5,000 divided by 24) for the
month. This fee had been unchanged
since the Exchange adopted Full Service
MEO Port fees in 2018.18 Beginning
with the First Proposed Rule Change,
the Exchange proposes to increase Full
Service MEO Port fees as further
described below, with the highest
monthly fee of $10,000 for the Full
Service MEO Port—Bulk. Members will
continue to receive two (2) Full Service
MEO Ports to each matching engine to
which they connect for the single flat
monthly fee. Assuming a Member
connects to all twelve (12) matching
engines during the month, with two Full
Service MEO Ports per matching engine,
this would result in a cost of $416.67
per Full Service MEO Port ($10,000
divided by 24).
The Exchange assesses Members Full
Service MEO Port Fees, either for a Full
Service MEO Port—Bulk and/or for a
Full Service MEO Port—Single, based
upon the monthly total volume
executed by a Member and its
Affiliates 19 on the Exchange across all
the NASDAQ SQF Interface Specification provides
that the SQF infrastructure is such that the firms
connect to one or more servers residing directly on
the matching engine infrastructure. Since there may
be multiple matching engines, firms will need to
connect to each engine’s infrastructure in order to
establish the ability to quote the symbols handled
by that engine.
18 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
19 ‘‘Affiliate’’ means (i) an affiliate of a Member
of at least 75% common ownership between the
firms as reflected on each firm’s Form BD, Schedule
A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed
EEM of an Appointed Market Maker). An
‘‘Appointed Market Maker’’ is a MIAX Pearl Market
Maker (who does not otherwise have a corporate
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16:44 Feb 24, 2022
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origin types, not including Excluded
Contracts,20 as compared to the Total
Consolidated Volume (‘‘TCV’’),21 in all
MIAX Pearl-listed options. The
Exchange adopted a tier-based fee
structure based upon the volume-based
tiers detailed in the definition of ‘‘NonTransaction Fees Volume-Based Tiers’’
described in the Definitions section of
the Fee Schedule. The Exchange
assesses these and other monthly Port
fees on Members in each month the
market participant is credentialed to use
a Port in the production environment.
Current Full Service MEO Port—Bulk
Fees. Prior to the First Proposed Rule
Change, the Exchange assessed
Members monthly Full Service MEO
Port—Bulk fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $3,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$4,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the Nonaffiliation based upon common ownership with an
EEM) that has been appointed by an EEM and an
‘‘Appointed EEM’’ is an EEM (who does not
otherwise have a corporate affiliation based upon
common ownership with a MIAX Pearl Market
Maker) that has been appointed by a MIAX Pearl
Market Maker, pursuant to the following process. A
MIAX Pearl Market Maker appoints an EEM and an
EEM appoints a MIAX Pearl Market Maker, for the
purposes of the Fee Schedule, by each completing
and sending an executed Volume Aggregation
Request Form by email to membership@
miaxoptions.com no later than 2 business days
prior to the first business day of the month in which
the designation is to become effective. Transmittal
of a validly completed and executed form to the
Exchange along with the Exchange’s
acknowledgement of the effective designation to
each of the Market Maker and EEM will be viewed
as acceptance of the appointment. The Exchange
will only recognize one designation per Member. A
Member may make a designation not more than
once every 12 months (from the date of its most
recent designation), which designation shall remain
in effect unless or until the Exchange receives
written notice submitted 2 business days prior to
the first business day of the month from either
Member indicating that the appointment has been
terminated. Designations will become operative on
the first business day of the effective month and
may not be terminated prior to the end of the
month. Execution data and reports will be provided
to both parties. See the Definitions Section of the
Fee Schedule.
20 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
21 ‘‘TCV’’ means total consolidated volume
calculated as the total national volume in those
classes listed on MIAX Pearl for the month for
which the fees apply, excluding consolidated
volume executed during the period of time in
which the Exchange experiences an Exchange
System Disruption (solely in the option classes of
the affected Matching Engine). See the Definitions
Section of the Fee Schedule.
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Transaction Fees Volume-Based Tiers,
or volume above 0.60%, $5,000.
Proposed Full Service MEO Port—
Bulk Fees. Since the First Proposed Rule
Change, the Exchange proposes to assess
Members monthly Full Service MEO
Port—Bulk fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $5,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$7,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $10,000.
Current Full Service MEO Port—
Single Fees. Prior to the First Proposed
Rule Change, the Exchange assessed
Members monthly Full Service MEO
Port—Single fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$3,375; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $3,750.
Proposed Full Service MEO Port—
Single Fees. Since the First Proposed
Rule Change, the Exchange proposes to
assess Members monthly Full Service
MEO Port—Single fees as follows:
(i) If its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,500;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$3,500; and
(iii) if its volume falls with the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $4,500.
The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, MEO ports
allow for a higher throughput and can
handle much higher quote/order rates
than FIX ports. Members that are Market
Makers 22 or high frequency trading
22 The term ‘‘Market Maker’’ means a Member
registered with the Exchange for the purpose of
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Federal Register / Vol. 87, No. 38 / Friday, February 25, 2022 / Notices
firms utilize these ports (typically
coupled with 10Gb ULL connectivity)
because they transact in significantly
higher amounts of messages being sent
to and from the Exchange, versus FIX
port users, who are traditionally
customers sending only orders to the
Exchange (typically coupled with 1Gb
connectivity). The different types of
ports cater to the different types of
Exchange Memberships and different
capabilities of the various Exchange
Members. Certain Members need ports
and connections that can handle using
far more of the network’s capacity for
message throughput, risk protections,
and the amount of information that the
System has to assess. Those Members
may account for the vast majority of
network capacity utilization and volume
executed on the Exchange, as discussed
throughout.
The Exchange proposes to increase its
monthly Full Service MEO Port fees
since it has not done so since the fees
were adopted in 2018 (prior to the First
Proposed Rule Change),23 which are
designed to recover a portion of the
costs associated with directly accessing
the Exchange. The Exchange notes that
its affiliates, Miami International
Securities Exchange, LLC (‘‘MIAX’’) and
MIAX Emerald, LLC (‘‘MIAX Emerald’’),
charge fees for their high throughput,
low latency MIAX Express Interface
(‘‘MEI’’) Ports in a similar fashion as the
Exchange charges for its MEO Ports—
generally, the more active user the
Member (i.e., the greater number/greater
national ADV of classes assigned to
quote on MIAX and MIAX Emerald), the
higher the MEI Port fee.24 This concept
is not new or novel. The Exchange also
notes that the proposed increased fees
for the Exchange’s Full Service MEO
Ports are in line with, or cheaper than,
the similar port fees for similar
membership fees charged by other
options exchanges.25
The Exchange has historically
undercharged for Full Service MEO
Ports as compared to other options
exchanges 26 because the Exchange
provides Full Service MEO Ports as a
package for a single monthly fee. As
described above, this package includes
two Full Service MEO Ports for each of
the Exchange’s twelve (12) matching
engines. The Exchange understands
other options exchanges charge fees on
a per port basis. The Exchange believes
other exchanges’ port fees are a useful
example of alternative approaches to
providing and charging for port access
and provides the below table for
comparison purposes only to show how
its proposed fees compare to fees
currently charged by other options
exchanges for similar port access.
Exchange
Type of port
Monthly fee
MIAX Pearl (as proposed) ......................................
MEO Full Service—Bulk ........................
Tier 1: $5,000 (or $208.33 per Matching Engine).
Tier 2: $7,500 (or $312.50 per Matching Engine).
Tier 3: $10,000 (or $416.66 per Matching Engine).
Tier 1: $2,500 (or $104.16 per Matching Engine).
Tier 2: $3,500 (or $145.83 per Matching Engine).
Tier 3: $4,500 (or $187.50 per Matching Engine).
Ports 1–40: $450 each.
Ports 41 or more: $150 each.
Ports 1–40: $450 each.
Ports 41 or more: $150 each.
Ports 1–5: $1,500 each.
Ports 6–20: $1,000 each.
Ports 21 or more: $500.
MEO Full Service—Single .....................
NYSE American, LLC (‘‘NYSE American’’) 27 ........
Order/Quote Entry .................................
NYSE Arca, Inc. (‘‘NYSE Arca’’) 28 .........................
Order/Quote Entry .................................
NASDAQ 29 .............................................................
Specialized Quote Interface ..................
The Exchange believes that its
proposal to amend its Fee Schedule is
consistent with Section 6(b) of the Act 30
in general, and furthers the objectives of
Section 6(b)(4) of the Act 31 in
particular, in that it is an equitable
allocation of reasonable dues, fees and
other charges among its members and
issuers and other persons using its
facilities. The Exchange also believes
the proposal furthers the objectives of
Section 6(b)(5) of the Act in that it is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest and is not designed to
permit unfair discrimination between
customers, issuers, brokers and dealers.
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’’).32 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.’’ 33 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
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
23 See supra note 18.
24 See MIAX Fee Schedule, Section 5)d)ii); MIAX
Emerald Fee Schedule, Section 5)d)ii).
25 See NYSE American Options Fee Schedule,
Section V.A., Port Fees; NYSE Arca Options Fee
Schedule, Port Fees; Nasdaq Stock Market LLC
(‘‘NASDAQ’’), Options 7, Pricing Schedule, Section
3.
26 See id.
27 See id.
28 See id.
29 See id.
30 15 U.S.C. 78f(b).
31 15 U.S.C. 78f(b)(4) and (5).
32 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).
33 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’’).
Implementation
The proposed fees are immediately
effective.
2. Statutory Basis
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reasonable because they will not result
in excessive pricing or supracompetitive profit; and (iv) utilize a
cost-based justification framework that
is substantially similar to a framework
previously used by the Exchange, and
its affiliates MIAX and MIAX Emerald,
to adopt or amend non-transaction fees
(including port and connectivity fees)
and market data fees.34
The Proposed Access 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 are
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various access fees for market
participants to access an exchange’s
marketplace. The Exchange deems the
Full Service MEO Port fees to be access
fees. It records these fees as part of its
‘‘Access Fees’’ revenue in its financial
statements.
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.’’ 35 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.’’ 36 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
34 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).
35 See Guidance, supra note 33.
36 Id.
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argument.’’ 37 The Exchange does not
assert that the Proposed Access Fees are
constrained by competitive forces.
Rather, the Exchange asserts that the
Proposed Access Fees are reasonable
because they will permit recovery of the
Exchange’s costs in providing access via
Full Service MEO Ports and will not
result in the Exchange generating a
supra-competitive profit.
The Guidance defines ‘‘supracompetitive profit’’ as ‘‘profits that
exceed the profits that can be obtained
in a competitive market.’’ 38 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.’’ 39 The Exchange provides
this analysis below.
Based on this analysis, the Exchange
believes the Proposed Access Fees are
reasonable and do not result in a
‘‘supra-competitive’’ 40 profit. The
Exchange believes that it is important to
demonstrate that these fees are based on
its costs and reasonable business needs.
The Exchange believes the Proposed
Access Fees will allow the Exchange to
offset expense the Exchange has and
will incur, and that the Exchange is
providing sufficient transparency (as
described below) into how the Exchange
determined to charge such fees.
Accordingly, the Exchange is providing
an analysis of its revenues, costs, and
profitability associated with the
Proposed Access Fees. This analysis
includes information regarding its
methodology for determining the costs
and revenues associated with the
Proposed Access Fees. As a result of this
analysis, the Exchange believes the
Proposed Access Fees are fair and
reasonable as a form of cost recovery
plus present the possibility of a
reasonable return for the Exchange’s
aggregate costs of offering Full Service
MEO Port access to the Exchange.
The Proposed Access Fees are based
on a cost-plus model. In determining the
appropriate fees to charge, the Exchange
considered its costs to provide Full
Service MEO Ports, 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 Full Service MEO Ports)
37 Id.
38 Id.
39 Id.
40 Id.
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to estimate such costs,41 as well as the
relative costs of providing and
maintaining Full Service MEO Ports,
and set fees that are designed to cover
its costs with a limited return in excess
of such costs. However, as discussed
more fully below, such fees may also
result in the Exchange recouping less
than all of its costs of providing and
maintaining Full Service MEO Ports
because of the uncertainty of forecasting
subscriber decision making with respect
to firms’ port needs and the likely
potential for increased costs to procure
the third-party services described
below.
To determine the Exchange’s costs to
provide the access services associated
with the Proposed Access Fees, the
Exchange conducted an extensive cost
review in which the Exchange analyzed
nearly every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the Proposed Access Fees,
and, if such expense did so relate, what
portion (or percentage) of such expense
actually supports the access services.
The sum of all such portions of
expenses represents the total cost of the
Exchange to provide the access services
associated with the Proposed Access
Fees.
The Exchange also provides detailed
information regarding the Exchange’s
cost allocation methodology—namely,
information that explains the
Exchange’s rationale for determining
that it was reasonable to allocate certain
expenses described in this filing
towards the cost to the Exchange to
provide the access services associated
with the Proposed Access Fees. The
Exchange conducted a thorough internal
analysis to determine the portion (or
percentage) of each expense to allocate
to the support of access services
associated with the Proposed Access
Fees. This analysis included discussions
with each Exchange department head to
determine the expenses that support
access services associated with the
Proposed Access Fees. This included
numerous meetings between the
Exchange’s Chief Information Officer,
Chief Financial Officer, Head of
Strategic Planning and Operations,
Chief Technology Officer, various
members of the Legal Department, and
other group leaders. The Exchange
reviewed each individual expense to
41 For example, the Exchange only included the
costs associated with providing and supporting Full
Service MEO Ports and excluded from its cost
calculations any cost not directly associated with
providing and maintaining such ports. Thus, the
Exchange notes that this methodology
underestimates the total costs of providing and
maintaining Full Service MEO Port access.
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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 access
services for the Proposed Access Fees.
The sum of all such portions of
expenses represents the total cost to the
Exchange to provide access services
associated with the Proposed Access
Fees. For the avoidance of doubt, no
expense amount was allocated twice.
The internal cost analysis conducted
by the Exchange is a proprietary process
that is designed to make a fair and
reasonable assessment of costs and
resources allocated to support the
provision of 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
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today.42 For example, a proposed fee
filing that closely resembles the
Exchange’s current filing was submitted
in 2020 by the Cboe Exchange, Inc.
(‘‘Cboe’’) and increased fees for Cboe’s
10Gb connections, an access fee.43 This
filing was submitted on September 2,
2020, nearly 15 months after the Staff’s
Guidance was issued. In that filing, the
Cboe stated that the ‘‘proposed changes
were not designed with the objective to
generate an overall increase in access
fee revenue.’’ 44 This filing provided no
cost based data to support its assertion
that the proposal was intended to be
revenue neutral. Among other things,
Cboe did not provide a description of
the costs underlying its provision of
10Gb connections to show that this
particular fee did not generate a supracompetitive profit or describe how any
potential profit may be offset by
increased costs associated with another
fee included in its proposal. This filing,
nonetheless, was not suspended by the
Commission and remains in effect
today.
The Exchange 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’’). IEX previously
provided its TOP and DEEP market data
feeds for free and proposed to adopt
modest, below market fees. 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
42 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).
43 See Securities Exchange Act Release No. 89826
(September 10, 2020), 85 FR 57900 (September 16,
2020) (SR–CBOE–2020–086) (increasing
connectivity fees without including a cost based
justification).
44 See id. at 57909.
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determine whether to approve or
disapprove the IEX Fee Proposal.45
The Commission received three
comment letters on the IEX Order.46 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.’ ’’ 47
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.48 HMA Letter 2
provides three examples to support this
assertion.49 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
45 See Securities Exchange Act Release No. 93883
(December 30, 2021), 87 FR 523 (January 5, 2021)
(SR–IEX–2021–14) (the ‘‘IEX Order’’).
46 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’’).
47 See Virtu Letter at page 3, id.
48 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’’).
49 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.
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to withstand judicial scrutiny.’’ 50 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
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 revenues associated with the
Proposed Access Fees in the instant
filing, the Exchange analyzed the
number of Members currently utilizing
Full Service MEO Ports, and, utilizing a
recent monthly billing cycle
representative of 2021 monthly revenue,
extrapolated annualized revenue on a
going-forward basis. The Exchange does
not believe it is appropriate to factor
into its analysis projected or estimated
future revenue growth or decline for
purposes of these calculations, given the
uncertainty of such projections due to
the continually changing access needs
of market participants and potential
increase in internal and third party
expenses. The Exchange is presenting
its revenue and expense associated with
the Proposed Access Fees in this filing
in a manner that is consistent with how
the Exchange presents its revenue and
expense in its Audited Unconsolidated
Financial Statements. The Exchange’s
most recent Audited Unconsolidated
Financial Statement is for 2020.
However, since the revenue and
expense associated with the Proposed
Access Fees were not in place in 2020
or for the majority of 2021, the Exchange
believes its 2020 Audited
Unconsolidated Financial Statement is
not representative of its current total
annualized revenue and costs associated
with the Proposed Access Fees.
Accordingly, the Exchange believes it is
more appropriate to analyze the
Proposed Access Fees utilizing its 2021
revenue and costs, as described herein,
which utilize the same presentation
50 See
Nasdaq Letter at page 13, id.
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methodology as set forth in the
Exchange’s previously-issued Audited
Unconsolidated Financial Statements.
Based on this analysis, the Exchange
believes that the Proposed Access Fees
are fair and reasonable because they will
not result in excessive pricing or supracompetitive profit when comparing the
Exchange’s total annual expense
associated with providing the services
associated with the Proposed Access
Fees versus the total projected annual
revenue the Exchange will collect for
providing those services. The Exchange
notes that this is the same justification
process utilized by the Exchange’s
affiliate, MIAX Emerald, in a filing
recently noticed and not suspended by
the Commission when MIAX Emerald
adopted MEI Port fees.51
As outlined in more detail below, the
Exchange projects that the final
annualized expense for 2021 to provide
Full Service MEO Ports to be
approximately $897,084 per annum or
an average of $74,757 per month. The
Exchange implemented the Proposed
Access Fees on July 1, 2021 in the First
Proposed Rule Change. For June 2021,
prior to the Proposed Access Fees,
Members and non-Members purchased a
total of 20 Full Service MEO Ports, for
which the Exchange charged a total of
approximately $71,625. This resulted in
a loss of $3,132 for that month (a margin
of ¥4.37%). For the month of
November 2021, which includes the
Proposed Access Fees, Members and
non-Members purchased a total of 19
Full Service MEO Ports,52 for which the
Exchange charged a total of
approximately $122,000 for that month.
This resulted in a profit of $47,243 for
that month, representing a profit margin
of approximately 38%. The Exchange
believes that the Proposed Access Fees
are reasonable because they are
designed to approximately generate a
modest profit margin of 38% permonth.53 The Exchange cautions that
51 See Securities Exchange Act Release No. 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Port Fees,
Increase Certain Network Connectivity Fees, and
Increase the Number of Additional Limited Service
MIAX Emerald Express Interface Ports Available to
Market Makers) (adopting tiered MEI Port fee
structure ranging from $5,000 to $20,500 per
month).
52 The Exchange notes that one Member dropped
one Full Service MEO Port–Bulk between June 2021
and November 2021, as a result of the Proposed
Access Fees.
53 The Exchange notes that this profit margin
differs from the First and Second Proposed Rule
Changes because the Exchange now has the benefit
of using a more recent billing cycle under the
Proposed Access Fees (November 2021) and
comparing it to a baseline month (June 2021) from
before the Proposed Access Fees were in effect.
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this profit margin is likely to fluctuate
from month to month based on the
uncertainty of predicting how many
Full Service MEO Ports may be
purchased from month to month as
Members and non-Members are able to
add and drop ports at any time based on
their own business decisions, which
they frequently do. This profit margin
may also decrease due to the significant
inflationary pressure on capital items
that the Exchange needs to purchase to
maintain the Exchange’s technology and
systems.54 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.
As mentioned above, the Exchange
projects that the final annualized
expense for 2021 to provide the services
associated with the Proposed Access
Fees to be approximately $897,084 per
annum or an average of $74,757 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.55 The Exchange notes that there
are material costs associated with
providing the infrastructure and
headcount to fully-support access to the
Exchange. The Exchange incurs
technology expense related to
establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
mandated processes, associated with its
54 See ‘‘Supply chain chaos is already hitting
global growth. And it’s about to get worse’’, by
Holly Ellyatt, CNBC, available at https://
www.cnbc.com/2021/10/18/supply-chain-chaos-ishitting-global-growth-and-could-get-worse.html
(October 18, 2021); and ‘‘There will be things that
people can’t get, at Christmas, White House warns’’
by Jarrett Renshaw and Trevor Hunnicutt, Reuters,
available at https://www.reuters.com/world/us/
americans-may-not-get-some-christmas-treatswhite-house-officials-warn-2021-10-12/ (October 12,
2021).
55 For example, on October 20, 2021, ICE Data
Services announced a 3.5% price increase effective
January 1, 2022 for most services. The price
increase by ICE Data Services includes their SFTI
network, which is relied on by a majority of market
participants, including the Exchange. See email
from ICE Data Services to the Exchange, dated
October 20, 2021. The Exchange further notes that
on October 22, 2019, the Exchange was notified by
ICE Data Services that it was raising its fees charged
to the Exchange by approximately 11% for the SFTI
network.
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network technology. While some of the
expense is fixed, much of the expense
is not fixed, and thus increases the cost
to the Exchange to provide access
services associated with the Proposed
Access Fees. For example, new
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number of Members
increases, the Exchange and its affiliates
may need to increase their data center
footprint and consume more power,
resulting in increased costs charged by
their third-party data center provider.
Accordingly, the cost to the Exchange
and its affiliates to provide access to its
Members is not fixed and indeed is
likely to increase rather than decrease
over time. The Exchange believes the
Proposed Access Fees are a reasonable
attempt to offset a portion of the costs
to the Exchange associated with
providing access to its network
infrastructure.
The Exchange only has four primary
sources of revenue and cost recovery
mechanisms to fund all of its
operations: Transaction fees, access fees
(which includes the Proposed Access
Fees), regulatory fees, and market data
fees. Accordingly, the Exchange must
cover all of its expenses from these four
primary sources of revenue and cost
recovery mechanisms. Until recently,
the Exchange has operated at a
cumulative net annual loss since it
launched operations in 2017.56 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.57 To do so, the Exchange chose
to waive the fees for some nontransaction related services or provide
them at a very marginal cost, which was
not profitable to the Exchange. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing higher fees.
The Exchange believes that the
Proposed Access Fees are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit, when comparing the
56 The Exchange has incurred a cumulative loss
of $86 million since its inception in 2017 to 2020,
the last year for which the Exchange’s Form 1 data
is available. See Exchange’s Form 1/A, Application
for Registration or Exemption from Registration as
a National Securities Exchange, filed July 28, 2021,
available at https://www.sec.gov/Archives/edgar/
vprr/2100/21000461.pdf.
57 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
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total annual expense that the Exchange
projects to incur in connection with
providing these access services versus
the total annual revenue that the
Exchange projects to collect in
connection with services associated
with the Proposed Access Fees. For
2021,58 the total annual expense for
providing the access services associated
with the Proposed Access Fees for the
Exchange is projected to be
approximately $897,084, or
approximately $74,757 per month. The
$897,084 in projected total annual
expense is comprised of the following,
all of which are directly related to the
access services associated with the
Proposed Access Fees: (1) Third-party
expense, relating to fees paid by the
Exchange to third-parties for certain
products and services; and (2) internal
expense, relating to the internal costs of
the Exchange to provide the services
associated with the Proposed Access
Fees.59 As noted above, the Exchange
believes it is more appropriate to
analyze the Proposed Access Fees
utilizing its 2021 revenue and costs,
which utilize the same presentation
methodology as set forth in the
Exchange’s previously-issued Audited
Unconsolidated Financial Statements.60
The $897,084 in projected total annual
expense is directly related to the access
services associated with the Proposed
Access Fees, and not any other product
or service offered by the Exchange. It
does not include general costs of
operating matching systems and other
trading technology, and no expense
amount was allocated twice.
As discussed, the Exchange
conducted an extensive cost review in
which the Exchange analyzed nearly
every expense item in the Exchange’s
general expense ledger (this includes
over 150 separate and distinct expense
items) to determine whether each such
expense relates to the access services
58 The
Exchange has not yet finalized its 2021
year end results.
59 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.
60 For example, the Exchange previously noted
that all third-party expense described in its prior fee
filing was contained in the information technology
and communication costs line item under the
section titled ‘‘Operating Expenses Incurred
Directly or Allocated From Parent,’’ in the
Exchange’s 2019 Form 1 Amendment containing its
financial statements for 2018. See Securities
Exchange Act Release No. 87876 (December 31,
2019), 85 FR 757 (January 7, 2020) (SR–PEARL–
2019–36). Accordingly, the third-party expense
described in this filing is attributed to the same line
item for the Exchange’s 2021 Form 1 Amendment,
which will be filed in 2022.
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10867
associated with the Proposed Access
Fees, and, if such expense did so relate,
what portion (or percentage) of such
expense actually supports those
services, and thus bears a relationship
that is, ‘‘in nature and closeness,’’
directly related to those services. In
performing this calculation, the
Exchange considered other services and
to which the expense may be applied
and how much of the expense is directly
or indirectly utilized in providing those
other services. The sum of all such
portions of expenses represents the total
cost of the Exchange to provide access
services associated with the Proposed
Access Fees.
External Expense Allocations
For 2021, total third-party expense,
relating to fees paid by the Exchange to
third-parties for certain products and
services for the Exchange to be able to
provide the access services associated
with the Proposed Access Fees, is
projected to be $40,166. This includes,
but is not limited to, a portion of the
fees paid to: (1) Equinix, for data center
services, for the primary, secondary, and
disaster recovery locations of the
Exchange’s trading system
infrastructure; (2) Zayo Group Holdings,
Inc. (‘‘Zayo’’) for network services (fiber
and bandwidth products and services)
linking the Exchange’s office locations
in Princeton, New Jersey and Miami,
Florida, to all data center locations; (3)
Secure Financial Transaction
Infrastructure (‘‘SFTI’’),61 which
supports connectivity and feeds for the
entire U.S. options industry; (4) various
other services providers (including
Thompson Reuters, NYSE, NASDAQ,
and Internap), which provide content,
connectivity services, and infrastructure
services for critical components of
options connectivity and network
services; and (5) various other hardware
61 In fact, on October 20, 2021, ICE Data Services
announced a 3.5% price increase effective January
1, 2022 for most services. The price increase by ICE
Data Services includes their SFTI network, which
is relied on by a majority of market participants,
including the Exchange. See email from ICE Data
Services to the Exchange, dated October 20, 2021.
This fee increase by ICE data services, while not
subject to Commission review, has material impact
on cost to exchanges and other market participants
that provide downstream access to other market
participants. The Exchange notes that on October
22, 2019, the Exchange was notified by ICE Data
Services that it was raising its fees charged to the
Exchange by approximately 11% for the SFTI
network, without having to show that such fee
change complies with the Act by being reasonable,
equitably allocated, and not unfairly
discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure
services provided by SFTI, that its fees are not
required to be rule-filed with the Commission
pursuant to Section 19(b)(1) of the Act and Rule
19b–4 thereunder. See 15 U.S.C. 78s(b)(1) and 17
CFR 240.19b–4, respectively.
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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 the providing
access services in connection with the
Proposed Access Fees. Only a portion of
all fees paid to such third-parties is
included in the third-party expense
herein, and no expense amount is
allocated twice. Accordingly, the
Exchange does not allocate its entire
information technology and
communication costs to the access
services associated with the Proposed
Access Fees. This may result in the
Exchange under allocating an expense
to the provision of access services in
connection with the Proposed Access
Fees and such expenses may actually be
higher or increase above what the
Exchange utilizes within this proposal.
Further, the Exchange notes that, with
respect to the MIAX Pearl expenses
included herein, those expenses only
cover the MIAX Pearl options market;
expenses associated with the MIAX
Pearl equities market are accounted for
separately and are not included within
the scope of this filing. As noted above,
the percentage allocations used in this
proposed rule change may differ from
past filings from the Exchange or its
affiliates due to, among other things,
changes in expenses charged by thirdparties, 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.
Therefore, the percentage allocations
used in this proposed rule change may
differ from past filings from the
Exchange or its affiliates due to, among
other things, changes in expenses
charged by third-parties, adjustments to
internal resource allocations, and
different system architecture of the
Exchange as compared to its affiliates.
The Exchange believes it is reasonable
to allocate such third-party expense
described above towards the total cost to
the Exchange to provide the access
services associated with the Proposed
Access Fees. In particular, the Exchange
believes it is reasonable to allocate the
identified portion of the Equinix
expense because Equinix operates the
data centers (primary, secondary, and
disaster recovery) that host the
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Exchange’s network infrastructure. This
includes, among other things, the
necessary storage space, which
continues to expand and increase in
cost, power to operate the network
infrastructure, and cooling apparatuses
to ensure the Exchange’s network
infrastructure maintains stability.
Without these services from Equinix,
the Exchange would not be able to
operate and support the network and
provide the access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
Equinix expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only
that portion which the Exchange
identified as being specifically mapped
to providing the access services
associated with the Proposed Access
Fees. According to the Exchange’s
calculations, it allocated approximately
1.80% 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
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.62
The Exchange believes it is reasonable
to allocate the identified portion of the
Zayo expense because Zayo provides
the internet, fiber and bandwidth
connections with respect to the
network, linking the Exchange with its
affiliates, MIAX and MIAX Emerald, as
well as the data center and disaster
recovery locations. As such, all of the
trade data, including the billions of
messages each day per exchange, flow
through Zayo’s infrastructure over the
Exchange’s network. Without these
services from Zayo, the Exchange would
not be able to operate and support the
network and provide the access services
associated with the Proposed Access
Fees. The Exchange did not allocate all
of the Zayo expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only the
portion which the Exchange identified
as being specifically mapped to
providing the Proposed Access Fees.
62 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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According to the Exchange’s
calculations, it allocated approximately
0.90% 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
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.63
The Exchange believes it is reasonable
to allocate the identified portions of the
SFTI expense and various other service
providers’ (including Thompson
Reuters, NYSE, NASDAQ, and Internap)
expense because those entities provide
connectivity and feeds for the entire
U.S. options industry, as well as the
content, connectivity services, and
infrastructure services for critical
components of the network. Without
these services from SFTI and various
other service providers, the Exchange
would not be able to operate and
support the network and provide access
to its Members and their customers. The
Exchange did not allocate all of the SFTI
and other service providers’ expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portions which
the Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees. According to the
Exchange’s calculations, it allocated
approximately 0.90% of the total
applicable SFTI and other service
providers’ 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 access services associated
with the Proposed Access Fees.64
The Exchange believes it is reasonable
to allocate the identified portion of the
other hardware and software provider
expense because this includes costs for
dedicated hardware licenses for
switches and servers, as well as
dedicated software licenses for security
monitoring and reporting across the
network. Without this hardware and
software, the Exchange would not be
able to operate and support the network
and provide access to its Members and
their customers. The Exchange did not
allocate all of the hardware and software
provider expense toward the cost of
providing the access services associated
with the Proposed Access Fees, only the
portions which the Exchange identified
as being specifically mapped to
63 Id.
64 Id.
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providing the access services associated
with the Proposed Access Fees.
According to the Exchange’s
calculations, it allocated approximately
0.90% 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 access
services associated with the Proposed
Access Fees.65
Internal Expense Allocations
For 2021, total projected internal
expenses relating to the Exchange
providing the access services associated
with the Proposed Access Fees, is
projected to be $856,918. This includes,
but is not limited to, costs associated
with: (1) Employee compensation and
benefits for full-time employees that
support the access services associated
with the Proposed Access Fees,
including staff in network operations,
trading operations, development, system
operations, business, as well as staff in
general corporate departments (such as
legal, regulatory, and finance) that
support those employees and functions;
(2) depreciation and amortization of
hardware and software used to provide
the access services associated with the
Proposed Access Fees, including
equipment, servers, cabling, purchased
software and internally developed
software used in the production
environment to support the network for
trading; and (3) occupancy costs for
leased office space for staff that provide
the access services associated with the
Proposed Access Fees. The breakdown
of these costs is more fully-described
below.
For clarity, 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 the access
services in connection with the
Proposed Access Fees. Only a portion of
all such internal expenses are included
in the internal expense herein, and no
expense amount is allocated twice.
Accordingly, the Exchange does not
allocate its entire costs contained in
those items to the access services
associated with the Proposed Access
Fees. This may result in the Exchange
under allocating an expense to the
provision of access services in
connection with the Proposed Access
Fees and such expenses may actually be
higher or increase above what the
Exchange utilizes within this proposal.
Further, as part its ongoing assessment
65 Id.
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of costs and expenses (described above),
the Exchange recently conducted a
periodic thorough review of its expenses
and resource allocations which, in turn,
resulted in a revised percentage
allocations in this filing.
The Exchange believes it is reasonable
to allocate such internal expense
described above towards the total cost to
the Exchange to provide the access
services associated with the Proposed
Access Fees. In particular, the
Exchange’s employee compensation and
benefits expense relating to providing
the access services associated with the
Proposed Access Fees is projected to be
$783,513, which is only a portion of the
$9,163,894 total projected expense for
employee compensation and benefits.
The Exchange believes it is reasonable
to allocate the identified portion of such
expense because this includes the time
spent by employees of several
departments, including Technology,
Back Office, Systems Operations,
Networking, Business Strategy
Development (who create the business
requirement documents that the
Technology staff use to develop network
features and enhancements), Trade
Operations, Finance (who provide
billing and accounting services relating
to the network), and Legal (who provide
legal services relating to the network,
such as rule filings and various license
agreements and other contracts). As part
of the extensive cost review conducted
by the Exchange, the Exchange reviewed
the amount of time spent by each
employee on matters relating to the
provision of access services associated
with the Proposed Access Fees. Without
these employees, the Exchange would
not be able to provide the access
services associated with the Proposed
Access Fees to its Members and their
customers. The Exchange did not
allocate all of the employee
compensation and benefits expense
toward the cost of the access services
associated with the Proposed Access
Fees, only the portions which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees. According to the
Exchange’s calculations, it allocated
approximately 8.55% 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 access services associated
with the Proposed Access Fees, and not
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10869
any other service, as supported by its
cost review.66
The Exchange’s depreciation and
amortization expense relating to
providing the access services associated
with the Proposed Access Fees is
projected to be $64,456, which is only
a portion of the $2,864,716 67 total
projected expense for depreciation and
amortization. The Exchange believes it
is reasonable to allocate the identified
portion of such expense because such
expense includes the actual cost of the
computer equipment, such as dedicated
servers, computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network and
provide the access services associated
with the Proposed Access Fees. Without
this equipment, the Exchange would not
be able to operate the network and
provide the access services associated
with the Proposed Access Fees to its
Members and their customers. The
Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing the access
services associated with the Proposed
Access Fees, only the portion which the
Exchange identified as being
specifically mapped to providing the
access services associated with the
Proposed Access Fees. According to the
Exchange’s calculations, it allocated
approximately 2.25% of the total
applicable depreciation and
amortization expense to providing the
services associated with the proposed
fees, as these access services would not
be possible without relying on such.
The Exchange believes this allocation is
reasonable because it represents the
Exchange’s actual cost to provide the
access services associated with the
Proposed Access Fees, and not any
other service, as supported by its cost
review.68
The Exchange’s occupancy expense
relating to providing the access services
associated with the Proposed Access
Fees is projected to be $8,949, which is
only a portion of the $497,180 total
projected expense for occupancy. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense
66 Id.
67 The Exchange notes that the total depreciation
expense is different from the total for the
Exchange’s filing relating to Trading Permits
because the Exchange factors in the depreciation of
its own internally developed software when
assessing costs for Full Service MEO Ports, resulting
in a higher depreciation expense number in this
filing.
68 Id.
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represents the portion of the Exchange’s
cost to rent and maintain a physical
location for the Exchange’s staff who
operate and support the network,
including providing the access services
associated with the Proposed Access
Fees. This amount consists primarily of
rent for the Exchange’s Princeton, New
Jersey office, as well as various related
costs, such as physical security,
property management fees, property
taxes, and utilities. The Exchange
operates its Network Operations Center
(‘‘NOC’’) and Security Operations
Center (‘‘SOC’’) from its Princeton, New
Jersey office location. A centralized
office space is required to house the
staff that operates and supports the
network. The Exchange currently has
approximately 200 employees.
Approximately two-thirds of the
Exchange’s staff are in the Technology
department, and the majority of those
staff have some role in the operation
and performance of the access services
associated with the Proposed Access
Fees. Without this office space, the
Exchange would not be able to operate
and support the network and provide
the access services associated with the
Proposed Access Fees to its Members
and their customers. Accordingly, the
Exchange believes it is reasonable to
allocate the identified portion of its
occupancy expense because such
amount represents the Exchange’s actual
cost to house the equipment and
personnel who operate and support the
Exchange’s network infrastructure and
the access services associated with the
Proposed Access Fees. The Exchange
did not allocate all of the occupancy
expense toward the cost of providing
the access services associated with the
Proposed Access Fees, only the portion
which the Exchange identified as being
specifically mapped to operating and
supporting the network. According to
the Exchange’s calculations, it allocated
approximately 1.80% 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 access services
associated with the Proposed Access
Fees, and not any other service, as
supported by its cost review.69
The Exchange notes that a material
portion of its total overall expense is
allocated to the provision of access
services (including connectivity, ports,
and trading permits). The Exchange
believes this is reasonable and in line,
as the Exchange operates a technologybased business that differentiates itself
69 Id.
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from its competitors based on its trading
systems that rely on access to a high
performance network, resulting in
significant technology expense. Over
two-thirds of Exchange staff are
technology-related employees. The
majority of the Exchange’s expense is
technology-based. As described above,
the Exchange has only four primary
sources of fees in to recover its costs,
thus the Exchange believes it is
reasonable to allocate a material portion
of its total overall expense towards
access fees.
Based on the above, the Exchange
believes that its provision of access
services associated with the Proposed
Access Fees will not result in excessive
pricing or supra-competitive profit. As
discussed above, the Exchange projects
that the annualized expense for 2021 to
provide Full Service MEO Ports to be
approximately $897,084 per annum or
an average of $74,757 per month. The
Exchange implemented the Proposed
Access Fees on July 1, 2021 in the First
Proposed Rule Change. For June 2021,
prior to the Proposed Access Fees,
Members and non-Members purchased a
total of 20 Full Service MEO Ports, for
which the Exchange charged a total of
approximately $71,625. This resulted in
a loss of $3,132 for that month (a margin
of ¥4.37%). For the month of
November 2021, which includes the
Proposed Access Fees, Members and
non-Members purchased a total of 19
Full Service MEO Ports, for which the
Exchange charged a total of
approximately $122,000 for that month.
This resulted in a profit of $47,243 for
that month, representing a profit margin
of 38%. The Exchange believes that the
Proposed Access Fees are reasonable
because they are designed to generate an
approximate profit margin of 38% permonth. The Exchange believes this
modest profit margin will allow it to
continue to recoup its expenses and
continue to invest in its technology
infrastructure. Therefore, the Exchange
also believes that this proposed profit
margin increase is reasonable because it
represents a reasonable rate of return.
Again, the Exchange cautions that this
profit margin is likely to fluctuate from
month to month based in the
uncertainty of predicting how many
Full Service MEO Ports may be
purchased from month to month as
Members and non-Members are free to
add and drop ports at any time based on
their own business decisions.
Notwithstanding that the revenue (and
profit margin) may vary from month to
month due to changes in the number of
ports utilized and volume conducted on
the Exchange, as well as changes to the
Exchange’s expenses, the number of
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ports utilized 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 profit margin
may also decrease due to the significant
inflationary pressure on capital items
that it needs to purchase to maintain the
Exchange’s technology and systems.70
Accordingly, the Exchange believes its
total projected revenue for providing the
access services associated with the
Proposed Access Fees will not result in
excessive pricing or supra-competitive
profit.
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.
The Exchange believes it is
reasonable, equitable and not unfairly
discriminatory to allocate the respective
percentages of each expense category
described above towards the total cost to
the Exchange of operating and
supporting the network, including
providing the access services associated
with the Proposed Access Fees because
the Exchange performed a line-by-line
item analysis of nearly every expense of
the Exchange, and has determined the
expenses that directly relate to
providing access to the Exchange.
Further, the Exchange notes that,
without the specific third-party and
internal items listed above, the
Exchange would not be able to provide
70 See
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the access services associated with the
Proposed Access Fees to its Members
and their customers. Each of these
expense items, including physical
hardware, software, employee
compensation and benefits, occupancy
costs, and the depreciation and
amortization of equipment, have been
identified through a line-by-line item
analysis to be integral to providing
access services. The Proposed Access
Fees are intended to recover the
Exchange’s costs of providing access to
Exchange Systems. Accordingly, the
Exchange believes that the Proposed
Access Fees are fair and reasonable
because they do not result in excessive
pricing or supra-competitive profit,
when comparing the actual costs to the
Exchange versus the projected annual
revenue from the Proposed Access Fees.
The Proposed Tiered-Pricing Structure
Is Not Unfairly Discriminatory and
Provides for the Equitable Allocation of
Fees, Dues, and Other Charges
The Exchange believes the proposed
tiered-pricing structure is reasonable,
fair, equitable, and not unfairly
discriminatory because it is the model
adopted by the Exchange when it
launched operations for its Full Service
MEO Port fees. Moreover, the tiered
pricing structure for Full Service MEO
Ports is not a new proposal and has
been in place since 2018, well prior to
the filing of the First Proposed Rule
Change. The proposed tiers of Full
Service MEO Port fees will continue to
apply to all Members and non-Members
in the same manner based upon the
monthly total volume executed by a
Member and its Affiliates on the
Exchange across all origin types, not
including Excluded Contracts, as
compared to the TCV in all MIAX Pearllisted options. Members and nonMembers may choose to purchase more
than the two Full Service MEO Ports the
Exchange currently provides upfront
based on their own business decisions
and needs. All similarly situated
Members and non-Members would be
subject to the same fees. The fees do not
depend on any distinction between
Members and non-Members because
they are solely determined by the
individual Members’ or non-Members’
business needs and their impact on
Exchange resources.
The proposed tiered-pricing structure
is not unfairly discriminatory and
provides for the equitable allocation of
fees, dues, and other charges because it
is designed to encourage Members and
non-Members to be more efficient and
economical when determining how to
access the Exchange and the amount of
the fees are based on the number of Full
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Service MEO Ports utilized, in addition
to the amount of volume conducted on
the Exchange. The proposed tiered
pricing structure should also enable the
Exchange to better monitor and provide
access to the Exchange’s network to
ensure sufficient capacity and headroom
in the System.
The proposed tiered-pricing structure
is not unfairly discriminatory and
provides for the equitable allocation of
fees, dues, and other charges because
the amount of the fee is directly related
to the Member or non-Member’s TCV
resulting in higher fees for greater TCV.
The higher the volume, the greater pull
on Exchange resources. The Exchange’s
high performance network solutions and
supporting infrastructure (including
employee support), provides
unparalleled system throughput and the
capacity to handle approximately 10.7
million order messages per second. On
an average day, the Exchange handles
over approximately 2.7 billion total
messages. However, in order to achieve
a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall expense for storage and
network transport capabilities.
There are material costs associated
with providing the infrastructure and
headcount to fully-support access to the
Exchange. The Exchange incurs
technology expense related to
establishing and maintaining
Information Security services, enhanced
network monitoring and customer
reporting, as well as Regulation SCI
mandated processes, associated with its
network technology. While some of the
expense is fixed, much of the expense
is not fixed, and thus increases as the
services associated with the Proposed
Access Fees increase. For example, new
Members to the Exchange may require
the purchase of additional hardware to
support those Members as well as
enhanced monitoring and reporting of
customer performance that the
Exchange and its affiliates provide.
Further, as the total number of Members
increases, the Exchange and its affiliates
may need to increase their data center
footprint and consume more power,
resulting in increased costs charged by
their third-party data center provider.
Accordingly, the cost to the Exchange
and its affiliates to provide access to its
Members is not fixed. The Exchange
believes the Proposed Access Fees are
reasonable in order to offset a portion of
the costs to the Exchange associated
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
10871
with providing access to its network
infrastructure.
The Exchange notes that the firms that
purchase more than two Full Service
MEO Ports that the Exchange initially
provides essentially do so for
competitive reasons amongst themselves
and choose to utilize numerous ports
based on their business needs and
desire to attempt to access the market
quicker by using the port with the least
amount of latency. These firms are
generally engaged in sending liquidity
removing orders to the Exchange and
seek to add more ports so they can
access resting liquidity ahead of their
competitors. For instance, a Member
may have just sent numerous messages
and/or orders over one of their Full
Service MEO Ports that are in queue to
be processed. That same Member then
seeks to enter an order to remove
liquidity from the Exchange’s Book.
That Member may choose to send that
order over one or more of their other
Full Service MEO Ports with less
message and/or order traffic to ensure
that their liquidity taking order accesses
the Exchange quicker because that port’s
queue is shorter. These firms also tend
to frequently add and drop ports midmonth to determine which have the
least latency, which results in increased
costs to the Exchange to constantly
make changes in the data center.
The firms that engage in the abovedescribed liquidity removing and
advanced trading strategies typically
require more than two Full Service MEO
Ports and, therefore, generate higher
costs by utilizing more of the
Exchange’s resources. Those firms may
also conduct other latency
measurements over their ports and drop
and simultaneously add ports midmonth based on their own assessment of
their performance. This results in
Exchange staff processing such requests,
potentially purchasing additional
equipment, and performing the
necessary network engineering to
replace those ports in the data center.
Therefore, the Exchange believes it is
equitable for these firms to experience
increased port costs based on their
disproportionate pull on Exchange
resources to provide the additional
ports.
In addition, the proposed tieredpricing structure is equitable because it
is designed to encourage Members and
non-Members to be more efficient and
economical when determining how to
connect to the Exchange. Section 6(b)(5)
of the Exchange Act requires the
Exchange to provide access on terms
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that are not unfairly discriminatory.71
As stated above, Full Service MEO Ports
are not an unlimited resource and the
Exchange’s network is limited in the
amount of ports it can provide.
However, the Exchange must
accommodate requests for additional
ports and access to the Exchange’s
System to ensure that the Exchange is
able to provide access on nondiscriminatory terms and ensure
sufficient capacity and headroom in the
System. To accommodate requests for
additional ports on top of current
network capacity constraints, requires
that the Exchange purchase additional
equipment to satisfy these requests. The
Exchange also needs to provide
personnel to set up new ports and to
maintain those ports on behalf of
Members and non-Members. The
proposed tiered-pricing structure is
equitable because it is designed to
encourage Members and non-Members
to be more efficient and economical in
selecting the amount of ports they
request while balancing that against the
Exchange’s increased expenses when
expanding its network to accommodate
additional port access.
The Proposed Fees Are Reasonable
When Compared to the Fees of Other
Options Exchanges With Similar Market
Share
The Exchange does not have visibility
into other equities exchanges’ costs to
provide ports and port access or their
fee markup over those costs, and
therefore cannot use other exchanges’
port fees as a benchmark to determine
a reasonable markup over the costs of
providing port access. Nevertheless, the
Exchange believes the other exchanges’
port fees are a useful example of
alternative approaches to providing and
charging for port access. To that end, the
Exchange believes the proposed tiered-
Exchange
Type of port
Monthly fee
MIAX Pearl (as proposed) ..............................
MEO Full Service—Bulk ................................
Tier 1: $5,000 (or $208.33 per Matching Engine).
Tier 2: $7,500 (or $312.50 per Matching Engine).
Tier 3: $10,000 (or $416.66 per Matching Engine).
Tier 1: $2,500 (or $104.16 per Matching Engine).
Tier 2: $3,500 (or $145.83 per Matching Engine).
Tier 3: $4,500 (or $187.50 per Matching Engine).
Ports 1–40: $450 each.
Ports 41 or more: $150 each.
Ports 1–40: $450 each.
Ports 41 or more: $150 each.
Ports 1–5: $1,500 each.
Ports 6–20: $1,000 each.
Ports 21 or more: $500.
MEO Full Service—Single .............................
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pricing structure for its Full Service
MEO Ports is reasonable because the
proposed highest tier is still less than or
similar to fees charged for similar port
access provided by other options
exchanges with comparable market
shares. For example, NASDAQ (equity
options market share of 8.38% as of
December 15, 2021 for the month of
December) 72 charges $1,500 per port for
SQF ports 1–5, $1,000 per SQF port for
ports 6–20, and $500 per SQF port for
ports 21 and greater,73 all on a per
matching engine basis, with NASDAQ
having multiple matching engines.74
NYSE American (equity options market
share of 6.74% as of December 15, 2021
for the month of December) 75 charges
$450 per port for order/quote entry ports
1–40 and $150 per port for ports 41 and
greater,76 all on a per matching engine
basis, with NYSE American having 17
match engines.77 The below table
further illustrates this comparison.
NYSE American .............................................
Order/Quote Entry .........................................
NYSE Arca .....................................................
Order/Quote Entry .........................................
NASDAQ ........................................................
Specialized Quote Interface ..........................
In the each of the above cases, the
Exchange’s highest tiered port fee, as
proposed, is similar to or less than the
port fees of competing options
exchanges with like market share.
Further, as described in more detail
below, many competing exchanges
generate higher overall operating profit
margins and higher ‘‘access fees’’ than
the Exchange, inclusive of the projected
revenues associated with the proposed
fees. The Exchange believes that it
provides a premium network experience
to its Members and non-Members via a
highly deterministic system, enhanced
network monitoring and customer
reporting, and a superior network
infrastructure than markets with higher
market shares and more expensive
access fees. Each of the port fee rates in
place at competing options exchanges
were filed with the Commission for
U.S.C. 78f(b)(5).
‘‘The market at a glance,’’ available at
https://www.miaxoptions.com/ (last visited
December 15, 2021).
immediate effectiveness and remain in
place today.
The Exchange further believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee,
the Exchange provides each Member
two (2) Full Service MEO Ports for each
matching engine to which that Member
is connected. Unlike other options
exchanges that provide similar port
functionality and charge fees on a per
port basis,78 the Exchange offers Full
Service MEO Ports as a package and
provides Members with the option to
receive up to two Full Service MEO
Ports per matching engine to which it
connects. The Exchange currently has
twelve (12) matching engines, which
means Members may receive up to
twenty-four (24) Full Service MEO Ports
for a single monthly fee, that can vary
based on certain volume percentages.
71 15
73 See
77 See
72 See
74 See
78 See
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16:44 Feb 24, 2022
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supra note 25.
supra note 17.
75 See supra note 72.
76 See supra note 25.
The Exchange currently assesses
Members a fee of $5,000 per month in
the highest Full Service MEO Port—
Bulk Tier, regardless of the number of
Full Service MEO Ports allocated to the
Member. Assuming a Member connects
to all twelve (12) matching engines
during a month, with two Full Service
MEO Ports per matching engine, this
results in a cost of $208.33 per Full
Service MEO Port—Bulk ($5,000
divided by 24) for the month. This fee
has been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.79 The Exchange now proposes to
increase the Full Service MEO Port fees,
with the highest Tier fee for a Full
Service MEO Port—Bulk of $10,000 per
month. Members will continue to
receive two (2) Full Service MEO Ports
to each matching engine to which they
are connected for the single flat monthly
fee. Assuming a Member connects to all
PO 00000
Frm 00109
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supra note 17.
supra note 17.
79 See supra note 18.
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twelve (12) matching engines during the
month, and achieves the highest Tier for
that month, with two Full Service MEO
Ports—Bulk per matching engine, this
would result in a cost of $416.67 per
Full Service MEO Port ($10,000 divided
by 24).
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete.
Intra-Market Competition
The Exchange believes that the
Proposed Access Fees do not place
certain market participants at a relative
disadvantage to other market
participants because the Proposed
Access Fees do not favor certain
categories of market participants in a
manner that would impose a burden on
competition; rather, the allocation of the
Proposed Access Fees reflects the
network resources consumed by the
various size of market participants—
lowest bandwidth consuming members
pay the least, and highest bandwidth
consuming members pays the most,
particularly since higher bandwidth
consumption translates to higher costs
to the Exchange.
lotter on DSK11XQN23PROD with NOTICES1
Inter-Market Competition
The Exchange believes the Proposed
Access Fees do not place an undue
burden on competition on other options
exchanges that is not necessary or
appropriate. In particular, options
market participants are not forced to
connect to (and purchase MEO Ports
from) all options exchanges. The
Exchange also notes that it has far less
Members as compared to the much
greater number of members at other
options exchanges. Not only does MIAX
Pearl have less than half the number of
members as certain other options
exchanges, but there are also a number
of the Exchange’s Members that do not
connect directly to MIAX Pearl. There
are a number of large users of the MEO
Interface and broker-dealers that are
members of other options exchange but
not Members of MIAX Pearl. The
Exchange is also unaware of any
assertion that its existing fee levels or
the Proposed Access Fees would
somehow unduly impair its competition
with other options exchanges. To the
contrary, if the fees charged are deemed
too high by market participants, they
can simply disconnect.
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The Exchange operates in a highly
competitive market in which market
participants can readily favor one of the
15 competing options venues if they
deem fee levels at a particular venue to
be excessive. Based on publiclyavailable information, and excluding
index-based options, no single exchange
has more than approximately 16%
market share. Therefore, no exchange
possesses significant pricing power in
the execution of multiply-listed equity
and ETF options order flow. Over the
course of 2021, the Exchange’s market
share has fluctuated between
approximately 3–6% of the U.S. equity
options industry.80 The Exchange is not
aware of any evidence that a market
share of approximately 3–6% provides
the Exchange with anti-competitive
pricing power. If the Exchange were to
attempt to establish unreasonable
pricing, then no market participant
would join or connect, and existing
market participants would disconnect.
The Exchange believes that the evershifting market share among exchanges
from month to month demonstrates that
market participants can discontinue or
reduce use of certain categories of
products, or shift order flow, in
response to fee changes. In such an
environment, the Exchange must
continually adjust its fees and fee
waivers to remain competitive with
other exchanges and to attract order
flow to the Exchange.
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
80 See
PO 00000
disclosures and rationale to support
their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
As described above, the Exchange
received one comment letter on the First
Proposed Rule Change 81 and no
comment letters on the Second or Third
Proposed Rule Changes. The Exchange
now responds to the one comment letter
in this filing. The SIG Letter cites Rule
700(b)(3) of the Commission’s Rules of
Fair Practice which places ‘‘the burden
to demonstrate that a proposed rule
change is consistent with the Act on the
self-regulatory organization that
proposed the rule change’’ and states
that a ‘‘mere assertion that the proposed
rule change is consistent with those
requirements . . . is not sufficient.’’ 82
The SIG Letter’s assertion that the
Exchange has not met this burden is
without merit, especially considering
the overwhelming amounts of revenue
and cost information the Exchange
included in the First and Second
Proposed Rule Changes and this filing.
Until recently, the Exchange has
operated at a net annual loss since it
launched operations in 2017.83 As
stated above, the Exchange believes that
exchanges in setting fees of all types
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various access fees for market
participants to access an exchange’s
marketplace. The Exchange believes it
has achieved this standard in this filing
and in the First and Second Proposed
Rules Changes. Similar justifications for
the proposed fee change included in the
First and Second Proposed Rule
Changes, but also in this filing, were
previously included in similar fee
changes filed by the Exchange and its
affiliates, MIAX Emerald and MIAX,
and SIG did not submit a comment
letter on those filings.84 Those filings
81 See
supra note 7.
CFR 201.700(b)(3).
83 See supra note 56.
84 See Securities Exchange Act Release Nos.
91858 (May 12, 2021), 86 FR 26967 (May 18, 2021)
(SR–PEARL–2021–23) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Amend the MIAX Pearl Fee Schedule to Remove
the Cap on the Number of Additional Limited
82 17
supra note 72.
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Continued
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Federal Register / Vol. 87, No. 38 / Friday, February 25, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
were not suspended by the Commission
and continue to remain in effect. The
justification included in each of the
prior filings was the result of numerous
withdrawals and re-filings of the
proposals to address comments received
from Commission Staff over many
months. The Exchange and its affiliates
have worked diligently with
Commission Staff on ensuring the
justification included in past fee filings
fully supported an assertion that those
proposed fee changes were consistent
with the Act.85 The Exchange leveraged
its past work with Commission Staff to
ensure the justification provided herein
and in the First, Second and Third
Proposed Rule Changes included the
same level of detail (or more) as the
prior fee changes that survived
Commission scrutiny. The Exchange’s
detailed disclosures in fee filings have
also been applauded by one industry
group which noted, ‘‘[the Exchange’s]
filings contain significantly greater
information about who is impacted and
Service Ports Available to Market Makers); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Its Fee Schedule To Adopt Port Fees,
Increase Certain Network Connectivity Fees, and
Increase the Number of Additional Limited Service
MIAX Emerald Express Interface Ports Available to
Market Makers); and 91857 (May 12, 2021), 86 FR
26973 (May 18, 2021) (SR–MIAX–2021–19) (Notice
of Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend Its Fee Schedule To
Remove the Cap on the Number of Additional
Limited Service Ports Available to Market Makers).
85 See, e.g., Securities Exchange Act Release No.
90196 (October 15, 2020), 85 FR 67064 (October 21,
2020) (SR–EMERALD–2020–11) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt OneTime Membership Application Fees and Monthly
Trading Permit Fees). See Securities Exchange Act
Release Nos. 90601 (December 8, 2020), 85 FR
80864 (December 14, 2020) (SR–EMERALD–2020–
18) (re-filing with more detail added in response to
Commission Staff’s feedback and after withdrawing
SR–EMERALD–2020–11); and 91033 (February 1,
2021), 86 FR 8455 (February 5, 2021) (SR–
EMERALD–2021–03) (re-filing with more detail
added in response to Commission Staff’s feedback
and after withdrawing SR–EMERALD–2020–18).
The Exchange initially filed a proposal to remove
the cap on the number of additional Limited
Service MEO Ports available to Members on April
9, 2021. See SR–PEARL–2021–17. On April 22,
2021, the Exchange withdrew SR–PEARL–2021–17
and refiled that proposal (without increasing the
actual fee amounts) to provide further clarification
regarding the Exchange’s revenues, costs, and
profitability any time more Limited Service MEO
Ports become available, in general, (including
information regarding the Exchange’s methodology
for determining the costs and revenues for
additional Limited Service MEO Ports). See SR–
PEARL–2021–20. On May 3, 2021, the Exchange
withdrew SR–PEARL–2021–20 and refiled that
proposal to further clarify its cost methodology. See
SR–PEARL–2021–22. On May 10, 2021, the
Exchange withdrew SR–PEARL–2021–22 and
refiled that proposal as SR–PEARL–2021–23. See
Securities Exchange Act Release No. 91858 (May
12, 2021), 86 FR 26967 (May 18, 2021) (SR–PEARL–
2021–23).
VerDate Sep<11>2014
16:44 Feb 24, 2022
Jkt 256001
how than other filings that have been
permitted to take effect without
suspension.’’ 86 That same industry
group also noted their ‘‘worry that the
Commission’s process for reviewing and
evaluating exchange filings may be
inconsistently applied.’’ 87
Therefore, a finding by the
Commission that the Exchange has not
met its burden to show that the
proposed fee change is consistent with
the Act would be different than the
Commission’s treatment of similar past
filings, would create further ambiguity
regarding the standards exchange fee
changes should satisfy, and is not
warranted here.
In addition, the arguments in the SIG
Letter do not support their claim that
the Exchange has not met its burden to
show the proposed rule change is
consistent with the Act. Prior to, and
after submitting the First Proposed Rule
Change, the Exchange solicited feedback
from its Members, including SIG. SIG
relayed their concerns regarding the
proposed change. The Exchange then
sought to work with SIG to address their
concerns and gain a better
understanding of the access/
connectivity/quoting infrastructure of
other exchanges. In response, SIG
provided no substantive suggestions on
how to amend the First Proposed Rule
Change to address their concerns and
instead chose to submit a comment
letter. One could argue that SIG is using
the comment letter process not to raise
legitimate regulatory concerns regarding
the proposal, but to inhibit or delay
proposed fee changes by the Exchange.
Nonetheless, the Exchange has
enhanced its cost and revenue analysis
and data in this Third [sic] Proposed
Rule Change to further justify that the
Proposed Access Fees are reasonable in
accordance with the Commission Staff’s
Guidance. Among other things, these
enhancements include providing
baseline information in the form of data
from the month before the Proposed
Access Fees became effective.
General
First, the SIG Letter states that 10Gb
ULL ‘‘lines are critical to Exchange
members to be competitive and to
provide essential protection from
adverse market events’’ (emphasis
added).88 The Exchange notes that this
86 See
letter from Tyler Gellasch, Executive
Director, Healthy Markets Association, to Hon. Gary
Gensler, Chair, Commission, dated October 29,
2021.
87 Id. (providing examples where non-transaction
fee filings by other exchanges have been permitted
to remain effective and not suspended by the
Commission despite less disclosure and
justification).
88 See SIG Letter, supra note 7.
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
statement is generally not true for Full
Service MEO Ports as those ports are
used primarily for order entry and not
risk protection activities like purging
quotes resting on the MIAX Pearl
Options Book. Full Service MEO Ports
are essentially used for competitive
reasons and Members may choose to
utilize one or two Full Service MEO
Ports 89 based on their business needs
and desire to attempt to access the
market quicker by using one port that
may have less latency. For instance, a
Member may have just sent numerous
messages and/or orders over one of their
Full Service MEO Ports that are in
queue to be processed. That same
Member then seeks to enter an order to
remove liquidity from the Exchange’s
Book. That Member may choose to send
that order over one of their other Full
Service MEO Ports with less message
and/or order traffic or any of their
optional additional Limit Service MEO
Ports 90 to ensure that their liquidity
taking order accesses the Exchange
quicker because that port’s queue is
shorter.
The Tiered Pricing Structure for Full
Service MEO Ports Provides for the
Equitable Allocation of Reasonable
Dues, Fees, and Other Charges
The SIG Letter challenges the below
two bases the Exchange set forth in its
Initial Proposed Fee Change and herein
to support the assertion that the
proposal provides for the equitable
allocation of reasonable dues, fees, and
other charges:
• ‘‘If the Exchanges were to attempt to
establish unreasonable pricing, then no
market participant would join or
connect to the Exchanges, and existing
market participants would disconnect.
• The fees will not result in excessive
pricing or supra-competitive profit.’’ 91
The Exchange responds to each of
SIG’s challenges in turn below.
If the Exchanges Were To Attempt To
Establish Unreasonable Pricing, Then
No Market Participant Would Join or
Connect to the Exchange, and Existing
Market Participants Would Disconnect
SIG asserts that ‘‘the prospect that a
member may withdraw from the
Exchanges if a fee is too costly is not a
basis for asserting that the fee is
89 The rates set forth for Full Service MEO Ports
under Section 5)d) of the Exchange’s Fee Schedule
entitle a Member to two (2) Full Service MEO Ports
for each Matching Engine for a single monthly fee.
90 Members may be allocated two (2) Full-Service
MEO Ports per Matching Engine and may request
Limited Service MEO Ports for which the Exchange
will assess no fee for the first two Limited Service
MEO Ports requested by the Member. See Fee
Schedule, Section 5)d).
91 See SIG Letter, supra note 7.
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reasonable.’’ 92 SIG misinterprets the
Exchange’s argument here. The
Exchange provided the examples of
firms terminating access to certain
markets due to fees to support its
assertion that firms, including market
makers, are not required to connect to
all markets and may drop access if fees
become too costly for their business
models and alternative or substitute
forms of connectivity are available to
those firms who choose to terminate
access. The Commission Staff Guidance
also provides that ‘‘[a] statement that
substitute products or services are
available to market participants in the
relevant market (e.g., equities or
options) can demonstrate competitive
forces if supported by evidence that
substitute products or services exist.’’ 93
Nonetheless, the Third [sic] Proposed
Rule Change no longer makes this
assertion as a basis for the proposed fee
change and, therefore, the Exchange
believes it is not necessary to respond
to this portion of the SIG Letter.
lotter on DSK11XQN23PROD with NOTICES1
The Proposed Fees Will Not Result in
Excessive Pricing or Supra-Competitive
Profit
Next, SIG asserts that the Exchange’s
‘‘profit margin comparisons do not
support the Exchange’s claims that they
will not realize a supracompetitive
profit,’’ that ‘‘the Exchanges’ respective
profit margins of 30% (for MIAX and
Pearl) and 51% (for Emerald) in relation
to connectivity fees are high in any
event,’’ and ‘‘comparisons to competing
exchanges’ overall operating profit
margins are an inapt ‘apples-to-oranges’
comparison.’’
The Exchange has provided ample
data that the proposed fees would not
result in excessive pricing or a supracompetitive profit. In this Third [sic]
Proposed Rule Change, the Exchange no
longer utilizes a comparison of its profit
margin to that of other options
exchanges as a basis that the Proposed
Access Fees are reasonable. Rather, the
Exchange has enhanced its cost and
revenue analysis and data in this Third
[sic] Proposed Rule Change to further
justify that the Proposed Access Fees are
reasonable in accordance with the
Commission Staff’s Guidance.
Therefore, the Exchange believes it is no
longer necessary to respond to this
portion of the SIG Letter.
The Proposed Tiered Pricing Structure
Is Not Unfairly Discriminatory
SIG challenges the proposed fees by
arguing that ‘‘the Exchange[ ] provide[s]
no support for [its] claim that [the]
proposed tiered pricing structure is
needed to encourage efficiency in
connectivity usage and the Exchange[ ]
provided no support for [the] claim that
the tiered pricing structure allows them
to better monitor connectivity usage, nor
that this is an appropriate basis for the
pricing structure in any event.’’ The
tiered pricing structure for Full Service
MEO Ports is not a new proposal and
has been in place since 2018, well prior
to the filing of the First Proposed Rule
Change. Nonetheless, the Exchange
provided additional justification to
support that the Proposed Access Fees
are equitable and not unfairly
discriminatory above in response to
SIG’s assertions.
Recoupment of Exchange Infrastructure
Costs
Nowhere in this proposal or in the
First Proposed Rule Change did the
Exchange assert that it benefits
competition to allow a new exchange
entrant to recoup their infrastructure
costs. Rather, the Exchange asserts
above that its ‘‘proposed fees are
reasonable, equitably allocated and not
unfairly discriminatory because the
Exchange, and its affiliates, are still
recouping the initial expenditures from
building out their systems while the
legacy exchanges have already paid for
and built their systems.’’ The Exchange
no longer makes this assertion in this
filing and, therefore, does not believe it
is necessary to respond to SIG’s
assertion here.
Nonetheless, the Exchange notes that
until recently it has operated at a net
annual loss since it launched operations
in 2017.94 This is a result of providing
a low cost alternative to attract order
flow and encourage market participants
to experience the determinism and
resiliency of the Exchange’s trading
systems. To do so, the Exchange chose
to offer some non-transaction related
services for little to no cost. This
resulted in the Exchange forgoing
revenue it could have generated from
assessing higher fees. Further, a vast
majority of the Exchange’s Members, if
not all, benefited from these lower fees.
The Exchange could have sought to
charge higher fees at the outset, but that
could have served to discourage
participation on the Exchange. Instead,
the Exchange chose to provide a low
cost exchange alternative to the options
industry which resulted in lower initial
revenues. The SIG Letter chose to ignore
this reality and instead criticize the
Exchange for initially charging lower
fees or providing a moratorium on
certain non-transaction fees to the
92 Id.
93 See
Guidance, supra note 33.
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10875
benefit of all market participants. The
Exchange is now trying to amend its fee
structure to enable it to continue to
maintain and improve its overall market
and systems while also providing a
highly reliable and deterministic trading
system to the marketplace.
III. Suspension of the Proposed Rule
Change
Pursuant to Section 19(b)(3)(C) of the
Act,95 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,96 the Commission summarily may
temporarily suspend the change in the
rules of a self-regulatory organization
(‘‘SRO’’) if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in furtherance of the purposes of the
Act. As discussed below, the
Commission believes a temporary
suspension of the proposed rule change
is necessary and appropriate to allow for
additional analysis of the proposed rule
change’s consistency with the Act and
the rules thereunder.
As the Exchange further details above,
the Exchange first filed a proposed rule
change proposing fee changes as
proposed herein on July 1, 2021, with
the proposed fee changes being
immediately effective. That proposal,
SR–PEARL–2021–33, was published for
comment in the Federal Register on July
15, 2021.97 On August 27, 2021,
pursuant to Section 19(b)(3)(C) of the
Act, the Commission: (1) Temporarily
suspended the proposed rule change
(SR–PEARL–2021–33) and (2) instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change.98 On October 12, 2021, the
Exchange withdrew SR–PEARL–2021–
33. On November 1, 2021, the Exchange
filed a proposed rule change proposing
fee changes as proposed herein. That
proposal, SR–PEARL–2021–53, was
published for comment in the Federal
Register on November 17, 2021.99 On
December 20, 2021, the Exchange
withdrew SR–PEARL–2021–53 and filed
a proposed rule change proposing fee
95 15
U.S.C. 78s(b)(3)(C).
U.S.C. 78s(b)(1).
97 See Securities Exchange Act Release No. 92365
(July 9, 2021), 86 FR 37347 (July 15, 2021) (SR–
PEARL–2021–33). The Commission received one
comment letter on that proposal. Comment for SR–
PEARL–2021–33 can be found at: https://
www.sec.gov/comments/sr-pearl-2021-33/
srpearl202133-9208443-250011.pdf.
98 See Securities Exchange Act Release No. 93556
(August 27, 2021), 86 FR 49360 (September 2,
2021).
99 See Securities Exchange Act Release No. 93556
(November 19, 2021), 86 FR 64235 (November 17,
2021) (SR–PEARL–2021–53).
96 15
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changes as proposed herein on
December 20, 2021. That filing, SR–
PEARL–2021–58,100 was published for
comment in the Federal Register on
January 10, 2022.101 On February 15,
2022, the Exchange withdrew SR–
PEARL–2021–58 and filed the instant
filing, which is substantially similar.
When exchanges file their proposed
rule changes with the Commission,
including fee filings like the Exchange’s
present proposal, they are required to
provide a statement supporting the
proposal’s basis under the Act and the
rules and regulations thereunder
applicable to the exchange.102 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.’’ 103
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; 104 (2) perfect the mechanism
of a free and open market and a national
market system, protect investors and the
public interest, and not permit unfair
discrimination between customers,
issuers, brokers, or dealers; 105 and (3)
not impose any burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Act.106
In temporarily suspending the
Exchange’s fee change, the Commission
intends to further consider whether the
proposal to increase the monthly fees
for MIAX Express Network Full Service
Ports is consistent with the statutory
requirements applicable to a national
securities exchange under the Act. In
particular, the Commission will
consider whether the proposed rule
change satisfies the standards under the
Act and the rules thereunder requiring,
among other things, that an exchange’s
rules provide for the equitable
allocation of reasonable fees among
members, issuers, and other persons
100 See
text accompanying supra note 12.
Securities Exchange Act Release No.
93894 (January 4, 2022), 87 FR 1203 (January 10,
2022) (SR–PEARL–2021–58).
102 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’’).
103 Id.
104 15 U.S.C. 78f(b)(4).
105 15 U.S.C. 78f(b)(5).
106 15 U.S.C. 78f(b)(8).
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using its facilities; not be designed to
permit unfair discrimination between
customers, issuers, brokers or dealers;
and not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.107
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.108
IV. Proceedings To Determine Whether
To Approve or Disapprove the
Proposed Rule Change
The Commission is instituting
proceedings pursuant to Sections
19(b)(3)(C) 109 and 19(b)(2)(B) 110 of the
Act to determine whether the
Exchange’s proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change to inform the Commission’s
analysis of whether to approve or
disapprove the proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,111 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
107 See 15 U.S.C. 78f(b)(4), (5), and (8),
respectively.
108 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).
109 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.
110 15 U.S.C. 78s(b)(2)(B).
111 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of
the Act also provides that proceedings to determine
whether to disapprove a proposed rule change must
be concluded within 180 days of the date of
publication of notice of the filing of the proposed
rule change. See id. The time for conclusion of the
proceedings may be extended for up to 60 days if
the Commission finds good cause for such
extension and publishes its reasons for so finding,
or if the exchange consents to the longer period. See
id.
PO 00000
Frm 00113
Fmt 4703
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6(b)(4),112 6(b)(5),113 and 6(b)(8) 114 of
the Act. Section 6(b)(4) of the Act
requires that the rules of a national
securities exchange provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
members and issuers and other persons
using its facilities. Section 6(b)(5) of the
Act requires that the rules of a national
securities exchange be designed, among
other things, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Section 6(b)(8) of the Act requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, in addition to any other
comments they may wish to submit
about the proposed rule change. In
particular, the Commission seeks
comment on the following aspects of the
proposal and asks commenters to
submit data where appropriate to
support their views:
1. Cost Estimates and Allocation. The
Exchange states that it is not asserting
that the Proposed Access Fees are
constrained by competitive forces, but
rather set forth a ‘‘cost-plus model,’’
employing a ‘‘conservative
methodology’’ that ‘‘strictly considers
only those costs that are most clearly
directly related to the provision and
maintenance of the Full Service MEO
Ports.’’ 115 Setting forth its costs in
providing the Proposed Access Fees,
and as summarized in greater detail
above, the Exchange projects $897,084
in aggregate annual estimated costs for
2021 as the sum of: (1) $40,166 in thirdparty expenses paid in total to Equinix
(1.80% of the total applicable expense)
for data center services; Zayo Group
Holdings, for network services (0.90%
of the total applicable expense); SFTI for
connectivity support, Thompson
Reuters, NYSE, Nasdaq, and Internap
and others (0.90% of the total applicable
expense) for content, connectivity
services, and infrastructure services;
and various other hardware and
software providers (0.90% of the total
112 15
U.S.C. 78f(b)(4).
U.S.C. 78f(b)(5).
114 15 U.S.C. 78f(b)(8).
115 See supra Section II.A.2.
113 15
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applicable expense) supporting the
production environment, and (2)
$856,918 in internal expenses, allocated
to (a) employee compensation and
benefit costs ($783,513, approximately
8.55% of the Exchange’s total applicable
employee compensation and benefits
expense); (b) depreciation and
amortization ($64,456, approximately
2.25% of the Exchange’s total applicable
depreciation and amortization expense);
and (c) occupancy costs ($8,949,
approximately 1.80% 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 Proposed
Access Fees? The Exchange describes a
‘‘proprietary’’ process involving all
Exchange department heads, including
the finance department and numerous
meetings between the Exchange’s Chief
Information Officer, Chief Financial
Officer, Head of Strategic Planning and
Operations, Chief Technology Officer,
various members of the Legal
Department, and other group leaders,
but do not specify further what
principles were applied in making these
determinations or arriving at particular
allocations. Do commenters believe
further explanation is necessary? For
employee compensation and benefit
costs, for example, the Exchange
calculated an allocation of employee
time in several departments, including
Technology, Back Office, Systems
Operations, Networking, Business
Strategy Development, Trade
Operations, Finance, and Legal, but do
not provide the job titles and salaries of
persons whose time was accounted for,
or explain the methodology used to
determine how much of an employee’s
time is devoted to that specific activity.
What are commenters’ views on
whether the Exchange has provided
sufficient detail on the identity and
nature of services provided by third
parties? Across all of the Exchange’s
projected costs, what are commenters’
views on whether the Exchange has
provided sufficient detail on the
elements that go into Full Service MEO
Port costs, including how shared costs
are allocated and attributed to Full
Service MEO Port expenses, to permit
an independent review and assessment
of the reasonableness of purported costbased fees and the corresponding profit
margin thereon? Should the Exchange
be required to identify for what services
or fees the remaining percentage of unallocated expenses are attributable to?
Do commenters believe that the costs
projected for 2021 are generally
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representative of expected costs going
forward (to the extent commenters
consider 2021 to be a typical or atypical
year), or should an exchange present an
estimated range of costs with an
explanation of how profit margins could
vary along the range of estimated costs?
Should the Exchange use cost
projections or actual costs estimated for
2021 in a filing made in 2022, or make
cost projections for 2022?
2. Revenue Estimates and Profit
Margin Range. The Exchange provides a
single monthly revenue figure as the
basis for calculating the profit margin of
38%. Do commenters believe this is
reasonable? If not, why not? The
Exchange states that their proposed fee
structure is ‘‘designed to cover its costs
with a limited return in excess of such
costs,’’ and that ‘‘revenue and associated
profit margin [ ] are not solely intended
to cover the costs associated with
providing services subject to the
proposed fees,’’ and believes that a 38%
margin is a limited return over such
costs.116 The profit margin is also
dependent on the accuracy of the cost
projections which, if inflated
(intentionally or unintentionally), may
render the projected profit margin
meaningless. The Exchange
acknowledges that this margin may
fluctuate from month to month due to
changes in the number of ports
purchased, and that costs may increase.
They also state that the number of ports
has not materially changed over the
prior months and so the months that the
Exchange has used as a baseline to
perform its assessment are
representative of reasonably anticipated
costs and expenses.117 The Exchange
does not account for the possibility of
cost decreases, however. What are
commenters’ views on the extent to
which actual costs (or revenues) deviate
from projected costs (or revenues)? Do
commenters believe that the Exchange’s
methodology for estimating the profit
margin is reasonable? Should the
Exchange provide a range of profit
margins that they believe are reasonably
possible, and the reasons therefor?
3. Reasonable Rate of Return. Do
commenters agree with the Exchange
that its expected 38% profit margin
would constitute a reasonable rate of
return over cost for Full Service MEO
Ports? If not, what would commenters
consider to be a reasonable rate of return
and/or what methodology would they
consider to be appropriate for
determining a reasonable rate of return?
What are commenters’ views regarding
what factors should be considered in
116 See
117 See
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id.
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10877
determining what constitutes a
reasonable rate of return for Full Service
MEO Ports? Do commenters believe it
relevant to an assessment of
reasonableness that the Exchange’s
proposed fees for Full Service MEO
Ports, even at the highest tier, are still
less than or similar to those of other
options exchanges to which the
Exchange has compared the Proposed
Access Fees? Should an assessment of
reasonable rate of return include
consideration of factors other than costs;
and if so, what factors should be
considered, and why?
4. Periodic Reevaluation. The
Exchange has addressed whether it
believes a material deviation from the
anticipated profit margin would warrant
the need to make a rule filing pursuant
to Section 19(b) of the Act to increase
or decrease the fees accordingly, stating
that ‘‘[a]ny requirement that an
exchange should conduct a periodic reevaluation on a set timeline of its cost
justification and amend its fees
accordingly should be established by
the Commission holistically, applied to
all exchanges and not just pending fee
proposals, such as this filing,’’ and that
‘‘[i]n order to be fairly applied, such a
mandate should be applied to existing
market data fees as well.’’ 118 In light of
the impact that the number of
subscribers has on Full Service MEO
Port 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 Full Service MEO
Port fees to ensure that they stay in line
with their stated profitability target and
do not become unreasonable over time,
for example, by failing to adjust for
efficiency gains, cost increases or
decreases, and changes in subscribers?
How formal should that process be, how
often should that reevaluation occur,
and what metrics and thresholds should
be considered? How soon after a new
Full Service MEO Port fee change is
implemented should an exchange assess
whether its subscriber estimates were
accurate and at what threshold should
an exchange commit to file a fee change
if its estimates were inaccurate? Should
an initial review take place within the
first 30 days after a Full Service MEO
Port fee is implemented? 60 days? 90
days? Some other period?
5. Tiered Structure for Full Service
MEO Ports Fees. The Exchange states
that proposed tiered-pricing structure is
reasonable, fair, equitable, and not
unfairly discriminatory because it is the
model adopted by the Exchange when it
118 See
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launched operations for its Full Service
MEO Port fees, and further, that the
amount of the fee is directly related to
the Member or non-Member’s TCV
resulting in higher fees for greater
TCV.119 What are commenters’ views on
the adequacy of the information the
Exchange provides regarding the
proposed differentials in fees? Do
commenters believe that the proposed
price differences are supported by the
Exchange’s assertions that it set the
level of each proposed new fee in a
manner that it equitable and not
unfairly discriminatory?
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the Exchange Act and
the rules and regulations issued
thereunder . . . is on the [SRO] that
proposed the rule change.’’ 120 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,121 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.122 Moreover,
‘‘unquestioning reliance’’ on an SRO’s
representations in a proposed rule
change would not be sufficient to justify
Commission approval of a proposed rule
change.123
The Commission believes it is
appropriate to institute proceedings to
allow for additional consideration and
comment on the issues raised herein,
including as to whether the proposal is
consistent with the Act, any potential
comments or supplemental information
provided by the Exchange, and any
additional independent analysis by the
Commission.
V. Commission’s Solicitation of
Comments
The Commission requests written
views, data, and arguments with respect
to the concerns identified above as well
as any other relevant concerns. In
particular, the Commission invites the
written views of interested persons
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119 See
id.
CFR 201.700(b)(3).
121 See id.
122 See id.
123 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).
120 17
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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.124
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by March 18, 2022. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by April 1, 2022.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
PEARL–2022–04 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PEARL–2022–04. 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
124 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act
grants the Commission flexibility to determine what
type of proceeding—either oral or notice and
opportunity for written comments—is appropriate
for consideration of a particular proposal by an
SRO. See Securities Acts Amendments of 1975,
Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2022–04 and
should be submitted on or before March
18, 2022. Rebuttal comments should be
submitted by April 1, 2022.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(3)(C) of the Act,125 that
File Numbers SR–PEARL–2022–04 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.126
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03964 Filed 2–24–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94280; File No. SR–ICEEU–
2022–004]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change Relating to
Amendments to the ICE Clear Europe
CDS Clearing Stress Testing Policy
and CDS Clearing Back-Testing Policy
February 18, 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
10, 2022, ICE Clear Europe Limited
(‘‘ICE Clear Europe’’ or the ‘‘Clearing
House’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
125 15
U.S.C. 78s(b)(3)(C).
CFR 200.30–3(a)(12), (57) and (58).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
126 17
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]]>Agencies
[Federal Register Volume 87, Number 38 (Friday, February 25, 2022)]
[Notices]
[Pages 10860-10878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03964]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94286; File No. SR-PEARL-2022-04]
Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing
of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule
To Increase the Monthly Fees for MIAX Express Network Full Service
Port; Suspension of and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove the Proposed Rule Change
February 18, 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 15, 2022, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i)
Temporarily suspending the rule change; and (ii) instituting
proceedings to determine whether to approve or disapprove the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to amend the fees for the
Exchange's MIAX
[[Page 10861]]
Express Network Full Service (``MEO'') \3\ Ports.
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\3\ ``MEO Interface'' or ``MEO'' means a binary order interface
for certain order types as set forth in Rule 516 into the MIAX Pearl
System. See the Definitions Section of the Fee Schedule and Exchange
Rule 100.
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The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV [sic] below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to increase the
fees for its Full Service MEO Ports, Bulk and Single (the ``Proposed
Access Fees''), which allow Members \4\ to submit electronic orders in
all products to the Exchange. The Exchange initially filed this
proposal on July 1, 2021, with the proposed fee changes being
immediately effective (``First Proposed Rule Change'').\5\ The First
Proposed Rule Change was published for comment in the Federal Register
on July 15, 2021.\6\ The Commission received one comment letter on the
First Proposed Rule Change \7\ and subsequently suspended the Frist
[sic] Proposed Rule Change on August 27, 2021.\8\ The Exchange withdrew
First Proposed Rule Change on October 12, 2021 and re-submitted the
proposal on November 1, 2021, 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 certain points raised in the single comment
letter that was submitted on the First Proposed Rule Change. The Second
Proposed Rule Change was published for comment in the Federal Register
on November 17, 2021.\10\ The Commission received no comment letters on
the Second Proposed Rule Change. Nonetheless, the Exchange withdrew the
Second Proposed Rule Change on December 20, 2021 and submitted a
revised proposal for immediate effectiveness (``Third Proposed Rule
Change'').\11\ The Third Proposed Rule Change was published for comment
in the Federal Register on January 10, 2022.\12\ The Third Proposed
Rule Change meaningfully attempted to provide additional justification
and explanation for the proposed fee changes, directly respond to the
points raised in the single comment letter submitted on the First
Proposed Rule Change, and respond to feedback provided by Commission
Staff during a telephone conversation on November 18, 2021 relating to
the Second Proposed Rule Change. Although the Commission again did not
receive any comment letters on the Third Proposed Rule Change, the
Exchange withdrew the Third Proposed Rule Change on February 15, 2022
and now submits this revised proposal for immediate effectiveness
(``Fourth Proposed Rule Change''). This Fourth Proposed Rule Change
provides additional justification and explanation for the proposed fee
changes.
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\4\ ``Member'' means an individual or organization that is
registered with the Exchange pursuant to Chapter II of Exchange
Rules for purposes of trading on the Exchange as an ``Electronic
Exchange Member'' or ``Market Maker.'' Members are deemed
``members'' under the Exchange Act. See the Definitions Section of
the Fee Schedule and Exchange Rule 100.
\5\ See Securities Exchange Act Release No. 92365 (July 9,
2021), 86 FR 37347 (July 15, 2021) (SR-PEARL-2021-33).
\6\ See id.
\7\ See Letter from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021 (``SIG Letter'').
\8\ See Securities Exchange Act Release No. 92798 (August 27,
2021), 86 FR 49360 (September 2, 2021).
\9\ See Securities Exchange Act Release No. 93556 (November 10,
2021), 86 FR 64235 (November 17, 2021) (SR-PEARL-2021-53).
\10\ See id.
\11\ Securities Exchange Act Release No. 93894 (January 4,
2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58).
\12\ Id.
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Full Service MEO Port Fee Changes
The Exchange currently offers different types of MEO Ports
depending on the services required by the Member, including a Full
Service MEO Port-Bulk,\13\ a Full Service MEO Port-Single,\14\ and a
Limited Service MEO Port.\15\ For one monthly price, a Member may be
allocated two (2) Full-Service MEO Ports of either type per matching
engine \16\ and may request Limited Service MEO Ports for which MIAX
Pearl will assess Members Limited Service MEO Port fees per matching
engine based on a sliding scale for the number of Limited Service MEO
Ports utilized each month. The two (2) Full-Service MEO Ports that may
be allocated per matching engine to a Member may consist of: (a) Two
(2) Full Service MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--
Single; or (c) one (1) Full Service MEO Port--Bulk and one (1) Full
Service MEO Port--Single.
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\13\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\14\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\15\ ``Limited Service MEO Port'' means an MEO port that
supports all MEO input message types, but does not support bulk
order entry and only supports limited order types, as specified by
the Exchange via Regulatory Circular. See the Definitions Section of
the Fee Schedule.
\16\ A ``Matching Engine'' is a part of the MIAX Pearl
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol. A particular root
symbol may only be assigned to a single designated Matching Engine.
A particular root symbol may not be assigned to multiple Matching
Engines. See the Definitions Section of the Fee Schedule.
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Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\17\ the
[[Page 10862]]
Exchange offers Full Service MEO Ports as a package and provides
Members with the option to receive up to two Full Service MEO Ports
(described above) per matching engine to which that Member connects.
The Exchange currently has twelve (12) matching engines, which means
Members may receive up to twenty-four (24) Full Service MEO Ports for a
single monthly fee, that can vary based on certain volume percentages,
as described below. For illustrative purposes and as described in more
detail below, the Exchange currently assesses a fee of $5,000 per month
for Members that reach the highest Full Service MEO Port--Bulk Tier,
regardless of the number of Full Service MEO Ports allocated to the
Member. For example, assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port ($5,000 divided by 24) for the month. This fee had been unchanged
since the Exchange adopted Full Service MEO Port fees in 2018.\18\
Beginning with the First Proposed Rule Change, the Exchange proposes to
increase Full Service MEO Port fees as further described below, with
the highest monthly fee of $10,000 for the Full Service MEO Port--Bulk.
Members will continue to receive two (2) Full Service MEO Ports to each
matching engine to which they connect for the single flat monthly fee.
Assuming a Member connects to all twelve (12) matching engines during
the month, with two Full Service MEO Ports per matching engine, this
would result in a cost of $416.67 per Full Service MEO Port ($10,000
divided by 24).
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\17\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees (each port charged on a per matching engine basis, with NYSE
American having 17 match engines). See NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many matching engines are used
by each exchange?) (September 2020) (providing a link to an Excel
file detailing the number of matching engines per options exchange);
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a
per matching engine basis, NYSE Arca having 19 match engines); and
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How
many matching engines are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the number of matching
engines per options exchange). See NASDAQ Fee Schedule, Nasdaq
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports
and Other Services (each port charged on a per matching engine
basis, with Nasdaq having multiple matching engines). See Nasdaq
Specialized Quote Interface (SQF) Specification, Version 6.5b
(updated February 13, 2020), Section 2, Architecture, available at
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The
NASDAQ SQF Interface Specification also provides that NASDAQ's
affiliates, Nasdaq PHLX LLC (``Nasdaq Phlx'') and Nasdaq BX, Inc.
(``Nasdaq BX''), have trading infrastructures that may consist of
multiple matching engines with each matching engine trading only a
range of option underlyings. Further, the NASDAQ SQF Interface
Specification provides that the SQF infrastructure is such that the
firms connect to one or more servers residing directly on the
matching engine infrastructure. Since there may be multiple matching
engines, firms will need to connect to each engine's infrastructure
in order to establish the ability to quote the symbols handled by
that engine.
\18\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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The Exchange assesses Members Full Service MEO Port Fees, either
for a Full Service MEO Port--Bulk and/or for a Full Service MEO Port--
Single, based upon the monthly total volume executed by a Member and
its Affiliates \19\ on the Exchange across all origin types, not
including Excluded Contracts,\20\ as compared to the Total Consolidated
Volume (``TCV''),\21\ in all MIAX Pearl-listed options. The Exchange
adopted a tier-based fee structure based upon the volume-based tiers
detailed in the definition of ``Non-Transaction Fees Volume-Based
Tiers'' described in the Definitions section of the Fee Schedule. The
Exchange assesses these and other monthly Port fees on Members in each
month the market participant is credentialed to use a Port in the
production environment.
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\19\ ``Affiliate'' means (i) an affiliate of a Member of at
least 75% common ownership between the firms as reflected on each
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market
Maker (who does not otherwise have a corporate affiliation based
upon common ownership with an EEM) that has been appointed by an EEM
and an ``Appointed EEM'' is an EEM (who does not otherwise have a
corporate affiliation based upon common ownership with a MIAX Pearl
Market Maker) that has been appointed by a MIAX Pearl Market Maker,
pursuant to the following process. A MIAX Pearl Market Maker
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for
the purposes of the Fee Schedule, by each completing and sending an
executed Volume Aggregation Request Form by email to
[email protected] no later than 2 business days prior to
the first business day of the month in which the designation is to
become effective. Transmittal of a validly completed and executed
form to the Exchange along with the Exchange's acknowledgement of
the effective designation to each of the Market Maker and EEM will
be viewed as acceptance of the appointment. The Exchange will only
recognize one designation per Member. A Member may make a
designation not more than once every 12 months (from the date of its
most recent designation), which designation shall remain in effect
unless or until the Exchange receives written notice submitted 2
business days prior to the first business day of the month from
either Member indicating that the appointment has been terminated.
Designations will become operative on the first business day of the
effective month and may not be terminated prior to the end of the
month. Execution data and reports will be provided to both parties.
See the Definitions Section of the Fee Schedule.
\20\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\21\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
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Current Full Service MEO Port--Bulk Fees. Prior to the First
Proposed Rule Change, the Exchange assessed Members monthly Full
Service MEO Port--Bulk fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $4,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
Proposed Full Service MEO Port--Bulk Fees. Since the First Proposed
Rule Change, the Exchange proposes to assess Members monthly Full
Service MEO Port--Bulk fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $5,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $7,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $10,000.
Current Full Service MEO Port--Single Fees. Prior to the First
Proposed Rule Change, the Exchange assessed Members monthly Full
Service MEO Port--Single fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,375; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
Proposed Full Service MEO Port--Single Fees. Since the First
Proposed Rule Change, the Exchange proposes to assess Members monthly
Full Service MEO Port--Single fees as follows:
(i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,500;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,500; and
(iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $4,500.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers \22\ or high frequency trading
[[Page 10863]]
firms utilize these ports (typically coupled with 10Gb ULL
connectivity) because they transact in significantly higher amounts of
messages being sent to and from the Exchange, versus FIX port users,
who are traditionally customers sending only orders to the Exchange
(typically coupled with 1Gb connectivity). The different types of ports
cater to the different types of Exchange Memberships and different
capabilities of the various Exchange Members. Certain Members need
ports and connections that can handle using far more of the network's
capacity for message throughput, risk protections, and the amount of
information that the System has to assess. Those Members may account
for the vast majority of network capacity utilization and volume
executed on the Exchange, as discussed throughout.
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\22\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
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The Exchange proposes to increase its monthly Full Service MEO Port
fees since it has not done so since the fees were adopted in 2018
(prior to the First Proposed Rule Change),\23\ which are designed to
recover a portion of the costs associated with directly accessing the
Exchange. The Exchange notes that its affiliates, Miami International
Securities Exchange, LLC (``MIAX'') and MIAX Emerald, LLC (``MIAX
Emerald''), charge fees for their high throughput, low latency MIAX
Express Interface (``MEI'') Ports in a similar fashion as the Exchange
charges for its MEO Ports--generally, the more active user the Member
(i.e., the greater number/greater national ADV of classes assigned to
quote on MIAX and MIAX Emerald), the higher the MEI Port fee.\24\ This
concept is not new or novel. The Exchange also notes that the proposed
increased fees for the Exchange's Full Service MEO Ports are in line
with, or cheaper than, the similar port fees for similar membership
fees charged by other options exchanges.\25\
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\23\ See supra note 18.
\24\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee
Schedule, Section 5)d)ii).
\25\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees; NYSE Arca Options Fee Schedule, Port Fees; Nasdaq Stock Market
LLC (``NASDAQ''), Options 7, Pricing Schedule, Section 3.
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The Exchange has historically undercharged for Full Service MEO
Ports as compared to other options exchanges \26\ because the Exchange
provides Full Service MEO Ports as a package for a single monthly fee.
As described above, this package includes two Full Service MEO Ports
for each of the Exchange's twelve (12) matching engines. The Exchange
understands other options exchanges charge fees on a per port basis.
The Exchange believes other exchanges' port fees are a useful example
of alternative approaches to providing and charging for port access and
provides the below table for comparison purposes only to show how its
proposed fees compare to fees currently charged by other options
exchanges for similar port access.
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\26\ See id.
----------------------------------------------------------------------------------------------------------------
Exchange Type of port Monthly fee
----------------------------------------------------------------------------------------------------------------
MIAX Pearl (as proposed)...... MEO Full Service-- Tier 1: $5,000 (or $208.33 per Matching Engine).
Bulk.
Tier 2: $7,500 (or $312.50 per Matching Engine).
Tier 3: $10,000 (or $416.66 per Matching Engine).
MEO Full Service-- Tier 1: $2,500 (or $104.16 per Matching Engine).
Single.
Tier 2: $3,500 (or $145.83 per Matching Engine).
Tier 3: $4,500 (or $187.50 per Matching Engine).
NYSE American, LLC (``NYSE Order/Quote Entry Ports 1-40: $450 each.
American'') \27\. Ports 41 or more: $150 each.
NYSE Arca, Inc. (``NYSE Order/Quote Entry Ports 1-40: $450 each.
Arca'') \28\. Ports 41 or more: $150 each.
NASDAQ \29\................... Specialized Quote Ports 1-5: $1,500 each.
Interface. Ports 6-20: $1,000 each.
Ports 21 or more: $500.
----------------------------------------------------------------------------------------------------------------
Implementation
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\27\ See id.
\28\ See id.
\29\ See id.
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The proposed fees are 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 \30\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \31\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest and is not designed to permit unfair discrimination between
customers, issuers, brokers and dealers.
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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(4) and (5).
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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'').\32\ 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.'' \33\ 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
[[Page 10864]]
reasonable because they will not result in excessive pricing or supra-
competitive profit; and (iv) utilize a cost-based justification
framework that is substantially similar to a framework previously used
by the Exchange, and its affiliates MIAX and MIAX Emerald, to adopt or
amend non-transaction fees (including port and connectivity fees) and
market data fees.\34\
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\32\ 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).
\33\ 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'').
\34\ 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).
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The Proposed Access Fees Will Not Result in a Supra-Competitive Profit
The Exchange believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee amendment meets the requirements of the Act that fees
are reasonable, equitably allocated, not unfairly discriminatory, and
not create an undue burden on competition among market participants.
The Exchange believes this high standard is especially important when
an exchange imposes various access fees for market participants to
access an exchange's marketplace. The Exchange deems the Full Service
MEO Port fees to be access fees. It records these fees as part of its
``Access Fees'' revenue in its financial statements.
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.''
\35\ 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.'' \36\ 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.'' \37\ The Exchange does not assert
that the Proposed Access Fees are constrained by competitive forces.
Rather, the Exchange asserts that the Proposed Access Fees are
reasonable because they will permit recovery of the Exchange's costs in
providing access via Full Service MEO Ports and will not result in the
Exchange generating a supra-competitive profit.
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\35\ See Guidance, supra note 33.
\36\ Id.
\37\ Id.
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The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \38\
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.'' \39\ The Exchange provides
this analysis below.
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\38\ Id.
\39\ Id.
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Based on this analysis, the Exchange believes the Proposed Access
Fees are reasonable and do not result in a ``supra-competitive'' \40\
profit. The Exchange believes that it is important to demonstrate that
these fees are based on its costs and reasonable business needs. The
Exchange believes the Proposed Access Fees will allow the Exchange to
offset expense the Exchange has and will incur, and that the Exchange
is providing sufficient transparency (as described below) into how the
Exchange determined to charge such fees. Accordingly, the Exchange is
providing an analysis of its revenues, costs, and profitability
associated with the Proposed Access Fees. This analysis includes
information regarding its methodology for determining the costs and
revenues associated with the Proposed Access Fees. As a result of this
analysis, the Exchange believes the Proposed Access Fees are fair and
reasonable as a form of cost recovery plus present the possibility of a
reasonable return for the Exchange's aggregate costs of offering Full
Service MEO Port access to the Exchange.
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\40\ Id.
---------------------------------------------------------------------------
The Proposed Access Fees are based on a cost-plus model. In
determining the appropriate fees to charge, the Exchange considered its
costs to provide Full Service MEO Ports, 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 Full Service MEO Ports) to estimate such costs,\41\ as
well as the relative costs of providing and maintaining Full Service
MEO Ports, and set fees that are designed to cover its costs with a
limited return in excess of such costs. However, as discussed more
fully below, such fees may also result in the Exchange recouping less
than all of its costs of providing and maintaining Full Service MEO
Ports because of the uncertainty of forecasting subscriber decision
making with respect to firms' port needs and the likely potential for
increased costs to procure the third-party services described below.
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\41\ For example, the Exchange only included the costs
associated with providing and supporting Full Service MEO Ports and
excluded from its cost calculations any cost not directly associated
with providing and maintaining such ports. Thus, the Exchange notes
that this methodology underestimates the total costs of providing
and maintaining Full Service MEO Port access.
---------------------------------------------------------------------------
To determine the Exchange's costs to provide the access services
associated with the Proposed Access Fees, the Exchange conducted an
extensive cost review in which the Exchange analyzed nearly every
expense item in the Exchange's general expense ledger to determine
whether each such expense relates to the Proposed Access Fees, and, if
such expense did so relate, what portion (or percentage) of such
expense actually supports the access services. The sum of all such
portions of expenses represents the total cost of the Exchange to
provide the access services associated with the Proposed Access Fees.
The Exchange also provides detailed information regarding the
Exchange's cost allocation methodology--namely, information that
explains the Exchange's rationale for determining that it was
reasonable to allocate certain expenses described in this filing
towards the cost to the Exchange to provide the access services
associated with the Proposed Access Fees. The Exchange conducted a
thorough internal analysis to determine the portion (or percentage) of
each expense to allocate to the support of access services associated
with the Proposed Access Fees. This analysis included discussions with
each Exchange department head to determine the expenses that support
access services associated with the Proposed Access Fees. This included
numerous meetings between the Exchange's Chief Information Officer,
Chief Financial Officer, Head of Strategic Planning and Operations,
Chief Technology Officer, various members of the Legal Department, and
other group leaders. The Exchange reviewed each individual expense to
[[Page 10865]]
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 access services for the
Proposed Access Fees. The sum of all such portions of expenses
represents the total cost to the Exchange to provide access services
associated with the Proposed Access Fees. For the avoidance of doubt,
no expense amount was allocated twice.
The internal cost analysis conducted by the Exchange is a
proprietary process that is designed to make a fair and reasonable
assessment of costs and resources allocated to support the provision of
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.\42\ For example, a proposed fee filing that closely resembles
the Exchange's current filing was submitted in 2020 by the Cboe
Exchange, Inc. (``Cboe'') and increased fees for Cboe's 10Gb
connections, an access fee.\43\ This filing was submitted on September
2, 2020, nearly 15 months after the Staff's Guidance was issued. In
that filing, the Cboe stated that the ``proposed changes were not
designed with the objective to generate an overall increase in access
fee revenue.'' \44\ This filing provided no cost based data to support
its assertion that the proposal was intended to be revenue neutral.
Among other things, Cboe did not provide a description of the costs
underlying its provision of 10Gb connections to show that this
particular fee did not generate a supra-competitive profit or describe
how any potential profit may be offset by increased costs associated
with another fee included in its proposal. This filing, nonetheless,
was not suspended by the Commission and remains in effect today.
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\42\ 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).
\43\ See Securities Exchange Act Release No. 89826 (September
10, 2020), 85 FR 57900 (September 16, 2020) (SR-CBOE-2020-086)
(increasing connectivity fees without including a cost based
justification).
\44\ See id. at 57909.
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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''). IEX previously provided its TOP and DEEP market data feeds
for free and proposed to adopt modest, below market fees. 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.\45\
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\45\ See Securities Exchange Act Release No. 93883 (December 30,
2021), 87 FR 523 (January 5, 2021) (SR-IEX-2021-14) (the ``IEX
Order'').
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The Commission received three comment letters on the IEX Order.\46\
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.' '' \47\ 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.\48\ HMA Letter 2 provides three examples to
support this assertion.\49\ 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
[[Page 10866]]
to withstand judicial scrutiny.'' \50\ The Exchange agrees.
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\46\ 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'').
\47\ See Virtu Letter at page 3, id.
\48\ 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'').
\49\ 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.
\50\ See Nasdaq Letter at page 13, id.
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The Exchange believes exchanges, like all businesses, should be
provided flexibility when allocating costs and resources they deem
necessary to operate their business, including providing market data
and access services. The Exchange notes that costs and resource
allocations may vary from business to business and, likewise, costs and
resource allocations may differ from exchange to exchange when it comes
to providing market data and access services. It is a business decision
that must be evaluated by each exchange as to how to allocate internal
resources and what costs to incur internally or via third parties that
it may deem necessary to support its business and its provision of
market data and access services to market participants. An exchange's
costs may also vary based on fees charged by third parties and periodic
increases to those fees that may be outside of the control of an
exchange.
To determine the Exchange's projected revenues associated with the
Proposed Access Fees in the instant filing, the Exchange analyzed the
number of Members currently utilizing Full Service MEO Ports, and,
utilizing a recent monthly billing cycle representative of 2021 monthly
revenue, extrapolated annualized revenue on a going-forward basis. The
Exchange does not believe it is appropriate to factor into its analysis
projected or estimated future revenue growth or decline for purposes of
these calculations, given the uncertainty of such projections due to
the continually changing access needs of market participants and
potential increase in internal and third party expenses. The Exchange
is presenting its revenue and expense associated with the Proposed
Access Fees in this filing in a manner that is consistent with how the
Exchange presents its revenue and expense in its Audited Unconsolidated
Financial Statements. The Exchange's most recent Audited Unconsolidated
Financial Statement is for 2020. However, since the revenue and expense
associated with the Proposed Access Fees were not in place in 2020 or
for the majority of 2021, the Exchange believes its 2020 Audited
Unconsolidated Financial Statement is not representative of its current
total annualized revenue and costs associated with the Proposed Access
Fees. Accordingly, the Exchange believes it is more appropriate to
analyze the Proposed Access Fees utilizing its 2021 revenue and costs,
as described herein, which utilize the same presentation methodology as
set forth in the Exchange's previously-issued Audited Unconsolidated
Financial Statements. Based on this analysis, the Exchange believes
that the Proposed Access Fees are fair and reasonable because they will
not result in excessive pricing or supra-competitive profit when
comparing the Exchange's total annual expense associated with providing
the services associated with the Proposed Access Fees versus the total
projected annual revenue the Exchange will collect for providing those
services. The Exchange notes that this is the same justification
process utilized by the Exchange's affiliate, MIAX Emerald, in a filing
recently noticed and not suspended by the Commission when MIAX Emerald
adopted MEI Port fees.\51\
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\51\ See Securities Exchange Act Release No. 91460 (April 2,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network
Connectivity Fees, and Increase the Number of Additional Limited
Service MIAX Emerald Express Interface Ports Available to Market
Makers) (adopting tiered MEI Port fee structure ranging from $5,000
to $20,500 per month).
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As outlined in more detail below, the Exchange projects that the
final annualized expense for 2021 to provide Full Service MEO Ports to
be approximately $897,084 per annum or an average of $74,757 per month.
The Exchange implemented the Proposed Access Fees on July 1, 2021 in
the First Proposed Rule Change. For June 2021, prior to the Proposed
Access Fees, Members and non-Members purchased a total of 20 Full
Service MEO Ports, for which the Exchange charged a total of
approximately $71,625. This resulted in a loss of $3,132 for that month
(a margin of -4.37%). For the month of November 2021, which includes
the Proposed Access Fees, Members and non-Members purchased a total of
19 Full Service MEO Ports,\52\ for which the Exchange charged a total
of approximately $122,000 for that month. This resulted in a profit of
$47,243 for that month, representing a profit margin of approximately
38%. The Exchange believes that the Proposed Access Fees are reasonable
because they are designed to approximately generate a modest profit
margin of 38% per-month.\53\ The Exchange cautions that this profit
margin is likely to fluctuate from month to month based on the
uncertainty of predicting how many Full Service MEO Ports may be
purchased from month to month as Members and non-Members are able to
add and drop ports at any time based on their own business decisions,
which they frequently do. This profit margin may also decrease due to
the significant inflationary pressure on capital items that the
Exchange needs to purchase to maintain the Exchange's technology and
systems.\54\ 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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\52\ The Exchange notes that one Member dropped one Full Service
MEO Port-Bulk between June 2021 and November 2021, as a result of
the Proposed Access Fees.
\53\ The Exchange notes that this profit margin differs from the
First and Second Proposed Rule Changes because the Exchange now has
the benefit of using a more recent billing cycle under the Proposed
Access Fees (November 2021) and comparing it to a baseline month
(June 2021) from before the Proposed Access Fees were in effect.
\54\ 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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As mentioned above, the Exchange projects that the final annualized
expense for 2021 to provide the services associated with the Proposed
Access Fees to be approximately $897,084 per annum or an average of
$74,757 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.\55\ The Exchange notes that
there are material costs associated with providing the infrastructure
and headcount to fully-support access to the Exchange. The Exchange
incurs technology expense related to establishing and maintaining
Information Security services, enhanced network monitoring and customer
reporting, as well as Regulation SCI mandated processes, associated
with its
[[Page 10867]]
network technology. While some of the expense is fixed, much of the
expense is not fixed, and thus increases the cost to the Exchange to
provide access services associated with the Proposed Access Fees. For
example, new Members to the Exchange may require the purchase of
additional hardware to support those Members as well as enhanced
monitoring and reporting of customer performance that the Exchange and
its affiliates provide. Further, as the total number of Members
increases, the Exchange and its affiliates may need to increase their
data center footprint and consume more power, resulting in increased
costs charged by their third-party data center provider. Accordingly,
the cost to the Exchange and its affiliates to provide access to its
Members is not fixed and indeed is likely to increase rather than
decrease over time. The Exchange believes the Proposed Access Fees are
a reasonable attempt to offset a portion of the costs to the Exchange
associated with providing access to its network infrastructure.
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\55\ For example, on October 20, 2021, ICE Data Services
announced a 3.5% price increase effective January 1, 2022 for most
services. The price increase by ICE Data Services includes their
SFTI network, which is relied on by a majority of market
participants, including the Exchange. See email from ICE Data
Services to the Exchange, dated October 20, 2021. The Exchange
further notes that on October 22, 2019, the Exchange was notified by
ICE Data Services that it was raising its fees charged to the
Exchange by approximately 11% for the SFTI network.
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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 (which includes the Proposed Access Fees), regulatory fees,
and market data fees. Accordingly, the Exchange must cover all of its
expenses from these four primary sources of revenue and cost recovery
mechanisms. Until recently, the Exchange has operated at a cumulative
net annual loss since it launched operations in 2017.\56\ 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.\57\ To do so, the
Exchange chose to waive the fees for some non-transaction related
services or provide them at a very marginal cost, which was not
profitable to the Exchange. This resulted in the Exchange forgoing
revenue it could have generated from assessing higher fees.
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\56\ The Exchange has incurred a cumulative loss of $86 million
since its inception in 2017 to 2020, the last year for which the
Exchange's Form 1 data is available. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed July 28, 2021, available at
https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
\57\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
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The Exchange believes that the Proposed Access Fees are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the
Exchange projects to incur in connection with providing these access
services versus the total annual revenue that the Exchange projects to
collect in connection with services associated with the Proposed Access
Fees. For 2021,\58\ the total annual expense for providing the access
services associated with the Proposed Access Fees for the Exchange is
projected to be approximately $897,084, or approximately $74,757 per
month. The $897,084 in projected total annual expense is comprised of
the following, all of which are directly related to the access services
associated with the Proposed Access Fees: (1) Third-party expense,
relating to fees paid by the Exchange to third-parties for certain
products and services; and (2) internal expense, relating to the
internal costs of the Exchange to provide the services associated with
the Proposed Access Fees.\59\ As noted above, the Exchange believes it
is more appropriate to analyze the Proposed Access Fees utilizing its
2021 revenue and costs, which utilize the same presentation methodology
as set forth in the Exchange's previously-issued Audited Unconsolidated
Financial Statements.\60\ The $897,084 in projected total annual
expense is directly related to the access services associated with the
Proposed Access Fees, and not any other product or service offered by
the Exchange. It does not include general costs of operating matching
systems and other trading technology, and no expense amount was
allocated twice.
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\58\ The Exchange has not yet finalized its 2021 year end
results.
\59\ 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.
\60\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing
its financial statements for 2018. See Securities Exchange Act
Release No. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020)
(SR-PEARL-2019-36). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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As discussed, the Exchange conducted an extensive cost review in
which the Exchange analyzed nearly every expense item in the Exchange's
general expense ledger (this includes over 150 separate and distinct
expense items) to determine whether each such expense relates to the
access services associated with the Proposed Access Fees, and, if such
expense did so relate, what portion (or percentage) of such expense
actually supports those services, and thus bears a relationship that
is, ``in nature and closeness,'' directly related to those services. 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 access services associated with the Proposed Access
Fees.
External Expense Allocations
For 2021, total third-party expense, relating to fees paid by the
Exchange to third-parties for certain products and services for the
Exchange to be able to provide the access services associated with the
Proposed Access Fees, is projected to be $40,166. This includes, but is
not limited to, a portion of the fees paid to: (1) Equinix, for data
center services, for the primary, secondary, and disaster recovery
locations of the Exchange's trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking the Exchange's office
locations in Princeton, New Jersey and Miami, Florida, to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''),\61\ which supports connectivity and feeds for the entire
U.S. options industry; (4) various other services providers (including
Thompson Reuters, NYSE, NASDAQ, and Internap), which provide content,
connectivity services, and infrastructure services for critical
components of options connectivity and network services; and (5)
various other hardware
[[Page 10868]]
and software providers (including Dell and Cisco, which support the
production environment in which Members connect to the network to
trade, receive market data, etc.).
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\61\ In fact, on October 20, 2021, ICE Data Services announced a
3.5% price increase effective January 1, 2022 for most services. The
price increase by ICE Data Services includes their SFTI network,
which is relied on by a majority of market participants, including
the Exchange. See email from ICE Data Services to the Exchange,
dated October 20, 2021. This fee increase by ICE data services,
while not subject to Commission review, has material impact on cost
to exchanges and other market participants that provide downstream
access to other market participants. The Exchange notes that on
October 22, 2019, the Exchange was notified by ICE Data Services
that it was raising its fees charged to the Exchange by
approximately 11% for the SFTI network, without having to show that
such fee change complies with the Act by being reasonable, equitably
allocated, and not unfairly discriminatory. It is unfathomable to
the Exchange that, given the critical nature of the infrastructure
services provided by SFTI, that its fees are not required to be
rule-filed with the Commission pursuant to Section 19(b)(1) of the
Act and Rule 19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4, respectively.
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For clarity, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to the providing access services in connection with the
Proposed Access Fees. Only a portion of all fees paid to such third-
parties is included in the third-party expense herein, and no expense
amount is allocated twice. Accordingly, the Exchange does not allocate
its entire information technology and communication costs to the access
services associated with the Proposed Access Fees. This may result in
the Exchange under allocating an expense to the provision of access
services in connection with the Proposed Access Fees and such expenses
may actually be higher or increase above what the Exchange utilizes
within this proposal. Further, the Exchange notes that, with respect to
the MIAX Pearl expenses included herein, those expenses only cover the
MIAX Pearl options market; expenses associated with the MIAX Pearl
equities market are accounted for separately and are not included
within the scope of this filing. As noted above, the percentage
allocations used in this proposed rule change may differ from past
filings from the Exchange or its affiliates due to, among other things,
changes in expenses charged by third-parties, adjustments to internal
resource allocations, and different system architecture of the Exchange
as compared to its affiliates. Further, as part its ongoing assessment
of costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
Therefore, the percentage allocations used in this proposed rule change
may differ from past filings from the Exchange or its affiliates due
to, among other things, changes in expenses charged by third-parties,
adjustments to internal resource allocations, and different system
architecture of the Exchange as compared to its affiliates.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the access
services associated with the Proposed Access Fees to its Members and
their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only that portion which the Exchange
identified as being specifically mapped to providing the access
services associated with the Proposed Access Fees. According to the
Exchange's calculations, it allocated approximately 1.80% 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 access
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.\62\
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\62\ As noted above, the percentage allocations used in this
proposed rule change may differ from past filings from the Exchange
or its affiliates due to, among other things, changes in expenses
charged by third-parties, adjustments to internal resource
allocations, and different system architecture of the Exchange as
compared to its affiliates. Again, as part its ongoing assessment of
costs and expenses, the Exchange recently conducted a periodic
thorough review of its expenses and resource allocations which, in
turn, resulted in a revised percentage allocations in this filing.
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The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking the
Exchange with its affiliates, MIAX and MIAX Emerald, as well as the
data center and disaster recovery locations. As such, all of the trade
data, including the billions of messages each day per exchange, flow
through Zayo's infrastructure over the Exchange's network. Without
these services from Zayo, the Exchange would not be able to operate and
support the network and provide the access services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the access services associated
with the Proposed Access Fees, only the portion which the Exchange
identified as being specifically mapped to providing the Proposed
Access Fees. According to the Exchange's calculations, it allocated
approximately 0.90% 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 access services associated with the Proposed
Access Fees, and not any other service, as supported by its cost
review.\63\
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\63\ Id.
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The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, NASDAQ, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the access services associated with
the Proposed Access Fees. According to the Exchange's calculations, it
allocated approximately 0.90% of the total applicable SFTI and other
service providers' 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 access
services associated with the Proposed Access Fees.\64\
---------------------------------------------------------------------------
\64\ Id.
---------------------------------------------------------------------------
The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide access to its Members and their customers. The Exchange did not
allocate all of the hardware and software provider expense toward the
cost of providing the access services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to
[[Page 10869]]
providing the access services associated with the Proposed Access Fees.
According to the Exchange's calculations, it allocated approximately
0.90% 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 access services associated with
the Proposed Access Fees.\65\
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\65\ Id.
---------------------------------------------------------------------------
Internal Expense Allocations
For 2021, total projected internal expenses relating to the
Exchange providing the access services associated with the Proposed
Access Fees, is projected to be $856,918. This includes, but is not
limited to, costs associated with: (1) Employee compensation and
benefits for full-time employees that support the access services
associated with the Proposed Access Fees, including staff in network
operations, trading operations, development, system operations,
business, as well as staff in general corporate departments (such as
legal, regulatory, and finance) that support those employees and
functions; (2) depreciation and amortization of hardware and software
used to provide the access services associated with the Proposed Access
Fees, including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the network for trading; and (3) occupancy costs for leased
office space for staff that provide the access services associated with
the Proposed Access Fees. The breakdown of these costs is more fully-
described below.
For clarity, 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 the access services in connection with the
Proposed Access Fees. Only a portion of all such internal expenses are
included in the internal expense herein, and no expense amount is
allocated twice. Accordingly, the Exchange does not allocate its entire
costs contained in those items to the access services associated with
the Proposed Access Fees. This may result in the Exchange under
allocating an expense to the provision of access services in connection
with the Proposed Access Fees and such expenses may actually be higher
or increase above what the Exchange utilizes within this proposal.
Further, as part its ongoing assessment of costs and expenses
(described above), the Exchange recently conducted a periodic thorough
review of its expenses and resource allocations which, in turn,
resulted in a revised percentage allocations in this filing.
The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the access services associated with the Proposed Access Fees.
In particular, the Exchange's employee compensation and benefits
expense relating to providing the access services associated with the
Proposed Access Fees is projected to be $783,513, which is only a
portion of the $9,163,894 total projected expense for employee
compensation and benefits. The Exchange believes it is reasonable to
allocate the identified portion of such expense because this includes
the time spent by employees of several departments, including
Technology, Back Office, Systems Operations, Networking, Business
Strategy Development (who create the business requirement documents
that the Technology staff use to develop network features and
enhancements), Trade Operations, Finance (who provide billing and
accounting services relating to the network), and Legal (who provide
legal services relating to the network, such as rule filings and
various license agreements and other contracts). As part of the
extensive cost review conducted by the Exchange, the Exchange reviewed
the amount of time spent by each employee on matters relating to the
provision of access services associated with the Proposed Access Fees.
Without these employees, the Exchange would not be able to provide the
access services associated with the Proposed Access Fees to its Members
and their customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of the access
services associated with the Proposed Access Fees, only the portions
which the Exchange identified as being specifically mapped to providing
the access services associated with the Proposed Access Fees. According
to the Exchange's calculations, it allocated approximately 8.55% 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 access services associated with
the Proposed Access Fees, and not any other service, as supported by
its cost review.\66\
---------------------------------------------------------------------------
\66\ Id.
---------------------------------------------------------------------------
The Exchange's depreciation and amortization expense relating to
providing the access services associated with the Proposed Access Fees
is projected to be $64,456, which is only a portion of the $2,864,716
\67\ total projected expense for depreciation and amortization. The
Exchange believes it is reasonable to allocate the identified portion
of such expense because such expense includes the actual cost of the
computer equipment, such as dedicated servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were purchased to operate and support the network and provide the
access services associated with the Proposed Access Fees. Without this
equipment, the Exchange would not be able to operate the network and
provide the access services associated with the Proposed Access Fees to
its Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the access services associated with the Proposed Access Fees, only the
portion which the Exchange identified as being specifically mapped to
providing the access services associated with the Proposed Access Fees.
According to the Exchange's calculations, it allocated approximately
2.25% of the total applicable depreciation and amortization expense to
providing the services associated with the proposed fees, as these
access services would not be possible without relying on such. The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to provide the access services associated
with the Proposed Access Fees, and not any other service, as supported
by its cost review.\68\
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\67\ The Exchange notes that the total depreciation expense is
different from the total for the Exchange's filing relating to
Trading Permits because the Exchange factors in the depreciation of
its own internally developed software when assessing costs for Full
Service MEO Ports, resulting in a higher depreciation expense number
in this filing.
\68\ Id.
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The Exchange's occupancy expense relating to providing the access
services associated with the Proposed Access Fees is projected to be
$8,949, which is only a portion of the $497,180 total projected expense
for occupancy. The Exchange believes it is reasonable to allocate the
identified portion of such expense because such expense
[[Page 10870]]
represents the portion of the Exchange's cost to rent and maintain a
physical location for the Exchange's staff who operate and support the
network, including providing the access services associated with the
Proposed Access Fees. This amount consists primarily of rent for the
Exchange's Princeton, New Jersey office, as well as various related
costs, such as physical security, property management fees, property
taxes, and utilities. The Exchange operates its Network Operations
Center (``NOC'') and Security Operations Center (``SOC'') from its
Princeton, New Jersey office location. A centralized office space is
required to house the staff that operates and supports the network. The
Exchange currently has approximately 200 employees. Approximately two-
thirds of the Exchange's staff are in the Technology department, and
the majority of those staff have some role in the operation and
performance of the access services associated with the Proposed Access
Fees. Without this office space, the Exchange would not be able to
operate and support the network and provide the access services
associated with the Proposed Access Fees to its Members and their
customers. Accordingly, the Exchange believes it is reasonable to
allocate the identified portion of its occupancy expense because such
amount represents the Exchange's actual cost to house the equipment and
personnel who operate and support the Exchange's network infrastructure
and the access services associated with the Proposed Access Fees. The
Exchange did not allocate all of the occupancy expense toward the cost
of providing the access services associated with the Proposed Access
Fees, only the portion which the Exchange identified as being
specifically mapped to operating and supporting the network. According
to the Exchange's calculations, it allocated approximately 1.80% 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
access services associated with the Proposed Access Fees, and not any
other service, as supported by its cost review.\69\
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\69\ Id.
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The Exchange notes that a material portion of its total overall
expense is allocated to the provision of access services (including
connectivity, ports, and trading permits). The Exchange believes this
is reasonable and in line, as the Exchange operates a technology-based
business that differentiates itself from its competitors based on its
trading systems that rely on access to a high performance network,
resulting in significant technology expense. Over two-thirds of
Exchange staff are technology-related employees. The majority of the
Exchange's expense is technology-based. As described above, the
Exchange has only four primary sources of fees in to recover its costs,
thus the Exchange believes it is reasonable to allocate a material
portion of its total overall expense towards access fees.
Based on the above, the Exchange believes that its provision of
access services associated with the Proposed Access Fees will not
result in excessive pricing or supra-competitive profit. As discussed
above, the Exchange projects that the annualized expense for 2021 to
provide Full Service MEO Ports to be approximately $897,084 per annum
or an average of $74,757 per month. The Exchange implemented the
Proposed Access Fees on July 1, 2021 in the First Proposed Rule Change.
For June 2021, prior to the Proposed Access Fees, Members and non-
Members purchased a total of 20 Full Service MEO Ports, for which the
Exchange charged a total of approximately $71,625. This resulted in a
loss of $3,132 for that month (a margin of -4.37%). For the month of
November 2021, which includes the Proposed Access Fees, Members and
non-Members purchased a total of 19 Full Service MEO Ports, for which
the Exchange charged a total of approximately $122,000 for that month.
This resulted in a profit of $47,243 for that month, representing a
profit margin of 38%. The Exchange believes that the Proposed Access
Fees are reasonable because they are designed to generate an
approximate profit margin of 38% per-month. The Exchange believes this
modest profit margin will allow it to continue to recoup its expenses
and continue to invest in its technology infrastructure. Therefore, the
Exchange also believes that this proposed profit margin increase is
reasonable because it represents a reasonable rate of return.
Again, the Exchange cautions that this profit margin is likely to
fluctuate from month to month based in the uncertainty of predicting
how many Full Service MEO Ports may be purchased from month to month as
Members and non-Members are free to add and drop ports at any time
based on their own business decisions. Notwithstanding that the revenue
(and profit margin) may vary from month to month due to changes in the
number of ports utilized and volume conducted on the Exchange, as well
as changes to the Exchange's expenses, the number of ports utilized 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 profit margin may also decrease due to the significant
inflationary pressure on capital items that it needs to purchase to
maintain the Exchange's technology and systems.\70\ Accordingly, the
Exchange believes its total projected revenue for providing the access
services associated with the Proposed Access Fees will not result in
excessive pricing or supra-competitive profit.
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\70\ See supra note 54.
---------------------------------------------------------------------------
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.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the access
services associated with the Proposed Access Fees because the Exchange
performed a line-by-line item analysis of nearly every expense of the
Exchange, and has determined the expenses that directly relate to
providing access to the Exchange. Further, the Exchange notes that,
without the specific third-party and internal items listed above, the
Exchange would not be able to provide
[[Page 10871]]
the access services associated with the Proposed Access Fees to its
Members and their customers. Each of these expense items, including
physical hardware, software, employee compensation and benefits,
occupancy costs, and the depreciation and amortization of equipment,
have been identified through a line-by-line item analysis to be
integral to providing access services. The Proposed Access Fees are
intended to recover the Exchange's costs of providing access to
Exchange Systems. Accordingly, the Exchange believes that the Proposed
Access Fees are fair and reasonable because they do not result in
excessive pricing or supra-competitive profit, when comparing the
actual costs to the Exchange versus the projected annual revenue from
the Proposed Access Fees.
The Proposed Tiered-Pricing Structure Is Not Unfairly Discriminatory
and Provides for the Equitable Allocation of Fees, Dues, and Other
Charges
The Exchange believes the proposed tiered-pricing structure is
reasonable, fair, equitable, and not unfairly discriminatory because it
is the model adopted by the Exchange when it launched operations for
its Full Service MEO Port fees. Moreover, the tiered pricing structure
for Full Service MEO Ports is not a new proposal and has been in place
since 2018, well prior to the filing of the First Proposed Rule Change.
The proposed tiers of Full Service MEO Port fees will continue to apply
to all Members and non-Members in the same manner based upon the
monthly total volume executed by a Member and its Affiliates on the
Exchange across all origin types, not including Excluded Contracts, as
compared to the TCV in all MIAX Pearl-listed options. Members and non-
Members may choose to purchase more than the two Full Service MEO Ports
the Exchange currently provides upfront based on their own business
decisions and needs. All similarly situated Members and non-Members
would be subject to the same fees. The fees do not depend on any
distinction between Members and non-Members because they are solely
determined by the individual Members' or non-Members' business needs
and their impact on Exchange resources.
The proposed tiered-pricing structure is not unfairly
discriminatory and provides for the equitable allocation of fees, dues,
and other charges because it is designed to encourage Members and non-
Members to be more efficient and economical when determining how to
access the Exchange and the amount of the fees are based on the number
of Full Service MEO Ports utilized, in addition to the amount of volume
conducted on the Exchange. The proposed tiered pricing structure should
also enable the Exchange to better monitor and provide access to the
Exchange's network to ensure sufficient capacity and headroom in the
System.
The proposed tiered-pricing structure is not unfairly
discriminatory and provides for the equitable allocation of fees, dues,
and other charges because the amount of the fee is directly related to
the Member or non-Member's TCV resulting in higher fees for greater
TCV. The higher the volume, the greater pull on Exchange resources. The
Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 10.7 million
order messages per second. On an average day, the Exchange handles over
approximately 2.7 billion total messages. However, in order to achieve
a consistent, premium network performance, the Exchange must build out
and maintain a network that has the capacity to handle the message rate
requirements of its most heavy network consumers. These billions of
messages per day consume the Exchange's resources and significantly
contribute to the overall expense for storage and network transport
capabilities.
There are material costs associated with providing the
infrastructure and headcount to fully-support access to the Exchange.
The Exchange incurs technology expense related to establishing and
maintaining Information Security services, enhanced network monitoring
and customer reporting, as well as Regulation SCI mandated processes,
associated with its network technology. While some of the expense is
fixed, much of the expense is not fixed, and thus increases as the
services associated with the Proposed Access Fees increase. For
example, new Members to the Exchange may require the purchase of
additional hardware to support those Members as well as enhanced
monitoring and reporting of customer performance that the Exchange and
its affiliates provide. Further, as the total number of Members
increases, the Exchange and its affiliates may need to increase their
data center footprint and consume more power, resulting in increased
costs charged by their third-party data center provider. Accordingly,
the cost to the Exchange and its affiliates to provide access to its
Members is not fixed. The Exchange believes the Proposed Access Fees
are reasonable in order to offset a portion of the costs to the
Exchange associated with providing access to its network
infrastructure.
The Exchange notes that the firms that purchase more than two Full
Service MEO Ports that the Exchange initially provides essentially do
so for competitive reasons amongst themselves and choose to utilize
numerous ports based on their business needs and desire to attempt to
access the market quicker by using the port with the least amount of
latency. These firms are generally engaged in sending liquidity
removing orders to the Exchange and seek to add more ports so they can
access resting liquidity ahead of their competitors. For instance, a
Member may have just sent numerous messages and/or orders over one of
their Full Service MEO Ports that are in queue to be processed. That
same Member then seeks to enter an order to remove liquidity from the
Exchange's Book. That Member may choose to send that order over one or
more of their other Full Service MEO Ports with less message and/or
order traffic to ensure that their liquidity taking order accesses the
Exchange quicker because that port's queue is shorter. These firms also
tend to frequently add and drop ports mid-month to determine which have
the least latency, which results in increased costs to the Exchange to
constantly make changes in the data center.
The firms that engage in the above-described liquidity removing and
advanced trading strategies typically require more than two Full
Service MEO Ports and, therefore, generate higher costs by utilizing
more of the Exchange's resources. Those firms may also conduct other
latency measurements over their ports and drop and simultaneously add
ports mid-month based on their own assessment of their performance.
This results in Exchange staff processing such requests, potentially
purchasing additional equipment, and performing the necessary network
engineering to replace those ports in the data center. Therefore, the
Exchange believes it is equitable for these firms to experience
increased port costs based on their disproportionate pull on Exchange
resources to provide the additional ports.
In addition, the proposed tiered-pricing structure is equitable
because it is designed to encourage Members and non-Members to be more
efficient and economical when determining how to connect to the
Exchange. Section 6(b)(5) of the Exchange Act requires the Exchange to
provide access on terms
[[Page 10872]]
that are not unfairly discriminatory.\71\ As stated above, Full Service
MEO Ports are not an unlimited resource and the Exchange's network is
limited in the amount of ports it can provide. However, the Exchange
must accommodate requests for additional ports and access to the
Exchange's System to ensure that the Exchange is able to provide access
on non-discriminatory terms and ensure sufficient capacity and headroom
in the System. To accommodate requests for additional ports on top of
current network capacity constraints, requires that the Exchange
purchase additional equipment to satisfy these requests. The Exchange
also needs to provide personnel to set up new ports and to maintain
those ports on behalf of Members and non-Members. The proposed tiered-
pricing structure is equitable because it is designed to encourage
Members and non-Members to be more efficient and economical in
selecting the amount of ports they request while balancing that against
the Exchange's increased expenses when expanding its network to
accommodate additional port access.
---------------------------------------------------------------------------
\71\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Proposed Fees Are Reasonable When Compared to the Fees of Other
Options Exchanges With Similar Market Share
The Exchange does not have visibility into other equities
exchanges' costs to provide ports and port access or their fee markup
over those costs, and therefore cannot use other exchanges' port fees
as a benchmark to determine a reasonable markup over the costs of
providing port access. Nevertheless, the Exchange believes the other
exchanges' port fees are a useful example of alternative approaches to
providing and charging for port access. To that end, the Exchange
believes the proposed tiered-pricing structure for its Full Service MEO
Ports is reasonable because the proposed highest tier is still less
than or similar to fees charged for similar port access provided by
other options exchanges with comparable market shares. For example,
NASDAQ (equity options market share of 8.38% as of December 15, 2021
for the month of December) \72\ charges $1,500 per port for SQF ports
1-5, $1,000 per SQF port for ports 6-20, and $500 per SQF port for
ports 21 and greater,\73\ all on a per matching engine basis, with
NASDAQ having multiple matching engines.\74\ NYSE American (equity
options market share of 6.74% as of December 15, 2021 for the month of
December) \75\ charges $450 per port for order/quote entry ports 1-40
and $150 per port for ports 41 and greater,\76\ all on a per matching
engine basis, with NYSE American having 17 match engines.\77\ The below
table further illustrates this comparison.
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\72\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited December 15, 2021).
\73\ See supra note 25.
\74\ See supra note 17.
\75\ See supra note 72.
\76\ See supra note 25.
\77\ See supra note 17.
----------------------------------------------------------------------------------------------------------------
Exchange Type of port Monthly fee
----------------------------------------------------------------------------------------------------------------
MIAX Pearl (as proposed)...... MEO Full Service-- Tier 1: $5,000 (or $208.33 per Matching Engine).
Bulk.
Tier 2: $7,500 (or $312.50 per Matching Engine).
Tier 3: $10,000 (or $416.66 per Matching Engine).
MEO Full Service-- Tier 1: $2,500 (or $104.16 per Matching Engine).
Single.
Tier 2: $3,500 (or $145.83 per Matching Engine).
Tier 3: $4,500 (or $187.50 per Matching Engine).
NYSE American................. Order/Quote Entry Ports 1-40: $450 each.
Ports 41 or more: $150 each.
NYSE Arca..................... Order/Quote Entry Ports 1-40: $450 each.
Ports 41 or more: $150 each.
NASDAQ........................ Specialized Quote Ports 1-5: $1,500 each.
Interface. Ports 6-20: $1,000 each.
Ports 21 or more: $500.
----------------------------------------------------------------------------------------------------------------
In the each of the above cases, the Exchange's highest tiered port
fee, as proposed, is similar to or less than the port fees of competing
options exchanges with like market share. Further, as described in more
detail below, many competing exchanges generate higher overall
operating profit margins and higher ``access fees'' than the Exchange,
inclusive of the projected revenues associated with the proposed fees.
The Exchange believes that it provides a premium network experience to
its Members and non-Members via a highly deterministic system, enhanced
network monitoring and customer reporting, and a superior network
infrastructure than markets with higher market shares and more
expensive access fees. Each of the port fee rates in place at competing
options exchanges were filed with the Commission for immediate
effectiveness and remain in place today.
The Exchange further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee, the Exchange provides each Member two (2)
Full Service MEO Ports for each matching engine to which that Member is
connected. Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\78\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports per matching
engine to which it connects. The Exchange currently has twelve (12)
matching engines, which means Members may receive up to twenty-four
(24) Full Service MEO Ports for a single monthly fee, that can vary
based on certain volume percentages. The Exchange currently assesses
Members a fee of $5,000 per month in the highest Full Service MEO
Port--Bulk Tier, regardless of the number of Full Service MEO Ports
allocated to the Member. Assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port--Bulk ($5,000 divided by 24) for the month. This fee has been
unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\79\ The Exchange now proposes to increase the Full Service MEO
Port fees, with the highest Tier fee for a Full Service MEO Port--Bulk
of $10,000 per month. Members will continue to receive two (2) Full
Service MEO Ports to each matching engine to which they are connected
for the single flat monthly fee. Assuming a Member connects to all
[[Page 10873]]
twelve (12) matching engines during the month, and achieves the highest
Tier for that month, with two Full Service MEO Ports--Bulk per matching
engine, this would result in a cost of $416.67 per Full Service MEO
Port ($10,000 divided by 24).
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\78\ See supra note 17.
\79\ See supra note 18.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete.
Intra-Market Competition
The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the Proposed Access Fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation of the Proposed Access
Fees reflects the network resources consumed by the various size of
market participants--lowest bandwidth consuming members pay the least,
and highest bandwidth consuming members pays the most, particularly
since higher bandwidth consumption translates to higher costs to the
Exchange.
Inter-Market Competition
The Exchange believes the Proposed Access Fees do not place an
undue burden on competition on other options exchanges that is not
necessary or appropriate. In particular, options market participants
are not forced to connect to (and purchase MEO Ports from) all options
exchanges. The Exchange also notes that it has far less Members as
compared to the much greater number of members at other options
exchanges. Not only does MIAX Pearl have less than half the number of
members as certain other options exchanges, but there are also a number
of the Exchange's Members that do not connect directly to MIAX Pearl.
There are a number of large users of the MEO Interface and broker-
dealers that are members of other options exchange but not Members of
MIAX Pearl. The Exchange is also unaware of any assertion that its
existing fee levels or the Proposed Access Fees would somehow unduly
impair its competition with other options exchanges. To the contrary,
if the fees charged are deemed too high by market participants, they
can simply disconnect.
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 15 competing options
venues if they deem fee levels at a particular venue to be excessive.
Based on publicly-available information, and excluding index-based
options, no single exchange has more than approximately 16% market
share. Therefore, no exchange possesses significant pricing power in
the execution of multiply-listed equity and ETF options order flow.
Over the course of 2021, the Exchange's market share has fluctuated
between approximately 3-6% of the U.S. equity options industry.\80\ The
Exchange is not aware of any evidence that a market share of
approximately 3-6% provides the Exchange with anti-competitive pricing
power. If the Exchange were to attempt to establish unreasonable
pricing, then no market participant would join or connect, and existing
market participants would disconnect. The Exchange believes that the
ever-shifting market share among exchanges from month to month
demonstrates that market participants can discontinue or reduce use of
certain categories of products, or shift order flow, in response to fee
changes. In such an environment, the Exchange must continually adjust
its fees and fee waivers to remain competitive with other exchanges and
to attract order flow to the Exchange.
---------------------------------------------------------------------------
\80\ See supra note 72.
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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
As described above, the Exchange received one comment letter on the
First Proposed Rule Change \81\ and no comment letters on the Second or
Third Proposed Rule Changes. The Exchange now responds to the one
comment letter in this filing. The SIG Letter cites Rule 700(b)(3) of
the Commission's Rules of Fair Practice which places ``the burden to
demonstrate that a proposed rule change is consistent with the Act on
the self-regulatory organization that proposed the rule change'' and
states that a ``mere assertion that the proposed rule change is
consistent with those requirements . . . is not sufficient.'' \82\ The
SIG Letter's assertion that the Exchange has not met this burden is
without merit, especially considering the overwhelming amounts of
revenue and cost information the Exchange included in the First and
Second Proposed Rule Changes and this filing.
---------------------------------------------------------------------------
\81\ See supra note 7.
\82\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
Until recently, the Exchange has operated at a net annual loss
since it launched operations in 2017.\83\ As stated above, the Exchange
believes that exchanges in setting fees of all types should meet very
high standards of transparency to demonstrate why each new fee or fee
increase meets the requirements of the Act that fees be reasonable,
equitably allocated, not unfairly discriminatory, and not create an
undue burden on competition among market participants. The Exchange
believes this high standard is especially important when an exchange
imposes various access fees for market participants to access an
exchange's marketplace. The Exchange believes it has achieved this
standard in this filing and in the First and Second Proposed Rules
Changes. Similar justifications for the proposed fee change included in
the First and Second Proposed Rule Changes, but also in this filing,
were previously included in similar fee changes filed by the Exchange
and its affiliates, MIAX Emerald and MIAX, and SIG did not submit a
comment letter on those filings.\84\ Those filings
[[Page 10874]]
were not suspended by the Commission and continue to remain in effect.
The justification included in each of the prior filings was the result
of numerous withdrawals and re-filings of the proposals to address
comments received from Commission Staff over many months. The Exchange
and its affiliates have worked diligently with Commission Staff on
ensuring the justification included in past fee filings fully supported
an assertion that those proposed fee changes were consistent with the
Act.\85\ The Exchange leveraged its past work with Commission Staff to
ensure the justification provided herein and in the First, Second and
Third Proposed Rule Changes included the same level of detail (or more)
as the prior fee changes that survived Commission scrutiny. The
Exchange's detailed disclosures in fee filings have also been applauded
by one industry group which noted, ``[the Exchange's] filings contain
significantly greater information about who is impacted and how than
other filings that have been permitted to take effect without
suspension.'' \86\ That same industry group also noted their ``worry
that the Commission's process for reviewing and evaluating exchange
filings may be inconsistently applied.'' \87\
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\83\ See supra note 56.
\84\ See Securities Exchange Act Release Nos. 91858 (May 12,
2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Amend the MIAX Pearl Fee Schedule to Remove the Cap on the Number of
Additional Limited Service Ports Available to Market Makers); 91460
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt Port Fees, Increase
Certain Network Connectivity Fees, and Increase the Number of
Additional Limited Service MIAX Emerald Express Interface Ports
Available to Market Makers); and 91857 (May 12, 2021), 86 FR 26973
(May 18, 2021) (SR-MIAX-2021-19) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To
Remove the Cap on the Number of Additional Limited Service Ports
Available to Market Makers).
\85\ See, e.g., Securities Exchange Act Release No. 90196
(October 15, 2020), 85 FR 67064 (October 21, 2020) (SR-EMERALD-2020-
11) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule To Adopt One-Time Membership
Application Fees and Monthly Trading Permit Fees). See Securities
Exchange Act Release Nos. 90601 (December 8, 2020), 85 FR 80864
(December 14, 2020) (SR-EMERALD-2020-18) (re-filing with more detail
added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-11); and 91033 (February 1, 2021), 86 FR
8455 (February 5, 2021) (SR-EMERALD-2021-03) (re-filing with more
detail added in response to Commission Staff's feedback and after
withdrawing SR-EMERALD-2020-18). The Exchange initially filed a
proposal to remove the cap on the number of additional Limited
Service MEO Ports available to Members on April 9, 2021. See SR-
PEARL-2021-17. On April 22, 2021, the Exchange withdrew SR-PEARL-
2021-17 and refiled that proposal (without increasing the actual fee
amounts) to provide further clarification regarding the Exchange's
revenues, costs, and profitability any time more Limited Service MEO
Ports become available, in general, (including information regarding
the Exchange's methodology for determining the costs and revenues
for additional Limited Service MEO Ports). See SR-PEARL-2021-20. On
May 3, 2021, the Exchange withdrew SR-PEARL-2021-20 and refiled that
proposal to further clarify its cost methodology. See SR-PEARL-2021-
22. On May 10, 2021, the Exchange withdrew SR-PEARL-2021-22 and
refiled that proposal as SR-PEARL-2021-23. See Securities Exchange
Act Release No. 91858 (May 12, 2021), 86 FR 26967 (May 18, 2021)
(SR-PEARL-2021-23).
\86\ See letter from Tyler Gellasch, Executive Director, Healthy
Markets Association, to Hon. Gary Gensler, Chair, Commission, dated
October 29, 2021.
\87\ Id. (providing examples where non-transaction fee filings
by other exchanges have been permitted to remain effective and not
suspended by the Commission despite less disclosure and
justification).
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Therefore, a finding by the Commission that the Exchange has not
met its burden to show that the proposed fee change is consistent with
the Act would be different than the Commission's treatment of similar
past filings, would create further ambiguity regarding the standards
exchange fee changes should satisfy, and is not warranted here.
In addition, the arguments in the SIG Letter do not support their
claim that the Exchange has not met its burden to show the proposed
rule change is consistent with the Act. Prior to, and after submitting
the First Proposed Rule Change, the Exchange solicited feedback from
its Members, including SIG. SIG relayed their concerns regarding the
proposed change. The Exchange then sought to work with SIG to address
their concerns and gain a better understanding of the access/
connectivity/quoting infrastructure of other exchanges. In response,
SIG provided no substantive suggestions on how to amend the First
Proposed Rule Change to address their concerns and instead chose to
submit a comment letter. One could argue that SIG is using the comment
letter process not to raise legitimate regulatory concerns regarding
the proposal, but to inhibit or delay proposed fee changes by the
Exchange.
Nonetheless, the Exchange has enhanced its cost and revenue
analysis and data in this Third [sic] Proposed Rule Change to further
justify that the Proposed Access Fees are reasonable in accordance with
the Commission Staff's Guidance. Among other things, these enhancements
include providing baseline information in the form of data from the
month before the Proposed Access Fees became effective.
General
First, the SIG Letter states that 10Gb ULL ``lines are critical to
Exchange members to be competitive and to provide essential protection
from adverse market events'' (emphasis added).\88\ The Exchange notes
that this statement is generally not true for Full Service MEO Ports as
those ports are used primarily for order entry and not risk protection
activities like purging quotes resting on the MIAX Pearl Options Book.
Full Service MEO Ports are essentially used for competitive reasons and
Members may choose to utilize one or two Full Service MEO Ports \89\
based on their business needs and desire to attempt to access the
market quicker by using one port that may have less latency. For
instance, a Member may have just sent numerous messages and/or orders
over one of their Full Service MEO Ports that are in queue to be
processed. That same Member then seeks to enter an order to remove
liquidity from the Exchange's Book. That Member may choose to send that
order over one of their other Full Service MEO Ports with less message
and/or order traffic or any of their optional additional Limit Service
MEO Ports \90\ to ensure that their liquidity taking order accesses the
Exchange quicker because that port's queue is shorter.
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\88\ See SIG Letter, supra note 7.
\89\ The rates set forth for Full Service MEO Ports under
Section 5)d) of the Exchange's Fee Schedule entitle a Member to two
(2) Full Service MEO Ports for each Matching Engine for a single
monthly fee.
\90\ Members may be allocated two (2) Full-Service MEO Ports per
Matching Engine and may request Limited Service MEO Ports for which
the Exchange will assess no fee for the first two Limited Service
MEO Ports requested by the Member. See Fee Schedule, Section 5)d).
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The Tiered Pricing Structure for Full Service MEO Ports Provides for
the Equitable Allocation of Reasonable Dues, Fees, and Other Charges
The SIG Letter challenges the below two bases the Exchange set
forth in its Initial Proposed Fee Change and herein to support the
assertion that the proposal provides for the equitable allocation of
reasonable dues, fees, and other charges:
``If the Exchanges were to attempt to establish
unreasonable pricing, then no market participant would join or connect
to the Exchanges, and existing market participants would disconnect.
The fees will not result in excessive pricing or supra-
competitive profit.'' \91\
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\91\ See SIG Letter, supra note 7.
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The Exchange responds to each of SIG's challenges in turn below.
If the Exchanges Were To Attempt To Establish Unreasonable Pricing,
Then No Market Participant Would Join or Connect to the Exchange, and
Existing Market Participants Would Disconnect
SIG asserts that ``the prospect that a member may withdraw from the
Exchanges if a fee is too costly is not a basis for asserting that the
fee is
[[Page 10875]]
reasonable.'' \92\ SIG misinterprets the Exchange's argument here. The
Exchange provided the examples of firms terminating access to certain
markets due to fees to support its assertion that firms, including
market makers, are not required to connect to all markets and may drop
access if fees become too costly for their business models and
alternative or substitute forms of connectivity are available to those
firms who choose to terminate access. The Commission Staff Guidance
also provides that ``[a] statement that substitute products or services
are available to market participants in the relevant market (e.g.,
equities or options) can demonstrate competitive forces if supported by
evidence that substitute products or services exist.'' \93\
Nonetheless, the Third [sic] Proposed Rule Change no longer makes this
assertion as a basis for the proposed fee change and, therefore, the
Exchange believes it is not necessary to respond to this portion of the
SIG Letter.
---------------------------------------------------------------------------
\92\ Id.
\93\ See Guidance, supra note 33.
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The Proposed Fees Will Not Result in Excessive Pricing or Supra-
Competitive Profit
Next, SIG asserts that the Exchange's ``profit margin comparisons
do not support the Exchange's claims that they will not realize a
supracompetitive profit,'' that ``the Exchanges' respective profit
margins of 30% (for MIAX and Pearl) and 51% (for Emerald) in relation
to connectivity fees are high in any event,'' and ``comparisons to
competing exchanges' overall operating profit margins are an inapt
`apples-to-oranges' comparison.''
The Exchange has provided ample data that the proposed fees would
not result in excessive pricing or a supra-competitive profit. In this
Third [sic] Proposed Rule Change, the Exchange no longer utilizes a
comparison of its profit margin to that of other options exchanges as a
basis that the Proposed Access Fees are reasonable. Rather, the
Exchange has enhanced its cost and revenue analysis and data in this
Third [sic] Proposed Rule Change to further justify that the Proposed
Access Fees are reasonable in accordance with the Commission Staff's
Guidance. Therefore, the Exchange believes it is no longer necessary to
respond to this portion of the SIG Letter.
The Proposed Tiered Pricing Structure Is Not Unfairly Discriminatory
SIG challenges the proposed fees by arguing that ``the Exchange[ ]
provide[s] no support for [its] claim that [the] proposed tiered
pricing structure is needed to encourage efficiency in connectivity
usage and the Exchange[ ] provided no support for [the] claim that the
tiered pricing structure allows them to better monitor connectivity
usage, nor that this is an appropriate basis for the pricing structure
in any event.'' The tiered pricing structure for Full Service MEO Ports
is not a new proposal and has been in place since 2018, well prior to
the filing of the First Proposed Rule Change. Nonetheless, the Exchange
provided additional justification to support that the Proposed Access
Fees are equitable and not unfairly discriminatory above in response to
SIG's assertions.
Recoupment of Exchange Infrastructure Costs
Nowhere in this proposal or in the First Proposed Rule Change did
the Exchange assert that it benefits competition to allow a new
exchange entrant to recoup their infrastructure costs. Rather, the
Exchange asserts above that its ``proposed fees are reasonable,
equitably allocated and not unfairly discriminatory because the
Exchange, and its affiliates, are still recouping the initial
expenditures from building out their systems while the legacy exchanges
have already paid for and built their systems.'' The Exchange no longer
makes this assertion in this filing and, therefore, does not believe it
is necessary to respond to SIG's assertion here.
Nonetheless, the Exchange notes that until recently it has operated
at a net annual loss since it launched operations in 2017.\94\ This is
a result of providing a low cost alternative to attract order flow and
encourage market participants to experience the determinism and
resiliency of the Exchange's trading systems. To do so, the Exchange
chose to offer some non-transaction related services for little to no
cost. This resulted in the Exchange forgoing revenue it could have
generated from assessing higher fees. Further, a vast majority of the
Exchange's Members, if not all, benefited from these lower fees. The
Exchange could have sought to charge higher fees at the outset, but
that could have served to discourage participation on the Exchange.
Instead, the Exchange chose to provide a low cost exchange alternative
to the options industry which resulted in lower initial revenues. The
SIG Letter chose to ignore this reality and instead criticize the
Exchange for initially charging lower fees or providing a moratorium on
certain non-transaction fees to the benefit of all market participants.
The Exchange is now trying to amend its fee structure to enable it to
continue to maintain and improve its overall market and systems while
also providing a highly reliable and deterministic trading system to
the marketplace.
---------------------------------------------------------------------------
\94\ See supra note 56.
---------------------------------------------------------------------------
III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act,\95\ 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,\96\ 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.
---------------------------------------------------------------------------
\95\ 15 U.S.C. 78s(b)(3)(C).
\96\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
As the Exchange further details above, the Exchange first filed a
proposed rule change proposing fee changes as proposed herein on July
1, 2021, with the proposed fee changes being immediately effective.
That proposal, SR-PEARL-2021-33, was published for comment in the
Federal Register on July 15, 2021.\97\ On August 27, 2021, pursuant to
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily
suspended the proposed rule change (SR-PEARL-2021-33) and (2)
instituted proceedings to determine whether to approve or disapprove
the proposed rule change.\98\ On October 12, 2021, the Exchange
withdrew SR-PEARL-2021-33. On November 1, 2021, the Exchange filed a
proposed rule change proposing fee changes as proposed herein. That
proposal, SR-PEARL-2021-53, was published for comment in the Federal
Register on November 17, 2021.\99\ On December 20, 2021, the Exchange
withdrew SR-PEARL-2021-53 and filed a proposed rule change proposing
fee
[[Page 10876]]
changes as proposed herein on December 20, 2021. That filing, SR-PEARL-
2021-58,\100\ was published for comment in the Federal Register on
January 10, 2022.\101\ On February 15, 2022, the Exchange withdrew SR-
PEARL-2021-58 and filed the instant filing, which is substantially
similar.
---------------------------------------------------------------------------
\97\ See Securities Exchange Act Release No. 92365 (July 9,
2021), 86 FR 37347 (July 15, 2021) (SR-PEARL-2021-33). The
Commission received one comment letter on that proposal. Comment for
SR-PEARL-2021-33 can be found at: https://www.sec.gov/comments/sr-pearl-2021-33/srpearl202133-9208443-250011.pdf.
\98\ See Securities Exchange Act Release No. 93556 (August 27,
2021), 86 FR 49360 (September 2, 2021).
\99\ See Securities Exchange Act Release No. 93556 (November 19,
2021), 86 FR 64235 (November 17, 2021) (SR-PEARL-2021-53).
\100\ See text accompanying supra note 12.
\101\ See Securities Exchange Act Release No. 93894 (January 4,
2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58).
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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.\102\ 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.'' \103\
---------------------------------------------------------------------------
\102\ 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'').
\103\ 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; \104\ (2) perfect the mechanism of a
free and open market and a national market system, protect investors
and the public interest, and not permit unfair discrimination between
customers, issuers, brokers, or dealers; \105\ and (3) not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\106\
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\104\ 15 U.S.C. 78f(b)(4).
\105\ 15 U.S.C. 78f(b)(5).
\106\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposal to increase the
monthly fees for MIAX Express Network Full Service Ports is consistent
with the statutory requirements applicable to a national securities
exchange under the Act. In particular, the Commission will consider
whether the proposed rule change satisfies the standards under the Act
and the rules thereunder requiring, among other things, that an
exchange's rules provide for the equitable allocation of reasonable
fees among members, issuers, and other persons using its facilities;
not be designed to permit unfair discrimination between customers,
issuers, brokers or dealers; and not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\107\
---------------------------------------------------------------------------
\107\ 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.\108\
---------------------------------------------------------------------------
\108\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change
The Commission is instituting proceedings pursuant to Sections
19(b)(3)(C) \109\ and 19(b)(2)(B) \110\ of the Act to determine whether
the Exchange's proposed rule change should be approved or disapproved.
Institution of such proceedings is appropriate at this time in view of
the legal and policy issues raised by the proposed rule change.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide comments on the proposed rule change to
inform the Commission's analysis of whether to approve or disapprove
the proposed rule change.
---------------------------------------------------------------------------
\109\ 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.
\110\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\111\ 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),\112\ 6(b)(5),\113\ and 6(b)(8) \114\ 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.
---------------------------------------------------------------------------
\111\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act
also provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
See id. The time for conclusion of the proceedings may be extended
for up to 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding, or if the
exchange consents to the longer period. See id.
\112\ 15 U.S.C. 78f(b)(4).
\113\ 15 U.S.C. 78f(b)(5).
\114\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, in addition to any
other comments they may wish to submit about the proposed rule change.
In particular, the Commission seeks comment on the following aspects of
the proposal and asks commenters to submit data where appropriate to
support their views:
1. Cost Estimates and Allocation. The Exchange states that it is
not asserting that the Proposed Access Fees are constrained by
competitive forces, but rather set forth a ``cost-plus model,''
employing a ``conservative methodology'' that ``strictly considers only
those costs that are most clearly directly related to the provision and
maintenance of the Full Service MEO Ports.'' \115\ Setting forth its
costs in providing the Proposed Access Fees, and as summarized in
greater detail above, the Exchange projects $897,084 in aggregate
annual estimated costs for 2021 as the sum of: (1) $40,166 in third-
party expenses paid in total to Equinix (1.80% of the total applicable
expense) for data center services; Zayo Group Holdings, for network
services (0.90% of the total applicable expense); SFTI for connectivity
support, Thompson Reuters, NYSE, Nasdaq, and Internap and others (0.90%
of the total applicable expense) for content, connectivity services,
and infrastructure services; and various other hardware and software
providers (0.90% of the total
[[Page 10877]]
applicable expense) supporting the production environment, and (2)
$856,918 in internal expenses, allocated to (a) employee compensation
and benefit costs ($783,513, approximately 8.55% of the Exchange's
total applicable employee compensation and benefits expense); (b)
depreciation and amortization ($64,456, approximately 2.25% of the
Exchange's total applicable depreciation and amortization expense); and
(c) occupancy costs ($8,949, approximately 1.80% 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 Proposed Access Fees? The Exchange describes a
``proprietary'' process involving all Exchange department heads,
including the finance department and numerous meetings between the
Exchange's Chief Information Officer, Chief Financial Officer, Head of
Strategic Planning and Operations, Chief Technology Officer, various
members of the Legal Department, and other group leaders, but do not
specify further what principles were applied in making these
determinations or arriving at particular allocations. Do commenters
believe further explanation is necessary? For employee compensation and
benefit costs, for example, the Exchange calculated an allocation of
employee time in several departments, including Technology, Back
Office, Systems Operations, Networking, Business Strategy Development,
Trade Operations, Finance, and Legal, but do not provide the job titles
and salaries of persons whose time was accounted for, or explain the
methodology used to determine how much of an employee's time is devoted
to that specific activity. What are commenters' views on whether the
Exchange has provided sufficient detail on the identity and nature of
services provided by third parties? Across all of the Exchange's
projected costs, what are commenters' views on whether the Exchange has
provided sufficient detail on the elements that go into Full Service
MEO Port costs, including how shared costs are allocated and attributed
to Full Service MEO Port expenses, to permit an independent review and
assessment of the reasonableness of purported cost-based fees and the
corresponding profit margin thereon? Should the Exchange be required to
identify for what services or fees the remaining percentage of un-
allocated expenses are attributable to? Do commenters believe that the
costs projected for 2021 are generally representative of expected costs
going forward (to the extent commenters consider 2021 to be a typical
or atypical year), or should an exchange present an estimated range of
costs with an explanation of how profit margins could vary along the
range of estimated costs? Should the Exchange use cost projections or
actual costs estimated for 2021 in a filing made in 2022, or make cost
projections for 2022?
---------------------------------------------------------------------------
\115\ See supra Section II.A.2.
---------------------------------------------------------------------------
2. Revenue Estimates and Profit Margin Range. The Exchange provides
a single monthly revenue figure as the basis for calculating the profit
margin of 38%. Do commenters believe this is reasonable? If not, why
not? The Exchange states that their proposed fee structure is
``designed to cover its costs with a limited return in excess of such
costs,'' and that ``revenue and associated profit margin [ ] are not
solely intended to cover the costs associated with providing services
subject to the proposed fees,'' and believes that a 38% margin is a
limited return over such costs.\116\ The profit margin is also
dependent on the accuracy of the cost projections which, if inflated
(intentionally or unintentionally), may render the projected profit
margin meaningless. The Exchange acknowledges that this margin may
fluctuate from month to month due to changes in the number of ports
purchased, and that costs may increase. They also state that the number
of ports has not materially changed over the prior months and so the
months that the Exchange has used as a baseline to perform its
assessment are representative of reasonably anticipated costs and
expenses.\117\ The Exchange does not account for the possibility of
cost decreases, however. What are commenters' views on the extent to
which actual costs (or revenues) deviate from projected costs (or
revenues)? Do commenters believe that the Exchange's methodology for
estimating the profit margin is reasonable? Should the Exchange provide
a range of profit margins that they believe are reasonably possible,
and the reasons therefor?
---------------------------------------------------------------------------
\116\ See supra Section II.A.2.
\117\ See id.
---------------------------------------------------------------------------
3. Reasonable Rate of Return. Do commenters agree with the Exchange
that its expected 38% profit margin would constitute a reasonable rate
of return over cost for Full Service MEO Ports? If not, what would
commenters consider to be a reasonable rate of return and/or what
methodology would they consider to be appropriate for determining a
reasonable rate of return? What are commenters' views regarding what
factors should be considered in determining what constitutes a
reasonable rate of return for Full Service MEO Ports? Do commenters
believe it relevant to an assessment of reasonableness that the
Exchange's proposed fees for Full Service MEO Ports, even at the
highest tier, are still less than or similar to those of other options
exchanges to which the Exchange has compared the Proposed Access Fees?
Should an assessment of reasonable rate of return include consideration
of factors other than costs; and if so, what factors should be
considered, and why?
4. Periodic Reevaluation. The Exchange has addressed whether it
believes a material deviation from the anticipated profit margin would
warrant the need to make a rule filing pursuant to Section 19(b) of the
Act to increase or decrease the fees accordingly, stating that ``[a]ny
requirement that an exchange should conduct a periodic re-evaluation on
a set timeline of its cost justification and amend its fees accordingly
should be established by the Commission holistically, applied to all
exchanges and not just pending fee proposals, such as this filing,''
and that ``[i]n order to be fairly applied, such a mandate should be
applied to existing market data fees as well.'' \118\ In light of the
impact that the number of subscribers has on Full Service MEO Port
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 Full Service MEO Port fees to ensure that they stay in line with
their stated profitability target and do not become unreasonable over
time, for example, by failing to adjust for efficiency gains, cost
increases or decreases, and changes in subscribers? How formal should
that process be, how often should that reevaluation occur, and what
metrics and thresholds should be considered? How soon after a new Full
Service MEO Port fee change is implemented should an exchange assess
whether its subscriber estimates were accurate and at what threshold
should an exchange commit to file a fee change if its estimates were
inaccurate? Should an initial review take place within the first 30
days after a Full Service MEO Port fee is implemented? 60 days? 90
days? Some other period?
---------------------------------------------------------------------------
\118\ See supra Section II.A.2.
---------------------------------------------------------------------------
5. Tiered Structure for Full Service MEO Ports Fees. The Exchange
states that proposed tiered-pricing structure is reasonable, fair,
equitable, and not unfairly discriminatory because it is the model
adopted by the Exchange when it
[[Page 10878]]
launched operations for its Full Service MEO Port fees, and further,
that the amount of the fee is directly related to the Member or non-
Member's TCV resulting in higher fees for greater TCV.\119\ What are
commenters' views on the adequacy of the information the Exchange
provides regarding the proposed differentials in fees? Do commenters
believe that the proposed price differences are supported by the
Exchange's assertions that it set the level of each proposed new fee in
a manner that it equitable and not unfairly discriminatory?
---------------------------------------------------------------------------
\119\ See id.
---------------------------------------------------------------------------
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
[SRO] that proposed the rule change.'' \120\ 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,\121\ 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.\122\
Moreover, ``unquestioning reliance'' on an SRO's representations in a
proposed rule change would not be sufficient to justify Commission
approval of a proposed rule change.\123\
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\120\ 17 CFR 201.700(b)(3).
\121\ See id.
\122\ See id.
\123\ See Susquehanna Int'l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017)
(rejecting the Commission's reliance on an SRO's own determinations
without sufficient evidence of the basis for such determinations).
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The Commission believes it is appropriate to institute proceedings
to allow for additional consideration and comment on the issues raised
herein, including as to whether the proposal is consistent with the
Act, any potential comments or supplemental information provided by the
Exchange, and any additional independent analysis by the Commission.
V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. In particular, the Commission invites the written views of
interested persons concerning whether the proposal is consistent with
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the
Act, or the rules and regulations thereunder. The Commission asks that
commenters address the sufficiency and merit of the Exchange's
statements in support of the proposal, in addition to any other
comments they may wish to submit about the proposed rule change.
Although there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral
presentation.\124\
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\124\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by an SRO.
See Securities Acts Amendments of 1975, Report of the Senate
Committee on Banking, Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by March 18, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 1,
2022.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-PEARL-2022-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2022-04. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2022-04 and should be submitted on
or before March 18, 2022. Rebuttal comments should be submitted by
April 1, 2022.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\125\ that File Numbers SR-PEARL-2022-04 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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\125\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\126\
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\126\ 17 CFR 200.30-3(a)(12), (57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03964 Filed 2-24-22; 8:45 am]
BILLING CODE 8011-01-P
